Income Tax Appellate Tribunal - Delhi
Accession Buildwell (P) Ltd.,, New ... vs Department Of Income Tax on 15 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A" NEW DELHI
BEFORE SHRI R.P. TOLANI AND SHRI T.S. KAPOOR
ITA No. 2001/Del/2012
Asstt. Yr: 2008-09
Income-tax Officer, Vs. M/s Accession Buildwell (P) Ltd.,
Coy. Ward 1(2), New Delhi. FF-28, ECE House, K.G. Marg,
New Delhi-110001.
PAN: AAFCA 6909 E
( Appellant ) ( Respondent )
Appellant by : Shri Bhim Singh Sr. DR
Respondent by : Shri G.C. Srivastava Adv. &
Shri Saurav Srivastava CA
ORDER
PER R.P. TOLANI, J.M :
This is Revenue's appeal against CIT(A)'s order dated 15-3-2012, relating to A.Y. 2008-09. Following grounds are raised:
"1. The Ld. CIT(A) has erred on facts and in law in directing the AO to treat the interest income of Rs. 77,25,153/- on the Bank of India FDRs as part of business income of the assessee.
2. The Ld. CIT(A) has erred on facts and in law in directing the AO to allow the business expenditure up to Rs. 1,40,575/- as revenue expenditure."
2. Brief facts are: The assessee company is engaged in the business as builders and developers. During the course of assessment proceedings, the assessing officer observed that assessee has earned interest income of Rs. 2 77,25,153/- on FDRs which has been incorporated in the books of a/c by setting it off against the capitalized work in progress account of the assessee. On assessing officer's further queries in this behalf, assessee explained that:
(i) For the purpose of financing the purchases of the land assessee raised the funds from market by way of interest payable debentures for which a debenture trust was created by execution of a deed. As per the terms and conditions of the debenture trust deed, assessee was obliged to retain specified amount of FDRs for service of debenture loans. Thus, the raising of funds by debentures and corresponding retention of FDRs in the bank were were exclusively for the purpose of business of the assessee. The liability of interest payable on debentures was capitalized towards the cost of the project on the same principle the receipt of interest from FDRs as per debenture trusts condition was also set off against the cost of the project.
(ii) In case the interest earned is sought to be treated as income from other sources, then on the basis of matching principle, the interest paid by the assessee qua debentures, shall be net off and the balance be taxed as per law.
2.1. Assessing officer, however, rejected assessee's contentions and by relying on following judgments:
- Brook Bond India Ltd. Vs. CIT 225 ITR 798(SC);
- Punjab State Industrial Development Corporation Ltd. Vs. CIAT 225 ITR 792 (SC).3
held that the interest from these FDRs constituted income from other sources and no expenses were to be allowed or adjusted against this interest income.
2.2. Apropos second issue, the assessing officer disallowed the amount of Rs. 8,89,275/- as capital expenses, which included an amount of Rs.
7,48,700/- being ROC fees and stamp duty for increase in the authorized share capital of the company. CIT(A) held the ROC fee to be capital in nature and not allowable, however, the remaining amount of Rs. 1,40,575/- not related to ROC fee was allowed as revenue expenditure. 2.3. Aggrieved, revenue is before us on both grounds.
3. Ld. DR relied on the order of assessing officer.
4. Ld. Counsel for the assessee contends that assessing officer has not disputed the following facts:
(i) Assessee had raised funds by interest bearing on debentures by way of a debenture trust. As per the specific obligations set out by the trust deed, the assessee was required to maintain minimum interest reserve amount to safeguard the payment of interest on such debentures in the form of FDRs in the bank.
(ii) The assessee set off of interest earned on FDRs against the interest paid against the work-in-progress a/c of the relevant project in hand.
(iii) All the relevant documents were produced before the assessing officer and there is no allegation that any document was not produced.4
(iv) Assessing officer has neither adverted to the issue of debenture trust nor assessee's obligations and has summarily held the interest earned only under the head income from other sources. Further, no comments have been offered about "matching principle" and interest paid.
4.1. Ld. Counsel further contends that the interest paid on the debentures has been considered and allowed by assessing officer as per method of accounting and has been allowed to be capitalized towards cost of the project. On the same analogy, the keeping of the minimum interest reserve amount in FDRs under business obligation and interest earned thereon also should have been allowed as business earning. Therefore, on this proposition, work in progress method and matching principle the amount of FDR interest has been rightly set off against the interest paid for work in progress account by the assessee.
