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2019 (8) TMI 835 - AT - Income TaxTP adjustment - interest on fixed deposits in bank as income from other sources - AO in the instant case, held that the assessee is developing a property for its use in the business of letting them on hire and is not developing the property for future sale - construction of mall - HELD THAT - So far as the disallowance of various other expenses debited to the Profit Loss Account is concerned, the DRP held that except marketing research expenditure which is directly related to the project, the other expenses are allowable as business expenditure. The DRP also did not allow the claim of interest on overdraft as business expenditure. It is the submission of the ld. counsel for the assessee that when the A.O./DRP have already held that the assessee has set up its business, therefore, there was no need for having this divergent treatment of the income and expenses. As relying on INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED, NEW DELHI VERSUS ITO 2009 (2) TMI 32 - DELHI HIGH COURT , we hold that the funds raised by the assessee are inextricably linked with setting up of its mall at Bangalore and, therefore, the interest earned by the assessee by parking the said funds temporarily with bank cannot be treated as Income from other sources. Since the income was earned in a period prior to commencement of business, it was in the nature of capital receipt and, therefore, it would go to reduce the capital work-in-progress. We, therefore, accept the above contention of the ld. counsel for the assessee that if the expenditure is capitalized, the income earned on temporary parking of the funds being capital in nature will go to reduce the capital work-in-progress. Allowability of market research expenses and depreciation on leasehold improvements as business expenditure - HELD THAT - Since, in the preceding paragraphs, we have already held that the interest income should go to reduce the capital work-in-progress where all the expenses are capitalized, therefore, following similar reasoning we hold that the assessee should not have any grievance in treating this expenditure as work-in-progress since it is getting the benefit of reduction to the extent of the interest income. Ground of appeal therefore, dismissed. Claim of expenses on account of interest on overdraft facility - the same also, in our opinion, has to be capitalized and the assessee will get only the benefit of set off to the extent of interest income. - the appeal filed by the assessee is partly allowed
Issues Involved:
1. Validity of the assessment orders. 2. Disallowance and capitalization of interest paid on Fully and Compulsorily Convertible Debentures (FCCDs). 3. Deduction of interest payable on FCCDs under Section 57 of the Act. 4. Netting off the interest income with the interest expenses. 5. Disallowance and capitalization of other expenses. 6. Non-grant of credit for taxes deducted at source. 7. Initiation of penalty proceedings under section 271(1)(c) of the Act. Issue-wise Detailed Analysis: 1. Validity of the Assessment Orders: The assessee challenged the validity of the draft assessment order dated 28 December 2016 and the final assessment order dated 25 September 2017, arguing they were illegal, bad in law, and without jurisdiction. The Tribunal did not find merit in these grounds, and the orders were upheld as valid. 2. Disallowance and Capitalization of Interest Paid on FCCDs: The Assessing Officer (AO) disallowed the interest of ?61,93,34,362 on FCCDs, treating it as capital expenditure. The Dispute Resolution Panel (DRP) concurred with the AO's findings. The Tribunal, however, found merit in the assessee's argument that the funds raised were utilized for the ongoing project, and the interest expense should be treated as business expenditure. It was held that if the expenditure is capitalized, the income earned on temporary parking of the funds should reduce the capital work-in-progress. 3. Deduction of Interest Payable on FCCDs under Section 57: The assessee argued that the interest expense on FCCDs should be deductible under Section 57 against the interest income offered to tax under Section 56. The AO and DRP rejected this, stating there was no direct nexus between the interest expense and interest income. The Tribunal upheld this view, noting that the funds were borrowed for business purposes but were lying idle. 4. Netting Off the Interest Income with the Interest Expenses: The assessee contended that if the interest expense is capitalized, the interest income should be set off against the cost of the project. The Tribunal agreed, stating that the interest income, being inextricably linked with the ongoing project, should reduce the capital work-in-progress. 5. Disallowance and Capitalization of Other Expenses: The AO disallowed various expenses, including market research and depreciation on leasehold improvements, treating them as capital expenditure. The DRP allowed most business expenses except market research. The Tribunal held that since the interest income reduces the capital work-in-progress, the expenses should also be treated as work-in-progress, dismissing the assessee's grievance. 6. Non-grant of Credit for Taxes Deducted at Source: The AO did not grant the entire credit for taxes deducted at source. The Tribunal did not specifically address this issue, focusing instead on the primary grounds of appeal. 7. Initiation of Penalty Proceedings under Section 271(1)(c): The AO initiated penalty proceedings for furnishing inaccurate particulars of income. The Tribunal did not specifically address this issue in the detailed analysis. Conclusion: The Tribunal partly allowed the appeal, holding that the interest income should reduce the capital work-in-progress, and the related expenses should be capitalized. The decision was pronounced on 26.07.2019.
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