TaxTMI 
TaxTMI 
2011 (7) TMI 1203
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....y the above expenses should not be disallowed within the meaning of provision of section 40(a)(ia) of the Act, the assessee vide letter dated 30.10.2009 made the following submission:- "1) a. As regards, deduction of TDS of Freight System (I) Pvt. Ltd. of Rs. 1,33,561/- this is freight payment for import of goods paid on account of Foreign Shipping Line on which TDS is not deducted. b. Sum of Rs. 1,00,000/- is paid to Shri A. V. Menon for advertisements in newspapers and not towards his professional fees. Therefore, no TDS is to be paid. c. The listing fees of Rs. 65,000/- is paid as under:- Sr. No. Name of the party Amount 1 Radha Krishna Food 15000 2 Hypercity Mall 50000 Total 65000 The amount paid for keeping the goods of their company in the display box and their counters for sale. This is paid for the purpose of publicity." 2.3 Since the Ld. Counsel for the assessee did not press for the disallowance of Rs. 1,33,561/-, we are not discussing the observation of the AO on this addition. However, the submissions of the assessee for the other two additions was rejected by the AO for the foll....
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....or the assessee. 4.1 As regards payment made to Hypercity Mall, though termed as product listing fees, it is only in the nature of advertisement as held by the AO and therefore, needs no interference. He accordingly, upheld the action of the AO. 4.2 Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before us. 4.3 The Ld. Counsel for the assessee referring to page no.113 of the paper book drew the attention of the Bench to the bill issued by Shri A. V. Menon, Advocate which clearly shows that the same is towards expenses and costs incurred for Publishing Public Notices Translation work in respect of Orlem property of M/s. Kuber Developers. Referring to the paper book pg. no. 114 to 120, she drew the attention of the Bench to the public notices appearing in various news papers, known as Nava Shakti, Free Press Journal and Sakal. So far as the listing fee of Rs. 65,000/- is concerned, she referred to pg. no. 121 to 124 of the paper book, which is the reply given to the Ld. CIT(A). Referring to the paper book pg. no. 112, she drew the attention of the Bench to the email from the Manager - Corporate Affairs of the company to Mr.Suresh Serveseti of Hypercity....
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.... available. Even otherwise also the same is towards keeping the goods of the company in the display box which in our opinion amounts to advertisement. We, therefore, uphold the order of the Ld. CIT(A) on this issue. The ground raised by the assessee is accordingly dismissed. 6. The grounds of appeal no. 2 and 3 raised by the assessee, which are inter related, are as under:- "2. The CIT(A) has grossly erred in confirming the addition on account of Rs. 6013660/- by disallowing the following expenses and trading the same as work in progress:- Advertisement Expenses 166000 Interest paid on loan 4550000 Listing fees 65000 Printing and stationery 96706 Stamp duty and registration charges 1135954 Total 6013660 The CIT (Appeal) failed to appreciate the fact that the Appellant merely entered into Joint venture Agreement with M/s. Kuber Developers and according to the joint venture, the Appellant was not to do any construction activity but was to only finance the project. As such there was not work in progress with the Appellant. 3. The CIT(A) grossly erred in confirming addition of Rs. 1,77,19,081/- on account of in....
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.... submission which is reproduced as under:- "2. As regards paragraph 2 of your letter, we have to submit that the assessee had entered into the joint venture agreement with M/s. Kuber Developers on 25.01.07. But the same was terminated on 17.08.07. In view of this the amount paid to them is treated as advance and expenses have been treated as business loss and debited to Profit and Loss account." 6.3 The AO noted from the above reply that the assessee did not want to comment on the accounting of the expenses as capital or revenue expenses. Merely canceling an agreement does not absolve assessee from following the prescribed accounting standard for recognizing the income and expenditure or revenue and capital expenditure in its books. The AO accordingly disallowed the entire expenditure incurred and claimed in the profit and loss account amounting to Rs. 60,13,660/- and allowed the same to be capitalized to Work-in-Progress Account, along with the amount of Rs. 7,01,00,000/- paid to M/s. Kuber Developers, as advance. 6.4 The AO also noted that the assessee during the impugned year has credited an amount of Rs. 52,04,267/- to the P and L A/c, being the interest received....
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....m. Your honour may verify the same by issuing summons to M/s. Kuber Developers." 6.6 Rejecting the various explanations given by the assessee and holding that the assessee failed to recognize interest income on accrual basis, the AO invoked provisions of section 145 and calculated interest income of Rs. 1,77,19,081/- as income from other sources for the year ending 31.03.2007. So far as the interest income for the F.Y. 2005-06 is concerned, which was not offered to tax, the AO initiated remedial measures u/s.148 of the Act. 6.7 Before the Ld. CIT(A), it was submitted that since the development agreement was terminated, the expenses were treated as business loss and debited to the profit and loss account. It was submitted that on the date of finalization of the accounts it was within the knowledge of the assessee that the business venture has been discontinued and therefore, as per AS-4, which speaks of 'Contingencies and Events occurring after the Balance Sheet date' the assessee has considered the amount as business loss. Accordingly, it was considered that there was no work-in-progress with regard to the Development Agreement and the expenses therefore, were written....
