Clc Textile Park Pvt. Ltd.,, New Delhi vs Assessee

Assessee by : Sh. Anil Jain, CA Department by : Smt. Parwinder Kaur, Sr. DR

Date of Hearing : 12-06-2015 Date of Order : 24-06-2015 ORDER

PER H.S. SIDHU : JM This appeal by the Assessee is directed against the Order of the Ld. Commissioner of Income Tax (Appeals)-VI, New Delhi dated 12.8.2013 pertaining to assessment years 2009-10.

2. The assessee has raised the following grounds:-

"1. That the CIT(A) erred on facts and in law in confirming the addition of Rs. 5,91,850/- on account of interest income which was treated as capital receipt by the appellant.

2. That the CIT(A) erred on facts and in law in confirming the addition of Rs. 49,28,006/- on account of sale

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consideration of the appellant treated as unexplained income under section 68.

The appellant craves leave to add, alter, amend or vary from the above grounds of appeal at or before the time of hearing."

3. The brief facts of the case are that the assessee company is engaged in the business of development of infrastructure projects in textile sector. The assessee electronically filed return of its income for the relevant assessment 2009-10 declaring income at Rupees NIL. Subsequently, the case was selected for scrutiny and Authorised Representative of the company attended on various dates. However, the AO assessed the total income of the assessee at Rs. 55,19,856/- after making various additions and completed the assessment u/s. 143(3) of the I.T. Act, 1961 vide order dated 29.12.2011.

4. Aggrieved with the aforesaid assessment order dated 29.12.2011, assessee appealed before the Ld. CIT(A), who vide impugned order dated 12.8.2013 has confirmed the additions made by the AO by partly allowing the appeal of the assessee vide his order dated 12.8.2013.

5. Against the order of the Ld. CIT(A) dated 12.8.2013 assessee now appealed before the Tribunal.

6. Ld. Counsel of the assessee submitted that AO while completing the assessment treated Rs. 5,91,850/- as 'income from other sources' which was earned an interest income from fixed deposits, without appreciating that the interest was in the nature of capital receipt. In this regard, assessee's counsel submitted that the assessee was sanctioned a total grant of Rs. 43.07 crores which

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was to be paid in staggered manner. He further submitted that as per point no. 2 (xviii) at page 28 of the Disbursement letter it was stipulated that "the SPV shall not utilize the interest earned on grant so released to it for any purpose. The interest earned shall be indicated in the UC which can either be adjusted in next release or to be refunded to Govt. Of India after in aid sanctioned is utilized." And in view of this clause the Central Govt. released a grant of Rs. 12,91,45,365/- only as against Rs. 14.36 crores which was eligible as the 2nd installment. The assessee also in the balance sheet for FY 2011-12 has reflected the interest earned on grant as capital reserves. Thus, he pleaded that the interest earned on FD made with banks out of central government as not the income of the assessee and rather it was to be refunded to the Central Govt. or to be adjusted against the future grant. Accordingly, he submitted that it is of capital nature. He further submitted that the AO while passing the assessment order of the AY 2011-012 and the 2012-13 has also not treated the interest earned on FD as income of the assessee. In view of above, he requested that the interest received on FDR's of Rs. 5,91,850/- in the present case is not to be taxed as income from other sources in the hands of the assessee company. To substantiate its claim the Ld. Counsel of the assessee relied upon the decision of the Hon'ble Delhi High Court in the case Indian Oil Panipat Power Consortium Ltd. Vs. ITO 315 ITR 225 and Gujrat High Court decision in the case of Gujrat Power Corporation Ltd. 354 ITR

201. Ld. Counsel of the assessee further submitted that the case law relied upon by the Ld. CIT(A) of the Hon'ble Supreme Court of India in his impugned order in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT 227 ITR 172 (SC).

6.1 With regard to addition of Rs. 49,28,006/- on account of sale consideration of the fabrics treated as unexplained income under

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section 68 of the I.T. Act, assessee's counsel submitted that the purchase transaction is also genuine and the allegation of the AO and the CIT(A) that the purchase transaction was unproved is baseless. He further submitted that the books of account has not been rejected by the AO. He further submitted that disregarding the confirmation from the creditor, assessment was shown as completed on 29.12.2011 being antedated which is evident from the fact that the AO has written a line in the assessment order that till the time of conclusion of the instant proceeding no confirmation was filed. Therefore, he submitted that the purchases are duly substantiated, as all the payments have been made to the creditor through the account payee cheques within this year. Finally, he pleaded that there is no justification for treating the cash sales of Rs. 49,28,006/- as unexplained income u/s 68 which may be deleted.

