GODREJ REALTY PVT. LTD., MUMBAI V. I.T.O. WD.1(1)(4), MUMBAI

ITA 4487/MUM/2012

• Counselvise Citation: 448719914 RSA 2012
• Duration Of Justice: 1 year(s) 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 07-04-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 02-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M L PERUMAL
• Assessee Lawyers: FAROOKH IRANI
• Keywords: Reasonable cause
• Section: 143(3); 133(6)

Judgement Text

0 , IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI . . , , , BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICI AL MEMBER . / ITA NO. 4487 /MUM./ 2012 ( / ASSESSMENT YEAR : 200 8 09 ) GODREJ REALTY PRIVATE LIMITED C/O KALYANIWALLA & MISTRY KALPATARU HERITAGE 127, M.G. ROAD MUMBAI 400 001 .. / APP ELLANT V /S INCOME TAX OFFCER WARD 1(1)(4), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... / RESPONDENT ./ PERMANENT ACCOUNT NUMBER AACCC6224D / ASSESSEE BY : MR. FAROOKH IRANI / RE VE NUE BY : MR. M.L. PERUMAL / DATE OF HEARING 0 7 .04.2014 / DATE OF ORDE R 04.06.2014 / ORDER , / PER AMIT SHUKLA , J.M. THE AFORESAID APPEAL HAS BEEN PREFERR ED BY THE ASSESSEE CHALLENGING THE IMPUGNED ORDER DATED 10 TH FEBRUARY 2012, PASSED BY THE LEARNED COMMISSIONER (APPEALS) I, MUMBAI, FOR THE QUANTUM OF GODREJ REALTY PRIVATE LIMITED 2 ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT' ) FOR THE ASSESSME NT YEAR 2008 09 . 2 . THE APPEAL FILED BY THE ASSESSEE IS BARRED BY LIMITATION BY 57 DAYS. IN SUPPORT OF THE APPLICATION FOR CONDONATION OF DELAY, THE ASSESSEE HAS FILED AN AFFIDAVIT, WHICH IS SWORN BY MR. K.T. JITHENDRAN, DIRECTOR, WHEREIN, THE FOLLOWING REAS ONS HAVE BEEN DEPOSED: A) THE COMPANY IS A SUBSIDIARY OF GODREJ PROPERTIES LTD. AND DOES NOT HAVE ANY DEDICATED TAX TEAM AND CONSEQUENTLY, THE SAID APPELLATE ORDER WAS FORWARDED TO THE IN - HOUSE INCOME TAX TEAM OF THE HOLDING COMPANY FOR VERIFICATION AND FURTHER APPEAL. THE RELEVANT PAPERS WERE THEREAFTER FORWARDED TO OUR CHARTERED ACCOUNTANTS, M / S. KALYANIWALLA & MISTRY. B) THE PETITION OF APPEAL WAS FINALIZED ON MAY 3, 2012 AND MR. VIPUL PASAD, THE TAX MANAGER OF OUR CONSULTANTS WAS TO FORWARD THE ENTI RE SET OF THE NECESSARY APPEAL PAPERS TO THE HOLDING COMPANY FOR REVIEW AND SIGNING BY THE COMPANY'S DIRECTOR. C) HOWEVER, MR. VIPUL PASAD'S FATHER - IN - LAW, MR LAKHAMSHI H VORA WAS IN A VERY CRITICAL STATE IN THE INTENSIVE CARE UNIT OF THE PADMASHREE HOSPI TAL, DOMBIVILI (EAST), THANE, AS HE WAS SUFFERING FROM CHRONIC DIABETES AND HAD SUFFERED A PARALYTIC STROKE AND, HENCE, MR . VIPUL PASAD PROCEEDED ON UNSCHEDULED LEAVE FROM MAY 4, 2012 ONWARDS. HIS FATHER - IN - LAW, UNFORTUNATELY, PASSED AWAY ON MAY 10,2012 AND TO PERFORM THE LAST RITUALS AND PRAYERS, HE HAD TO VISIT THE NATIVE PLACE OF HIS IN - LAWS AND, HENCE, EXTENDED HIS LEAVE TO JUNE 9, 2012 AND RESUMED OFFICE ON JUNE 11,2012. D) ON RESUMING, HE REALIZED THAT THE APPEAL PAPERS HAD NOT BEEN FORWARDED AND HE, THEREFORE, IMMEDIATELY FORWARDED THE PAPERS TO THE TAX MANAGER OF THE HOLDING COMPANY ON JUNE 12,2012. E) HOWEVER, THE CONCERNED TAX MANAGER OF OUR HOLDING COMPANY WAS ON LEAVE FROM JUNE 11, 2012 