DCIT, CC-XIII, Kolkata, Kolkata V. M/s. Indus Estate Pvt. Ltd., Kolkata

ITA 848/KOL/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54725 (ITAT-KOLKATA)
• Duration Of Justice: 6 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2011
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 02-06-2011
• Court: TRIBUNAL
• Department Lawyers: M BHATTACHARYA LD
• Assessee Lawyers: R SUKLA LD
• Keywords: Capital asset converted into stock in trade; Business income; Business expenditure; Rectification of order
• Section: 56; 154

Judgement Text

, B , , IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH- B , CALCUTTA () BEFORE , SHRI MAHAVIR SINGH, JUDICIAL MEMBER. /AND . !., '# , SHRI C.D. RAO, ACCOUNTANT MEMBER. $ / ITA NO. 848/KOL/2011 %& '(/ ASSESSMENT YEAR: 2007-08 DEPUTY COMMISSIONER OF INCOME-TAX CC-XIII, KOLKATA M/S. INDUS ESTATE PVT. LTD. PAN: AAACI 5414K (*+ / APPELLANT ) - % - - VERSUS - . (-.*+/ RESPONDENT ) *+ / 0 '/ FOR THE APPELLANT: / SHRI M.BHATTACHARYA, LD.DR -.*+ / 0 '/ FOR THE RESPONDENT: / SHRI R. SUKLA, LD.AR 1%2 / !# /DATE OF HEARING : 13-12-2011 3' / !# /DATE OF PRONOUNCEMENT :15-12-2011 '4 / ORDER . !., '# , ,, , SHRI C.D.RAO, ACCOUNTANT MEMBER.: REVENUE HAS FILED THIS APPEAL AGAINST ORDER DATED 18-03-2011 OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS), KOLKATA FOR T HE ASSESSMENT YEAR 2007-08. 2. THE EFFECTIVE GROUNDS OF APPEAL TAKEN BY THE REV ENUE ARE AS UNDER:- 1. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD, CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS .41,63,552/- HOLDING THAT THERE WAS NO MISTAKE APPARENT FROM THE RECORD IN THAT ORDER WITHOUT APPRECIATING THAT THE ASSESSEE CAPITA LISED RS.2,80,157/- IN THE PROJECT-IN-PROGRESS BY NETTING OFF INTEREST FOR RS.44,43,709/- (INTEREST PAID ) AND RS.41 ,63,5521- (INTEREST RECEIVED ) AND AS THE PROJECT WAS IN PROGRESS , THEREFORE, T HE INTEREST RECEIPT OF RS. 41,63,552/- WAS REQUIRED TO BE OFFERED AS INCOM E OF THE YEAR., WHICH IS A MISTAKE OF APPLICATION OF LAW APPARENT F ROM RECORD. ITA NO. 848/KOL/2011-B-CDR 2 2. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS .41,63,552/- HOLDING THAT THE EXPENDITURE OF RS. 2,80,157/ CAPIT ALISED TOWARDS WORK IN PROGRESS AND INTEREST EXPENDITURE OF BALANC E AMOUNT OF RS.41,63,552/- ALLOWED AS REVENUE BUSINESS EXPENDIT URE AGAINST EQUIVALENT AMOUNT OF INTEREST INCOME UNDER THE HEAD BUSINESS INCOME IN THE ORIGINAL ASSESSMENT ORDER DATED 29.10.2007 C ANNOT BE DISTURBED BY THE A.O. IN A RECTIFICATION ORDER U/S 154 WITHOUT APPRECIATING THAT THE ASSESSEE HAD FAILED TO OFFER THE INTEREST RECEIPT OF RS. 41,63,552/- AS INCOME OF THE YEAR. 3. RELEVANT FACTS OF THESE TWO ISSUES ARE THAT TH E COMPANY IS ENGAGED CHIEFLY IN REAL ESTATE DEVELOPMENT ACTIVITIES. DURING THE YEAR, THE ASSESS EE PAID AN INTEREST OF RS.44,43,708.67 AND EARNED AN INTEREST OF RS.41,63,552.28. THE ASSESSEE DEBITED A NET EXPENDITURE OF RS.2,80,156.39 ON THIS ACCOUNT TO ITS PROFIT & LOSS ACCOUNT, WHICH WAS SUBSEQUENTLY ADDED TOWARDS PROJECT-IN-PROGRESS ALONG WITH OTHER EXPE NSES LIKE COST OF MATERIALS, LABOUR, VARIOUS ADMINISTRATIVE EXPENSES. AS REQUIRED IN THE ASSESSM ENT PROCEEDINGS, THE ASSESSEE FILED THE DETAILS OF INTEREST PAID AND INTEREST RECEIVED. 