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.... had accrued in the relevant year. There is no evidence to substantiate that the interest of Rs. 52,04,267/- is in full and final settlement of the claim. According to the Ld. CIT(A) it is at best an unilateral assertion made by the assessee. 6.11 The Ld. CIT(A) observed that as per the terms of the agreement the incidence of interest arises in the event of failure of assessee to advance further installments as contracted upon. The question whether the future installment would be made or not is within the special knowledge of the assessee himself. When the assessee was aware that the project was not taking off in the manner agreed upon, it had in fact stopped making further installments. At this point, the assessee acquired the right to receive interest as agreed upon. According to him income may accrue to an assessee without actual receipt of the same, if the assessee acquires a right to receive the income. As per the scheme of section 5 of the Income Tax Act, income is taxable when it accrues, arises or is received. When the right to receive income becomes vested in the assessee, income may be said to accrue or arise. He was of the opinion that by virtue of clause 4 of the joi....
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....he assessee had nothing to do with construction activity. Referring to the agreement of Joint Development (paper book pages 1-26), dated 13.02.2006, she submitted that Mr. Mahindra Arora of M/s. Kuber Developers is "The Developer" whereas the assessee M/s. Fobeoz India is "The Joint Developers". She submitted that an agreement for development of the property situated at Malad was entered into between M/s. Kuber Developers and the owners of the land on 29.12.2005. Referring to pg.no.5 of the Joint Development agreement, she submitted that the developers agreed to procure the co-operation and co-ordination from the assessee, so that the appropriate technical knowhow, finance management skill to be successfully completed. She submitted that as per clause 4 of the Joint Development agreement, the assessee was supposed to give aggregate finance of Rs. 20,00,00,000/- to the developers in installments and in turn the assessee was to be allotted 46 Flats and 2 shops duly completed. She submitted that accordingly the assessee had given 7crores as the first installment. Referring to clause 4 of the said agreement which contains interest clause also, she submitted that in the event the Joint ....
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....n of the bench to the Deed of Cancelation made on 17.08.2007. Referring to the pg. no. 4 of the Deed of Cancelation (pg. 62 of the paper book) she drew the attention of the Bench in view of the cancelation deed dated 17.08.2007, the agreement for development dated 07.08.2006 has been cancelled/revoked/terminated. Accordingly, the assessee has received back the amount of Rs. 7 crores and the interest amounting to Rs. 52,04,267/- from M/s. Kuber Devlopers. Under these circumstances, she submitted that the question of capitalization of interest in the books of accounts of the assessee does not arise. It can only be capitalized in the books of the joint venture. She submitted that since the assessee is not a Contractor, the Accounting Standards referred to by the AO are also not applicable. 7.2 Referring to the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Balarampur Commercial Enterprises Ltd. reported in 262 ITR 439, she submitted that even though the decision to waive interest was taken after the balance sheet date, yet it would be applicable in respect of the immediately preceding previous year. Referring to the decision of the Tribunal in the case of Pr....
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.... cannot say that it is only a Financer and not for Joint Development. Even if the contention of the Ld. Counsel for the assessee is accepted, then there was no need for the assessee to incur various expenses. He submitted that till the cancellation of the agreement on 17.08.2007, the development right of the property was with the assessee. Therefore, there was absolutely no error on the part of the AO or the Ld. CIT(A) in capitalizing the various expenses. The Ld. DR further submitted that the assessee by showing interest income at Rs. 52 Lakhs has given an impression that it is following cash system of accounting or atleast the interest income is being offered on receipt basis which cannot be accepted. Further the confirmation letter issued by M/s. Kuber Developers is dated 02.11.2009. He accordingly, submitted that the order of the Ld. CIT(A) being reasonable and in accordance with law should be upheld. 9. The Ld. Counsel for the assessee in her rejoinder submitted that the assessee has credited the interest actually received on the basis of real income theory. For this preposition she relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. Bokaro Steel ....
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....greement, if the construction does not start within a certain period, the amount so advanced has to be returned to the assessee. 10.2 We find the clause no. 4 of the Joint Development agreement reads as under:- "4. The Joint Developers have agreed to give aggregate finance of Rs. 20,00,00,000/- (Rupees Twenty Crore Only) to the Developers by installments as set out in the SCHEDULE III herein from time to time. The Joint Developer agrees to pay a sum of Rs. 7 Crores (Rupees Seven Crores Only) to the Developer against the developers producing a confirmation letter from M/s. Keshvi Developers. All the documents executed earlier which are not registered as stated in the letter dt. 06.02.06 by M/s. M. Dhruva and Co. (Advocates and Solicitors) will be registered as per the compliance requirements contained therein. The Joint developers shall provide to the developers further sum of Rs. 13,00,00,000/- (Rupees Thirteen Crore Only) in the manner set out in the SCHEDULE III by installments. In the event of the Joint Developers fail to make the payment of further amounts as set out in the SCHEDULE III by installments for any reasons whatsoever, the Joint Developers shall ....
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....f the assessee. We, therefore, concur with thee submission of the Ld. Counsel for the assessee that the lower authorities were not justified in capitalizing the various expenses to workin- progress. 10.6 Now coming to the question as to how much interest has to be considered as income during the year, we find the assessee has credited an amount of Rs. 52,04,267/- as interest income which the assesses has actually received during the year. It is the case of the Revenue that the assessee being a company which follows mercantile system of accounting, should have accounted the interest for the whole year. It is the submission of the Ld. Counsel for the assessee that in view of the subsequent termination of the agreement, the assessee was justified in accounting for only the actual interest received, in view of the theory of real income. 11. We find the Hon'ble Bombay High Court in the case of Sushila Shantilal Jhaveri (Supra) at pg. no.431 has held as under:- "Having heard Mr. Jhaveri, learned CIT(A) counsel for the petitioner; having seen the impact of the subsequent events on the operative part of the impugned order, the submission made by Mr. Jhaveri needs accepta....