NEELKANTH TOWNSHIP & CONSTRUCTION P.LTD, MUMBAI V. ITO 3(2)(3), MUMBAI

ITA 4792/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2840 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 17-07-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: V C SHAH
• Keywords: Capital receipt; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUM BAI BEFORE SHRI B.R. BASKARAN, AM AND SHRI RAM LAL NEGI , JM ./ I.T.A. NO.4792/MUM/2014 ( / ASSESSMENT YEAR: 2010-11) NEELKANTH TOWNSHIP & CONSTRUCTION PVT. LTD. 508, DALAMAL HOUSE, JAMNALAL BAJAJ ROAD, NARIMAN POINT, MUMBAI-400 021. / VS. ITO - 3 (2) (3), AAYAKAR BHAVAN, MUMBAI-400 020. ./ ./PAN/GIR NO. AACCN 5345C ( /APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI V.C. SHAH / RESPONDENT BY : SHRI DURGA DUTT / DATE OF HEARING : 16/06/2016 !'# / DATE OF PRONOUNCEMENT : 22/06/2016 $% / O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 08-05-2014 PASSED BY LD CIT(A)-4, MUMBAI AND IT RELATES TO THE ASSESSMENT YEAR 2010-11. THE ASSESSEE IS AGGRIEVED BY THE DECISION OF LD CIT(A ) IN UPHOLDING THE ASSESSMENT OF INTEREST EARNED ON DEPOSITS MADE BY T HE ASSESSEE OUT OF BORROWED FUNDS. 2 ITA NO. 4792/MUM/14 (A.Y. 2010-11) NEELKANTH TOWNSHIP & CONSTRUCTION PVT. LTD. VS. ITO 2. THE FACTS RELATING TO THE ISSUE ARE STATED I N BRIEF. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROPERTY DEVELOPMENT. IN THE PAS T YEARS, IT HAD RAISED FUNDS BY ISSUING 1% AND 0% OPTIONALLY FULLY CONVERTIBLE D EBENTURES FOR AN AGGREGATE AMOUNT OF RS.51.00 CRORES. THE ASSESSEE HAD ALSO RA ISED FUNDS BY WAY OF SHARE CAPITAL TO THE TUNE OF RS.1.25 CRORES. DURING THE YEAR UNDER CONSIDERATION, IT WAS IN THE PROCESS OF IMPLEMENTING THE PROJECT OF DEVEL OPING A TOWNSHIP. THE AMOUNT SPENT ON PROJECT WAS SHOWN AS INVENTORY IN I TS BOOKS OF ACCOUNT, SINCE IT CONSTITUTES CURRENT ASSET IN ITS HANDS, I.E., THE ASSESSEE SHALL SELL THE FLATS DEVELOPED IN THE PROJECT TO VARIOUS PROSPECTIVE BUY ERS OF FLATS. THE OPENING BALANCE OF INVENTORY WAS RS.16.91 CRORES AND THE CLO SING BALANCE OF INVENTORY WAS RS.17.27 CRORES. THE NET CURRENT ASSETS WAS SHOW N AT RS.53.44 CRORES AND 53.88 CRORES DURING THE YEAR ENDING 31.3.2009 AND 3 1.3.2010. 3. DURING THE YEAR UNDER CONSIDERATION, THE ASSE SSEE EARNED INTEREST INCOME OF RS.27.15 LAKHS AND THE SAME WAS CREDITED TO THE PROF IT AND LOSS ACCOUNT. HOWEVER, FOR INCOME-TAX PURPOSES, THE ASSESSEE ADJUS TED THE INTEREST INCOME CITED ABOVE AGAINST THE PROJECT COST AND THE NET AM OUNT OF PROJECT COST WAS ADDED TO THE INVENTORY ACCOUNT. THE AO, HOWEVER, HEL D THAT THE INTEREST INCOME IS ASSESSABLE AS INCOME OF THE ASSESSEE AND ACCORDI NGLY ASSESSED THE SAME AS INCOME OF THE ASSESSEE. THE LD CIT(A) ALSO CONFIRMED THE SAME. 4. BEFORE US, THE LD A.R PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN THE CASE OF NTPC SAIL POWER COMP ANY P LTD (ITA NO.1238/2011 DATED 17.7.2012), WHEREIN