3.1 SUBSEQUENTLY, IT WAS NOTICED THAT THE ASSESSEE PAID INTEREST AMOUNTING TO RS.44,43,7091- WAS REQUIRED TO BE CAPITALIZED AND THE TOTAL AMOUNT OF INTEREST EARNED AMOUNTING TO RS.41 ,63,5521- WAS REQUIRED TO BE TAXED AS INCOME FROM OTHER SOURCES. ACCORDINGLY, A NOTICE U/S 154 WAS ISSUED AND SERVED TO THE ASSESSEE ON 09.08. 2010 FIXING 18.08.2010. 3.2 AFTER TAKING INTO CONSIDERATION THE VARIOUS SUB MISSION OF THE ASSESSEE THE ASSESSING OFFICER ADDED AN AMOUNT OF RS.41,63,552/- BY OBSERV ING AS UNDER:- THE QUESTION OF ADJUSTMENT OF INTEREST PAID BY THE COMPANY AGAINST INTEREST EARNED B IT WILL DEPEND UPON THE P ROVISION OF ACT. THE EXPENDITURE ON ACCOUNT OF INTEREST PAYMENT WOULD HA VE BEEN DEDUCTIBLE AS INCURRED FOR THE PURPOSE OF BUSINESS HAD THE BUS INESS OF THE ASSESSEE COMMENCED. BUT THAT IS NOT THE CASE HERE. THE ASSES SEES PROJECT IS UNDER CONSTRUCTION DURING THE YEAR . THE ASSESSEE IS ENTI TLED TO CAPITALISE THE INTEREST PAID , BUT IT CANNOT CLAIM THE ADJUSTMENT OF THE INTEREST EXPENDITURE AGAINST INTEREST ASSESSABLE U/S 56 OF T HE ACT. IT MAY BE MENTIONED THAT SECTION 57 OF THE ACT SETS OUT IN ITS CLAUSES (I) TO (III), THE EXPENDITURE WHICH ARE ALL OWABLE AS DEDUCTION FROM INCOME ASSESSABLE U/S 56 OF THE ACT. BUT , IT IS NOT A CASE OF THE ASSESSEE THAT TH INTEREST PAID IS ALLOWABLE AS DEDU CTION U/S 56 OF THE ACT ITA NO. 848/KOL/2011-B-CDR 3 AS THE PROJECT OF THE ASSESSEE IS UNDER CONSTRUCTIO N AND NO REVENUE COULD BE RECOGNIZED AND OFFERED FOR TAXATION UNLESS IT IS COMPLETED AND SOLD. THE SPECIFIC PROVISION OF SECTION 70 OF ACT FOR SET TING OF LOSS FROM ONE SOURCE AGAINST INCOME FROM OTHER SOURCES UNDER THE SAME HEAD OF INCOME AND ALSO THE PROVISION OF SECTION 71 OF THE ACT FOR SETTING OF LOSS FROM ONE HEAD AGAINST INCOME FROM ANOTHER HEAD ARE NOT APPLICABLE TO THIS CASE AS ITS PROJECT WAS NOT COMPLETED AND NO R EVENUE WAS RECOGNISED FROM THE REAL ESTATE BUSINESS. THERE IS NO PROVISIO N OF LAW UNDER WHICH THE ASSESSEE COULD CLAIM DEDUCTION OR SET OFF OF HI S INCOME FROM OTHER SOURCES AGAINST INTEREST PAID ON BORROWED FUND. IN THE INSTANCE CASE, THE COMPANY HAD SURPLUS FUND AND IN ORDER TO EARN INCOME OUT OF THE SURPLUS FUND, IT INVESTED THE AMOUNT FOR THE PURPOSE OF EARNING OF INTEREST. THEREFORE, THE INTE REST OF RS.41,63,5521-, THUS EARNED IS CLEARLY OF REVENUE NATURE AND WILL H AVE TO BE TAXED ACCORDINGLY. HOWEVER, THE ASSESSEE IS ENTITLED TO C APITALISED RS.44,43,709/- INSTEAD OF CAPITALISING RS. RS.2 ,80 , 157/- IN THE PROJECT- IN-PROGRESS. . 