whether Interest on FDRs made out of customer advances wasn’t income from other sources if same was reduced from WIP ?
Where a construction company, received bank interest on FDRs which were made out of advances received from customers, even if construction was not complete during current year interest income could not be treated as income from other sources as same had been reduced from work-in-progress
Full Judgement :-
IN THE ITAT CHANDIGARH BENCH ‘B’
Samar Estate (P.) Ltd.
AND T. R. SOOD, ACCOUNTANT MEMBER
IT APPEAL NO. 1252 (CHD.) OF 2011
[ASSESSMENT YEAR 2008-09]
FEBRUARY 6, 2015
Tej Mohan Singh for the Appellant. Jyoti Kumari for the Respondent.
T.R. Sood, Accountant Member – The appeal by the assessee is directed against the order dt. 31st Oct., 2011 passed by the CIT(A), Panchkula.
2. In this appeal assessee has raised the following grounds :
‘1. That the learned CIT(A) has erred in law as well as on facts in upholding the addition of Rs. 2,19,70,183 which is illegal, arbitrary and unjustified.
2. That learned CIT(A) has further erred in upholding that the interest income earned by the assessee is “Income from other sources” and not “business income” in utter disregard of the explanation rendered which is arbitrary and unjustified.
3. That the learned CIT(A) has further erred in upholding the factually incorrect finding of the AO that the business of the assessee company had not commenced and as such the company was not eligible for any relief under s. 70 or 71 which is arbitrary and unjustified.
4. That the learned CIT(A) has further erred in not considering the written submissions filed before her during the course of appellate proceedings which is arbitrary and unjustified.’
3. After hearing both the parties we find that during assessment proceedings it was noticed that assessee is engaged in the business of developing land and construction of residential apartments thereon. According to AO, the assessee company had not commenced the business. It was further noticed that assessee had received bank interest on FDRs amounting to Rs. 2,19,70,183. These FDRs were made out of the advances received from customers. In response to the query why this interest should not be subjected to tax, it was mainly stated that assessee was developing land and constructing residential apartments in the area of Panchkula. During the year, the apartments remained under construction and were not complete and, therefore, not ready for sale. The assessee was following mercantile accounting system right from the inception and all the construction cost and related expenses were shown as ‘work-in-progress’ and interest received was credited to such work-in-progress.
4. According to AO such interest income was required to be taxed particularly in view of the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT  227 ITR 172 He further opined that facts of the assessee were almost identical with the facts of the decision of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) because assessee has not commenced its business and has earned interest. Accordingly, the interest income was subjected to tax as ‘income from other sources’.
5. On appeal, it was mainly contended that AO is not correct in observing that assessee has not commenced its business because assessee company had performed ‘Bhumi Puja’ and thereafter started construction of flats. Advertisements for sale of such flats were given in the newspapers. It was further pointed out that certain advances were received from customers and such advances had direct link to the business. The money received from such advances was partly used and was partly kept in bank on which interest was earned which was credited to the work-in-progress account because construction was complete (sic—incomplete).
6. The learned CIT(A) after considering the submissions observed that interest has been earned by the assessee company during pre-operative period and the idle funds before the pre-operative period has been used in making FDRs. She further referred to the P&L a/c and pointed out that in such P&L a/c, sales as well as all expenses were shown as nil which makes it clear that assessee has not commenced the business, therefore, decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was applicable. In this background she confirmed the assessment of income from interest as income from other sources.
7. Before us, learned counsel for the assessee submitted that assessee was in the business of development of land and construction of residential flats. The construction activity has already started after performing Bhumi Puja and, therefore, it cannot be said that business is not commenced. In the case of construction companies, business would commence the moment construction starts. Since flats were not ready for sale, therefore, all expenses were shown as ‘work-in-progress’.
