TMI Blog2017 (5) TMI 1416X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, we are of the considered opinion that the issue should be remitted back to the file of the AO to consider taxing the share income of the assessee as per the provisions of section IT Act. This view is supported by the Hon’ble MP High Court decision in the case of CIT Vs. D&H Secheron Electrodes Ltd. [2005 (1) TMI 92 - MADHYA PRADESH High Court]. Accordingly, we set aside the issue in dispute to the file of the AO with a direction to compute the income of the AOP and the share income of the AOP in the hands of the Members of AOP i.e. assessee. Accordingly, the additional ground raised by the assessee is allowed for statistical purposes. - I.T.A. Nos. 766, 767 & 768/HYD/2016 - - - Dated:- 26-5-2017 - SHRI V. DURGA RAO, JUDICIAL MEMBER, AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER For The Assessee : Shri S. Rama Rao For The Revenue : Smt. Suman Malik ORDER PER D.S. SUNDER SINGH, A.M.: All these appeals filed by one assessee are directed against a common order of CIT(A) 2, Hyderabad, dated, 18-02-2016 for the AYs 2009-10 to 2011-12. As identical issue is involved in these appeals, they were clubbed and heard together and, therefore, we find it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission of the assessee that since commercial operation has not commenced, and matter is locked up in litigation, the interest credited cannot be taxed. It was submitted that the interest has only accrued and credited. The same has not been received and there is no likelihood of receipt of the same as the matter relating to JV is under arbitration and the fate of receipt of this amount is uncertain. It was further contended that the interest accrued to the assessee has to be reduced from capital work in p-ogress (WIP). On the other hand, it was the contention of the AO that since the assessee is following mercantile system, it has to account for the accrued interest. It was further observed by the AO that unless there is an inextricable link between the receipt of interest and business, the interest income cannot be related to business income and accounted for in reducing WIP during pre-commencement period. In this regard, the observations of the AO for the AY 2010-11 are as under: 3. From the other details/ documents obtained from the assessee during the course of hearings for the Assessment Year 2011-12, it was made out thet the assessee company and trt/s DLF Retail Develope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are doubtful of recovery of the same. The assessee also made an alternate plea that since the interest element in their hands is out of unutilized funds contributed by them to the Consortium, any accrual I interest out of the above should be reduced from the WIP instead of treating the Same as income from other sources. In support of this alternate plea, the assessee relied on the decision of Bombay High Court in the case of CIT v. Lok Holdings (Bombay) reported in 308 ITR 356. During the course of present proceedings, the assessee also filed a copy of the decision of the Apex Court in the case of CIT v. Excel Industries Ltd (358 ITR 295) and submitted that the since no interest was received by them till date, the taxability of such interest does not arise. 5. The submissions of the assessee are considered. In the first place, the assessee had not recognized any receipt of interest in their hands while filing the original return of income for the subject Assessment year on 14.10.2010, while the interest was brought into the books for the immediately preceding Assessment year 2009-10. However, when the facts of crediting their account by the Consortium With the gross amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be taxed in the hands of the assessee, regardless of the further claims of doubtfulness expressed by the assessee on recovering the balance interest amount from the AOP. Accordingly, the amount of ₹ 1,10,15,907/- being interest, is brought to tax in the hands of the assessee. 6. The next aspect for consideration is the treatment to be given to this receipt of interest of ₹ 1,10,15,907/- in the hands of the assessee. As per the claim put forth by the assessee vide their revised return and further filing of case laws, the interest has to be reduced from the closing WIP and cannot be taxed as income from other sources. The submissions and the case law of the assessee are considered. Admittedly, the assessee had not started its commercial operations by the end of the subject Assessment year. It is a settled law that unless there is an inextricable nexus with the nature of the business of the assessee, interest earned on investments is to be treated as income from other Sources. The financials of the Consortium M/s GSG-DRDL Consortium, for the Assessment year 2010-11 show the credit balance of the assessee at ₹ 8,18,87,750/- against ₹ 4,29,76,775/- adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove view of the Apex court. 6.3 As regards the case laws relied upon by the assessee in support of reducing the interest from capital WIP, it is seen that the facts of the decision of Bombay High Court in the case of CIT v. Lok Holdings (Bombay) reported in 308 ITR 356 are totally different to the facts of case on hand. In this case, the facts are that M/s Lok Holdings are in the business of construction and received advances from customers, which were deposited in banks. The interest accrued on such advances was treated as income from other sources by the AO. It is against this treatment, the Bombay High Court held that since receipt of advances is part its business of the assessee, the interest accrued on such business advances go to reduce the capital WIP, till the conclusion of the project. However, in the case on hand, the assessee has invested an amount of ₹ 429.76 lakhs in the Consortium and the said GSG DRDL Consortium, which was entrusted with the job of maintaining the books of account of the consortium, has credited the account of the assessee with the interest amount, lying unutilized at the year end Therefore, going by the above facts, the interest is borne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome from other sources. 