JOYNEST PRREMISES P.LTD,MUMBAI vs. ITO 5(3)(4), MUMBAI

The above titled appeals have been preferred by the assessee against the two separate orders of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] of even date 14.08.2014 relevant to A.Y. 2009-10 & 2010-11 respectively. &6718/Mum/14 Jovnest Premises Pvt. Ltd. vs. ITO 2. At the outset, ld.AR of the assessee has stated that the issues involved in both the appeals are almost identical in nature and further that the assessment relevant to assessment year 2009-10 was reopened on the basis of observation made by the Assessing Officer [hereinafter referred to as AO] for A.Y. 2010-11. He therefore, has submitted that the facts from appeal for assessment year 2010-11 be taken for adjudication of the above appeals. We, accordingly, take the for A.Y.2010-11 as lead case. (A.Y.2010-11): The assessee in this appeal has taken the following grounds of appeal:

Ground Nos.1,3&5 are general in nature and do not require any adjudication.

The brief facts of the case relating to issues taken vide these grounds of appeal are that the assessee is a Private Limited company engaged in the business of Builders and Civil Contractors. The assessee had entered into an agreement with the Government of Maharashtra for construction and development of a project at Plot CTS No.469-A at Chembur, Mumbai. As per the terms of the agreement with Government of Maharashtra, the assessee had to keep a performance security Deposit &6718/Mum/14 Jovnest Premises Pvt. Ltd. vs. ITO of Rs.6,70,00,000/-. The assessee had delivered to the Government of Maharashtra performance security for construction in the Form of FDR of Rs.6,70,00,000/- with Dena Bank. The assessee earned interest of Rs.40,90,696/- for F.Y. 2008-09 and Rs.69,42,577/- for F.Y. 2009-10 aggregating to Rs.1,19,33,273/- from the said FDR with Dena Bank. During the year under consideration, assessee reduced the entire interest income of Rs.1,19,33,273/- from its work in progress. During assessment proceedings, the AO asked the assessee as to why the gross interest income on FDR earned by the assessee should not be brought to tax. In response, the assessee submitted that the FDR was in the nature of compulsory fixed deposit into bank as a project performance guarantee and that the same was incidental to the business of the assessee. The assessee thereby submitted that the interest earned on compulsory fixed deposit was inextricably linked to the project of the assessee and hence had rightly been reduced out of work in progress. The assessee therefore submitted that the same should not be taxed as income from other sources. The AO further did not accept the contention put-forth by the assessee and taxed the interest of Rs.69,42,577/- earned on fixed deposit by the assessee under the head ‘Income from other Sources’. AO while relying upon judgemnet of Supreme Court in the case of ‘Tuticorin Alkali Chemicals and Fertilisers Ltd’ [227ITR172] rejected the above contention of the assessee and taxed the interest. &6718/Mum/14 Jovnest Premises Pvt. Ltd. vs. ITO 5. Being aggrieved by the above action of the AO, the assessee filed appeal before the Ld. CIT(A). Before the ld. CIT(A), the assessee explained that Supreme Court decision in the case of ‘Tuticorin Alkali Chemicals and Fertilisers Ltd.’ (supra) was not applicable to the facts of the case of the assessee as in that case the concerned assessee had surplus funds in its hands and in order to earn income out of the surplus funds the same were invested for the purpose of earning interest income. Further in the case of the assessee, the decision of the Hon’ble Supreme Court in the case of ‘CIT vs. Bokaro Steel Ltd’ [236 ITR 315] was applicable wherein, the Hon’ble Supreme Court in somewhat similar circumstances has held that where the utilization of various assets of the company and the payments received from such utilization are directly linked with the activity of setting up the business of the assessee and such receipts are inextricably linked with the setting up of the capital structure of the assessee-company, then these receipts must be viewed as capital receipts going to reduce the cost of construction.

The ld. CIT(A), however did not accept the above contention of the assessee and observed that in the instant case, the assessee had not actually started business in real terms as the deposits were made in the process of starting business and under these circumstances, the interest income earned on the FDR’s was taxable under the head ‘Income from other Sources’. He observed that the funds utilized for making the &6718/Mum/14 Jovnest Premises Pvt. Ltd. vs. ITO FDR’s had not been generated from the business activity of the assessee. He accordingly upheld the finding of the AO on this issue.

Being aggrieved by the above findings of the CIT(A), the assessee has come in appeal before us. Ld. AR of the assessee at the outset has relied upon various case laws including that of the Hon’ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd. (supra) and in the case of CIT vs. Karnal Co-operative Sugar Mills Ltd.[243 ITR 2] (Supreme Court). He further has strongly relied upon the decision of Hon’ble Delhi High Court in the case of CIT vs. Jaypee DSC Ventures Ltd [335 ITR 132] (Delhi).

We find that the facts of the case in hand are squarely covered by the above various decisions of the Hon’ble Supreme court as well as of the Hon’ble Delhi High Court. Respectfully following the same, this issue is decided in favour of the assessee.

In ground no.4, the assessee has agitated the disallowance of business expenditure of Rs.5,73,031/-. The AO disallowed the said expenditure on the ground &6718/Mum/14 Jovnest Premises Pvt. Ltd. vs. ITO that the assessee had not earned any income during the year under the head profits and gains from business or profession. He rejected the contention of the assessee that the assessee had already set up his business and the above stated expenses were routine business expenditure.

Aggrieved by the said disallowance, the assessee preferred appeal before the Ld. CIT(A). The ld. CIT(A) however also rejected the contention of the assessee observing that since the project of the assessee had not started yielding any revenue hence all the expenses relating to the incomplete project should have been capitalized.

Being aggrieved by the order of CIT(A), the assessee has come in appeal before us. The assessee before us had relied upon the decision of Hon’ble Delhi High Court in the case of CIT Vs. Dhoomketu Builders and Development P. Ltd. [2014]368 ITR 680 (Delhi), wherein, Hon’ble Delhi High Court has held that there is a difference between the setting up and commencement of business. When a business is established and is ready to commence, then it can be said of that business has been set up. The Hon’ble Delhi High Court has observed that there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business would be permissible deductions/business loss. &6718/Mum/14 Jovnest Premises Pvt. Ltd. vs. ITO 12. In view of the above proposition of law laid down by the Hon’ble Delhi High Court, the routine expenses incurred by the assessee after setting of the business in our view are allowable as business expenditure. This issue is accordingly decided in favour of the assessee.

Now, coming to assessee appeal for A.Y.2009-10, the assessee in this appeal has taken six grounds of appeal. The ld. AR of the assessee at the outset had stated that he does not press ground no.1,2&4 are therefore dismissed as not pressed. We find that ground no.6 is general in nature and does not require any adjudication. Now we are left with ground no.3 &5.

The issue involved in ground no.3 is identical to the ground no.2 of the assessee’s appeal for A.Y. 2010-11 relating to taxability of interest received on compulsory FDR made as project performance guarantee.In view of our findings given above while adjudicating the ground no.2 of the assessee appeal for AY. 2010- 11, this issue is accordingly decided in favour of the assessee. &6718/Mum/14 Jovnest Premises Pvt. Ltd. vs. ITO Ground No.5 15. The issue taken by the assessee in ground no.5 is identical to the issue taken in ground no.4 of the assessee appeal for A.Y.2010-11, in relation to the allowability of the expenditure incurred during the year, when no income was earned by the assessee from its business activity. In view of our findings given above, this issue is accordingly decided in favour of the assessee.