2016 (6) TMI 1399 - AT - Income Tax

Taxable income - interest income credited to Work-in- process (i.e. WIP) (on the ongoing phase) - as attributable to the WIP, and should be reduced from amount of WIP of the project undertaken by the assessee in its proprietorship unit namely M/s Silver Developers - HELD THAT - Impugned interest is a period item. Under these circumstances, it can clearly be said that assessee had earned pre-decided amount of interest as the time passed. It is further noted by us that factually also GIPL had paid interest to the assessee as was stipulated in the agreement and that too after deducting tax at source. The said amount of TDS has been admittedly claimed by the assessee in its return of income. As clearly establish that the impugned interest amount should be treated as income of the assessee for the period under consideration. It is also noted that with respect to interest amount received from M/s Industrial Finance Securities Pvt Ltd, Ld. Counsel fairly stated during the hearing that this company is an independent party unconnected with this project, and therefore this interest income is not relatable to WIP, but it was inadvertently reduced from WIP, but it should be separately taxed as business income. We uphold the order of the Ld. CIT(A) for treating the total interest income as taxable in the year under consideration and also uphold his action in treating same as income from business in the given facts and circumstances of the case. Thus, this ground is dismissed. Addition on account of interest expenses holding the same as business expenditure as against the capital expenses attributable to WIP - HELD THAT - As already held in earlier part of our order that interest income is not part of WIP and it was assessable separately as business income of the period under consideration. Thus, drawing same analogy, we find that interest expense is also not part of WIP but business expense of the assessee for the period under consideration. The AO had also unfortunately followed double standards while passing the assessment order. When he had treated the interest income as separate income and did not choose to reduce it from the cost of WIP, then there was no justification on his part to treat interest expense as part of WIP and disallow the same. Thus, taking into totality of facts and circumstances of the case, we find that order of Ld. CIT(A) is well reasoned and thus Ld CIT(A) is justified in treating the interest expenses as having been incurred in the regular course of business and deductible in full as business expense of the period under consideration. We do not find any need to interfere in the findings of the Ld. CIT(A) and the same are upheld. This ground of revenue is dismissed. Notional interest attributable to interest free deposits while computing the income under the head House Property of the assessee during the year - HELD THAT - AO nowhere held that actual rent received by the assessee was not annual let out value and nowhere he had given any other comparables to determine the ALV. Actual rent received was required to be accepted as ALV. The law does not permit the addition of notional interest on the ground of interest-free deposits received from the tenant. The law in this regard has been clearly explained in the various judgments as has been relied upon by the CIT(A), as reproduced above. No contrary judgment was brought to our notice by the Ld. DR. Under these circumstances, we do not find any reason to interfere in the order of Ld. CIT(A) and therefore same is upheld ground no.2 of revenue s appeal is dismissed. Treatment to hire charges income received - income from house property or income from other sources - AO treated the rent receipts towards amenities from the tenant in the form of hire charges as income from other sources as the assessee had entered into separate agreements for the hiring amenities and therefore the amount received by the assessee was towards utilization of amenities and not for the utilization of house property - HELD THAT - The perusal of particulars of items provided under the amenities, as has been discussed by the Ld. CIT(A) in his order, show that these amenities are of the nature that they constitute integral part of the house building e.g. Electrical Panels, AHU rooms and fire control system, water tanks, elevator, etc. In our considered view, all these items are nowadays considered as items of basic necessities. It has been contended before us that the impugned premises could not have been put to use without these amenities. In any case, the main intention of the assessee was stated to be for exploiting the property and not to render any service with the help of these amenities. We do not find anything indicating that services provided with the help of these amenities were in any manner distinct from letting out of the property. Under these circumstances, hire charges need not necessarily be separately assessed from rental income. Thus, both of these can be assessed under the head income from house property as part of total rental income. We find that the order of Ld. CIT(A) is justified on facts and law both. Proportionate disallowance of expenses which would have been incurred towards the property which was either let out or gifted - AO made disallowance @ of 25% of the total expenses on the basis of area occupied by the let out properties - HELD THAT - CIT(A) has made item wise analysis of all the expenses and found that none of these expenses were related to the let out properties or gifted properties. If any expenses were incurred on such type of properties then the same were recovered. It is further noted that Ld. CIT(A) has analysed other expenses also for example professional fee and various other expenses before giving the factual findings that none of these expenses related to let out properties. Denial of natural justice - addition debited under the head purchases deleted by CIT-A - CIT(A) had considered additional evidences in violation of Rule 46A of Income Tax Rule 1962 - HELD THAT - During the course of hearing, it was put to the Ld. DR by point out that what are those additional evidences which have been referred by the Ld. CIT(A) in his order. Ld. DR was not able to point out any additional evidences. Even on merits Ld. DR was not able to controvert or contradict the factual findings given by the Ld. CIT(A). It is seen that Ld. CIT(A) has analysed entire facts and similar expenses have been allowed in earlier year A.Y. 2008-09 in the order passed u/s 143(3) by the AO himself. It was further found by the Ld. CIT(A) that the impugned expenses were not related to the joint venture project and therefore there were no reasons for transferring these expenses to the WIP account. Under these facts, we find that Ld. CIT(A) has rightly deleted the disallowance made by the AO. We do not find any reasons to interfere in the findings recorded by the Ld. CIT(A) and therefore these are upheld and consequently ground no.1 of Revenue s appeal is dismissed.

