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Interest on funds belonging to cooperative society but held by assessee in fiduciary capacity cannot be treated as assessee’s own income: ITAT

2019-TIOL-1537-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘B’ MUMBAI

ITA No.3505/Mum/2014
Assessment Year: 2010-11

M/s NEELKANTH PALM REALTY
FINE HOUSE, ANANDJI LANE, 5TH FLOOR
M G ROAD, GHATKOPAR (E), MUMBAI – 400077
PAN NO: AAEFN5224B

Vs

DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE 15(3), MUMBAI

Mahavir Singh, JM & Nk Pradhan, AM

Date of Hearing: June 12, 2019
Date of Decision: June 12, 2019

Appellant Rep by: Shri Nitesh Joshi, AR
Respondent Rep by: 
Ms Jothi Lakshmi Nayak, DR

Income Tax – Business expenditure – Co-operative society – Interest income – Fiduciary capacity – Finance charges -Future project

THE assessee is engaged in the business of building and developing of real estates. Subsequently the AO noticed from the P&L account filed by assessee along with return that the assessee has debited a sum of Rs 40.63 lacs under the head finance expenses. According to AO, the assessee has sold parking lot in classic project and opening stock of flats and parking lot in the ‘Royale Housing Project’. He noted that no construction activity was carried out during the year in respect of these two projects. Even there is no new loan obtained during the year. Accordingly, he required the assessee to explain the co-relation of such finance expenses to the profit declared from these two projects. The assessee claimed that finance charges includes loan processing fees. The charges are paid for sanctioning the working capital loan for the purpose of business and in the ordinary course of business. The assessee obtained sanction of loan from Kotak Mahindra in AY 2010-11. The finance charges do not have any element of interest. The charges paid are of the revenue in nature and are allowable business expenditure. On appeal, the CIT(A) confirmed the action of the AO.

On appeal, the Tribunal held that,

Whether claim of finance charges on processing loan as business expenses can be allowed, if loan is taken for future project but payment is made in the current AY- YES : ITAT

++ in so far as the finance charges claimed on processing of loan as business expenses are concerned, it is to be noted that the loan obtained by the assessee in regard to continuous business proposition and assessee is following the project completion method of accounting being a builder, loan taken in future project but payment made in the relevant assessment on account of processing charges of the loan is liable as business expenditure. Thus, placing reliance in the decision of Bombay High Court in the case of CIT vs. Lokhandwala Construction Inds. Ltd. this Tribunal allow the claim of the assessee;

Whether interest on funds belonging to co-operative society but held by the assessee in a fiduciary capacity can be assessed as income of the assessee -NO: ITAT

++ in so far as the addition on account of undisclosed interest income is concerned, it is to be noted that the corpus funds and society deposit is required to be handed over to the society on formation of the co-operative society. The sums received on account of society deposit and corpus fund is deposited in a separate bank account maintained for Society deposit and Corpus fund. The funds belong to the society and the same are held by the assessee company in fiduciary capacity and the funds do not belong to the assessee company. The interest income earned on the said fixed deposit is also credited to the said society deposit and corpus fund account since the interest income belong the said society. Thererfore, this Tribunal is of the view that the funds not belonging to the assessee company and held by the assessee company in fiduciary capacity, the interest income not belonging to the assessee company but belonging to and credited to the society account cannot be assessed in the hands of the assessee company.

Assessee’s appeal Partly allowed

ORDER

Per: Mahavir Singh:

This appeal filed by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-26, Mumbai [in short CIT(A)], in appeal No. CIT(A)-26/IT-99/DCIT.15(3)/12-13, dated 05.03.2014. The Assessment was framed by the Dy. Commissioner of Income Tax, Circle-15(3), Mumbai (in short ITO/ AO) for the A.Y. 2010-11 vide order dated 29.01.2013, under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).

2. The first issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing finance charges claimed on processing of loan by assessee as business expenses amounting to Rs. 40,03,250/-.

