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Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
These are the two appeals preferred by the assessee against the order of CIT(A)- IV, New Delhi dated 13.06.2013 raising for two years grounds for both the years i.e. grounds A. Y. 2008- 09 : “1. That the order passed by the Ld. Assessing Officer and confirmed by Ld. CIT (A) is not only bad in law but also against the facts of the case.
The Ld. CIT (A) is erred under the law while holding that A.O. has a valid jurisdiction u/s 153A of the Act. 3. The Ld. CIT(A) is erred under the law while holding that the commission income of Rs. 43,700/- earned by the appellant is not its business income as per object clause of the Memorandum & Articles of Association of the Company. 4. That the Ld. CIT(A) is erred under the law while holding that the interest on FDR as income from other source instead of abating it out of capital work in progress as claimed by the appellant. 5. That any other grounds of appeal
may be added/deleted or amended at the time of hearing. Therefore, it is prayed as under : a) The entire assessment proceedings may please be declared as null and void in view of provisions contained u/s 153A of the Act. Or alternatively, b) The Commission income fo the appellant may please be treated as business income. c) The interest on FDR may please be abated against the capital work in progress instead of treating it as income from other source. d) Any other suitable order as your honour may deem fit may please be passed.” -19/Del/2013 Mahagun Hotels Pvt. Ltd. A Y 2008-09 & 2009-10 Grounds for A.Y 2009-10 : 1. “That the order passed by the Ld. Assessing Officer and confirmed by Ld. CIT(A) is not only bad in law but also against the facts of the case.
2. The Ld. CIT(A) is erred under the law while holding that A.O. has a valid jurisdiction u/s 153A of the Act.
3. That the Ld. CIT(A) is erred under the law while holding that the interest on FDR as income from other source instead of abating it out of capital work in progress as claimed by the appellant.
4. That the Ld. CIT(A) is erred under law while disallowing claim of depreciation of Rs. 1,88,288/- on tools/machinery those has been used for the business of the appellant. Therefore, it is prayed as under : a) The entire assessment proceedings may please be declared as null and void in view of provisions contained u/s 153A of the Act Or alternatively, b) The interest on FDR may please be abated against the capital work in progress instead of treating it as income from other source. c) The depreciation as claimed may please be allowed. d) Any other suitable order as your honour may deem fit may please be passed.” ITA no. 4418.Del.2013
02. Before us, the ld. AR of the assessee submitted that he does not want to press ground no. 1 and 2 of the appeal and therefore they are dismissed.
3. Ground no. 3 of the appeal is against the decision of AO and CIT (A) holding that commission income of Rs. 43,700/- is not its business income as per object clause of the Memorandum & Articles of Association of the Company. The sole reason for treating the commission income of the assessee as income from other source is that main business of the company is to manage and run hotels and not to act as a commission agent as per Memorandum & Articles of Association of the company. Before the CIT (A) assessee reiterated the same arguments and CIT (A) rejected them giving same reason as per assessment order. Therefore, assessee is in appeal before us.
We have heard the rival contentions. The brief facts is that during the year assessee has earned Rs. 43,700/- as commission from real estate business and shown it in the P & L Account of the assessee. We have perused the Memorandum & Articles of the company wherein object no. 1 it is stated be that of to manage, administrator, operate, maintain into carrying on the business of hotels and related properties and further to act a work as consultant commission agent for all over in India and abroad. We are of the view that commission income of Rs. 43,700/- which has been generated from real estate business is widely covered under the object clause of the Memorandum of Association of the Company. Further, the earning of commission income is itself a separate business of the company as it is an activity of arranging and helping in negotiation of real estate. It is -19/Del/2013 Mahagun Hotels Pvt. Ltd. A Y 2008-09 & 2009-10 an organized effort of the assessee company to generate the revenue. According to section 2 (13) of the Income tax Act business has been defined as “Business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture”
We are unable to comprehend that commission income earned by the assessee company is not chargeable to tax under the head business income. According to us, commission income earned by the assessee is chargeable to tax under the head of “profits and gains of the business “only. As business, income it specifically falls under the specific heads of income as provided under the Section 14 of the Income Tax Act it cannot be texted under the residuary head of income. Therefore we are not in agreement with the views of AO and CIT(A) therefore ground no. 3 of the appeal is allowed.