7. On the contrary, Ld. DR relied upon the orders of the authorities below.

8. We have heard both the parties and perused the records especially the orders of the revenue authorities and submissions of both the parties. With regard to ground no. 1 relating to confirmation of addition of Rs. 5,91,850/- on account of interest income which was treated as capital receipt by the assessee. As per the P&L A/c, the assessee had earned interest income of Rs.5,91,850/- on FDR with banks, though simultaneously, the assessee had debited the P&L A/c with a sum of Rs.47,21,002/- and after setting off such expenditure against interest income, a loss of Rs.41,29,152/- was capitalised under the Head "Preoperative Expenses', In fact, according to the AO, the assessee has parked the surplus funds in the form of FDs, as regards the Central Govt. Subsidy received by the assessee, Therefore, the AO held that the earning of interest income was no where inextricably linked to

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setting up of business and moreover, sec. 57(iii) of the IT Act, 1961 provides that unless an expense has been incurred wholly and exclusively for the purpose of business, the same cannot be allowed to be set off against interest income. Other incomes which are normally included under the head 'Income from Other Sources', inter alia, includes 'interest on bank deposits'. We find that the Ld. CIT(A) in his impugned order has referred the judgment of the Hon'ble Supreme Court of India in CIT Vs. Dr. V Gopinathan (2001) 248 ITR 449 (SC), wherein it has been held that interest received by the asseesee from the bank on a fixed deposit is income in his hands and there could be no deduction therefrom unless there is a law permitting such deduction. Ld. CIT(A) again referred a similar judgment which was delivered by Hon'ble Delhi High Court in CIT Vs. Delhi Brass and Metal Works Ltd. (2009) 313 ITR 353 (Del). We further find that the Ld. CIT(A) also referred a decision in the case of Indian Oil Panipat Power Consortium Ltd. Vs ITO (2009) 315 ITR 255 (Del), wherein it has been held by the Hon'ble Court that where the funds in the form of share capital were infused for the specific purpose of acquiring land and the development of infrastructure and the interest was earned on money received as share capital by the assesssee by temporarily placing the money In a fixed deposit awaiting acquisition of lands, which had run into legal entanglements on account of title decision of Supreme Court in Tuticorin Alkali Chemicals and Fertilizers limited (1997) 227 ITR 172 (SC) is not applicable, in that case on the basis of facts of the case that funds so infused as share capital were inextricably linked with tile setting up the plant-and hence interest earned by the assessee could not be treated as Income from Other Sources but it was to be treated as a capital received as it was earned in a prior period to commencement of business and was required to be set off against preoperative expenses. Ld. CIT(A) noted that in the case of Tuticorin 5 ITA NO.5667/Del/2013

Alkali Chemical & Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172 (SC), it was, however, held by the apex court that the computation if income under each of the five heads of income will have to be made independently and separately. There are specific rules of deduction and allowance under each head. No deduction or adjustment on account of any expenditure can be made except as provided by the Act. It was further held in this case that interest income is always of a revenue nature, unless it is received by way of damages or compensation. If a person borrows money for business purposes but utilises that money to earn interest, howsoever, temporarily, the interest so generated will be his income. Merely because it was utilized to repay the interest on loan taken by the assessee, it did not cease to be his income when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override Section 56 or any other provision of the Income Tax Act. Similar views have been held in CIT Vs Assam Plantation Crops Development Corporation Ltd. (1996) 221 ITR 392 (Gau), that section 56 envisages that income of every kind which is not to be excluded from total income under the Act, shall be chargeable to Income Tax, if it is not chargeable under any of the heads in section 14. The interest so earned on share capital funds on short term FDs undoubtedly fell in the category of 'Income from Other Sources'. We note that Ld. CIT(A) has observed that in view the fact that the Hon'ble Apex Court In Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 93 Taxman 502/227 ITR 172 (SC) has clearly held that interest earned on short term investment of funds before commencement of business has to be assessed as 'lncome from Other Sources' and that it cannot be held to be non taxable on 6 ITA NO.5667/Del/2013

ground that it would go to reduce interest liability on borrowed amount which would be capitalized. Ld. CIT(A) has noted that Interest on fixed deposits and even other deposits before the commencement of business is 'Income from Other Sources'. In other words, interest income in respect of surplus money, not immediately required for business and deposited, in bank, as idle money for safe, keeping or otherwise, would be assessable as Income from Other Sources Further, if the income from interest is from a fund or grant, which has been brought as surplus capital. It would still be assessable as 'Income from Other Sources. Even, the funds received from Central Govt. and required to be utilized for authorized purposes by way of creation of a 'Special Purpose Vehicle' (SPV), cannot itself alter the nature of the receipt, where such funds are parked for a smaller period to earn interest income, as business prudence or commercial expediency cannot alter the legal provisions as such. In view of the above, CIT(A) concluded that the AO has clearly held that there is no link let alone inextricable link, between earning of interest income and incurring of preoperative expenses. Ld. CIT(A) confirmed the addition made by the AO.