3. Briefly stated facts are that the assessee is engaged in the business of building and developing of real estates. The assessee is following project completion method of accounting for computing income. The AO noticed from the profit and loss account filed by assessee along with return of income as on 31.03.2010 that the assessee has debited a sum of Rs. 40,63,250/- under the head finance expenses. The bifurcation of the above finance charges relates to loan processing charges of Rs. 30,33,250, registration charges of Rs. 30,000/- and stamp duty charges of Rs. 10 lacs. According to AO, the assessee has sold parking lot aggregating to Rs. 4,52,500/- in classic project and opening stock of flats and parking lot aggregating to Rs. 4,23,81,367/- in the ‘Royale Housing Project’. He noted that no construction activity was carried out during the year in respect of these two projects. Even there is no new loan obtained during the year. Accordingly, he required the assessee to explain the co-relation of such finance expenses to the profit declared from these two projects. The assessee filed letter dated 19.12.2012 and claimed that finance charges of Rs. 40,63,250/- includes loan processing fees Rs. 30,33,250/-. The said charges are paid for sanctioning the working capital loan of Rs. 27.15 crores for the purpose of business and in the ordinary course of business. Working capital loan is released in the subsequent assessment year 2011-12 for the purpose of business. The assessee obtained sanction of loan from Kotak Mahindra in assessment year 2010-11. For sanctioning the loan the assessee incurred a sum of Rs. 30,33,250 as processing charges, Rs. 30,000 as registration fees and Rs. 10,00,000/- as stamp duty. The said finance charges do not have any element of interest. The said charges paid are of the revenue in nature and are allowable business expenditure. In support of the above, the assessee relies on the following case laws including decisions of the Supreme Court. India Cement Ltd. versus Commissioner of Income Tax, 60 ITR 52(SC) = 2002-TIOL-421-SC-IT-LBDCIT versus Paramount Hotel Ltd. 76 ITD 25 ITAT Mumbai (SMC). But the AO has not accepted the claim of assessee and disallowed the claim of expenses of finance expenses of Rs. 40,63,250/-. Aggrieved, assessee came in appeal before CIT(A). The CIT(A) confirmed the action of the AO vide para 5.1 and 5.2 as under: –

“5.1 Admittedly, the assessee follows ‘Project Completion Method’ for taxation of its income from various housing projects. Admittedly, working capital loan has been sanctioned for a new housing project and any income from this new project has not been offered for taxation during the year, neither any amount of any loan has been disbursed during the year. Thus, the working capital loan taken by the assessee is for a specific future project and it is not for the general business purpose and therefore, the cost of the sanction of the loan has to be capitalized towards the cost of such new project since it is a specific purpose loan.

5.2 It is a settled law that a specific cost has to be considered specifically and cannot be allowed as deduction as general business expenses and more so when income from such project as in this case is assessable only after the completion of the project and the deduction in any case is admissible towards income from the project as and when such income is assessable. Therefore, the case laws relied upon by the assessee are not relevant since they are not for a specific project income from which is taxable only on completion. Therefore, the case laws do not apply in the facts of the present case. There is no doubt that deduction for the processing charges would be admissible to the assessee, but this will be allowed as cost of the project and deduction for such cost of the project is to be allowed as and when the income for the project is offered for taxation. This ground is, therefore, decided accordingly and the order of the A.O is upheld.”

Aggrieved, assessee came in appeal before Tribunal.

4. We have heard rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee argued that the assessee is consistently following substantial Project Completion Method of accounting of Expenses on employee’s remuneration, professionals & consultancy fees relating to business in general, administration expenses. insurance expenses, electricity repairs & maintenance interest expenses (including finance charges comprising of loan processing fees, registration charges ore) are all periodic cost debited to general profit & loss account year to year and the same have been allowed year to year after due scrutiny. The loan processing charges and other related expenses which disallowance is the subject matter of appeal are fixed cost for the year which had to be incurred irrespective of the loan being disbursed or utilized. If the same was not incurred, the bank would have cancelled the sanction. The same are therefore expenses incurred in the normal and ordinary course of business allowable in the year in which the same has been incurred. Without prejudice to the above, Ld Counsel argued that these expenses are compulsorily to be incurred before bank disburse the funds No interest expenses have been debited to profit & loss account for the year and therefore the said expenses i.e. loan processing charges etc. debited to the profit and loss account cannot be equated to the interest expenses.

