2022 (10) TMI 1093 - AT - Income Tax

Correct head of income - treatment of interest income - income from other sources OR business income claimed by the assessee - HELD THAT - Admittedly, the fact is that assessee has received incremental advance of flat bookings of Rs.32.18 Cr. during the year which has been duly reported in the audited financial statement. Also it is fact on record that there is an increase of capital WIP in respect of development of construction project of Sunny Fort, Rajarhat of Rs.16.48 Cr. during the year. These facts itself evidently demonstrate that assessee had substantial own funds which were interest free and were utilized by it in its financing activities which were in terms of objects mentioned in its Memorandum of Association (supra). It is also a fact that assessee has not completed its development project and earned any income out of the same during the year. Income earned during the year by the assessee is on intercorporate deposit with Williamson Services Ltd. as interest income. We also note that assessee has consistently reported its earning of interest income from ICDs, as business income which has been accepted by the Department as demonstrated by the Ld. Counsel from the records for AY 2012-13 and AY 2014-15. These facts have not been controverted by the Ld. Sr. DR by bringing any positive material on record. As relying on Chhangalal Khimji Co. Pvt. Ltd. 2015 (11) TMI 864 - ITAT MUMBAI we are inclined to accept the contentions of the assessee to hold the interest income of the assessee as business income. Ld. AO is accordingly, directed to treat the same as business income. Thus, grounds relating to this issue are allowed. Disallowance of interest expenses for the purpose of capitalization into the working in progress of the construction project - HELD THAT - We noted that Ld. Counsel has evidently demonstrate from the cash flow statement that there were substantial funds available with it from the advance received on flat bookings amounting to Rs.32.18 Cr. out of which capital WIP has been of Rs.16.48 Cr. during the year under consideration leaving with surplus funds of Rs.15.70 Cr. Thus, interest expenses claimed by assessee is in respect of funds which were not deployed on the development project but were otherwise available to the assessee in its financing activities. Accordingly, from this factual matrix, we find that Ld. AO is not justified in disallowing the claim of interest expense and treating it for capitalization in the project cost. Accordingly, we direct the Ld. AO to allow the claim of interest expenses. Appeal of the assessee is allowed.

Summary

Issues:
1. Treatment of interest income as income from other sources instead of business income.
2. Disallowance of interest expenses for capitalization towards project development.

Issue 1: Treatment of Interest Income:
The appeal concerned two main issues: the treatment of interest income as income from other sources and the disallowance of interest expenses. The appellant contested the Ld. CIT(A)'s decision to treat interest income of Rs.89,73,695 as income from other sources instead of business income. The Ld. AO had noted that the interest income was earned from an Inter-corporate Deposit (ICD) and classified it as income from other sources under section 56(2) of the Income-tax Act, 1961. The appellant argued that in previous and subsequent assessment years, the Department had accepted the interest income as business income. The appellant presented financial statements and a cash flow statement to support their claim that the interest income was part of their business activities. The Tribunal accepted the appellant's contentions, directing the Ld. AO to treat the interest income as business income.

Issue 2: Disallowance of Interest Expenses:
The second issue revolved around the disallowance of interest expenses amounting to Rs.41,06,890 towards capitalization for a construction project. The Ld. AO disallowed the interest expenses, stating that the unsecured loans obtained by the appellant were utilized for the project and the interest should be capitalized. However, the appellant demonstrated through a cash flow statement that substantial funds were available from flat bookings, with a surplus remaining after accounting for the project's capital work in progress. The Tribunal found that the interest expenses claimed by the appellant were not directly related to the project but were part of their overall financing activities. Consequently, the Tribunal directed the Ld. AO to allow the claim of interest expenses. As a result, the appeal of the assessee was allowed in both issues.

In conclusion, the Tribunal ruled in favor of the appellant, directing the Ld. AO to treat the interest income as business income and allow the claim of interest expenses. The judgment highlighted the importance of considering the nature of funds and activities when determining the treatment of income and expenses in the context of business operations.