Summary

Issues Involved:

1. Treatment of interest income as part of Work-in-Process (WIP) or taxable income.
2. Deletion of addition on account of interest expenses.
3. Deletion of addition on account of notional interest attributable to interest-free deposits.
4. Classification of hire charges income as 'income from house property' or 'income from other sources.'
5. Deletion of addition on account of proportionate common expenses.
6. Deletion of addition under the head purchases.

Detailed Analysis:

1. Treatment of Interest Income as Part of Work-in-Process (WIP) or Taxable Income:

The assessee contended that the interest income of ?2,90,90,872/- credited to WIP should be reduced from the WIP amount and not included in taxable income separately. The AO taxed this amount separately as income from other sources. The CIT(A) held that the interest income was liable to be taxed but should be assessed under 'income from business/profession.' The Tribunal upheld the CIT(A)'s decision, confirming that the interest income should be treated as taxable business income and not reduced from WIP.

2. Deletion of Addition on Account of Interest Expenses:

The AO disallowed a proportionate amount of interest expenses, attributing it to WIP. The CIT(A) found that the interest expenses were incurred for business purposes and not related to WIP, thus allowable as business expenses. The Tribunal agreed with the CIT(A), noting that similar treatment should be given to both interest income and expenses, and upheld the decision to treat interest expenses as business expenses.

3. Deletion of Addition on Account of Notional Interest Attributable to Interest-Free Deposits:

The AO added notional interest on interest-free deposits while computing the annual letting value (ALV) of the property. The CIT(A) deleted this addition, citing various judgments that disallowed the addition of notional interest for determining ALV. The Tribunal upheld the CIT(A)'s decision, stating that the actual rent received should be accepted as ALV and notional interest should not be added.

4. Classification of Hire Charges Income as 'Income from House Property' or 'Income from Other Sources':

The AO treated hire charges for amenities as 'income from other sources.' The CIT(A) found that the amenities were integral to the property and inseparable, thus the income should be classified under 'income from house property.' The Tribunal upheld this decision, agreeing that the amenities were basic necessities and inseparable from the property, thus the income should be treated as 'income from house property.'

5. Deletion of Addition on Account of Proportionate Common Expenses:

The AO disallowed 25% of common expenses, assuming they related to let out or gifted properties. The CIT(A) found that the expenses were not related to these properties and were incurred for business purposes. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were correctly identified as business expenses and not related to let out properties.

6. Deletion of Addition Under the Head Purchases:

The AO disallowed expenses debited under purchases, claiming they should be capitalized as part of WIP. The CIT(A) found that these expenses were not related to the joint venture project and were revenue expenses incurred as per contractual obligations. The Tribunal upheld the CIT(A)'s decision, noting that similar expenses were allowed in the previous year and were correctly identified as revenue expenses.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on all issues, confirming that the interest income should be treated as business income, interest expenses as business expenses, notional interest should not be added to ALV, hire charges should be classified as 'income from house property,' common expenses should be treated as business expenses, and disallowed purchases should be treated as revenue expenses. All appeals filed by the assessee and Revenue were dismissed.