TO JUNE 23, 2012 AND RESUMED OFFICE ON JUNE 25, 2012 AND HE NCE THE APPEAL COULD NOT BE SIGNED AND VERIFIED BY THE DIRECTOR AS THE APPELLANT COMPANY DOES NOT HAVE ANY MANAGING DIRECTOR. F) ON HIS RESUMPTION, THE NECESSARY PETITION OF APPEAL WAS SIGNED AND FORWARDED TO THE CONSULTANTS ON JUNE 27, 2011. GODREJ REALTY PRIVATE LIMITED 3 G) THE CON SULTANTS, THEREAFTER, PREPARED THE APPEAL SETS AND INFORMED US ABOUT THE REQUIREMENT OF THE AFFIDAVIT ON JUNE 28, 2012, WHICH WAS DRAFTED ON JUNE 29, 2012, AND HAS BEEN FILED BY ME ACCORDINGLY . 3 . IN VIEW OF THE AFORESAID SUBMISSIONS AND AFTER HEARING BOTH THE PARTIES, WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE HAD A REASONABLE CAUSE FOR NOT FILING THE APPEAL WITHIN THE STATUTORY TIME. ACCORDINGLY, WE CONDONE THE DELAY OF 57 DAYS IN FILING THE APPEAL AND PROCEED TO DISPOSE OFF THE APPEAL ON MERIT. T HE GROUNDS RAISED BY THE ASSESSEE, READ AS UNDER: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN HOLDING THAT AN AMOUNT OF RS . 1,98,33,263 WAS LIABLE TO BE TAXED AS INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES SINCE THE SAME HAD ACCRUED AND BECOME DUE TO THE APPELLANT COMPANY AND IN IGNORING THE DOCUMENTS SUBSTANTIATING THE FACT THAT THERE WAS NO POSSIBILITY OF ANY INTEREST ACCRUING ON THE PROJECT SECURITY DEPOSIT AS THE SAME WAS WAIVED BY THE PARTIES CONCERNED. HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT SUBMITS THAT THE SAID ADDITION IS ERRONEOUS AND UNWARRANTED, AND REQUIRES TO BE DELETED. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FURTHER ERRED IN HOLDING THAT THE INTEREST INCOME ACCRUED TO THE APPELLANT IRRESPECTIVE OF THE OUTCOME OF THE PROJECT AND IN CONFIRMING THE ADDITION ON THE BASIS THAT THE OPPOSITE PARTY HAD CLAIMED THE INTEREST EXPENSES AND, HENCE, SUCH INTEREST WAS TO BE TAXED AS THE INCOME OF THE APPELLANT . 3. WITHOUT PREJUDICE TO THE FOREGOING GROUNDS, EVEN ASSUMING THOUGH NOT CONCEDING THAT SUCH INTEREST INCOME WAS LIABLE TO TAX IN THE HANDS OF THE APPELLANT FOR THE YEAR UNDER CONSIDERATION, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT SUCH INTEREST INCOME WAS LIABLE TO BE TAXED UNDER THE HEAD 'INCOME FROM OTHER SOURCES' AS AGAINST THE HEAD 'PROFITS & GAINS OF BUSINESS' AND FURTHER ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO ALLOW THE EXPENDITURE ATTRIBUTABLE TO THE EARNING OF SUCH INTEREST INCOME . GODREJ REALTY PRIVATE LIMITED 4 4 . BRIEF FACTS, QUA THE ISSUE RAISED IN THE GROUNDS OF APPEAL ARE THAT, THE ASSESSING OFFICER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, INFORMED THE ASSESSEE THAT HE HAS SOUGHT INFORMATION UNDER SECTI ON 133(6) FROM M/S. DESAI & GAIKWAD, WHEREIN, IN THEIR LEDGER ACCOUNT , THEY HAVE SHOWN THE CLOSING BALANCE IN THE NAME OF THE ASSESSEE AT ` 9,60,63,263, WHICH INCLUDES THE INTEREST LIABILITY OF ` 10,00,03,883, WHEREAS, IN THE BOOK OF THE ASSESSEE COMPANY, THE PROJECT ADVANCE TO THE SAID PARTY WAS SHOWN AT ` 7,62,30,000. THE DIFFERENTIAL AMOUNT IS INTEREST INCOME WHICH HAS NOT BEEN OFFERED FOR TAX BY THE ASSESSEE. