NEELKANTH TOWNSHIP & CONSTRUCTION P.LTD,MUMBAI vs. ITO 3(2)(3), MUMBAI

The appeal of the assessee is directed against the order dated 08-05-2014 passed by Ld CIT(A)-4, Mumbai and it relates to the assessment year 2010-11. The assessee is aggrieved by the decision of Ld CIT(A) in upholding the assessment of interest earned on deposits made by the assessee out of borrowed funds.

The facts relating to the issue are stated in brief. The assessee is engaged in the business of property development. In the past years, it had raised funds by issuing 1% and 0% Optionally fully convertible Debentures for an aggregate amount of Rs.51.00 crores. The assessee had also raised funds by way of share capital to the tune of Rs.1.25 crores. During the year under consideration, it was in the process of implementing the project of developing a township. The amount spent on project was shown as “Inventory” in its books of account, since it constitutes “current asset” in its hands, i.e., the assessee shall sell the flats developed in the project to various prospective buyers of flats. The opening balance of inventory was Rs.16.91 crores and the closing balance of inventory was Rs.17.27 crores. The net current assets was shown at Rs.53.44 crores and 53.88 crores during the year ending 31.3.2009 and 31.3.2010.

During the year under consideration, the assessee earned interest income of Rs.27.15 lakhs and the same was credited to the Profit and Loss account. However, for income-tax purposes, the assessee adjusted the interest income cited above against the project cost and the net amount of project cost was added to the inventory account. The AO, however, held that the interest income is assessable as income of the assessee and accordingly assessed the same as income of the assessee. The Ld CIT(A) also confirmed the same.

Before us, the Ld A.R placed reliance on the decision rendered by Hon’ble Delhi High Court in the case of NTPC Sail Power Company P Ltd (ITA No.1238/2011 dated 17.7.2012), wherein it was held that if the receipt is inextricably linked to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of project. The Ld A.R submitted that the assessee’s project got delayed due to non-receipt of sanctions from various Government authorities and hence the assessee was constrained to park the funds raised by way of debentures in the bank deposits. Accordingly he submitted that the interest income earned by the assessee is inextricably linked to the setting up of the project and accordingly he submitted that the assessee was justified in adjusting the interest income against the cost of project.

As an alternative contention, the Ld A.R submitted that the assessing officer has not increased the value of Inventory (Work in progress) to the extent of interest assessed by him and the value of Inventory should be increased, if the first contention of the assessee was not accepted.

On the contrary, the Ld D.R submitted that the identical addition made in AY 2008-09 has since been accepted by the assessee. He further submitted that the Ld CIT(A) has placed reliance on the decision of Hon’ble Supreme Court rendered in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd (227 ITR 172) to decide this issue against the assessee.

We have heard rival contentions and perused the record. A perusal of Balance sheet would show that the assessee is in the process of implementing its project only and during the year under consideration, the net current assets has increased by a sum of Rs.44.00 lakhs only. Further a perusal of Schedule D to Balance sheet, which contains details ‘cash and bank balance’ and also ‘Loans and advances’, would show that the assessee has made fixed deposits with bank as well as with other Corporate companies as inter-corporate deposits. Since the assessee is in the process of implementing the project, the demand for funds would always there and hence normally the surplus funds, if any, would be parked in banks in order to earn interest, simply for the reason that the process of en-cashing the bank fixed deposits is very easy. However, when a person is making inter-corporate deposits, in our view, it cannot be said that the same was made with a short term objective of parking surplus funds for temporary period. It is a conscious decision to advance funds to other companies as inter corporate deposits. Accordingly, in our view, the theory of parking surplus funds would not apply to the inter-corporate deposits made by the assessee. Accordingly, we are of the view that the interest income earned from inter corporate deposits cannot be said to be inextricably linked to the implementation of project.

Now coming to the business of the assessee, we have seen that the assessee is developing a housing project, i.e., after development of the project, the entire constructed area shall be sold by the assessee. Hence, the cost of development of project is treated as “Inventory” by the assessee in its books of account, which means that the assessee is in the process of constructing a project, which is a “Current asset” in the hands of the assessee. When the project constructed by the assessee itself is a current asset, in our view, the question of treating the interest income as “Capital receipt” does not apply. In the case of NTPC Sail Power Company P Ltd (supra), the assessee therein was establishing a new unit for generation of power and the cost of construction of the unit was Capital expenditure in its hands. Further, a finding was given that the receipt of interest income was inextricably linked to the implementation of project. In the above set of facts, the Hon’ble Delhi High Court held that the interest income should be reduced from the cost of project and it cannot be assessed separately. We have noticed that the facts prevailing in the instant case are altogether different. Hence, in our view, the decision rendered by Hon’ble Delhi High Court cannot be applied to the facts prevailing in the instant case.

Hence we are of the view that the interest income earned by the assessee cannot be treated as Capital receipt in the hands of the assessee and hence the Ld CIT(A) was justified in confirming the assessment of interest income in the hands of the assessee.

However, we find merit in the alternative contentions of the assessee. Since the interest income has been assessed separately for income tax purposes, it should not go to reduce the value of Inventory for income tax purposes. It was stated that the assessing officer has followed this methodology in AY 2008- 09 also and hence the assessee did not prefer appeal against the assessment of interest income. Accordingly we direct the AO to increase the value of inventory by the amount of interest income assessed separately.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 22nd June, 2016