3. Aggrieved by the order of AO, the assessee carried the matter in appeal before the CIT(A). The submissions made by the AR of the assessee were extracted by the CIT(A) in his appeal at pages 10 to 12. 4. After considering the submissions of the assessee, the CIT(A) observed that as per the MOU entered by the assessee and M/s DRDL constituting the AOP, M/s GSG DRDL Consortium, interest is due to the parties of the AOP at the year end on the unutilized funds. Accordingly, the AOP has credited the account of the assessee with the interest due on the funds of the assessee at ₹ 1,10,15,907/- and deducted TDS at applicable rates. Since these facts are borne out of record, and admittedly the assessee is following mercantile system of accounting, the interest of ₹ 1.10 crores is to be taxed in the hands of the assessee. 4.1 CIT(A) further observed that this clause in the MoU is driven by common business exigencies and not by any compulsion. The assessee claimed that this interest amount is to be netted off against closing WIP, claiming that this interest income should go to reduce the pre-production expenses Which would ultimately be capitaliz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The learned Commissioner of Income-Tax (Appeals) erred in confirming the action of the Assessing officer in making addition on the ground that it represents interest income earned by the assessee from unutilized investments. 3. Any other ground that may be urged at the time of hearing. 5.1 The assessee filed a petition for admission of the following additional ground: The AO and the CIT(A) ought to have considered the fact that any income i.e., share income or interest or remuneration received from AOP by a member can be assessed only in accordance with the provisions of section 67A of the IT Act, and not otherwise. 6. Ld. AR appearing for the assessee submitted that assessee is a member of AOP(Joint Venture) namely, GSG DRDL Consortium constituted specifically for funding the GHMC Project. He submitted that the assessee has entered into a Memorandum of Understanding with DLF Retail Developers Ltd. for development of the property with profit sharing ratio of 50:50 and contributed the capital in the form of interest bearing loans. AOP consortium has not invested any surplus funds for the purpose of earning the interest income. Interest clause was incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the contribution properly. He submitted that since the profit sharing is equal,the AOP is determinative and the income of AOP is required to be computed in accordance with the provisions of section 67A 86, 167B of the Act, which is separate code by itself. He contended that the AO ignored the section 67A and preferred to tax the interest in the hands of assessee instead of computing the income in the hands of AOP as per the provisions of section 67A and to tax the share income as a member of the AOP in the assessee s hands. This aspect was not considered by the revenue authorities and submitted that the issue goes to the root of the assessment and requested for admission of additional ground and adjudicate the same. 9.0. Per contra, ld. DR strongly supported the orders of revenue authorities and submitted that in the assessee s case, the business activity has not yet commenced and as per the MoU, it is clearly evident that the funds contributed by the members of the AOP bears interest and even interest on unutilized funds. Ld. DR submitted that as per form 26AS, it was clearly mentioned that interest was credited to the capital account and to the extent of interest payment th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 67A, which reads as under: 67A. Method of computing a member s share in income of association of persons or body of individuals.- (1) In comput ing the total income of an assessee who is a member of an associat ion of persons or a body of individuals wherein the shares of the members are determinate and known other than a company or a cooperat ive society or a society registered under the Societ ies Registrat ion Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India, whether the net result of the computat ion of the total income of such associat ion or body is a profit or a loss, his share (whether a net prof it or net loss) shall be computed as follows, namely :- (a) any interest, salary, bonus, commission or remuneration by whatever name called, paid to any member in respect of the previous year shall be deducted from the total income of the associat ion or body and the balance ascertained and apport ioned among the members in the proport ions in which they are ent it led to share in the income of the association or body ; (b) where the amount appor t ioned to a member under clause (a) is a prof it, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which should be brought to tax in the hands of the assessee since the shares of the AOP are determinate. In the instant case assessee is member of AOP and received interest as member of the AOP, hence as per section 67A, the income has to be computed in the hands of AOP and the share income has to be brought to tax in the hands of member of AOP. This issue has not been considered by this AO or CIT(A). Therefore, we are of the considered opinion that the issue should be remitted back to the file of the AO to consider taxing the share income of the assessee as per the provisions of section IT Act. This view is supported by the Hon ble MP High Court decision in the case of CIT Vs. D H Secheron Electrodes Ltd., 290 ITR 697. Accordingly, we set aside the issue in dispute to the file of the AO with a direction to compute the income of the AOP and the share income of the AOP in the hands of the Members of AOP i.e. assessee. Accordingly, the additional ground raised by the assessee is allowed for statistical purposes. 13.2 As we have adjudicated the additional ground raised by the assessee and the issue raised therein is remitted back to the file of the AO, we consider it is not neces ..... X X X X Extracts X X X X X X X X Extracts X X X X
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