IT WAS HELD T HAT IF THE RECEIPT IS INEXTRICABLY LINKED TO THE SETTING UP OF THE PROJEC T, IT WOULD BE CAPITAL RECEIPT NOT LIABLE TO TAX BUT ULTIMATELY BE USED TO REDUCE THE COST OF PROJECT. THE LD A.R SUBMITTED THAT THE ASSESSEES PROJECT GOT DELAYED D UE TO NON-RECEIPT OF SANCTIONS 3 ITA NO. 4792/MUM/14 (A.Y. 2010-11) NEELKANTH TOWNSHIP & CONSTRUCTION PVT. LTD. VS. ITO FROM VARIOUS GOVERNMENT AUTHORITIES AND HENCE THE A SSESSEE WAS CONSTRAINED TO PARK THE FUNDS RAISED BY WAY OF DEBENTURES IN THE BA NK DEPOSITS. ACCORDINGLY HE SUBMITTED THAT THE INTEREST INCOME EARNED BY THE AS SESSEE IS INEXTRICABLY LINKED TO THE SETTING UP OF THE PROJECT AND ACCORDINGLY HE SUBMITTED THAT THE ASSESSEE WAS JUSTIFIED IN ADJUSTING THE INTEREST INCOME AGAIN ST THE COST OF PROJECT. 5. AS AN ALTERNATIVE CONTENTION, THE LD A.R SUB MITTED THAT THE ASSESSING OFFICER HAS NOT INCREASED THE VALUE OF INVENTORY (W ORK IN PROGRESS) TO THE EXTENT OF INTEREST ASSESSED BY HIM AND THE VALUE OF INVENT ORY SHOULD BE INCREASED, IF THE FIRST CONTENTION OF THE ASSESSEE WAS NOT ACCEPTE D. 6. ON THE CONTRARY, THE LD D.R SUBMITTED THAT T HE IDENTICAL ADDITION MADE IN AY 2008-09 HAS SINCE BEEN ACCEPTED BY THE ASSESSEE. HE FURTHER SUBMITTED THAT THE LD CIT(A) HAS PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT RENDERED IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD (227 ITR 172) TO DECIDE THIS ISSUE AGAINST THE ASSESSEE. 7. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORD. A PERUSAL OF BALANCE SHEET WOULD SHOW THAT THE ASSESSEE IS IN THE PROCESS OF IMPLEMENTING ITS PROJECT ONLY AND DURING THE YEAR UNDER CONSIDERATIO N, THE NET CURRENT ASSETS HAS INCREASED BY A SUM OF RS.44.00 LAKHS ONLY. FURTHER A PERUSAL OF SCHEDULE D TO BALANCE SHEET, WHICH CONTAINS DETAILS CASH AND BANK BALANCE AND ALSO LOANS AND ADVANCES, WOULD SHOW THAT THE ASSESSEE HAS MADE FIXED DEPOSITS WITH BANK AS WELL AS WITH OTHER CORPORATE COMPANIES AS INTER-CO RPORATE DEPOSITS. SINCE THE ASSESSEE IS IN THE PROCESS OF IMPLEMENTING THE PROJ ECT, THE DEMAND FOR FUNDS WOULD ALWAYS THERE AND HENCE NORMALLY THE SURPLUS FUN DS, IF ANY, WOULD BE PARKED IN BANKS IN ORDER TO EARN INTEREST, SIMPLY F OR THE REASON THAT THE PROCESS 4 ITA NO. 4792/MUM/14 (A.Y. 2010-11) NEELKANTH TOWNSHIP & CONSTRUCTION PVT. LTD. VS. ITO OF EN-CASHING THE BANK FIXED DEPOSITS IS VERY EASY. HOWEVER, WHEN A PERSON IS MAKING INTER-CORPORATE DEPOSITS, IN OUR VIEW, IT CAN NOT BE SAID THAT THE SAME WAS MADE WITH A SHORT TERM OBJECTIVE OF PARKING SURPLUS FUNDS FOR TEMPORARY PERIOD. IT IS A CONSCIOUS DECISION TO ADVANCE FUNDS TO OTHE R COMPANIES AS INTER CORPORATE DEPOSITS. ACCORDINGLY, IN OUR VIEW, THE THEORY OF P ARKING SURPLUS FUNDS WOULD NOT APPLY TO THE INTER-CORPORATE DEPOSITS MADE BY THE A SSESSEE. ACCORDINGLY, WE ARE OF THE VIEW THAT THE INTEREST INCOME EARNED FROM IN TER CORPORATE DEPOSITS CANNOT BE SAID TO BE INEXTRICABLY LINKED TO THE IMPLEMENTA TION OF PROJECT. 