2019 (7) TMI 921 - AT - Income Tax

Disallowance of interest - whether the appellant had sufficient non-interest bearing funds to give the advances? - HELD THAT - The perusal of financial statements as placed on record reveal that the assessee s free funds in the shape of Share Capital and Reserves far exceeds the interest free deposits granted by the assessee. Another feature to be noted is that there is very minor increase in the deposits during the impugned AY. Therefore, a presumption was to be drawn in assessee s favor that the stated deposits were made out of free funds available with the assessee unless the nexus of borrowed funds vis - vis interest free deposits granted by the assessee could be proved by the revenue. The said proposition is in line with the recent decision of Hon ble Supreme Court rendered in CIT Vs Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT . Respectfully following the same, we delete disallowance u/s 36(1)(iii) made by Ld. AO. AO is directed to nullify the adjustment of the same from WIP. Ground No. A stands allowed. Taxability of Rent received from tenant and tenancy transfer fees - adjustment and reduction from WIP - in the opinion of Ld. AO, was assessable as Income from other sources - both received in respect of project of assessee - incoming tenants has agreed to obtain tenancy rights from outgoing tenants for a certain lump sum consideration and landlord, as a consenting party, received of a sum of ₹ 5 Lacs - HELD THAT - It also emanates from the record that the assessee was pursuing only one project which was at the above stated site. All costs under the project have been capitalized by the assessee under the head stock-in-process following project completion method of accounting. No expenditure has been claimed in the Profit Loss Account during impugned AY. The perusal of Schedule 13 Other Expenses reveal that the assessee has paid compensation of ₹ 3 Lacs to tenants which has also been capitalized under the same head and not claimed as an expenditure. The aforesaid factors would reveal that all the activities transactions being carried out by the assessee, in unison, were in furtherance of carrying out the stated project only and part and parcel of the unified construction activity. This being so, the action of the assessee in reducing the stated amounts from WIP was justified. Therefore, by reversing the stand of lower authorities, we direct Ld. AO to delete the stated additions and reduce WIP by corresponding amount. Ground Nos. B D stands allowed. Ground No. C, being without prejudice ground, becomes infructuous.

Summary

Issues:
1. Disallowance of interest
2. Taxing rent
3. Taxing rent on a gross basis
4. Taxing transfer fees received as income

Analysis:

Issue 1: Disallowance of interest
The assessee contested the disallowance of interest amounting to ?7,03,401 by the Income Tax Officer, which was confirmed by the Commissioner of Income Tax (Appeals). The Appellate Tribunal noted that the assessee had sufficient non-interest bearing funds to provide the advances. Citing the recent decision of the Supreme Court in CIT Vs. Reliance Industries Ltd., the Tribunal ruled in favor of the assessee, deleting the disallowance under section 36(1)(iii) and directing the AO to reverse the adjustment. Ground No. A was allowed.

Issue 2: Taxing rent
The AO assessed the rent received by the assessee at ?21,150 as income from other sources, which was confirmed by the CIT(A). The assessee argued that the rent and transfer fees were related to a project and should not be taxed individually. The Tribunal examined the agreement for transfer of tenancy rights and found that all activities were in furtherance of the stated project. Therefore, the additions made by the lower authorities were reversed, and the AO was directed to reduce the WIP by the corresponding amounts. Ground Nos. B & D were allowed.

Issue 3: Taxing rent on a gross basis
The Tribunal deemed this issue infructuous as Ground No. C was considered without prejudice and the other grounds had been allowed.

Conclusion
The appeal was partly allowed, with the disallowance of interest being deleted and the additions related to rent and transfer fees being reversed. The Tribunal's order was pronounced on 6th June 2019.