8. In this regard he referred to the balance sheet where the work-in- progress has been shown separately. The details of work-in-progress as given in a schedule are available at p. 334 of the paper book. He pointed out that a sum of Rs. 1,22,12,592 on account of net financial charges has been reduced from such work-in-progress. The assessee has paid some interest on the borrowings made, therefore, after reducing such payment from the interest received, the net amount has been credited to the P&L a/c. He contended that reduced work-in-progress would mean that whatever interest element is there would become taxable in the next year when the flats are actually sold because cost would be lower because of this credit of interest. He further contended that in the identical circumstances, the Hon’ble Bombay High Court in the case of CIT v. Lok Holdings  308 ITR 356 has held that interest income would constitute as business Income. In that case also interest was reduced from the work-in-progress. The AO held interest to be taxable as ‘income from other sources’ and the Hon’ble High Court reversed the decision of AO. t
9. On the other hand, learned Departmental Representative strongly supported the order of AO and the CIT(A). She further submitted that since assessee has not commenced business, therefore, income from interest was rightly taxed because of the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). She also strongly relied on the decision of Bombay High Court in the case of CIT v. Swani Spice Mills (P.) Ltd.  332 ITR 288 . She further relied on the decision of Hon’ble Supreme Court in the case of CIT v.Autokast Ltd.  248 ITR 110
10. We have considered the rival submissions carefully. After considering the rival submissions we find force in the submissions of learned counsel for the assessee. In our opinion, the AO is not correct in observing that assessee has not commenced its business. In case of a construction company, once construction activity starts then it can definitely be said that business has commenced. In the case before us, the assessee has purchased various materials and has incurred labour charges and other expenses like administrative expenses, salaries, electricity, machinery repair etc. However, since flats were not complete, therefore, all these expenses along with material etc. have been shown as ‘work-in-progress’ which becomes clear from p. 334 of the paper book which gives details of the work-in-progress as well as the balance sheet which is available at p 4 of the paper book. The total work-in-progress is Rs. 9,50,10,025, therefore, the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is not applicable because in that case assessee had not commenced any business.
The above situation further becomes clear from the decision of Hon’ble Bombay High Court in the case of Lok Holdings(supra). In that case the following questions were raised :
“4(a) Question is whether, on the facts and circumstances of the case and in law the Tribunal is right in deleting the addition on the ground that in the case of East Coast Enterprises, the Tribunal had upheld the deletion without discussing the facts of the said case of East Coast Enterprises ?
(b) Question is whether, on the facts and circumstances of the case and in law, the Tribunal is right in holding that the interest income cannot be assessed as income from other sources without referring to s. 56 of the IT Act and contrary to the decision of the apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 141 CTR (SC) 387 : 1997) 227 ITR 172 (SC)?
(c) Question is whether, on the facts and circumstances of the case and in law, the Tribunal is right in coming to a conclusion that the interest income received by the respondent is nothing but business income and, therefore, the same cannot be assessed as income from other sources ?”
11. In that case the facts are identical to the case before us. The assessee was engaged in the business of development and construction of properties. The assessee firm had received advances from customers and money received through such advances which were not required immediately was deposited in FDRs etc. on temporary basis. The interest credited on such deposits was deducted from the work-in-progress. However, AO taxed such interest as ‘income from other sources’. In that case also on behalf of the Revenue reliance was placed on the decision of Hon’ble Supreme Court in the case ofTuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The Hon’ble Court clearly observed that facts in this case are completely different and, therefore, decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was not applicable. Ultimately, the Court referred to another decision of Hon’ble Supreme Court in the case of CIT v. Bokaro Steel Ltd.  236 ITR 315 and held that interest income is to be assessed as business income because the assessee had already commenced business. In this background the interest income was held to be not taxable. In our opinion, the facts of the assessee’s case are identical to this case and, therefore, following this decision, we hold that interest income cannot be treated as ‘income from other sources’ as the same has been reduced from the work-in-progress, the same is not taxable. Therefore, we set aside the order of learned CIT(A) and delete the addition.
12. In the result, assessee’s appeal is allowed.