8. NOW COMING TO THE BUSINESS OF THE ASSESSEE, WE HAVE SEEN THAT THE ASSESSEE IS DEVELOPING A HOUSING PROJECT, I.E., AFT ER DEVELOPMENT OF THE PROJECT, THE ENTIRE CONSTRUCTED AREA SHALL BE SOLD BY THE AS SESSEE. HENCE, THE COST OF DEVELOPMENT OF PROJECT IS TREATED AS INVENTORY BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT, WHICH MEANS THAT THE ASSESSEE IS IN THE PRO CESS OF CONSTRUCTING A PROJECT, WHICH IS A CURRENT ASSET IN THE HANDS OF THE ASSESSEE. WHEN THE PROJECT CONSTRUCTED BY THE ASSESSEE ITSELF IS A CUR RENT ASSET, IN OUR VIEW, THE QUESTION OF TREATING THE INTEREST INCOME AS CAPITA L RECEIPT DOES NOT APPLY. IN THE CASE OF NTPC SAIL POWER COMPANY P LTD (SUPRA), TH E ASSESSEE THEREIN WAS ESTABLISHING A NEW UNIT FOR GENERATION OF POWER AND T HE COST OF CONSTRUCTION OF THE UNIT WAS CAPITAL EXPENDITURE IN ITS HANDS. FURT HER, A FINDING WAS GIVEN THAT THE RECEIPT OF INTEREST INCOME WAS INEXTRICABLY LINK ED TO THE IMPLEMENTATION OF PROJECT. IN THE ABOVE SET OF FACTS, THE HONBLE DE LHI HIGH COURT HELD THAT THE INTEREST INCOME SHOULD BE REDUCED FROM THE COST OF PROJECT AND IT CANNOT BE ASSESSED SEPARATELY. WE HAVE NOTICED THAT THE FACT S PREVAILING IN THE INSTANT CASE ARE ALTOGETHER DIFFERENT. HENCE, IN OUR VIEW, THE DECISION RENDERED BY HONBLE DELHI HIGH COURT CANNOT BE APPLIED TO THE F ACTS PREVAILING IN THE INSTANT CASE. 5 ITA NO. 4792/MUM/14 (A.Y. 2010-11) NEELKANTH TOWNSHIP & CONSTRUCTION PVT. LTD. VS. ITO 9. HENCE WE ARE OF THE VIEW THAT THE INTEREST INC OME EARNED BY THE ASSESSEE CANNOT BE TREATED AS CAPITAL RECEIPT IN THE HANDS O F THE ASSESSEE AND HENCE THE LD CIT(A) WAS JUSTIFIED IN CONFIRMING THE ASSESSMENT OF INTEREST INCOME IN THE HANDS OF THE ASSESSEE. 10. HOWEVER, WE FIND MERIT IN THE ALTERNATIVE CO NTENTIONS OF THE ASSESSEE. SINCE THE INTEREST INCOME HAS BEEN ASSESSED SEPARAT ELY FOR INCOME TAX PURPOSES, IT SHOULD NOT GO TO REDUCE THE VALUE OF INVENTORY F OR INCOME TAX PURPOSES. IT WAS STATED THAT THE ASSESSING OFFICER HAS FOLLOWED TH IS METHODOLOGY IN AY 2008- 09 ALSO AND HENCE THE ASSESSEE DID NOT PREFER APPEA L AGAINST THE ASSESSMENT OF INTEREST INCOME. ACCORDINGLY WE DIRECT THE AO TO IN CREASE THE VALUE OF INVENTORY BY THE AMOUNT OF INTEREST INCOME ASSESSED SEPARATEL Y. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE I S PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JUNE, 2016 SD/- SD/- (RAM LAL NEGI ) (B.R. BASKARAN) &' $ / JUDICIAL MEMBER $ / ACCOUNTANT MEMBER ( ) MUMBAI; *$ DATED :22.06.2016 PS. ASHWINI 6 ITA NO. 4792/MUM/14 (A.Y. 2010-11) NEELKANTH TOWNSHIP & CONSTRUCTION PVT. LTD. VS. ITO / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. + ( ) / THE CIT(A) 4. + / CIT - CONCERNED 5. ./0 ''12 , 12# , ( ) / DR, ITAT, MUMBAI 6. 045 6 / GUARD FILE / BY ORDER / !'# (DY./ASSTT. REGISTRAR) #$ %, ( ) / ITAT, MUMBAI