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE MADE VERY DETAIL SUBMISSION S AFTER ELABORATI NG THE ENTIRE FACTS RELATING TO THE TRANSACTION BETWEEN THE ASSESSEE AND M/S. DESAI & GAIKWAD. THE GIST OF THE SAID SUBMISSIONS WERE AS UNDER: A) THE APPELLANT COMPANY HAD ENTERED INTO A MEMORANDUM OF UNDERSTANDING DATED AUGUST 23, 2005 FOR DEVELOPMENT OF A PROJECT WITH THE SAID M/S. DESAI & GAIKWAD, WHEREBY THE APPELLANT COMPANY WAS TO DEVELOP A RESIDENTIAL PROJECT ON THE PLOT OF LAND BELONGING TO THE SAID PARTY AT BAVDHAN, PUNE. B) THE SAID M/S. DESAI & GAIKWAD WAS TO OBTAIN CERTAIN CLEARANCES AND APP ROVALS AND ONCE THEY HAD MADE OUT THE CLEAR AND MARKETABLE TITLE TO THE PROPERTY, BOTH THE PARTIES WERE TO ENTER INTO A FORMAL DEVELOPMENT AGREEMENT. C) AS PER THE TERMS OF THE AFORESAID MEMORANDUM, THE APPELLANT COMPANY HAD GIVEN AN ADVANCE OF RS.7,62,30 ,0001 - TO THE SAID PARTY. D) IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THE SAID MEMORANDUM, THE SAID PARTY WAS LIABLE TO PAY INTEREST @ 10% P.A. ON THE AFORESAID PROJECT ADVANCE TO THE APPELLANT COMPANY FROM THE DATE OF EXECUTION OF THE PROPOSED DEV ELOPMENT AGREEMENT. E) SINCE THERE WAS AN INORDINATE DELAY IN THE PROCUREMENT OF THE REQUISITE APPROVALS AND CLEARANCES WHICH WERE TO BE OBTAINED BY THE SAID PARTY, THE EXECUTION OF THE FORMAL DEVELOPMENT AGREEMENT WAS DELAYED. GODREJ REALTY PRIVATE LIMITED 5 F) THE APPELLANT COMPAN Y, THEREFORE, CHARGED INTEREST ON THE PROJECT ADVANCE, AND RAISED A DEBIT NOTE ON M / S. DESAI & GAIKWAD DATED FEBRUARY 19, 2007, TOWARDS THE INTEREST CHARGEABLE ON THE AFORESAID PROJECT ADVANCE. A COPY OF THE DEBIT NOTE WAS FURNISHED TO THE ASSESSING OFFIC ER DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. G) THE SAID M/S. DESAI & GAIKWAD DID NOT ACCEPT SUCH INTEREST CHARGED BY THE APPELLANT COMPANY AS PER THE SAID DEBIT NOTE AND INFORMED THE APPELLANT COMPANY ACCORDINGLY VIDE LETTER DATED MARCH 6, 2007, AND RETURNED THE DEBIT NOTE TO THE APPELLANT COMPANY. THE COPY OF THE LETTER DATED MARCH 6, 2007, WAS ALSO FURNISHED TO THE ASSESSING OFFICER. H) AFTER FURTHER DISCUSSIONS BETWEEN THE PARTIES, IT WAS ULTIMATELY DECIDED BY BOTH THE PARTIES THAT SINCE THE DEVELOPMENT AGREEMENT HAD STILL NOT BEEN EXECUTED AND VARIOUS APPROVALS AND CLEARANCES WERE PENDING AND THE CONSTRUCTION ON THE RESIDENTIAL PROJECT HAD NOT COMMENCED, SUCH INTEREST WOULD NOT BE CHARGED AND THE APPELLANT COMPANY COMPLETELY WAIVED THE INTER EST TO BE CHARGED ON THE PROJECT ADVANCE. I) THE APPELLANT COMPANY RECORDED THIS AGREEMENT IN THE MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS OF THE APPELLANT COMPANY HELD ON MAY 23,2007, WHEREBY THE BOARD OF DIRECTORS PASSED A RESOLUTION DULY RECOR DING THE FACT THAT DUE TO THE AFORESAID FACTS AND CONSIDERING THE NON - ACCEPTANCE OF SUCH CHARGE OF INTEREST BY M/S. DESAI & GAIKWAD, THE INTEREST ON THE PROJECT ADVANCE GIVEN TO THE SAID PARTY WAS WAIVED BY THE APPELLANT COMPANY AND WAS NOT CHARGED. J) IN VIEW OF THE FOREGOING FACTS, THE APPELLANT COMPANY DID NOT ACCRUE ANY INTEREST INCOME FOR THE YEAR ENDED MARCH 31, 2007, AS ALSO FOR THE YEAR ENDED MARCH 31, 2008, ON THE PROJECT ADVANCE GIVEN TO MIS. DESAI & GAIKWAD AS NO INTEREST INCOME WAS RECEIVABLE BY THE COMPANY FROM THE SAID PART . 