TaxTMI 
TaxTMI 
2017 (5) TMI 1416
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....income from other sources. 2.1 The facts as taken from AY 2010-11 are that Return of income was filed on 14-10-2010 admitting NIL income from business. The case was processed and subsequently reopened by the AO under section 147 of the Act for taxing interest income of Rs. 1,10,15,907 received from the joint venture. named GSG DRDL Consortium (AOP) in which the assessee is a constituent. Subsequently assessee filed a revised return on 30-08-2013 adjusting the interest amount in capital work-inprogress (WIP) and claiming refund of the interest amount of Rs. 11,01,591/-. Non inclusion of interest amount in the original return was for the reason the assessee states that it was not aware of the credit of interest by the Consortium as on the date of filing of the return. 2.2. Assessee has entered into an Memorandum of Understanding (MOU) with DLF Retail Developers Ltd. for development of property. The joint venture is named GSG DRDL Consortium (AOP) with each constituent having 50% share. The two constituents have agreed to jointly to pull their resources to construct a commercial property in Basheerbagh Hyderabad. Revenue sharing basis was fixed at 50: 50 upon completion of construct....
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....s. It was further brought out by the assessee that some. differences cropped up between them and M/s DLF Retail Developers l.td., in relation to execution of the MoU and arbitration proceedings are underway for settlement of their respective claims. 3.1 Though the 26-AS details indicate that TDS was deducted from the interest credited to the account of the assessee and further the MoU entered into also clearly indicate that the investing funds bear interest, considering the submissions of the assessee and the disputes arising between the two constituents of the AOPI the consortium AOP M/s GSG DRDL Consortium, Delhi were asked to confirm the payment of interest. In response, the AOP vide their letters dated 04.02.2014 and 07.03.2014 confirmed that they deducted TDS and deposited in Central Government account as per rule of Income Tax Act on account of interest accrued but not due. The Consortium further confirmed that though no interest payment was made to the assessee but their account has been credited with the said amount of interest. Accordingly, the Consortium produced copies of financials for various Assessment veers, including the subject Assessment year. The balance appear....
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....tal work-in-progress shown at Rs. 1,19,31,448/- in the audited books of account as on 31.03.2010 can be reduced in the revised computation of income filed in response to notice u/s 148? When questioned, on this aspect, the assessee vide letter dated 25.12.2014 submitted that on the date of filing of revised return, i.e. on 30.08.2013, general entries were passed reducing the amount of TDS receivable (Rs.11,01,591) and the amount of interest receivable (Rs.99,14,316) from M/s GSG DRDL Consortium from the capital work-in-progress as on the date of filing the revised return of income. A ledger copy of 'Capital Workin- Progress' pertaining to the financial year 2013-14, wherein the treatment given to the interest pertaining to the assessment year 2010-11, was also filed. However, the adjustments, as above, made in the Capital Work-in-Progress during the financial year 2013-14 are a result of reopening of the assessment for the subject assessment year and not voluntary on the part of the assessee. 5.2 Be that as it may, the next issue for consideration is whether the interest receipt is to be taxed as income from other sources in the light of the fact that the interest accrued....
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.... paid on the funds remaining at the end of the year left unutilized out of their contributions made to the AOP. This clause in the MoU is driven by common business exigencies and not by any compulsion; as was in the case law relied upon by the assessee. The assessee claimed that this interest amount is to be netted off against closing WIP, Claiming that this interest incomes should go to reduce the pre-production expenses which would ultimately be capitalized. The test to be applied for determining the issue on hand is that- the income earning activities of the assessee are to be intrinsically connected with the business of the assessee and therefore the same can be set off against capita/expenditure I reduce the cost of capital asset. In the case on hand, the assessee invested certain funds in the Consortium and the consortium is crediting interest on the outstanding balance due to the assessee. Therefore, the interest-yielding investments cannot be said to be the business of the assessee and the interest accrued on such investments cannot be reduced from the Capital WIP. The issue of earning interest from borrowed I own funds was specifically dealt with in the case of Tuticorin A....