6. The 4th ground of appeal is against the chargeability of interest on FDR as income from other sources as per AO and CIT (A) against the view of the assessee that it should be abated against capital working progress. The facts of the cases that the appellant company was under an obligation as per clause 3.14 of terms and conditions of allotment letter of DDA for purchase of hotel plot to furnish performance guarantee in the form of bank guarantee of Rs. 1,61,05,000/- accordingly the company raised equity capital as it source and made a FDR of Rs. 1.62 crores with Canara Bank and obtained bank guarantee in favour of DDA out of this FDR assessee has earned interest of Rs. 1,81,379/- as per Clause no. 3.14 it is apparent that furnishing of bank guarantee was a mandatory condition and therefore only assessee could start construction of the project. Therefore, the allotment of hotel plot to the appellant is a pre-requisite of bank guarantee and therefore the assessee’ s action of putting bank FDR is inextricable link with the business of the company. Further a loan of Rs 20 crore was obtained by the assessee Assessee was to deposit Rs 23,96,00,000/- with DDA within 180 days from the date of allotment of plot. For which against the loan amount Rs 20 crores were disbursed therefore appellant kept it in FDR for just 9 days and earned Rs 241095/- as interest. This money was not surplus as not required for the project but a short-term parking of funds disbursed out of loan availed. As soon as the loan amount is disbursed, the interest payment to bank is due and therefore to reduce the overall cost as a prudent businessman assessee has got it invested in FDR. The case of the assessee is not that assessee was having unutilized money and such surplus money is deposited by the appellant to earn interest income thereon. Had that been the case issue of taxability of interest income would have been under the head of income from other sources as per the decision of Hon’ble Supreme Court in case of CIT vs. Tuticorin Alkali Chemicals -19/Del/2013 Mahagun Hotels Pvt. Ltd. A Y 2008-09 & 2009-10 & Fertilizers Ltd. 227 ITR 172. However, in the case of the assessee, it was not a surplus money but it was use of the money for the purpose of the business, which has resulted into interest income. Before us, Ld. AR has submitted decisions of various authorities including decision of Hon’ble Supreme Court in case of CIT vs. Bokaro Steel Limited 236 ITR 315. Hon’ble Delhi High Court in case of Indian Oil Panipat Power Consortium Ltd. vs. ITO has considered the issue of taxability of interest income arising on activity, which is inextricable linked with the business of the assesee. Honourable Delhi high court in Indian oil Panipat power consortium Limited V ITO in appeal no 1156 & 1157 /2007 dated 26.02.2009 held as under :-
“5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in Section 3 of the Act which states that for newly set up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of Section 4 of the Act which is the charging Section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under Section 14 in Chapter IV of the Act. For an income to be classified as income under the head "profit and gains of business or profession" it would have to be an activity which is in some manner or form connected with business. The word "business" is of wide import which would also include all such activities which coalesce into setting up of the business. See Mazagaon Dock Ltd vs CIT & Excess Profits Tax; (1958) 34 ITR 368 (SC), and Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax; (1954) 26 ITR 765 (SC). Once it is held that the assessee‟s income is an income connected with business, which would be so in the present case, in view of the finding of fact by the CIT(A) that the monies which were inducted into the joint venture company by the joint venture partners were primarily infused to purchase land and to develop infrastructure - then it cannot be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank, will result in the character of the funds being changed, in as much as, the interest earned from the bank would have a hue different than that of business and be brought to tax under the head „income from other sources". It is well-settled that an income received by the assessee can be taxed under the head "income from other sources" only if it does not fall under any other head of income as provided in Section 14 of the Act. The head "income from other sources" is a residuary head -19/Del/2013 Mahagun Hotels Pvt. Ltd. A Y 2008-09 & 2009-10 of income. See S.G. Mercantile Corporation P. Ltd vs CIT, Calcutta; (1972) 83 ITR 700 (SC) and CIT vs Govinda Choudhury & Sons.; (1993) 203 ITR 881 (SC).
5.2 It is clear upon a perusal of the facts as found by the authorities below that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources. Since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. In the case of Tuticorin Alkali Chemicals (supra) it was found by the authorities that the funds available with the assessee in that case were „surplus‟ and, therefore, the Supreme Court held that the interest earned on surplus funds would have to be treated as „income from other sources‟. On the other hand in Bokaro Steel Ltd (supra) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be „inextricably linked‟ to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre- operative expenses.
