2019 (6) TMI 1468 - AT - Income Tax

Disallowing finance charges claimed on processing of loan by assessee as business expenses - assessee is engaged in the business of building and developing of real estates - HELD THAT - We noted from the above that the loan obtained by the assessee in regard to continuous business proposition and assessee is following the project completion method of accounting being a builder loan taken in future project but payment made in the relevant assessment on account of processing charges of the loan is liable as business expenditure. In view of the decision of Hon ble Bombay High Court in the case of Lokhandwala Construction Inds. Ltd. 2003 (1) TMI 93 - BOMBAY HIGH COURT - In view of the above we allow the claim of the assessee. Addition of undisclosed interest income - interest received on FDRs maintained with HDFC Bank Ltd. and that with ICICI Bank Ltd. - as contended that this interest income receipt was on account of funds received on account of corpus funds and society deposits from the flat purchasers - HELD THAT - The bank deducts tax at source on the interest income earned on the fixed deposit taken from the society deposit and corpus fund account. Interest on the fixed deposits pertaining to and received on account of the assessee s own fixed deposit is duly declared and credited in the profit and loss account. However interest pertaining to the fixed deposit invested out of society deposit and corpus fund account is credited to the said account as stated herein above and do not form part of the assessee company income. It is further pertinent to note here that the assessee company has not claimed any tax deducted at source (TDS) in respect of interest income credited to the society deposit and corpus fund account. The working in this respect and the relevant ledger account of society deposit and corpus account is also filed before us. In view of the funds not belonging to the assessee company and held by the assessee company in fiduciary capacity the said interest income not belonging to the assessee company but belonging to and credited to the society account cannot be assessed in the hands of the assessee company. - Appeal of assessee allowed.

Summary

Issues:
1. Disallowance of finance charges claimed on loan processing as business expenses.
2. Addition of undisclosed interest income.

Issue 1: Disallowance of Finance Charges:
The appeal concerns the disallowance of finance charges claimed by the assessee as business expenses, specifically loan processing charges amounting to Rs. 40,03,250. The Assessing Officer (AO) disallowed the expenses, emphasizing that the working capital loan was specific to future projects and not for general business purposes. The AO required the assessee to explain the correlation of finance expenses to the profit from the projects. The assessee argued that the charges were for sanctioning a working capital loan for business purposes. However, the Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the loan was specific to a future project and should be capitalized towards that project's cost. The Tribunal, citing relevant case law, allowed the claim, noting that the loan was for continuous business operations and the expenses were allowable. The Tribunal emphasized the project completion method of accounting followed by the assessee, ultimately allowing the claim.

Issue 2: Addition of Undisclosed Interest Income:
The second issue involves the addition made by the AO of undisclosed interest income amounting to Rs. 5,92,005. The interest was received on fixed deposits maintained with banks, attributed to funds received from flat purchasers for society deposits and corpus funds. The assessee contended that these funds belonged to the society and were held in a fiduciary capacity by the company. The interest income earned on these deposits was credited to the society's account, not forming part of the assessee's income. The Tribunal observed that the funds did not belong to the company and were maintained separately, with interest income credited to the society's account. As the interest did not belong to the assessee, it was not assessable in the company's hands. The Tribunal allowed the appeal on this issue.

In conclusion, the Tribunal ruled in favor of the assessee on both issues, allowing the claim for finance charges and rejecting the addition of undisclosed interest income. The judgment highlights the importance of understanding the specific nature of expenses and income in the context of business operations and accounting methods followed by the assessee.