Interest income by Developer firm is assessable as Business Income & not as Income from Other Source Income: Adv. Ravindra Poojary

Interest income by Developer firm is assessable as Business Income & not as Income from Other Source Income: Adv. Ravindra Poojary

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Interest income by Developer firm is assessable as Business Income & not as Income from Other Source Income: Adv. Ravindra Poojary

IN THE INCOME TAX APPELLATE TRIBUNAL   “A” BENCH, MUMBAI  
BEFORE SHRI M BALAGANESH, ACCOUNTANT MEMBER &
  SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER  
 ITA No.542/Mum/2020 (A.Y: 2015-16)  
M/s Lhotse Developers  and Traders Pvt Ltd.,  Hotel Grand Hometel,  CTS No. 406/11, 4th Floor, Raheja  Chambers, Linking  Road, Santacruz (W),  Mumbai – 400054. 
Vs. 
DCIT – 12(3)(2) Room No. 147B, 1st Floor, Aaykar Bhavan,  MK Road, Mkumbai –  400020. 
PAN/GIR No. : AABCL0079N
Appellant 
.. 
Respondent
Appellant by
Shri Ravindra Poojary. AR
Respondent by
Shri Mehul B. Jain. DR
Date of Hearing 
09.11.2021
Date of Pronouncement
17.11.2021
आदेश / O R D E R 
 PER PAVAN KUMAR GADALE JM: 
The assessee has filed the appeal against the order of the Commissioner of Income Tax (Appeals)-20,  Mumbai, passed u/s 143(3) and 250 of the Act.  
 At the time of hearing, the Ld.AR submitted that  the ground of appeal No. I & II are not pressed and made endorsement in the appeal memo. Therefore, the grounds of appeal I & II are treated as withdrawn and  are dismissed. The effective ground of appeal-III is as  under: 
  III Treatment of interest income of Rs. 75,86,135/- 
  1. The Ld. CIT(A) erred in upholding the treatment of interest  income earned of Rs. 75,86,135/- as income from other sources  instead of income from business offered by the appellant in the  return of income filed.  
  2. The CIT(A) failed to consider the fact that assessee had  borrowed funds from Kikomo Trading (India) Pvt Ltd., for the  purpose of business and utilized the funds for advancing loan to  B. Raheja Property Pvt Ltd., on which the interest was earned.  Such interest income earned was inextricably linked with the  amount borrowed and therefore, such interest earned ought to  have been allowed as business income. 
2. There was a delay of 22 days in filing the appeal  before the Hon’ble Tribunal. The assessee has filed the  condonation petition along with affidavit. On perusal of  the facts, we found that there is a reasonable cause  and the Ld.DR has no specific objections. Accordingly,  we condone the delay and admit the appeal.
3. The Brief facts of the case are that the assessee  company is engaged in the business of real estate  development and filed the return of income for the A.Y  2014-15 on 29.09.2015 with a total income (loss) of  Rs.1,89,11,749/- and the return of income was  processed u/s 143(1) of the Act. Subsequently the case  was selected for scrutiny under the CASS and notice u/s 143(2) and 142(1) of the Act are issued.In  compliance, the Ld.AR of the assessee appeared from time to time and furnished the details and the case was  discussed. The Assessing Officer(A.O.) find that the  assessee in the return of income has disclosed the loss  under the business. The assessee company has debited  interest expenditure of Rs.96,15,667/- in the profit and  loss account and the assessee has only one project  under construction at Hyderabad. The assessee has  filed a letter on 13.11.2016 referred at Para 4 of the  assessment order. The A.O. was not satisfied with the  explanations and observed that the assessee has not  carried on business activities during the year and  capitalized the interest expenditure towards work in  progress (WIP) of the project.  
  1. Whereas, the assessee has disclosed interest income  of Rs.75,86,135/- as other income under income from business. The A.O is of the opinion that the interest  income should be taxable under income from other  sources. The assessee has filed a letter dated  13.11.2017 explaining the nexus of borrowed funds  and justification of the claim of the expenses, but the  A.O found that the submissions of the assessee are not  tenable as the assessee is not engaged in the business  of borrowing and lending of funds. The main business  of the firm is in construction of the properties and the  funds are borrowed for the purpose of business.  Therefore the entire interest income from B. Raheja Property Pvt Ltd was assessed under income from other  sources and determined the total loss of Rs.  27,09,950/- and passed the order u/s 143(3) of the Act dated 08.12.0217. 
 