5 . IN VIEW OF THE AFORESAID FACTS, IT WAS SUBMITTED THAT NO INTEREST INCOME HAD ACTUALLY ACCRUED TO THE ASSESSEE AS THE SAID PARTY ITSELF HAS NOT ACCEPT ED THE CHARGE OF INTEREST. THE ASSESSING OFFICER, HOWEVER, REJECTED THE ASSESSEES CONTENTION AND ADDED THE DIFFERENCE OF ` 1,98,33,263 [ ` 9,60,63,263 ( ) ` 7,62,30,000] ON THE GROUND THAT MERELY WAIVING THE INTEREST UNILATERALLY DOES NOT ABSOLVE THE ASSESSEE GODREJ REALTY PRIVATE LIMITED 6 FROM FOLLOWING THE PRESCRIBED ACCOUNTING STANDARD FOR RECOGNIZIN G THE INCOME IN ITS BOOKS OF ACCOUNT. THE ASSESSEE HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND, THEREFORE, IT WAS INCUMBENT UPON THE ASSESSEE TO SHOW THE ACCRUED INTEREST . HIS DETAIL REASONS AFTER DISCUSSING VARIOUS JUDICIAL PRONOUNCEMENTS HAVE BEEN ELABORATED FROM PAGES 7 TO 11 OF THE ASSESSMENT ORDER. 6 . BEFORE THE LEARNED COMMISSIONER (APPEALS), DETAIL REBUTTAL WAS MADE ON EACH AND EVERY OBSERVATION AND REASONING OF THE ASSESSING OFFICER AND SUBMITTED THAT THE INTEREST INCOME WHICH H A S BEEN REFL ECTED IN THE BOOKS OF ACCOUNT OF M/S. DESAI & GAIKWAD, WAS CONTRARY TO THE FACT S ON RECORD AND ALSO THE MUTUAL UNDERSTANDING OF THE TWO PARTIES , WHICH IS EVIDENT FROM THE FACT THAT THE DEBIT NOTE RAISED BY THE ASSESSEE HAS BEEN RETURNED / REJECTED BY THE S AID PARTY . THUS, NO INTEREST INCOME COULD HAVE BEEN POSSIBLY ACCRUED TO THE ASSESSEE AND, THEREFORE, NO ENTRY TO THIS EFFECT WAS MADE IN THE BOOKS OF ACCOUNT. 7 . THE LEARNED COMMISSIONER (APPEALS) REJECTED THE ASSESSEES SUBMISSION AND HELD THAT AS PER THE M OU, THE INTEREST @ 10% WA S TO BE PAID TO THE ASSESSEE FROM THE ADVANCEMENT OF SECURITY DEPOSIT TO THE DATE OF ASSIGNING OF THE DEVELOPMENT AGREEMENT AND IN CASE THE DEVELOPMENT AGREEMENT DID NOT MATERIALIZE, THEN THE INTEREST @ 10% WAS TO BE PAID TO THE AS SESSEE BY THE SAID PARTY. THERE IS NO SUCH CLAUSE IN THE MOU TO WAIVE THE SAID INTEREST. THE OTHER PARTY HAS ALSO SHOWN INTEREST LIABILITY AS EXPENDITURE IN ITS BOOKS OF ACCOUNT. THEREFORE, THE ACTION OF THE ASSESSING OFFICER IS NOT ONLY CORRECT ON THE FAC TS BUT ALSO IN LAW. GODREJ REALTY PRIVATE LIMITED 7 8 . BEFORE US, THE LEARNED SENIOR COUNSEL, MR. FAROOKH IRANI, ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS IN THE BUSINESS OF PROPERTY DEVELOPMENT AND IT HAD ENTERED INTO MOU DATED 23RD AUGUST 20205, WITH M/S. DESAI & GAIKWAD , WHO WERE THE OWNER OF THE PLOT OF LAND ADMEASURING 5.10 ACRES IN THE VILLAGE BARDHAN, TALUKA MUNSHI, DISTRICT PUNE , WHERE THE ASSESSEE HAD AGREED TO DEVELOP THE SAID PROPERTY IN TWO PHASES . AS PER THE MUTUAL UNDERSTANDING AND AGREEMENT, M/S. DESAI & GAIKWA D, WERE TO OBTAIN CLEARANCE AND APPROVALS AND GET THE CLEAR TITLE OF THE PROPERTY. AS PER THE MOU, THE ASSESSEE HAD GIVEN ADVANCE OF ` 7,62,32,000 TO THE SAID PARTY BEING 50% OF THE PAYMENT TOWARDS ADVANCE AGAINST THE LAND COST. IN THE SUPPLEMENTARY MOU EN TERED ON 26 TH JULY 2006, IT WAS AGREED THAT THE ASSESSEE SHALL HAVE THE RIGHT TO TERMINATE THE MOU , IF THE OWNER WAS UNABLE TO GET THE CLEAR TITLE AND NECESSARY APPROVAL AND THE AMOUNT OF ADVANCE SHALL