There is another perspective from which the present issue can be examined. Under Section 208of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in Section (2) to (7) of Section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd vs CIT(1975) 98 ITR 167. The Supreme Court went on to observe at page 175 as follows:
"We have already referred to section 208 of the Companies Act which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of sub-Section (1) of that section provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalizing the interest in case the interest is paid on money raised to defray expenses of the construction of any -19/Del/2013 Mahagun Hotels Pvt. Ltd. A Y 2008-09 & 2009-10 work or building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses."
6.1 In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the later situation it cannot be capitalized. To test the principle we could extend the example, that is, would our answer be any different had assessee passed on the interest to the respective shareholders. If not, then in our view the only conclusion possible is that interest earned in the present circumstances ought to be capitalized.
In view of the discussion above, in our opinion the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals (supra) in the facts of the present case. In our opinion on account of the finding of fact returned by the CIT(A) that the funds infused in the assessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treated as income from other sources. In the result we answer the question as framed in favour of the assessee and against the Revenue. These appeals are allowed and the impugned judgment is set aside.”
7. Therefore respectfully following the decision of Honourable high court we hold that interest income earned by the assessee is also inextricably linked with the business of the company and therefore AO and CIT (A) both erred in applying the ratio of decision of Honourable Supreme court in case of CIT V Tuticorin Alkalis Limited 227 ITR 172. Therefore, same is required to be abated against the cost of working progress of the hotel of the assessee. Therefore, we hold that AO and CIT (A) both yield in this case in taxing the interest income of FDR of Rs. 4,22,474/- as income from other sources. In view of this addition made by AO is deleted. Ground no. 4 of the appeal is allowed.
.Del.2013 for AY 2009-10 :- 08. Ground no. 1 and 2 of the appeal are not pressed and therefore same are dismissed. -19/Del/2013 Mahagun Hotels Pvt. Ltd. A Y 2008-09 & 2009-10 09. Ground no. 3 of the appeal is regarding taxability of interest income of Rs. 14,44,838/- being interest on FDR which is taxed by assessing officer as income from other sources against the treatment given by the assessee against the treatment given by the assessee of its reduction from the capital working progress of the project. We have decided this issue in this order while deciding the appeal of the assessee for AY 2008-09 wherein we have directed that interest income shall go to reduce the cost of capital working progress as the amount invested is inextricable linked with the business of the company. Ground no. 4 in that appeal for AY 2008-09 and this ground of the appeal are identical in facts and circumstances. Therefore based on our decision for AY 2008-09 we are of the view that FDR interest income of Rs. 14,44,835/- will go to reduce the cost of hotel and will not be chargeable to tax under the head of income from other sources. Therefore, ground no. 3 of this appeal is allowed.
Next ground of appeal is against the disallowance of claim of depreciation of Rs. 1,88,288/- earned tools used for the business of the appellant. The brief facts are that assessee has claimed depreciation of Rs. 1,88,288/- on such as Batching Plant, submersible pumps etc., which are tools / Machines for constructing the building. According to AO these machines are used in the construction activity whereas the business of the assessee is as hotel year therefore according to him these machines cannot be said to have been utilized for the business of the assessee and therefore depreciation of Rs. 18,8,288/- is disallowed. Before the CIT(A) assessee contended that the assets are owned by the assessee and are utilized for the purpose of the business of the assessee and alternative plea was also taken before that the amount of depreciation should be allowed to be accumulated towards the cost of construction of the hotel. The CIT (A) rejected the claim of the assessee that construction of the hotel is not the business of the assessee and therefore depreciation is not allowable and alternate submission of the assessee was also rejected because if the depreciation is allowed to be accumulated in the cost of construction, same would be eligible for depreciation when the hotel is complete. The CIT (A) therefore confirm the order of AO therefore assessee is in appeal before us.
We have heard the rival contentions.
According to us, the tools and machineries, which are purchased by the assessee, are not eligible for depreciation but they themselves are cost of construction of the hotel building. Therefore, we find no infirmity in the order of AO and CIT (A) in not granting the depreciation on the assets hence, ground no. 5 of the appeal is dismissed.
-19/Del/2013 Mahagun Hotels Pvt. Ltd. A Y 2008-09 & 2009-10
In the result, both the appeals of the assessee are partly allowed. (Order Pronounced in the Court on 06/11/2015)