2022 (11) TMI 588 - AT - Income Tax

Interest earned on FD - Income from other sources - HELD THAT - It is an undisputed fact that all the FDRs were purchased by the assessee for letter of credits and bank guarantees given to various suppliers of goods from abroad. The details have been furnished before the lower authorities, which have been examined and no adverse inference has been drawn in so far as details for issue of letters of credit/bank guarantee in favour of the supplier is concerned. It is also not in dispute that the assessee has reduced interest accrued on FDRs from the Project and Pre-operative Expenses reflected in the balance sheet. Entire transaction has been duly explained by way of Notes to the respective Schedule to the Balance Sheet by the assessee and the auditors. We are of the considered view that the assessee has filed complete details of FDs and has also provided details of LC/BG against which FD was taken and it can be safely concluded that the interest earned on FD is inextricably linked to the setting up the hotel as such and, therefore, the findings of the ld. CIT(A) in treating interest as income from other sources is not only erroneous but against the facts of the case in hand as explained hereinabove. We direct the Assessing Officer to consider the interest as part of capital receipt to be deducted from the cost of project. Disallowance being 1/5 of preliminary expenses u/s 35D - HELD THAT - It is true that the said claim was made during the assessment proceedings for Assessment Year 2007-08 wherein the Assessing Officer denied the claim of expenses but the CIT(A) allowed 1/5th of the expenses u/s 35D of the Act. It is equally true that once the claim has been allowed in the initial assessment year, the said claim cannot be denied in the subsequent assessment years on identical set of facts. We find that the expenditure was incurred by the assessee towards fees paid to the Registrar of Companies and the said expenditure was incurred in Assessment Year 2007-08 and since it has been considered as preliminary expenses in the said assessment year and since 1/5th of the same has been allowed u/s 35D of the Act, balance has to be allowed in the subsequent four assessment years following the ratio of SHASUN CHEMICALS AND DRUGS LTD. 2016 (9) TMI 1199 - SUPREME COURT We accordingly direct the assessing officer to allow the said claim. Ground No. 3 with sub grounds is allowed.

Summary

Issues Involved:
1. Addition of Rs. 23,31,717/- as income from other sources.
2. Disallowance of Rs. 8,97,700/- being 1/5th of preliminary expenses.

Issue-wise Detailed Analysis:

1. Addition of Rs. 23,31,717/- as income from other sources:

The core issue revolves around the confirmation of an addition of Rs. 23,31,717/- by the CIT(A) from a total addition of Rs. 46,92,827/- made by the AO. The assessee contended that the interest accrued on FDRs is inextricably linked to the construction project and should be considered as a capital receipt deductible from the cost of the project. The CIT(A) partially accepted this argument but disallowed Rs. 23,31,717/-, treating it as income from other sources.

The Tribunal examined the facts and submissions, noting that the FDRs were purchased to provide letters of credit and bank guarantees for suppliers from abroad, directly linking the interest earned to the construction project. The Tribunal referenced the Delhi High Court judgment in Indian Oil Panipat Power Consortium Ltd, which held that interest earned on funds brought for a specific purpose before business commencement is a capital receipt and should be set off against pre-operative expenses.

The Tribunal concluded that the interest earned on FDRs is inextricably linked to the hotel project, and thus, the CIT(A)'s treatment of Rs. 23,31,717/- as income from other sources was erroneous. The Tribunal directed the AO to consider this interest as part of the capital receipt deductible from the project's cost.

2. Disallowance of Rs. 8,97,700/- being 1/5th of preliminary expenses:

The second issue pertains to the disallowance of Rs. 8,97,700/- by the CIT(A), which represents 1/5th of preliminary expenses amounting to Rs. 44,88,500/-. These expenses were incurred in the Assessment Year 2007-08 for ROC fees and were claimed as revenue expenditure. The AO disallowed this claim, but the CIT(A) allowed 1/5th of the expenses under section 35D of the Income Tax Act.

The CIT(A) in the current year did not find reasoning in the predecessor's decision and denied the claim for subsequent years. However, the Tribunal noted that once a claim is allowed in the initial assessment year, it cannot be denied in subsequent years on identical facts. Citing precedents from the Hon'ble Bombay High Court and the Supreme Court, the Tribunal directed the AO to allow the claim for the subsequent years.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the AO to consider the interest of Rs. 23,31,717/- as part of the capital receipt and to allow the preliminary expenses claim of Rs. 8,97,700/-. The order was pronounced in the open court on 11.11.2022.