4.2. The assessee's case finds further strength from the fact that on matching principle the interest earned on FDRs is consequent to and inextricably linked to the payment of interest on the borrowed funds which has been raised for financing the projects, has not been disputed by the assessing officer. Therefore, alternatively, on matching principle also, as both the expenditure and receipt have already matching ingredients, the netting off is to be allowed. Thus, on the basis of business expediency and 5 matching principle, both propositions support the case of the assessee. CIT(A) has rightly allowed the amount by following observations:
5.5 Under the facts and circumstances as mentioned above, I find that the debentures were issued by the appellant company for raising finance for the purpose of the appellant's business which has been utilized mainly for the purpose of land. The investment in bank FDRs was made as per the terms of the Debenture Trust Deed with a view to maintaining the Minimum Interest Reserve Account for the purpose of servicing the interest burden on debentures. In view of the above and considering the case laws on the subject as pointed out by the Id. AR, I find that the interest accrued on the bank FDRs forms part of the business income of the appellant and is not an independent activity which can be classified as income from other sources. The case laws relied upon by the AO including that of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172 (SC) are not relevant to the instant case, as in the above case of Tuticorin Alkali interest was earned by the assessee before the commencement of business on short term deposits made in the bank out of surplus funds from the term loans received from financial institutions. As against the above, in the instant case, interest has accrued to the appellant on the bank FDRs after the commencement of the appellant's business. The said investment in bank FDRs was not out of surplus funds but for creating a Minimum Interest Reserve Account to service the interest burden on the above debenture as per the terms of the above Debenture Trust Deed. In view of the above, the facts in the instant case are clearly distinguishable. Considering the same, I find that the action of the AO in treating the impugned amount of Rs.77,25, 153/- as income from other sources is not sustainable on facts or in law. Even for the sake of argument, if the AO's stand is accepted then the proportionate interest paid by the appellant on the debentures is to be allowed as deduction against the above FDR interest in terms of)Section 57(iii) of the Act which will also defeat the purpose of the above 6 stand taken by the AO. In view of the above, the AO is directed to treat the interest income on the aforesaid bank FDRs as part of business income of the appellant. This ground of the appellant is accordingly allowed.
4.3. Apropos second ground, ld. Counsel contended that CIT(A) allowed Rs. 1,40,575/- as revenue expenditure by holding as under:
7.2 I have carefully considered the assessment order and the submissions made by the Id. AR on the above issue. As per the facts of the case, the appellant company was incorporated on 17.03.2006 for the purpose of doing business as builders and developers. The assessee has during the year under consideration has raised finance by way of debentures at RS.591.06 crores, acquired land for its inventory at Rs.45.8 crores, given advance to subsidiary company against Collaboration Agreement for further acquisition of land at RS.512.09 crores, and paid amounts to Emaar MGF at RS.16.7 crores for joint development of land etc. This is evident from the audited accounts of the company for the year under consideration and the details submitted as discussed in ground no. 3 above. Therefore, it is clear that the business of the appellant company has already been set up and the company is ready to commence its business. It is settled law that the expenses incurred after the business is set up is to be allowed as revenue expenditure. The Id. AR has also relied upon a large number of case laws which are directly relevant to the issue in hand. Therefore, I find that the AO's action in capitalizing the expenditure of Rs.8,89,275/- incurred after the setting up of the appellant's business is not legally tenable as per settled law on the matter. However, I find that the above expenditure includes an amount of Rs.7,48,700/- towards ROC fees and stamp duty for increase in the authorized share capital of the company from RS.2 lakhs to Rs.10 crores. The AO has 7 simply observed that the above expenditure needs to be capitalized. On careful examination of the matter, I find that as per law the above expenditure on ROC fees etc. for increase in authorized share capital is not an allowable expenditure. The same is also not amortizable u/s 35D(2)(c)(iii) of the Act, not being fee for initial registration of the company. This view stands confirmed by the Hon'ble Supreme Court in Brook Bond India Ltd. Vs. CIT 225 ITR 798 and Punjab State Industrial Development Corporation Ltd. Vs. CIT 225 ITR 798. In view of the above, the amount of Rs.7,48,700/- is disallowed. The AO is directed to allow the balance expenditure of Rs.1,40,575/- only (i.e. Rs.8,89,275/-
minus Rs.7,48,700/-) as revenue expenditure.
4.4. It is contended that the above part of the amount disallowed by assessing officer was purely revenue in nature which has been rightly allowed by the CIT(A) accordingly. Assessing officer has given no reasons for holding this amount to be capital in nature. Order of CIT(A) is relied upon.
5. We have heard rival contentions and gone through the entire material available on record. The fact that FDRs were made to fulfill the obtained by obligation cast by the debenture trust deed on the assessee has not been disputed. Thus, the earning of interest has a direct nexus with the business operations of the assessee i.e. raising of funds by debentures to finance the project. The interest incurred thereon has been allowed as business liability and as per method of accounting regularly followed i.e. work in progress, the amount has been allowed to be capitalized in project account. Ld. Counsel 8 for the assessee apart from the judgments referred to in CIT(A)'s order has relied on the judgments of the Hon'ble Delhi High Court in the cases of CIT v. Sasan Power Ltd. (2012) 18 Taxmann. Com 182 (Del.); and Indian Oil Panipat Power Consortium Ltd. Vs. ITO (2009) 181 Taxman 249 (Del.). 5.1. In our considered view, these cases, which in turn have relied on the judgments of CIT Vs. Bokaro Steel Ltd. 236 ITR 315; and Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT 227 ITR 172 etc. support the view adopted by the CIT(A). In view thereof on both the propositions i.e. method of accounting and matching principle, CIT(A)'s order deserves to be upheld.
6. In the result, revenue's appeal is dismissed.
Order pronounced in open court on 09-09-2013.
Sd/- Sd/-
( T.S. KAPOOR ) ( R.P. TOLANI )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 9th Sept. 2013.
MP
Copy to :
1. Assessee
2. AO
3. CIT
4. CIT(A)
5. DR
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