4. ON APPEAL, THE LEARNED COMMISSIONER OF INCOME-TA X (APPEALS) HAS DELETED THE SAME BY OBSERVING AS UNDER:- 4.1 I HAVE GONE THROUGH THE RECTIFICATION ORDER AN D SUBMISSIONS OF APPELLANT. THE FACTS AS SUBMITTED BEFORE ME SHOW TH AT THE APPELLANT COMPANY WAS INCORPORATED IN 1992 AND IS CARRYING OU T THE REAL ESTATE BUSINESS SINCE PAST SO MANY YEARS AND THE BUSINESS OF REAL ESTATE OF APPELLANT WAS IN EXISTENCE DURING THE FINANCIAL YEA R RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. THE COST OF BORROWING WAS CONSIDERED BY APPELLANT AT RS. RS.2,80,157/- ONLY BECAUSE APPELLA NT HAD ADVANCED CERTAIN LOANS OUT OF THE SURPLUS FUNDS TO REDUCE THE INTERE ST COST OF BORROWING AND HAD EARNED INTEREST OF RS. 41,63,552/- ON SUCH LOAN S ADVANCED. APPELLANT REDUCED THE INTEREST EXPENDITURE COST OF RS. 44,43, 709/- WITH INTEREST INCOME OF RS 4 1,63,552/- AND CAPITALIZED THE NET COST OF BORROWING TO THE EXTENT OF RS.2,80,157 TOWARDS WORK IN PROGRESS. THE ASSESSING OFFICER HAS STATED THAT APPELLANT SHOULD HAVE CAPITALIZED THE ENTIRE AMOUNT OF INTEREST OF RS.44,43,709 INSTEAD OF ONLY RS. 2,80, 157/- TOWARD S, THE COST OF PROJECT AND SHOULD HAVE OFFERED THE INTEREST INCOME OF RS. 4 1, 63,552/- FOR TAXATION UNDER THE HEAD INCOME FROM OTHER SOURCES. THE EXTEN T TO WHICH SUCH INTEREST EXPENDITURE OF RS.44,43,709/- IS REQUIRED TO BE CAP ITALIZED TOWARDS THE COST OF WORK IN PROGRESS IS THE DISPUTE IN PRESENT CASE. APPELLANT HAS REFERRED TO THE GUIDANCE NOTE ON RECOGNITION OF REVENUE BY REA L ESTATE DEVELOPERS FOR CAPITALIZING INTEREST OF RS. 2,80,157/- OUT OF TOTAL INTEREST EXPENDITURE OF RS.44,43,709/-. AS FAR AS INCOME UNDER INCOME TAX A CT IS CONCERNED, THE ITA NO. 848/KOL/2011-B-CDR 4 SAME SHOULD BE CALCULATED AS PER THE PROVISIONS OF SECTION 145(2) OF THE I.T.ACT. CBDT VIDE NOTIFICATION S.O. 69(E) DATED 25 /1/1996 HAVE PRESCRIBED THE ACCOUNTING STANDARD I AND II FOR ALL THE ASSESS EES WHO ARE FOLLOWING THE MERCANTILE METHOD OF ACCOUNTING. ACCOUNTING STANDAR D-I OF THIS NOTIFICATION IS IN RESPECT OF ACCOUNTING POLICIES WHICH SHOULD B E BASED ON PRUDENCE, SUBSTANCE OVER FORM AND MATERIALITY AND SHOULD BE A PPARENT ON ACCOUNT OF CONSISTENCY OR DISCLOSED IN THE FINANCIAL ACCOUNT. IN THE PRESENT CASE IT IS DISCLOSED IN THE AUDITORS REPORT ON FINANCIAL ACCO UNTS OF APPELLANT THAT APPELLANT IS FOLLOWING THE ACCOUNTING STANDARDS A S REFERRED TO IN SUBSECTION (3C) OF SECTION 211 OF THE COMPANIES ACT 1956. AS PER SECTION (3C) OF SECTION 211 OF COMPANIES ACT, ACCOUNTING S TANDARDS MEANS THE STANDARDS OF ACCOUNTING RECOMMENDED BY THE INSTITUT E OF CHARTERED ACCOUNTANTS OF INDIA. F THE ACCOUNTING STANDARD AS- 16 AS SPECIFIED BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA U/S SEC TION 211 OF COMPANIES REFERS TO THE BORROWING COSTS FOR ASSETS OR PROJEC T THAT NECESSARILY TAKES A SUBSTANTIAL PERIOD OF TIME TO GET READY FOR ITS INT ENDED USE OR SALE. IN PARA 8 TO 12 OF AS-16, THE AMOUNTS ELIGIBLE FOR CAPITALI ZATION ARE DESCRIBED. 