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....It is on this issue, the High Court held that till actual Import of goods no income accrues to the assessee and since hypothetical incomes cannot be considered as real income, and accordingly decided the issue in favour of the assessee. In the case on hand, the interest accrued from the Consortium is not hypothetical and the account of the assessee in the Consortium was credited with the interest income and TDS at applicable rates was made u/s 194A. The closing balance for the year ending 31.03.2010 in the books of Consortium is Rs. 8,18,87,750/- against the investment made and admitted at Rs. 4,27,76,775/- by the assessee in their books. Therefore, this case law is also distinguishable to the facts of the case and accordingly not followed. 6.5 Now coming to the simple accounting principles, interest income accrued to the assessee from the Consortium on the investments made by it is to be admitted as income. Agreeing, without conceding, that the interest accrued out of the investment 's doubtful, going by the simple accounting principles, the interest accrued should have been added to the investments since the account of the assessee in the books of Consortium is being credit....
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....the AR points out that the assessee has earned interest out of its own funds and not on the funds borrowed. This view of the AR is not correct. It is immaterial whether the funds are own or borrowed. What is material is whether such funds (own or borrowed), have earned any interest to the assessee before the commencement of the business. If that being the case, the interest so earned has to be treated as 'income from other sources' only. As the business has not been commenced, the interest income so earned cannot be linked with the business of the assessee. In other words, it is not the income from business. But, it is income from other sources. The AO has dealt the issue elaborately and also distinguished the assessee's case with other cases relied upon by the AR in the relevant paragraphs of the assessment order and therefore, action of the AO is correct in bringing to tax the above incomes under 'income from other sources. 4.3 Finally, the CIT(A) relying on the decision of the ITAT, Hyderabad in the case of M/s Kakinada SEZ Pvt. Ltd., in ITA No. 1218/Hyd/2010, dtd. 29/12/2010, held that the interest in question earned from unutilized funds is to be assessed as '....
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....ts of assessee company. The Ld.A.R further submitted that so far the assessee has not received the interest, and it was credited to the capital account in the AOP and there is no certainty of receiving the interest since the case has gone for arbitration. The Ld. A.R submitted that as a developer, the business commences with acquiring the land, either by purchase or by development agreement and taking approvals. He submitted that once the assessee has commenced the construction activity, the business is commenced and the contention of the AO and CIT(A) that there is no business activity has been commenced is far from the truth. He submitted that since the business activity has commenced, the interest received on the capital contribution made by the assessee to AOP should go to reduce the work-in-progress and cannot be assessed as income from other sources. He submitted that the assessee has not invested the surplus funds to earn the interest income and the sole activity of the assessee is developer and developing only GHMC projects. Accordingly, the ld. AR vehemently opposed the orders of revenue authorities and requested to set off the interest credited to the capital account to r....
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....Court held to tax such interest income on the deposits as income from other sources, whereas, in the assessee's case funds were parked in the AOP wholly for utilization of construction of GHMC project, which was undertaken by the assessee. He, therefore, submitted that the facts are clearly distinguishable and the case laws relied upon by the ld. DR are not applicable in this case. 12. We have heard both the parties carefully and perused the material on record. It is observed that the assessee is a member of AOP and the interest credited to the capital account of the AOP and interest is paid or credited in accordance with the MoU entered into by the assessee and the another constituent DRDL of the AOP(JV). There is no dispute with regard to the status of AOP. Since the interest is paid on the contribution made by the assessee as a member of the AOP, we are of the considered opinion that the additional ground raised by the assessee goes to the root of the assessment, hence, the additional ground is admitted. 13. Considered the rival submissions and perused the material facts on record. The AOP has paid interest of Rs. Rs. 58,56,030/-, Rs. 1,10,15,907/- and Rs. 1,21,54,303/- for AY....
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....ect ion (1), shall, for the purposes of assessment, be appor t ioned under the various heads of income in the same manner in which the income or loss of the associat ion or body has been determined under each head of income. (3) Any interest paid by a member on capital borrowed by him for the purposes of investment in the association or body shall, in comput ing his share chargeable under the head "Prof its and gains of business or profession" in respect of his share in the income of the associat ion or body, be deducted from his share. Explanat ion.-In this sect ion, "paid" has the same meaning as is assigned to it in clause (2) of sect ion 43. " 13.1 As per section 67A, the total income of the AOP has to be determined as per the provisions of Income tax act, under the different heads and share income of the assessee has to be determined separately as provided in section 67A of the Income-tax Act inclusive of any salary, interest, bonus or remuneration paid to any member in respect of previous year relevant to AY. The mode of determining the share income has been clearly provided in section 67A of the IT Act. As per section 67A, the total income of the AOP from all the heads o....