TMI Blog2019 (8) TMI 835X X X X Extracts X X X X X X X X Extracts X X X X ..... f its mall at Bangalore and, therefore, the interest earned by the assessee by parking the said funds temporarily with bank cannot be treated 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, therefore, it would go to reduce the capital work-in-progress. We, therefore, accept the above contention of the ld. counsel for the assessee that if the expenditure is capitalized, the income earned on temporary parking of the funds being capital in nature will go to reduce the capital work-in-progress. Allowability of market research expenses and depreciation on leasehold improvements as business expenditure - HELD THAT:- Since, in the preceding paragraphs, we have already held that the interest income should go to reduce the capital work-in-progress where all the expenses are capitalized, therefore, following similar reasoning we hold that the assessee should not have any grievance in treating this expenditure as work-in-progress since it is getting the benefit of reduction to the extent of the interest income. Ground of appeal therefore, dismissed. Claim of expenses on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of interest amounting to ₹ 13,79,02,237/- has been treated as business income by the assessee. Further, the assessee has also disclosed capital gain of ₹ 72, 68,440/- in its accounts. According to the Assessing Officer, the assessee failed to substantiate as to how the interest income is business income. According to him, the assessee is a real estate developer and its project is under construction. The assessee has not earned any revenue from the project till date. The interest is on the short-term deposit of surplus funds lying with the banks. The actual nature of receipts according to the Assessing Officer appeared to be from pre commencement income taxable as Income from other sources. He noted that the assessee is involved in the business of development of real estate. All the costs incurred for real estate development has been capitalized except for a few items. He observed that as per Note 22 to the Notes to the Accounts, the assessee has stated the following capital work in progress:- Capital work in progress The Company is in the process of construction of Hotel Commercial Building at Bangalore. Expenditure incurred, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the same. After making repayment of loan to Eicher Goodearth Ltd., the company invested the balance fund in Mutual Funds on temporary basis. In the year 2010-11 the company raised ₹ 1,40,00,00,000/- by allotting 5600 Shares of ₹ 10/- each at a premium of ₹ 2,49,990/- to Virtuous Retail Ltd., and in the year 201112 the company further raised ₹ 1,90,22,75,000/- by allotting 19,02,27,500 FCDs of ₹ 10/- each to Vassam Ltd., of Cyprus and ₹ 4,70,67,75,160 by allotting 47,06,77,516 FCDs to Virtuous Retail Pte Ltd., of Singapore and repaid Debenture Application Money of ₹ 4,70,67,75,160/- to Vassam Ltd of Cyprus. The Company also executed Sale Deeds for purchase of land rights for execution of mixed commercial development project at Chennai and is currently executing construction of mixed commercial development project at Bangalore, work for which is under progress. 5. The details of funds raised by the assessee from all the sources during the year under consideration is as below: S. No. Source of funds Amount (Rs.) l. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the assessee out of the borrowed funds, while the business of the assessee of construction of the said commercial complex had not commenced or the said funds had not been utilized for the construction of the said commercial complex and during the period when the funds were lying idle could not be considered as business income and was taxable under the head Income from other sources. Similarly, the interest paid on the borrowed funds was not allowed to be set off against the said interest income in terms of the provisions of section 57 of the Act since the funds invested by the assessee were out of borrowed funds which though were taken for the purpose of the business of the assessee were lying idle and could not be considered to have a direct nexus with the business income of the assessee. The Assessing Officer similarly disallowed various other expenses debited to the P L Account. In the draft order, the Assessing Officer also disallowed depreciation on various assets. 7. The assessee approached the DRP. However, the DRP concurred with the findings given by the Assessing Officer so far as the treatment of the interest income as Income from other sources a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessment orders, on facts in the circumstances of the case and in law, the Ld. AO/ Hon ble DRP has erred in disallowing and capitalizing the interest of ₹ 61,93,34,362 payable on FCCDs, even after accepting that the funds were raised and utilized for the purposes of the ongoing project (which constituted the business of the Appellant), without appreciating that the interest expense is incurred wholly and exclusively for the purposes of business of the Appellant and is an allowable expenditure under the provisions of Section 37/ 36(i)(iii) of the Act. Ground No. 4: Disallowance of interest paid on FCCDs under Section 57 of the Act (on a without prejudice basis) 4.1 Without prejudice to the above grounds, on facts in the circumstances of the case and in law, the Ld. AO/ Hon ble DRP has erred in not allowing deduction for the interest payable on FCCDs under Section 57 of the Act against the interest income offered to tax under Section 56 of the Act. 4.2 On facts in the circumstances of the case, the Ld. AO/ Hon ble DRP has failed to appreciate that there is a direct nexus between interest expense and interest income of the Appellant as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciating that the Appellant has claimed the credit of taxes deducted at source based on Form 26AS. 7.2. On facts in the circumstances of the case and in law, the Ld. AO/ Hon ble DRP erred in holding that the Appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 271(1)(c) of the Act. The above grounds are without prejudice to each other. The Appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing. 8.1 The assessee has also raised the following additional grounds:- Without prejudice to the above grounds, on the facts, in the circumstances of the case and in law, the interest income amounting to ₹ 75,74,22,181 accruing to the Appellant, in the absence of set up of business, was liable to be treated as capital receipt with the consequential effect of such receipt reducing the capital work-in-pr ogress. On the facts, in the circumstances of the case in law, the interest income amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted that the ld. DRP while directing the Assessing Officer to capitalize the various expenses as work-inprogress, treated the interest income as Income from other sources. Referring to Note No.17 attached to the Notes Forming Part of Financial Statements, copy of which is placed at page 18 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the finance costs of ₹ 62,38,48,105/- which consists of interest on Fully and Compulsorily Convertible Debentures at ₹ 61,93,34,362/- and interest on overdraft facility at ₹ 45,13,743/-. He submitted that the Assessing Officer treated the interest income as Income from other sources on the ground that the assessee has not received any income. He submitted that the Assessing Officer is taking divergent views. If the expenditure has to be capitalized, then, the income should go to reduce the capital work-in-progress. Referring to the decision of the Hon'ble Delhi High court in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO reported in 181 Taxman 249, he submitted that the Hon'ble High Court held that when the income was earned in a period prior to commencem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d clearly show that it is ready to commence business and as a corollary that it has already been set up. The actual acquisition of land is the result of such efforts put in by the assessee. Once the land is acquired, the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of land may be a first step in the commencement of the business, but, section 3 of the Act does not speak of commencement of the business. It speaks only of setting up of the business. Accordingly, the order of the CIT(A) allowing the various expenses as business expenditure as against capitalization of the same as work-in-progress by the Assessing Officer was upheld. 15. Referring to various other decisions as filed in the paper book, the ld. counsel for the assessee submitted that disallowance of the various expenses including the interest paid on Fully Compulsorily Convertible Debentures is not justified. 16. In his another plank of argument, the ld. counsel for the assessee submitted that if the interest expenses was to be capitalized in the cost of the ongoing project, the interest income being inextr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 taxman 568 (AP). 18. We have considered the rival arguments made by both the sides and perused the orders of the A.O./TPO/DRP. We have also considered the various decisions cited before us. We find the Assessing Officer, in the instant case, held that the assessee is developing a property for its use in the business of letting them on hire and is not developing the property for future sale. Therefore, the Revenue in future will not come from sale of property but will come from rental receipt and the business assets on which the assessee will earn income will come into existence much later. He, therefore, held that the interest income on the investments made by the assessee out of the borrowed funds while the business of the assessee of construction of the said commercial complex had not commenced or the said funds had not been utilized for the construction of the said commercial complex and during the period when the funds were lying idle could not be considered as business income and was taxable under the head Income from other sources. Similarly, he held that the interest paid on the borrowed funds was not allowable to be set off against the said interest incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned was 'inextricably linked' with the setting up of the power plant. He, therefore, applied the judgment of the Supreme Court in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 and allowed the claim of the assessee by directing the Assessing Officer to delete the addition and to consider the same for capitalization towards pre-operative expenses. On the revenue's appeal, the Tribunal, following decision in Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172 / 93 Taxman 502 (SC) reversed the order of the Commissioner (Appeals). 20. Before the Hon'ble High Court, the following substantial question of law arose for its consideration:- Whether the Tribunal misdirected itself in law in holding that interest which accrued on funds deployed with the bank could be taxed as income from other sources and not as capital receipt liable to be set off against pre-operative expenses ? 20.1 We find the Hon'ble High Court decided the issue in favour of the assessee. The relevant observations of the Hon'ble High Court from para 5 onwards read as under:- 5. In our opinion the Tribunal has miscons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney 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. 7. In view of the discussion above, in our opinion the Tribunal misdirected itself in applying the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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