BE REFUNDED. HE DREW OUR ATTENTION TO CLAUSE 9 OF THE SUPPLEMENTARY MOU , WHEREIN IT WAS AGREED THAT IN CASE OF FAILURE TO COMPLY WITH THE REQUISITION RELATING TO APPROVAL AND CLEAR TITLE OF THE LAND, OWNER SHALL REFUND THE AMOUNT ALONG WITH THE 10% INTEREST PER ANNUM TILL THE DATE OF PAYMENT. FURTHER, CLAUSE 1 2 PROVED THAT THE AMOUNT ADVANCED BY THE ASSESSEE SHALL OTHERWISE ALSO CARRY INTEREST @ 10% PER ANNUM WHICH SHALL BE CALCULATE D AT THE TIME OF EXECUTION OF THE DEVELOPMENT AGREEMENT FOR THE SECOND PHASE OF THE PROPERTY. SINCE THERE WAS AN INORDINATE DELAY IN THE PROCUREMENT OF THE REQUISITE APPROVAL AND CLEARANCE BY THE OWNER , THE EXECUTION OF THE FORMAL DEVELOPMENT AGREEMENT WAS DELAYED. ACCORDINGLY, THE ASSESSEE COMPANY CHARGED INTEREST ON THE PROJECT ADVANCE OF SUCH DELAY AND RAISED A DEBIT NOTE DATED 1 9 TH FEBRUARY 2007, ON M/S. DESAI & GAIKWAD. THE SAID DEBIT NOTE WAS NOT ACCEPTED BY THE SAID PARTY AND IT WAS RETURNED BACK BY THEM VIDE THEIR LETTER DATED 8 TH MARCH 2007. GODREJ REALTY PRIVATE LIMITED 8 HE POINTED OUT TO THE RELEVANT DEBIT NOTE AND THE SAID LETTER RETURNING THE DEBIT NO TE BY THE SAID PARTY FROM THE PAPER BOOK. THEREAFTER, THE ASSESSEE COMPANY, IN ITS BOARD OF DIRECTORS MEETING, PASSED A RESOLUTION THAT CONSIDERING THE NON ACCEPTANCE OF SUCH A CHARGE OF INTEREST BY M/S. DESAI & GAIKWAD, THE INTEREST WAS TO BE WAIVED OFF AND, THEREFORE, SUCH INTEREST DID NOT ACCRUE TO THE ASSESSEE FOR THE YEAR ENDING 31 ST MARCH 2007 AND ALSO FOR THE YEAR ENDING 31 ST MARCH 2008. HE FURTHER POINTED OUT THAT ON 15 TH OCTOBER 200 8 , THERE WAS A CANCELLATION OF ALL THE MOUS AND THE DEVELOPMENT AG REEMENT WITH THE SAID PARTY. S UCH A CANCELLATION F E LL IN THE ASSESSMENT YEAR 2009 10. IN PURSUANCE OF THE SAID CANCELLATION AGREEMENT , THE ASSESSEE HAD RECEIVED INTEREST OF ` 1,81,25,729, WHICH WAS ON ACCOUNT OF REFUND OF ADVANCE OF ` 7,62,30,000. THIS INT EREST INCOME HAS BEEN OFFERED FOR TAX IN THE ASSESSMENT YEAR 2009 10. AFTER NARRATING THESE FACTS, HE SUBMITTED THAT THE PENAL CLAUSE OF CHARGING OF INTEREST AS CONTEMPLATED IN SUPPLEMENTARY MOU DATED 26 TH JULY 2006, BY VIRTUE OF CLAUSE 9, THE SAME HAD N E ITHER ACCRUED TO THE ASSESSEE N OR HAS BEEN RECEIVED BY THE ASSESSEE , BECAUSE THE SAID PARTY HAS REJECTED THE SAID DEBIT NOTE WHICH HAS ALSO BEEN AGREED BY THE ASSESSEE. THUS, SUCH AN INTEREST HAS NOT ACCRUED TO THE ASSESSEE AT ALL . IF THE SAID PARTY HAS SH OWN THIS INTEREST AS LIABILITY IN ITS BOOKS OF ACCOUNT, THEN IT CANNOT LEAD TO AN INFERENCE THAT THE ASSESSEE HAS ALSO RECOGNISED IT AS AN INCOME. THE INTEREST WHICH HAS ACTUALLY ACCRUED TO THE ASSESSEE ON ACCOUNT OF CANCELLATION OF AGREEMENT THAT IS ON TH E REFUND OF THE DEPOSITS, THE SAME HAS ALREADY BEEN OFFERED FOR TAX AND, THEREFORE, INTEREST WHICH HAS BEEN ADDED BY THE ASSESSING OFFICER IN THIS YEAR, IS WHOLLY UNJUSTIFIED IN LAW AND ON FACTS. HE FURTHER SUBMITTED THAT THE CONCEPT OF REAL INCOME HAS TO BE SEEN , WHETHER ANY REAL INCOME HAS ACCRUED TO THE ASSESSEE OR NOT. IN SUPPORT OF HIS CONTENTION, HE HAS GODREJ REALTY PRIVATE LIMITED 9 STRONGLY RELIED UPON THE DECISION S OF THE HON'BLE SUPREME COURT IN CIT V/S SHOORJI VALLABHDAS AND CO., [1962]46 ITR 144 (SC) AND GODHRA ELECTRICITY CO . LTD. V/S CIT, [1997] 225 ITR 0746 (SC). 