4.1 HE FURTHER BY REFERRING THE VARIOUS PROVISIONS OF [ACCOUNTING STANDARD] AS-16 FINALLY CONCLUDED AND DELETED THE ADDITION BY OBSERVING AS UNDER:- 4.2 IN THE PRESENT CASE, IF THE APPELLANT HAS CAPI TALIZED THE COST OF BORROWING TO THE EXTENT OF RS. 2,80,157/- OUT OF TO TAL EXPENDITURE OF INTEREST OF RS. 44,43,709/- TOWARDS THE COST OF PROJECT, THE N IT IS IN ACCORDANCE WITH THE ACCOUNTING POLICY. IT IS ALTOGETHER A DIFFERENT QUESTION AS WHAT WOULD HAPPEN TO THE BALANCE INTEREST EXPENDITURE OF RS. 4 1,63,552/- AND INTEREST INCOME OF THE SAME AMOUNT IF THE BUSINESS OF APPELL ANT HAD NOT COMMENCED. IN THE PRESENT CASE THE BUSINESS OF REAL ESTATE OF APPELLANT IS IN EXISTENCE SINCE PAST SO MANY YEARS AND THEREFORE THE BALANCE INTEREST EXPENDITURE OF RS. 4 1,63,552/- IS ALLOWABLE BUSINESS EXPENDITURE U/S 36(1)(III) / 37 OF THE I.T.ACT AND INTEREST INCOME OF RS. 4 1,63,552/- IS TAXABLE REVENUE INCOME. THE TAXATION OF SUCH INTEREST INCOME OF RS.4 1,63, 552/- UNDER THE HEAD BUSINESS INCOME HAS BEEN APPROVED BY BOMBAY HIGH CO URT IN CASE OF CIT VS. LOK HOLDINGS [2008.] 308 ITR 356 [BORN] AND THE REFORE TAXING SUCH INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES IS A DEBATABLE ISSUE AND OUT OF THE PURVIEW OF RECTIFICATION ORDER. EVEN OTH ERWISE IT WOULD NOT HAVE MADE ANY DIFFERENCE IN THE COMPUTATION OF TOTAL INC OME AS THE INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES CAN BE SET OFF A GAINST THE BUSINESS LOSS. THE CAPITALIZATION OF INTEREST EXPENDITURE OF RS. 4 4,43,709/- TO THE EXTENT OF RS. 2,80,157/- TOWARDS THE COST OF PROJECT IS IN AC CORDANCE WITH ACCOUNTING POLICIES AND THE CLAIM OF BALANCE INTEREST EXPENDIT URE OF RS. 4 1,63,552/- AS BUSINESS EXPENDITURE U/S 36(1)(III) / 37 IS ALLOWAB LE UNDER INCOME TAX ACT ITA NO. 848/KOL/2011-B-CDR 5 AS THE BUSINESS OF APPELLANT WAS IN EXISTENCE SINCE EARLIER YEARS. THE STAND OF ASSESSING OFFICER THAT THE CAPITALIZATION OF INT EREST EXPENDITURE OF RS. 44,43,709/- TO THE EXTENT OF RS. 2,80,157/- IS INCO RRECT AND SHOULD HAVE BEEN RS 44,43,709/- IS AN INDIRECT QUESTION ON THE CORRE CTNESS OF ACCOUNTING POLICY AS WELL AS THE PROVISIONS OF SECTION 145(2) OF THE I.T.ACT ,WHICH IS EITHER NOT ALLOWED OR WHICH AT LEAST NEEDS FURTHER INVESTIGATION OF FACTS IN ACCORDANCE WITH THE ACCOUNTING POLICIES. OTHERWISE, IF THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF BALANCE INTEREST EXPEND ITURE OF RS.41,63,552/- U/S 36(1)(III)/ 37 OF THE I.T.ACT ON THE PRESUMPTI ON THAT THE BUSINESS OF APPELLANT HAS NOT COMMENCED THEN THAT IS AN INCORRE CT PRESUMPTION BECAUSE THE BUSINESS OF APPELLANT IS IN EXISTENCE SINCE 199 2 AS PER THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE APPELLANT COMPAN Y. THEREFORE FIND THAT THE EXPENDITURE OF RS. 2,80,157/- CAPITALIZED TOWARDS W ORK IN PROGRESS AND INTEREST EXPENDITURE OF BALANCE AMOUNT OF RS. 41,63 ,552/- ALLOWED AS REVENUE BUSINESS EXPENDITURE AGAINST EQUIVALENT AMO UNT OF INTEREST INCOME UNDER THE HEAD BUSINESS INCOME IN THE ORIGINAL ASSE SSMENT ORDER DATED 29.10.2007 CANNOT BE DISTURBED BY THE ASSESSING OFF ICER IN A RECTIFICATION ORDER U/S 154 BECAUSE THERE WAS NO MISTAKE APPARENT FROM RECORDS IN THAT ORDER. 