2021 (1) TMI 282 - AT - Income Tax

Capitalizing interest expenses and treated the entire interest income as income from other source - HELD THAT - The facts are identical in the present assessment year to that of AY 2014-15. 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 result in reduction in the capital work-in-progress. It is pertinent to note that in the present year, the assessee received the amount on account of interest on fixed deposits in bank. Under expenses incurred on interest cannot be considered as income of the assessee as business income as it is the income from other sources as per the provisions of Income Tax Act. Therefore, in the present assessment year as well, we accept the contention of the Ld. AR that if the expenditure is capital, the interest fund earn on fixed deposits being capital in nature amounts to income from other sources. Transfer pricing adjustment - AR made the contention before us that the adjustment made in the transfer pricing proceedings was made on a protective basis and as per Tribunal's decision in AY 2013-14 in the present assessment year the transfer pricing adjustment would become academic as the expenses would remain to be capitalized and the adjustment will not affect the profit and loss account - HELD THAT - Contention of the Ld. AR appears to be not correct as the adjustment made by the Transfer Pricing Officer is more of alternative assessment in the nature rather than a protective as claimed by the Ld. AR. There is a substantive assessment in the Assessment Year 2013-14 2019 (8) TMI 835 - ITAT DELHI . Merely not having any impact/effect to the profit and loss account will not make the present assessment void. Hence, the contention of the Ld. AR that there is no substantive assessment does not sustain. Thus, the protective assessment is valid in this year. Payment of interest on FCCDs - contentions of the Ld. AR that the TPO has inappropriately considered Bright Buildtech as a comparable agreement appears to be correct. The NCDs issued by Bright Buildtech at 1% rate of interest and these have been issued to an overseas entity namely Clear Horizon Investments Pvt. Ltd. in two tranches. The total amount of the NCDs issued to Clear Horizon is ₹ 365 crores. From the balance sheet of Bright Buildtech in the year of issue reveals that the book value of the total assets of Bright Buildtech is ₹ 6,54,33,84,492/- as compared to 365 crores which is the total amount of NCD issued. Thus, percentage of NCDs issued to Clear Horizon to the total assets of Bright Buildtech is 55.78%. As per Section 92(A)(2)(c) of the Act, Clear Horizon shall be treated as an Associated Enterprise of Bright Buildtech since the loan was Clear Horizon exceeds 51% of the book value of the total assets of the Bright Buildtech. Thus, the NCD issued by Bright Buildtech to Clear Horizon cannot be taken as the comparable since Clear Horizon is an AE of Bright Buildtech. Average of the comparables taken by the TPO/AO (after excluding Bright Buildtech) comes at 15.58%. Hence, we direct the TPO to consider the transaction of the assessee in relation to the payment of interest on FCCDs in light of these four comparables - Kapstone Constructions Pvt. Ltd, Flicker Project Pvt. Ltd.,Ashiana Landcraft Realty Pvt. Ltd. AND Ashiana Landcraft Realty Pvt. Ltd.at arm's length.

Issues Involved:
1. Assessment of income and non-acceptance of previous order.
2. Treatment of interest income.
3. Disallowance and capitalization of interest expenses.
4. Deduction for interest payable on FCCDs under Section 57.
5. Capitalization of market research expenses and depreciation on leasehold improvements.
6. Transfer pricing adjustments on a protective basis.
7. Miscellaneous issues including penalty proceedings.

Detailed Analysis:

1. Assessment of Income and Non-Acceptance of Previous Order:
The appellant challenged the assessment order dated 28/10/2019, which assessed their income at ?33,37,98,719 against a returned loss of ?9,26,83,394. The appellant argued that the AO, following the directions of the DRP, erred in not accepting the Tribunal's decision for AY 2013-14, which treated interest income as capital in nature and required it to be netted off against the project cost.

2. Treatment of Interest Income:
The appellant argued that the interest income of ?19,62,91,587 should be considered a capital receipt not chargeable to tax, as it was inextricably linked with the ongoing project. The Tribunal agreed, citing the identical facts to AY 2013-14, and held that the interest earned by parking funds temporarily with the bank cannot be treated as 'Income from other sources'. It was deemed a capital receipt, reducing the capital work-in-progress. Therefore, grounds 2 to 5 were allowed.

3. Disallowance and Capitalization of Interest Expenses:
The appellant contended that the AO/DRP erred in disallowing and capitalizing the interest of ?31,55,60,282 payable on FCCDs, despite accepting that the funds were raised and utilized for the ongoing project. The Tribunal upheld that the interest expenses should be treated as capital in nature and netted off against the project cost.

4. Deduction for Interest Payable on FCCDs under Section 57:
The appellant argued that the AO/DRP erred in not allowing a deduction for the interest payable on FCCDs under Section 57 against the interest income offered to tax under Section 56. The Tribunal allowed this ground, agreeing that there was a direct nexus between the interest expense and interest income.

5. Capitalization of Market Research Expenses and Depreciation on Leasehold Improvements:
The appellant contended that the AO/DRP erred in capitalizing market research expenses and depreciation on leasehold improvements, which should be treated as revenue in nature. The Tribunal agreed and allowed the appellant's contention, treating these expenses as revenue in nature.

6. Transfer Pricing Adjustments on a Protective Basis:
The appellant argued against the transfer pricing adjustment of ?8,14,74,438 made on a protective basis. The Tribunal noted that the adjustment was more of an alternative assessment rather than a protective one and upheld the validity of the protective assessment. However, the Tribunal directed the TPO to consider the transaction of the assessee in relation to the payment of interest on FCCDs in light of four comparables mentioned, excluding Bright Buildtech, resulting in an average interest rate of 15.58%. Thus, grounds 7 to 10 were allowed.

7. Miscellaneous Issues Including Penalty Proceedings:
The appellant challenged the initiation of penalty proceedings under section 271(1)(c). The Tribunal noted that this issue was consequential and did not adjudicate upon it.

Conclusion:
The appeal was partly allowed, with the Tribunal directing specific adjustments and considerations in line with the appellant's contentions and previous Tribunal decisions. The Tribunal pronounced the order on 23rd December 2020.

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