9 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUBMITTED THAT THE ASSESSEE HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND THE ASSESSEE WAS LIABLE TO SHOW THE ACCRUED INTEREST IN TERMS OF THE A GREEMENT BETWEEN THE SAID PARTY , WHICH CLEARLY PROVIDED THAT 10% OF THE INTEREST HAS TO BE CHARGED IN CASE OF DELAY IN GETTING NECESSARY APPROVAL AND CLEARANCE. NOT ONLY THIS, THE OTHER PARTY HAS ALSO RECOGNISED THIS LIABILITY AND HAS SHOWN IT IN ITS BOOKS OF ACCOUNT. HE REFERRED TO THE RELEVANT COPY OF THE LEDGER ACCOUNT OF THE SAID PARTY AS GIVEN IN THE PAPER BOOK. THIS INTEREST HAS ALSO ACCRUED TO THE ASSESSEE IN THE ASSESSMENT YEAR 2007 08 ALSO , WHICH IS EVIDENT FROM THE FACT THAT THERE IS AN INTEREST C OMPONENT IN THE OPENING BALANCE IN THE LEDGER ACCOUNT OF THE SAID PARTY. HE REQUESTED THAT THE DIRECTION SHOULD BE GIVEN BY THIS BENCH TO REOPEN THE CASE OF THE ASSESSMENT YEAR 2007 08 ALSO. HE STRONGLY REFERRED TO THE REASONING OF TH E ASSESSING OFFICER AS GIVEN IN PAGE 7 TO 1 OF THE ASSESSMENT ORDER, WHICH HAS BEEN CONFIRMED BY THE LEARNED COMMISSIONER (APPEALS). THUS, IN SUM AND SUBSTANCE, HIS MAIN CONTENTION IS THAT ONCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THEN WHAT IS DUE TO THE A SSESSEE IN TERMS OF THE AGREEMENT HAS TO BE SHOWN AS INCOME. 10 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AS WELL AS THE MATERIAL AVAILABLE ON RECORD. THE MAIN ISSUE BEFORE US IS , WHETHER THE INTEREST WHICH HAS BEEN WORKED OUT BY THE ASSESSING OFFICER AT ` 1,98,33,263, WHICH IS THE ACCOUNT OF THE DIFFERENCE IN THE LEDGER ACCOUNT OF M/S. DESAI & GAIKWAD AND IN THE GODREJ REALTY PRIVATE LIMITED 10 BOOKS OF THE A SSESSEE CAN B E TREATED AS INCOME, TAXABLE IN THIS YEAR . FOR ADJUDICATING THIS ISSUE, THE FAC TS ARE AGAIN REITERATED FOR BETTER APPRECIATION. FROM THE MATERIAL PLACED ON RECORD, IT IS EVIDENT THAT THE ASSESSEE HAD ENTERED INTO AN MOU ON 23 RD AUGUST 2005 WITH M/S. DESAI & GAIKWAD FOR DEVELOPMENT OF A PROJECT IN TWO PHASES ON THE PROPERTY BELONGING TO THE SAID PARTY AT BAVDHAN, PUNE. IN TERMS OF THE SAID MOU, THE OWNER WAS REQUIRED TO GET NECESSARY CLEARANCE , APPROVAL AND CLEAR TITLE ON THE SAID PLOT FOR DEVELOPING THE PROJECT. THE ASSESSEE WAS ALSO REQUIRED TO GIVE AN ADVANCE OF ` 7,62,30,000, ON WH ICH THE SAID PARTY WAS LIABLE TO PAY INTEREST @ 10% PER ANNUM AT THE TIME OF EXECUTION OF THE PROPOSED DEVELOPMENT AGREEMENT. THEREAFTER, THE SUPPLEMENTARY MOU DATED 26 TH JULY 2006 WAS ENTERED , WHEREIN IT WAS AGREED THAT THE OWNER HAS TO, WITHIN 45 DAYS, G ET THE CLEAR AND MARKETABLE TITLE AND ALL THE NECESSARY APPROVALS. IN CASE, THE OWNER FAILS TO COMMIT FOR SUCH REQUISITION, THE ASSESSEE HAS THE RIGHT TO TERMINATE THE MOU AND ASK FOR REFUND OF THE SAID ADVANCE. IT ALSO CONTAINED A PENAL CLAUSE (NO.9), WHI CH PROVIDES THAT IN THE EVENT, THE OWNER FAILS TO COMPLY WITH THE SAID REQUISITION, THEN IT SHALL CHA R GE INTEREST @ 10% PER ANNUM ON THE DEPOSIT AMOUNT OF ` 7,62,20,000. SINCE THERE WAS AN INORDINATE