5. AGGRIEVED BY THIS, NOW THE REVENUE IS IN APPEA L BEFORE US. 6. AT THE TIME OF HEARING BEFORE US THE LD. DR APPE ARING ON BEHALF OF THE REVENUE HAS RELIED ON THE ORDER OF THE AO AND FURTHER CONTENDE D THAT THE ACTION OF THE ASSESSING OFFICER IS BASED ON THE FACT THAT THE COMPANY HAD SURPLUS FUND IN ORDER TO EARN INCOME OUT OF THE SURPLUS FIND, IF INVESTED THE AMOUNT FOR THE PURPOSE OF EAR NING INTEREST, SUCH INTEREST IS TO BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES IN ACCOR DANCE WITH THE LAW. THEREFORE, HE CONTENDED THAT THE ASSESSING OFFICER WAS JUSTIFIED IN INVOKING THE PROVISION OF SECTION 154 OF THE ACT. THUS, HE REQUESTED THE BENCH TO UPHOLD TH E SAME. 7. ON THE OTHER HAND, THE LEARNED COUNSEL APPEARI NG ON BEHALF OF THE ASSESSEE HAS HEAVILY RELIED ON THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) AND FURTHER CITED VARIOUS CASE LAWS, WHEREIN THE HONBLE HIGH COURTS/ APEX COURTS HAVE DEFINED THE MISTAKE APPARENT FROM RECORD. HE FURTHER CONTENDED THAT IN VIEW OF THE LEGAL PRONOUNCEMENTS THE ACTION OF THE LEARNED COMMISSIONER OF INCOME-TAX (A PPEALS) WAS JUSTIFIED IN THE FACTS AND CIRCUMSTANCE OF THE CASE. THEREFORE, HE REQUESTED T HE BENCH TO UPHOLD THE SAME. 8. AFTER HEARING THE RIVAL SUBMISSIONS, ON CAREFU L PERUSAL OF THE MATERIAL AVAILABLE ON RECORD AND KEEPING IN VIEW OF THE FACT THAT THE ASS ESSEE HAS BEEN REGULARLY FOLLOWING THE SAME ITA NO. 848/KOL/2011-B-CDR 6 SYSTEM OF ACCOUNTING [AS-16] AS PRESCRIBED IN THE A CCOUNTING STANDARD [AS-16], WHICH IS MANDATORY FOR THE COMPANIES.. THUS, WE FIND NO INFI RMITY IN THE ORDER OF THE LEARNED COMMISSIONER OF. INCOME-TAX (APPEALS) IN DELETING T HE ADDITION MADE BY THE ASSESSING OFFICER. WE UPHOLD THE SAME. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. '4 #1' 5 1% 6 7 THIS ORDER IS PRONOUNCED IN OPEN COURT ON DT. 15-12 -2011 SD/- SD/- ( , ) ( MAHAVIR SINGH, JUDICIAL MEMBER) ( . !. , '# ) ( C.D. RAO ,ACCOUNTANT MEMBER ) ( (( (!# !# !# !#) )) ) DATE: 15-12-2011 '4 / -8 9'8': / COPY OF THE ORDER FORWARDED TO: 1. . *+ / THE APPELLANT : D.C.I.T, CC-XIII, 18 RABINDRA SA RANI, KOL-1. 2 -.*+ / THE RESPONDENT- M/S. INDUS ESTATE PVT. LTD 69, GANESH.CHANDRA AVENUE, INDIA HOUSE, KOL-13.EXCELO CLEARING & FORWA RDING AGENTS PVT. LTD 21/B CANNING ST., GR. FL. KOL-1. 3. 4% / THE CIT, 4. 4% ( )/ THE CIT(A), 5 . ;6 -% / DR, KOLKATA BENCH 6 . GUARD FILE . .8 -/ TRUE COPY, '4%1/ BY ORDER, < /ASSTT REGISTRAR . *PRADIP* => %?< @