5. On the other hand, the learned Sr. Departmental Representative argued that the working capital loan taken by the assessee is for a specific future project and it is not for the business purposes and therefore, the cost of the sanctioning of the loan i.e. processing charges has to be capitalized towards the cost of such new project since it is a specific purposes loan. She supported the orders of the lower authorities.

6. We noted from the above arguments and the case laws relied on the Hon’ble Bombay High court in the case of CIT vs. Lokhandwala Construction Inds. Ltd. [2003] 260 ITR 579 (Bombay) that the processing charges for loan are allowable expense. The learned Counsel for the assessee drew our attention to the relevant findings of Hon’ble Bombay High Court which read as under: –

“In the present case, the assessee was a builder. In the present case, the assessee had undertaken the Project of construction of flats under the Kandivali Project. Therefore, the loan was for obtaining stock-in-trade. That, the Kandivali Project constituted the stock-in-trade of the assessee. That, the Project did not constitute a fixed asset of the assessee. In this case, we are concerned with deduction under section 36(1)(iii). Since the assessee had received loan for obtaining stock-in-trade (Kandivali Project), the assessee was entitled to deduction under section 36(1)(iii) of the Act. That, while adjudicating the claim for deduction under section 36(1)(iii) of the Act, the nature of the expense – whether the expense was on capital account or revenue account – was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That, the utilization of the capital was irrelevant for the purposes of adjudicating the claim for deduction under section 36(1)(iii) of the Act – Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 (Bom.) = 2003-TIOL-1295-HC-MUM-IT. In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. The said judgment of the Bombay High Court applies to the facts of this case.”

7. We noted from the above that the loan obtained by the assessee in regard to continuous business proposition and assessee is following the project completion method of accounting being a builder, loan taken in future project but payment made in the relevant assessment on account of processing charges of the loan is liable as business expenditure. In view of the decision of Hon’ble Bombay High Court in the case of Lokhandwala Construction Inds. Ltd. (supra). In view of the above, we allow the claim of the assessee.

8. The next issue in this appeal of assessee is against the order of CIT(A) confirming the addition made by AO of undisclosed interest income of Rs. 5,92,005/-.

9. We have heard rival contentions and gone through the facts and circumstances of the case. The learned Counsel for the assessee before us filed the details of interest received on FDRs maintained with HDFC Bank Ltd. and that with ICICI Bank Ltd. It was contended that this interest income receipt was on account of funds received on account of corpus funds and society deposits from the flat purchasers. We noted from the facts that the said corpus funds and society deposit is required to be handed over to the society on formation of the co-operative society. The sums received on account of society deposit and corpus fund is deposited in a separate bank account maintained for Society deposit and Corpus fund. The said funds belong to the society and the same are held by the assessee company in fiduciary capacity and the said funds do not belong to the assessee company. The assessee company maintains a separate record of the said society deposit and corpus fund account. The amounts received in the said bank accounts are invested in fixed deposit with bank. The interest income earned on the said fixed deposit is also credited to the said society deposit and corpus fund account since the interest income belong the said society. The bank deducts tax at source on the interest income earned on the fixed deposit taken from the society deposit and corpus fund account. Interest on the fixed deposits pertaining to and received on account of the assessee’s own fixed deposit is duly declared and credited in the profit and loss account. However, interest pertaining to the fixed deposit invested out of society deposit and corpus fund account is credited to the said account as stated herein above and do not form part of the assessee company income. It is further pertinent to note here that the assessee company has not claimed any tax deducted at source (TDS) in respect of interest income credited to the society deposit and corpus fund account. The working in this respect and the relevant ledger account of society deposit and corpus account is also filed before us. In view of the funds not belonging to the assessee company and held by the assessee company in fiduciary capacity, the said interest income not belonging to the assessee company but belonging to and credited to the society account cannot be assessed in the hands of the assessee company.

10. In the result, the appeal of assessee is allowed.

(Order pronounced in the open court on 12.06.2019)

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