8.1 We find considerable cogency in the assessee's submissions that assessee was sanctioned a total grant of Rs. 43.07 crores which was to be paid in staggered manner. We also find that as per point no. 2 (xviii) at page 28 of the Disbursement letter it was mentioned that "the SPV shall not utilize the interest earned on grant so released to it for any purpose. The interest earned shall be indicated in the UC which can either be adjusted in next release or to be refunded to Govt. Of India after in aid sanctioned is utilized." And in view of this clause the Central Govt. released a grant of Rs. 12,91,45,365/- only as against Rs. 14.36 crores which was eligible as the 2nd installment. The assessee also in the balance sheet for FY

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2011-12 has reflected the interest earned on grant as capital reserves. Thus, he pleaded that the interest earned on FD made with banks out of Central Government as not the income of the assessee and rather it was to be refunded to the Central Govt. or to be adjusted against the future grant. Ld. Counsel of the assessee further submitted that it is of capital nature. He further submitted that the AO while passing the assessment order of the AY 2011-012 and the 2012-13 has also not treated the interest earned on FD as income of the assessee.

8.2 We also find that Ld. Counsel has relied upon the decision of the Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. vs. ITO 315 ITR 255, Delhi High Court wherein it was held that "the assessee corporation was formed as joint venture of two corporations to set up a power project. The share capital contributed by two corporation was to be used for purchase of land and development of infrastructure for the project. Since there was some legal problem to acquire title of land, the funds were temporarily put in FDR in a bank. The interest earned on FDR before commencement of project was to be treated as capital receipt to be adjusted preoperative expenses, since it had a direct link with setting up power project. The interest was not assessable as income from other sources. Section 4 and Section 56 of the Income Tax Act, 1961. We also find that similar decision was also relied upon by the assessee's counsel of the Hon'ble Gujrat High Court in the case of Gujrat Corporation Ltd. 354 ITR 201, wherein it was held that "the assessee corporation was promoted by Government for augmenting power supply. The share capital was provided by Government. The interest on short term deposits from share capital was paid to Government as per agreement. The interest income was diverted at sat source. It was not assessable in its hands. So the income did not

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belong to the assessee, but that was of the Govt. of Gujrat, and therefore, it cannot be taxed in the hands of the assessee". We also find force in the assessee's counsel that the case law relied upon by the Ld. CIT(A) in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT 227 ITR 172 (SC) has been distinguished in the above said case of the Hon'ble Delhi High Court.

8.3 In the background of the aforesaid discussions and precedents,

we find considerable cogency in the submissions and the case laws

relied upon by the Ld. Counsel of the assessee, therefore, we are of

the view that the interest received on FDR's of Rs. 5,91,850/- in the

present case is not to be taxed as income from other sources in the

hands of the assessee company, hence, we delete the addition

made by the AO and confirmed by the Ld. CIT(A) of Rs. 5,91,850/-

and allowed the issue involved in ground no. 1 in favor of the

assessee.

9. With regard to ground no. 2 relating to confirmation of addition of Rs. 49,28,006/- on account of sale consideration of the assessee treated as unexplained income under section 68 of the I.T. Act, we find that AO has made the addition of Rs.49,28,006/- as in the Trading Account filed during the course of assessment proceedings, it was found by him that assessee had shown sales and purchases of an equivalent amount i.e. Rs.49,28,006/- though the assessee claimed to be in the business of setting up infrastructure projects, as a part of Central Government Scheme, on PPP Basis. Therefore, the AO was of the view that though the purchases were stated to have been effected from one party i.e. M/s Shyam Lal Goyal Textiles (Pvt.) Ltd, over the period May-July, of F.Y. 2008-09, but the same was sold

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through 33 different invoices in cash for an amount exactly totaling at Rs. 49,28,006/-. Initially before the A0, it was submitted by the AR on behalf of the assessee that the cash sales bills are not available but subsequently he produced 33 invoices/sales bills. Moreover none of the sales bills contain any details e.g. name and address of the parties to whom the goods were sold in cash There was even no details' regarding measurement of cloth sold either in terms of No of bales or in terms of length Moreover. There was no description of the quality or the make of the fabric, on the face of the bills. Even there were no details of cartage or transportation of consignment. We further find that AO has given the following finding that since:

(i) the names and addresses in respect of all the 33 sales invoices

were not made available, thus stone walling any efforts at

verification of such transactions.

(ii) the entire sale being in cash, also has not been explained and it is too much of a coincidence that all 33 sales invoices do not have the names of the customers.

(iii) no details in terms of quality and quantity of items sold have been mentioned on the face of the bills.

(iv) no details regarding transportation of goods traded have been mentioned.

(v) no confirmation could be received from the said M/s Shyam Lal Gupta Textiles (Pvt.) Ltd or its one of the Director's, namely Mr. Suresh Goyal and hence purchases also remaining unproved, the said transactions regarding sale/purchase of cloths remained unproved and that the evidence in the form of sales bills etc were in

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the nature of "in house" evidence, manufactured for the purpose of generating cash for purchase of land in Madhya Pradesh and therefore, by invoking the provisions of Section 68 of IT Act that the transactions of sale as credited in the books of account of the assessee of Rs.49,28,006/- remained unexplained, added the same to the total income of the assessee u/s 68 of l.T. Act, 1961. On the other, the assessee has submitted that as the assessee already got late in purchasing land at Madhya Pradesh for setting up of the project, it required immediate cash and that it decided to dispose off the goods at the earliest at cost and hence there was no profits, but the transaction of 'Sale' is genuine. Moreover, M/s Shyam Lal Gupta Textiles (Pvt) Ltd was paid only by way of Account Payee Cheques and this fact was brought to the notice of the AO and therefore, the allegation of the In that even tile purchase transaction was unproved is baseless. The assessee cited the case law of ITO Vs T&T Metals Pvt Ltd delivered on 29th June, 2012 by Kolkata Bench of ITAT and stated that if assuming that there is no sales, the entire amount of purchases would have remained in the closing stock as purchase was never disputed in the instant case.

9.1 As compared to the case law cited by the assessee as above,

Ld. CIT(A) has observed that where only sales remain unproved,

according to the AO, in the present case not only the sales remained

unproved, but even the purchases have been held to unproved, as

detailed in the assessment order under reference. Moreover, while

the purchases have been stated to be effected from 21.05.2008 to

08.08.2008 amounting in all to Rs.49,28,006/- by way of

transactions on different dates, the payment to the said Shyam Lal

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Textiles (P) Ltd has been made, subsequently after approx seven

months on 21.03.2009 and afterwards upto 26.03.2009 i.e. at the

fag end of the financial year, where even the appellant is stated to

have sold its entire stock by August 2008 and also closed its cloth

business in August 2008, itself. The cash book of the appellant

company, reflects cash transfers to Pandhurna in MP of

Rs.37,50,100/- on 21.07.2008, followed by another cash transfer on

02.09.2008 of Rs.11,78,070/- amounting in all to Rs.49,78,170/- for

the purpose of purchase of land at Pandhurna Industrial Cluster,

Chhindwara, M.P. for the purpose of undertaking the said Industrial

Infrastructure Upgradation Scheme (IIUS), a Govt Of India initiation

on S.P.V./P.P.P basis. Therefore, as per the Ld. CIT(A) it is the

immediate requirement of cash that had made the assessee to bring

in picture the entire paper transaction of sale and purchase of cloth,

though in effect no such transaction took place. In view of the

above, the genuineness of sales transaction as well as purchase

transaction remaining unproved, we find considerable cogency in

the finding of the Ld. CIT(A) wherein he has observed that the

addition made by the AO uls 68 of IT Act is correct on account of

unproved purchases and subsequent unproved sales thereby

leading to unexplained cash credit u/s 68 of IT Act, 1961 at

Rs.49,28,006/-. Keeping in view of the aforesaid facts and

circumstances of the case as explained above, in our considered

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opinion, the Ld. CIT(A) has passed a well reasoned on the issue in

dispute which does not need any interference on our part, hence, we

uphold the same and decide the ground no. 2 against the Assessee.

10. In the result, the Appeal filed by the Assessee stands partly allowed.

Order pronounced in the Open Court on 24/6/2015.

Sd/- Sd/-

[S.V. MEHROTRA] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER Date 24/6/2015 "SRBHATNAGAR" Copy forwarded to: - 1. Appellant - 2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT

TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

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