DELAY IN PROCUREMENT OF REQUISITE APPROVAL AND CLEARANCE , THE ASSESSEE COMPANY DID RAISE THE DEBIT NOTE FOR CHARGING OF INTEREST OF ` 98,29,381 FOR THE PERIOD 3 RD NOVEMBER 2005 TO 31 ST MARCH 2007. HOWEVER, M/S. DESAI & GAIKWAD DID NOT ACCEPT SUCH CHARGING OF INTEREST AND THE DEBIT NOTE WAS RETURNED BACK TO THE ASSESSEE AFTER REJECTING THE CHARGING OF SUCH INTEREST, VIDE LETTER DATED 6 TH MARCH 2007. AFTER VARIOUS ROUNDS OF DISCUSSIONS BETWEEN THE PARTIES, IT WAS ULTIMATELY DECIDED THAT SINCE THE DEVELOPMENT AGREEMENT WA S STILL TO BE LEGALLY EXECUTED AND APPROVALS AND CLEARANCES WERE PENDING AND THE CONSTRUCTION OF THE RESIDENTIAL PROJECT GODREJ REALTY PRIVATE LIMITED 11 HAD NOT COMMENCED, THEREFORE, SUCH PENAL INTEREST WOULD NOT BE CHARGED AND, ACCORDINGLY, ASSESSEE DECIDED TO WAIVE THE SAME. IN PURSUANCE THEREOF, THE ASSESSEE COMPANY, IN ITS RES OLUTION, PASSED BY THE BOARD OF DIRECTORS, WAIVED SUCH INTEREST. ULTIMATELY, WHEN THE ENTIRE AGREEMENT WAS CANCELLED ON 15 TH OCTOBER 2008, THE OWNER REFUNDED THE SAID AMOUNT OF ` 7,62,30,000, ALONG WI TH THE INTEREST @ 10% PER ANNUM, WHICH WAS STIPULATED I N THE MOU, ON THE AMOUNT OF ADVANCE AND THE SAME HAS BEEN OFFERED FOR TAXATION IN THE ASSESSMENT YEAR 2009 10. 11 . NOW, ON THESE FACTS, THE ISSUE BEFORE US IS, WHETHER THE CHARGING OF PENAL INTEREST ON ACCOUNT OF NON FULFILLMENT OF REQUISITION AS PER THE TER MS OF MOU, WHICH LATER ON HAS BEEN WAIVED OFF BY THE PARTIES, CAN BE SAID TO BE ACCRUED TO THE ASSESSEE SO AS TO BE HELD TAXABLE IN THIS YEAR. IT IS A SETTLED PRINCIPLE OF LAW THAT THE INCOME CAN BE TAXED ON THE REAL INCOME ONLY . THE LIABILITY TO TAX IS AT TRACTED EITHER AT THE TIME OF ACCRUAL OF THE INCOME OR ON ITS RECEIPT. HOWEVER, IF THE INCOME DOES NOT RESULT AT ALL, THEN THE SAME CANNOT BE TAXED EVEN THOUGH AN ENTRY IS MADE IN THE BOOKS OF ACCOUNT ABOUT SUCH A HYPOTHETICAL INCOME WHICH HAS NOT BEEN MAT ERIALIZED. FOR TAXING AN INCOME, THE ASSESSEE MUST HAVE RECEIVED OR HA S THE RIGHT TO RECEIVE THE INCOME BEFORE IT CAN BE TAXED. UNDER THE MERCANTILE SYSTEM OF ACCOUNTING ALSO, THERE MUST BE A DEBT CREATED IN FAVOUR OF THE ASSESSEE BY SOMEBODY AND UNTIL THE N, IT CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. THIS PRINCIPLE OF LAW HAS BEEN REITERATED BY THE HON'BLE SUPREME COURT RIGHT FROM THE DECISION OF SHOORJI VALLABHDAS AND CO. (SUPRA) UP TO THE DECISION OF GODHRA ELECTRICITY CO. LTD. (SUPRA) AND ALSO IN SUBSEQUENT DECISIONS BY THE HIGH COURTS. MERELY BECAUSE THERE WAS A PENAL CLAUSE FOR CHARGING OF INTEREST ON ACCOUNT OF DELAY IN GETTING THE REQUISITE APPROVAL AND GODREJ REALTY PRIVATE LIMITED 12 CLEARANCE, IT DOES NOT IPSO FACTO CONFERS RI GHT UPON THE ASSESSEE TO CHARGE INTEREST , UNLESS THE OTHER PARTY ALSO RECOGNISE S AS A DEBT TO BE DISCHARGED IN ACTUAL TERMS. THE FACT THAT THE DEBIT NOTE RAISED BY THE ASSESSEE HAS BEEN REJECTED / RETURNED BACK TO THE ASSESSEE AND BASED ON THIS, THE ASSESS EE HAS NOT RECOGNISED THIS INCOME, HAS NOT BEEN DISPUTED BY ANY MATERIAL ON RECORD OR BY WAY OF ANY ENQUIRY FROM THE SAID PARTY SPECIFIC ON THIS SCORE, THEN IT CANNOT BE HELD THAT THE INCOME, H AS