  1. Aggrieved by the order, the assessee has filed an  appeal before the CIT(A), whereas the CIT(A) has  confirmed the action of the AO and dismissed the  assessee’s appeal. Aggrieved by the order of the CIT(A)  the assessee has filed an appeal before the Honble  Tribunal.  
  2. At the time of hearing, the Ld. AR has restricted  the submissions on the ground of appeal No.III were  the A.O. has treated the interest income under income  from other sources, irrespective of the fact that  assessee has provided the loan for business purpose.  The Ld. AR contended that the loan was given for  continuation of the business relations and the  business funds have been utilized due to project delay.  The Ld.AR submitted that the assessee has obtained  the barrowed funds from Kikomo Trading (India) Pvt  Ltd and the same was utilized for the purpose of  advancing loan to M/s. B Raheja Property Pvt Ltd due  to delay in project works of the assessee. The assessee  has been offering the interest on loan from B. Raheja  Properties @ 18% p.a. from earlier years and Whereas,  the funds are borrowed from the M/S Kikomo Trading  (India) Pvt Ltd.@ 18% p.a. The assessee’ project at Hyderabad could not be completed due to state  agitations and the business liabilities were  accumulated. The Ld. AR’s contention are that the  assessee has obtained the loan and due to agitation of  Andhra Pradesh and Telangana, there was slow down  in real estate market and the project could not be  proceeded. In such circumstances, the assessee has  provided the loan and the business was continued. The  Ld.AR submitted that since the assessing officer (A.O.)  has capitalized the interest expenditure to Work In  Progress(WIP) Account and the CIT(A) has confirmed  the action of A.O. and the assessee is not pressing this  ground of appeal before the Honble Tribunal. Hence the  Interest income taxed under the Income from other  sources should be credited to the Work In Progress  (WIP) Account.The Ld.AR has substantiated the  submissions with the paper book and the judicial  decisions and prayed for allowing this ground of  appeal. Contra, the Ld. DR supported the order of the  CIT(A).
  1. We heard the rival submissions and perused the  material on record. The sole crux of the disputed issue  that the CIT(A) has confirmed the action of the A.O treating the interest on loan received from B. Raheja  Property Pvt Ltd under income from other sources.  The contentions of the Ld.AR that the assessee has  obtained the loan for the purpose of business from  M/s Kikomo Trading (India) Pvt Ltd and the loan was utilized for advancing to B. Raheja Property Pvt Ltd and  at the same rate of interest.The Ld.AR submitted that  the assessee has taken up a residential and commercial  project at Hyderabad but due to various agitations in  respect of separation of Andhra Pradesh and Telangana  the project could not be proceeded and there was lot of  pending approval from local authorities and the project  was temporally stopped and also due to slowdown in  the real estate market.Therefore the assessee  considering the fact of availability of funds and the  same could not be utilized for the purpose of business  immediately has advanced the loan. The Ld. AR has  demonstrated that the amount lying with the assessee,  which was borrowed from Kikomo Trading (India) Pvt  Ltd.and was advanced to B. Raheja Property pvt Ltd  and there exist a direct nexus of amount advanced.  The Ld. AR referred to the bank statements where the  credit from M/s Kikomo Trading (India) Pvt Ltd is  reflected and at the same time the amount was  advanced to B. Raheja Property Pvt Ltd. The only line of  dispute is that, the assessee due to slow down of real  estate business and the project under taken at  Hyderabad could not be take off has advanced the  funds on interest. The Ld. AR submitted the financial  statements and emphasized on the income and the  business operations.
  1. The Ld.AR has referred to the profit and loss  account at page 9 of the paper book, were the assessee  has disclosed the income under schedule 19 which also  includes interest income. Prima-facie it cannot be  presumed that the assessee is not in the business but  due to temporary lull in the real estate business the  assessee could not proceed with the project. On perusal  of the notes on the financial statements at page 22 of  the paper book at note 14 inventories, the assessee has  disclosed the construction work in progress which the  revenue cannot dispute. The Ld.AR has relied on the  following judicial decisions.
  1. CIT Vs. Lok Holdings [2010] 189 taxman 452 (Bombay).  
  2. Karanja Terminal & Logistics (P) Ltd. Vs. DCIT, [2019] 109  taxmann.com 105 (Mum-Trib).  
  3. NTPC Sail Power Company P Ltd, Vs CIT [2012] 25  taxmann.com 401 (Del).  
  4. Indian Oil Panipat Power Consortium Ltd., Vs. ITO [2009]  181 taxmann 249 (Delhi).  
  5. CIT Vs. Bokaro Steel Ltd., [1999] 102 Taxmann 94 (SC).  
  6. CIT Vs. Dalmia Promoters Developers Pvt Ltd., [2006] 281  ITR 346 (Delhi).  
9. For the brevity purpose we refer to the Hon’ble  High Court of Bombay decision in the case of CIT Vs.  Lok Holdings [2010] 189 taxmann 452 held as under:  
In the instant case, income from interest, admittedly, arose out  of running business of the assessee. Interest was earned out of  monies accruing from the business of the assessee and the  same was also utilized for the purpose of its business.  
In view of the judgment of the Bombay High Court in the case of  CIT Vs. Paramount Premium (P) Ltd [1991] 190 ITR 259 in which  on identical issue was decided in favour of the assessee and  which was squarely applicable to the facts of the instant  appeal, the interest income earned by the assessee would be  assessable as income from business and not as income from  other sources.  
  1. We considering the ratio of the decision, facts and  the submissions of the assessee find that the assessee  business cannot be treated as non operating. The  assessee could not take up the project immediately due  to slow down of real-estate activities at Hyderabad.  Further, the Ld.AR submitted that for the A.Y.2012-13  & A.Y.2013-14 the A.O. has accepted the interest  income as business income. We are of the considered  view that the interest income on loan cannot be treated  as income from other sources and since the assessee has accepted the capitalization of interest expenditure  to W.I.P. We are of the substantive view that the  Interest income taxed under the Income from other  sources should be credited to the Work In Progress  (WIP) Account . Accordingly, we set aside the order of  the CIT(A) on this disputed issue and direct the  Assessing officer to credit the interest received on loan  to the Work In Progress (WIP) Account and allow the ground of appeal in fovour of the assessee
  1. In the result, the appeal filed by the assessee is  partly allowed  
 Order pronounced in the open court on 17.11.2021  
 Sd/                                                                – Sd/-  
 (M BALAGANESH)                     (PAVAN KUMAR GADALE) 
ACCOUNTANT MEMBER                         JUDICIAL MEMBER  
Mumbai, Dated 17.11.2021  
KRK, PS

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