1991 (12) TMI 129 - AT - Income Tax

Tribunal rules security deposit as trading receipt, allows interest deduction and export sales benefit

SI. Property Development (Private) Limited. Versus Inspecting Assistant Commissioner.

The Tribunal partly allowed the appeal by determining that the security deposit collected by the assessee was considered a trading receipt. They also ... Accounting Year, Export Business, Interest On Borrowed Capital, Trading Receipt Issues Involved:1. Assessment of Rs. 26,80,640 collected as a deposit as a trading receipt.2. Disallowance of interest of Rs. 3,20,000.3. Denial of deduction under section 80HHC of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Assessment of Rs. 26,80,640 Collected as a Deposit as a Trading Receipt:The assessee, engaged in the construction and sale of residential flats and commercial units, collected deposits totaling Rs. 26,80,640 for the use of reserved areas in a building project. The Assessing Officer treated this amount as a trading receipt and taxed it accordingly. The CIT(A) upheld this view, stating that the amount was part of the trading transaction and could not cease to be income merely because it was called a security deposit.The assessee contended that the security deposit was taken under a separate license agreement and carried a liability to refund the amount on certain contingencies, thus it should not be treated as part of the trading receipts. The Revenue argued that the license agreement was not independent of the sale of the office premises and was inextricably connected to it, making the deposit part of the trading receipt.Upon review, the Tribunal considered the submissions and relevant documents. They noted that the license deed did not grant any rights that the unit owners did not already enjoy by way of easement of necessity. The license fee was deemed a supplement to the consideration paid for the purchase of the undivided share in the land and office space. The Tribunal concluded that the security deposit constituted part of the consideration for the entire arrangement and was a trading receipt. They directed the Assessing Officer to make necessary adjustments in ascertaining the correct amount to be brought to tax.2. Disallowance of Interest of Rs. 3,20,000:The assessee paid Rs. 3,20,000 as interest on a security deposit received from Southern Investments for a construction project. The Assessing Officer and CIT(A) held that this interest should be capitalized as part of the work-in-progress and not allowed as a deduction in computing the income.The assessee argued that there was no nexus between the deposit and the actual project, and the funds borrowed were for the purpose of the business as a whole. The Revenue contended that the deposit was received in connection with the project and the interest should be capitalized.The Tribunal found that the funds made available to the assessee were not inextricably connected with the project. The obligation of Southern Investments was only to pay a security deposit, while the assessee had to arrange additional finance for the project. Therefore, the interest paid was not the cost of construction of the project. The Tribunal deleted the addition of Rs. 3,20,000.3. Denial of Deduction under Section 80HHC:The assessee entered into the business of sale of fish foods and claimed a deduction under section 80HHC for export sales. The Assessing Officer disallowed the deduction, concluding that the export was made by a sister concern, Kaveri Sea Foods, and was an arrangement for tax avoidance. The CIT(A) upheld this view.The assessee contended that it was recognized as an exporter, and the export was made in its name, supported by documentation. The Revenue maintained that the assessee was not entitled to the deduction.The Tribunal found that the assessee had procured orders abroad and Kaveri Sea Foods acted as an agent. The documentation established that the export business was done by the assessee. Citing judicial precedents, the Tribunal concluded that the assessee was the real exporter entitled to the deduction under section 80HHC. They directed the Assessing Officer to re-compute the income accordingly.Conclusion:The appeal was partly allowed. The Tribunal held that the security deposit was a trading receipt, deleted the disallowance of interest, and allowed the deduction under section 80HHC.