Project receipts, accrual of income and capitalisation of interest: statutory body not treated as agent; stock additions deleted.

A statutory housing board executing a project in its own name is not treated as an agent of the Administration merely because it is described as a nodal agency, and project receipts are not diverted by overriding title unless the documents create an antecedent superior right in favour of the Administration. Under the mercantile system, consideration for grant of leasehold and development rights accrues when an enforceable right to receive arises, even if payment is in instalments. Interest on fixed deposits made from project funds follows the character of those funds, while interest on overdrafts may be capitalised to work-in-progress where the borrowings are not shown to have been used otherwise. Stock-related additions were deleted where they were already reflected or rectified in closing stock.

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Issues: (i) Whether the assessee-Board could be treated as an agent of the Chandigarh Administration in relation to the RGCTP project, and whether the project receipts stood diverted to the Administration by overriding title; (ii) Whether the consideration for grant of leasehold and development rights accrued to the assessee in the year under appeal; (iii) Whether interest income on fixed deposits made out of RGCTP project funds was taxable in the assessee's hands; (iv) Whether interest on overdrafts raised against fixed deposits was rightly capitalised to work-in-progress; (v) Whether the additions relating to stock differences were rightly deleted.

Issue (i): Whether the assessee-Board could be treated as an agent of the Chandigarh Administration in relation to the RGCTP project, and whether the project receipts stood diverted to the Administration by overriding title.

Analysis: The statutory scheme under the Haryana Housing Board Act, 1971 authorised the Board to undertake housing schemes and regulated the manner of implementation, but did not create a principal-agent relationship. The description of the Board as a "nodal agency" in administrative documents was held to be contextual and not determinative of agency in law. The project was executed by the Board in its own name, the land had been purchased by it in its own right, and no material showed authority to bind the Chandigarh Administration in dealings with third parties. The alleged diversion of receipts also failed because the agreement and related documents did not create any antecedent superior title in favour of the Administration; the directions relied upon only regulated application of funds after receipt.

Conclusion: The Board was not the agent of the Chandigarh Administration, and the project receipts did not stand diverted at source by overriding title. This issue was decided against the assessee.

Issue (ii): Whether the consideration for grant of leasehold and development rights accrued to the assessee in the year under appeal.

Analysis: The Development Agreement and Lease Agreement created an enforceable right in favour of the assessee to receive the agreed consideration on execution of the documents, with the developer undertaking a corresponding liability to pay the bid price in instalments. Under the mercantile system, income accrues when the right to receive is vested, even if actual receipt is deferred. The conditions precedent and staggered instalments were treated as contractual consequences and payment terms, not as defeating the crystallisation of the right to receive. The precedents relied upon by the assessee were distinguished on the basis that those cases involved either a real dispute as to the right to receive or a materially different factual setting.

Conclusion: The consideration accrued in the year under appeal and was rightly taxed on accrual basis. This issue was decided against the assessee.

Issue (iii): Whether interest income on fixed deposits made out of RGCTP project funds was taxable in the assessee's hands.

Analysis: Once the RGCTP receipts were held to belong to the assessee and not to the Chandigarh Administration, the interest earned on fixed deposits created out of those funds also followed the same character. The assessee's plea of agency was rejected, and no separate basis was shown to exclude the interest from its taxable income.

Conclusion: The interest income on the fixed deposits was taxable in the assessee's hands. This issue was decided against the assessee.

Issue (iv): Whether interest on overdrafts raised against fixed deposits was rightly capitalised to work-in-progress.

Analysis: The assessee failed to substantiate its shifting stand regarding the use of overdraft funds. The lower authorities recorded a factual finding that additional work-in-progress during the year required corresponding inflow of funds, and the assessee did not produce reliable material to show that the borrowings were used only for fresh fixed deposits. The interest was therefore treated in accordance with the assessee's own accounting treatment as capitalised expenditure attributable to work-in-progress.

Conclusion: The disallowance and capitalisation of the overdraft interest were upheld. This issue was decided against the assessee.

Issue (v): Whether the additions relating to stock differences were rightly deleted.

Analysis: The CIT(A) accepted the assessee's explanation that the alleged differences in stock of houses, booths and material had already been absorbed in the closing stock values or otherwise rectified in the books, and that the proposed additions would amount to double taxation of the same adjustment. The Revenue did not establish any infirmity in these factual findings.

Conclusion: The deletions of the stock-related additions were upheld. This issue was decided in favour of the assessee.

Final Conclusion: The assessee failed on the core questions relating to agency, diversion of income and accrual of project receipts, and also on the interest expenditure issue, but succeeded on the stock adjustments. The Revenue's appeal was allowed only to the limited extent of remand on the conversion-fee interest issue, while the remaining relief granted by the CIT(A) was sustained.

Ratio Decidendi: A statutory body executing a project in its own name does not become an agent of the Government merely because it is described as a nodal agency, and income accrues for tax purposes when an enforceable right to receive it arises even if receipt is deferred by instalments.

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