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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: SHRI R.C. SHARMA & SHRI PAWAN SINGH
This appeal is filed by the assessee against the order of CIT(A), Mumbai for A.Y 2011-12, in the matter of order passed u/s. 143(3) of the Income Tax Act, 1961.
2 M/s. Island Star Mall Developers Pvt. Ltd.
The only grievance of the assessee relates to treatment of interest income from fixed deposit as ‘income from other sources’ and not allowing set-off of such income against the project cost.
Rival contentions have been heard and record perused. Facts in brief are that on verification of the details filed during the course of assessment proceedings, the AO found that the assessee is in receipt of the following income :
i. Interest on Fixed Deposit Rs. 1,67,08,006/- ii. Sundry balances written back Rs. 2,23,258/- iii. Exchange Difference Rs. 2,12,887/- iv. Miscellaneous Recovery Rs. 58,253/- Rs. 1,72,02,404/- It is seen from the computation of income that the assessee has not declared/disclosed the above income in its return of income. It is further seen from the Auditor’s report that the assessee has netted off this interest against various expenditure under the head “Project Development Expenditure”. In view of this, the assessee vide order sheet entry dated 29.10.2013 was asked by the AO to explain as to why the above receipts amounting to Rs.1,72,02,404/- should not be taxed as ‘income from other sources’ as has been treated in A.Y 2010-11.
By following the order passed in A.Y 2010-11, the AO added the above income as ‘income from other sources’. By the impugned order, CIT(A) confirmed the action of the AO.
3 M/s. Island Star Mall Developers Pvt. Ltd.
The ld. AR placed on record the order of the Tribunal in assessee’s own case for A.Y 2010-11 wherein similar addition so made was deleted by the Tribunal vide order dt. 31.7.2015 in after making following observations :
“6. I have heard the rival contentions and perused the material available on record. It is observed that the assessee is engaged in the business of construction of shopping centers, shopping malls, arcades, as per the main object of memorandum of association of the assessee company. In the current year, assessee is engaged in the development of an integrated market complex at White Field, Bangalore, and the said project is still under implementation stage. The assessee has raised term loans from Bank for the project, and during the year, its term loan from the Bank has increased to almost `194.36 crores from an amount of `114.29 crores last year. The value of capital work-in- progress as on 31st March 2010, stands at `194.34 crores as against `106.01 crores as on 31st March 2009. The assertion of the assessee is that the term loans raised from the Bank are fully raised for the purpose of the project and the interest payable on such loans is being capitalized. The assessee has not earned any income during the year except the interest of `7,35,674, on ultra short term fixed deposits. The said income has been capitalized, i.e., assessee has reduced it from the figure of capital work-in-progress. The claim of the assessee is that the impugned interest income is inextricably linked to the setting-up of the project and thus it is a capital receipt which is permissible to be set-off against the capital work-in-progress. On the contrary, the stand of the Revenue is that since the assessee has not commenced its business, the netting-off of interest income of FDRs is not permissible and such income of ` 7,35,675, is to be taxed as "Income From Other Sources", following the ratio of the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra).
7. First of all, it is factually evident that the interest has been earned on FDRs KEPT WITH Banks for a very short period of time. The details are placed in the paper book at Pages-23 to 25, which show
4 M/s. Island Star Mall Developers Pvt. Ltd. that the FDRs are placed for periods ranging from 10 to 30 days. The learned Representative explains that the term loan was borrowed for the purpose of the project and in the interregnum i.e., between the date of receipt of loan funds from bank and its disbursal towards the project, assessee used to place it temporarily for an ultra short period in FDRs, which have yielded income. The aforesaid fact / situation is not in dispute. Thus, it is quite apparent that the funds deployed in FDRs are tied up funds and not surplus funds. Rather, in my considered opinion, the impugned funds are inextricably linked to the development and construction of assessee's project of integrated market complex at White Field, Bangalore. In the background of the aforesaid factual position, in my view, the income on FDRs is required to be capitalized to be reducd from the capital work-in-progress, and is fully covered by the ratio of the judgment of the Hon'ble Supreme Court in the case of CIT v/s Bokaro Steel Ltd., [1999] 236 ITR 315 (SC), and not by the judgment of Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra), as contended by the Revenue. The distinction in the application of the two aforesaid judgments of the Hon'ble Supreme Court has been aptly brought out by the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. (supra) in the following words:-
“In our opinion, the Tribunal has misconstrued the ratio of the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals [1997] 227 ITR 172 and that of Bokaro Steel Ltd, [1999] 236 ITR 315. The test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemical [1997] 227 ITR 172 is that if funds have been borrowed for setting up of a plant and if the funds are "surplus" and tehn by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head "Income from other sources". On the other hand, the ratio of the Supreme Court judgment in Bokaro Steel Ltd., [1999] 236 ITR 315 to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise "inextricably linked" to the setting up of the plant,
5 M/s. Island Star Mall Developers Pvt. Ltd. such income is required to be capitalized to be set off against pre-operative expenses."
In the case before the Hon'ble Delhi High Court, issue related to the treatment to be accorded to the interest earned the monies received as share capital by the assessee which were temporarily put in a fixed deposit awaiting acquisition of land which had run into legal entanglements. The Revenue treated such income as income under the head "Income From Other Sources". As per the Honble High Court, since the funds infused in the assessee were inextricably linked with the setting up of the plant, the interest income could not be treated as income from other sources. Since it has found to have been earned in a period prior to commencement of business, it was held to be in the nature of a capital receipt and was liable to be set-off against the preoperative expenses.
In my view, the judgment of the Hon'ble Supreme Court fully covers the controversy before me. On facts, it is quite clear that the funds available with the assessee for deploying the ultra short period FDRs were not surplus funds and, therefore, the ratio of the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra) would not govern the present situation.
I conclude by holding that the assessee has rightly reduced the said interest income from the capital work-in-progress, because the funds deployed are only for an ultra short period which in inextricably linked with the project. Hence, I set aside the impugned order passed by the learned Commissioner (Appeals) and hold that the addition of ` 7,35,675, needs to be deleted. I order accordingly. The Ground of appeal no.1, raised by the assessee is allowed.”
We have considered rival contentions and carefully gone through the order of Tribunal in assessee’s own case passed by Tribunal dt. 31.5.2015. As the facts and circumstances during the year under consideration are pari materia, respectfully following the order of the 6 M/s. Island Star Mall Developers Pvt. Ltd.
Tribunal in assessee’s own case, we do not find any justification for not setting off income against the project cost. It is not in dispute that even during the year under consideration the project was under implementation and not completed.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 30th March, 2016.