ACCRUED TO THE ASSESSEE IN THE REAL SENSE . THE REVENUES CAS E IS THAT, FIRSTLY, SUCH AN INTEREST IS FLOWING FROM THE CLAUSE OF THE AGREEMENT AND, THEREFORE, THE ASSESSEE HAS A RIGHT ON SUCH AN INCOME AND SECONDLY, THE OTHER PARTY HAS RECOGNISED THE SAID INTEREST AS LIABILITY IN ITS BOOKS OF ACCOUNT . SUCH A CONTENTI ON OF THE DEPARTMENT CANNOT BE ACCEPTED FOR THE REASON THAT FIRSTLY, THE TERMS OF CHARGING OF INTEREST ON NON PERFORMANCE OF THE REQUISITION STIPULATED IN THE AGREEMENT HAS BEEN WAIVED OFF BY THE ACT OF THE PARTIES , WHICH IS EVIDENT FROM THE EVIDENCES PLAC ED ON RECORD, THEN, ON SUCH A WAIVER, IT CANNOT BE HELD THAT THERE IS A ACCRUAL OF INCOME IN REAL SENSE BECAUSE , THE DEBT HAS NOT BEEN RECOGNISED BY THE OTHER PARTY; SECONDLY, MERE ENTRY IN THE BOOKS OF ACCOUNT OF THE SECOND PARTY WILL NOT CREATE A DEBT IN FAVOUR OF THE ASSESSEE , UNLESS THAT PARTY AGREES FOR SUCH A DEBT. IN THE PRESENT CASE, M/S. DESAI & GAILKWAD, HAVE REJECTED THE DEBIT NOTE RAISED BY THE ASSESSEE IN CLEAR AND UNEQUIVOCAL TERMS. BASED ON THIS REJECTION, THE ASSESSEE HAS WAIVED OFF THIS INT EREST IN ITS BOOKS OF ACCOUNT. MOREOVER, THE I NCOME CANNOT BE SAID TO BE GENERATED, ACTUAL OR ACCRUED, BY M E RE ENTRIES IN THE ACCOUNTS MADE BY THE PARTIES. SUCH A HYPOTHETICAL INCOME CANNOT BE SAID TO HAVE BEEN ACCRUED TO THE ASSESSEE MERELY BECAUSE THE OT HER PARTY HAS TREATED IT AS A LIABILITY. IF THAT IS SO, THEN THE DEPARTMENT SHOULD HAVE ENQUIRED FROM THE SAID PAR T Y, WHETHER IT HAS NOT REJECTED THE GODREJ REALTY PRIVATE LIMITED 13 ASSESSEES CLAIM OF INTEREST. FURTHER, FROM THE LEDGER ACCOUNT OF THE SAID PARTY, IT IS NOT CLEAR, WHICH K IND OF INTEREST HAS BEEN SHOWN AS LIABILITY, WHETHER ON ACCOUNT OF AMOUNT RECEIVED AS ADVANCE OR ON ACCOUNT OF PENAL CLAUSE OF DELAY OF REQUISITION, BECAUSE , AS IS EVIDENT FROM THE RECORDS, THE OTHER COVENANT OF THE AGREEMENT THAT THE ASSESSEE WILL RECEIV E 10% INTEREST ON THE ADVANCE HAS BEEN ACTED UPON BY BOTH THE PARTIES, WHICH HAS MATERILISED IN THE ASSESSMENT YEAR 2009 10 AND THE SAME HAS ALREADY BEEN OFFERED FOR TAX. THUS, ON THESE FACTS, AND CIRCUMSTANCES OF THE CASE AND MATERIAL ON RECORD, WE HOLD T HAT THE INTEREST INCOME OF ` 1,98,33,263, AS TAKEN BY THE ASSESSING OFFICER, HAS NOT ACCRUED TO THE ASSESSEE AND, THEREFORE, THE SAME IS NOT LIABLE TO THE TAX ED IN THE HANDS OF THE ASSESSEE. CONSEQUENTLY, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARN ED COMMISSIONER (APPEALS) AND DELETE THE ADDITION ON ACCOUNT OF INTEREST CONFIRMED BY HIM. THUS, GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 12 . GROUND NO.3, IS AN ALTERATIVE PLEA, WHICH HAS BECOME PURELY ACADEMIC IN VIEW OF OUR FINDINGS GIVEN ABOVE. HENCE TH E SAID GROUND IS TREATED AS INFRUCTUOUS. 13 . 1 3 . IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. 4 TH JUNE 2014 ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH JUNE 2014 SD/ - N.K. BILL AIYA ACCOUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 4 TH JUNE 2014 GODREJ REALTY PRIVATE LIMITED 14 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDH URY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI