FOBEOZ INDIA P. LTD, MUMBAI v. ITO WD 9(1)-4, MUMBAI

ITA 9231/MUM/2010 | 2007-2008
Pronouncement Date: 29-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 923119914 RSA 2010
Assessee PAN AAACF9720B
Bench Mumbai
Appeal Number ITA 9231/MUM/2010
Duration Of Justice 6 month(s) 29 day(s)
Appellant FOBEOZ INDIA P. LTD, MUMBAI
Respondent ITO WD 9(1)-4, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted F
Tribunal Order Date 29-07-2011
Assessment Year 2007-2008
Appeal Filed On 31-12-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F MUMBAI BEFORE SHRI R. V. EASWAR HON'BLE PRESIDENT AND SHRI R.K. PANDA ACCOUNTANT MEMBER ITA NO.9231/MUM/2010 ASSESSMENT YEAR : 2007-08 M/S. FOBEOZ INDIA PVT. LTD. FOBEOZ TOWERS SHEETAL APTS RAMCHNDRA LANE KANCHPADA MALAD (W) MUMBAI-400 064 PAN NO: AAACF9720B VS. ITO WD 9(1)-4 MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : MISS. ARATI VISSANJI RESPONDENT BY : MISS. ASHIMA GUPTA O R D E R PER R.K. PANDA A.M. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 08.10.2010 PASSED BY THE CIT(A)-19 MUMBAI RELATIN G TO A.Y. 2007-08. 2. THE GROUNDS OF APPEAL NO. 1 RAISED BY THE ASSES SEE READS AS UNDER: 1. THE CIT(A) GROSSLY ERRED IN CONFIRMING ADDITION OF RS.2 83 561/- U/S.40(A)(IA) ON ACCOUNT OF NON DEDUC TION OF TDS. 2.1 FACTS OF THE CASE IN BRIEF ARE THAT THE ASSES SEE HAD CLAIMED THE FOLLOWING EXPENSES IN THE PROFIT & LOSS ACCOUNT ON WHICH NO TDS HAS BEEN MADE : ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 2 A) IMPORT FREIGHT PAID TO M/S. FREIGHT SYSTEMS (I) PVT. LTD. 133561 B) A. V. MENON THROUGH M/S. DORFTEL CHEMICALS (I) P. LTD. 100000 C) LISTING FEES THROUGH M/S. DORFLSATED CHEMICALS (I) P. LTD. 65000 298561 2.2 ON BEING ASKED BY THE AO TO EXPLAIN AS TO WHY THE ABOVE EXPENSES SHOULD NOT BE DISALLOWED WITHIN THE MEANING OF PROV ISION OF SECTION 40(A)(IA) OF THE ACT THE ASSESSEE VIDE LETTER DATE D 30.10.2009 MADE THE FOLLOWING SUBMISSION:- 1) A. AS REGARDS DEDUCTION OF TDS OF FREIGHT SYST EM (I) PVT. LTD. OF RS.1 33 561/- THIS IS FREIGHT PAYMENT FOR IMPORT OF GOODS PAID ON ACCOUNT OF FOREIGN SHIPPING LINE ON W HICH 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 PR OFESSIONAL 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 COMP ANY IN THE DISPLAY BOX AND THEIR COUNTERS FOR SALE. THIS IS PA ID 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 DISCUSSIN G THE OBSERVATION OF THE AO ON THIS ADDITION. HOWEVER THE SUBMISSIONS OF TH E ASSESSEE FOR THE OTHER TWO ADDITIONS WAS REJECTED BY THE AO FOR THE FOLLOW ING REASONS :- ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 3 B) AS REGARDS ADVERTISING EXPENSES PAID TO SHRI A. V. MENON IT IS SUBMITTED THAT THE SAME IS FOR ADVERTISEMENT IN NEWSPAPER AND NOT TOWARDS THE PROFESSIONAL FEES. IN SUPPORT O F THE ASSESSEES CLAIM A SELF MADE BILL ISSUED BY SHRI A. V. MENON WHICH IS NOT EVEN ACKNOWLEDGED BY THE ASSESSEE HAS BEEN FILED WITH COPIES OF ONE TIME PUBLIC NOTICES ISSUED IN 3 SEPARATE NEWSPAPERS. IT IS OBSERVED FROM THE COPIES OF SAID PUBLIC NOTICES THE SAME WERE ISSUED BY M/S. RAJASHREE NAIR ADVOCA TE HIGH COURT ON BEHALF OF HER CLIENT M/S. KUBER DEVELOPERS A PROPRIETARY FIRM OF MR. MAHINDRA ARORA. THEREFORE THE ASSESSEES CLAIM THAT THE AMOUNT PAID TO SHRI A. V. MENON IS NOT LIABLE FOR TDS IS INCORRECT. IF IT IS THE REIMBURSE MENT OF EXPENSES THE BILL ISSUED SHOULD HAVE BEEN SUPPORTED BY THE A CTUAL COST INCURRED TOWARDS PUBLISHING THE SAID NOTICES. THERE FORE ASSESSEES CLAIM IS NOT ACCEPTED AND WITHOUT PREJUD ICE TO THE ALLOWABILITY OF THE EXPENSE AS BUSINESS EXPENSE OF THE ASSESSE THE SAME IS DISALLOWED WITHIN THE MEANING OF SECTIO N 40(A)(IA) OF THE ACT FOR NON DEDUCTION TDS AS REQUIRED UNDER 194 J OF THE ACT. C) AS REGARD THE LISTING FEES THE ASSESSEES ADMISS ION THAT THE SAME IS INCURRED FOR PUBLICITY ITSELF SHOWS THA T THE SAID EXPENSE IS IN THE NATURE OF ADVERTISING AND LIABLE FOR TDS U/S.194C OF THE ACT. ASSESSEE DID NOT DEDUCT TDS ON THE SAME THEREFORE THE AMOUNT PAID TO HYPERCITY MALL AMOUNT ING TO RS.50 000/- IS DISALLOWED U/S.40(A)(IA) OF THE ACT. 3. BEFORE THE LD. CIT(A) IT WAS SUBMITTED THAT THE PAYMENT MADE TO A.V. MENON IS TOWARDS REIMBURSEMENT FOR EXPENSES INCURRE D FOR TRANSLATION WORK AND FOR PUBLISHING PUBLIC NOTICE IN THE NEWSPA PERS-NAVA SHAKTI FREE PRESS JOURNAL & SAKAL. SINCE THE PAYMENTS HAVE BEEN MADE TOWARDS REIMBURSEMENT OF EXPENSES THEREFORE THE ASSESSEE WAS NOT LIABLE TO DEDUCT TDS. 3.1 AS REGARDS PAYMENT MADE TO HYPERCITY MALL IT W AS SUBMITTED THAT THE ASSESSEE WANTED ITS PRODUCTS TO BE DISPLAYED AT PROMINENT SHELF IN THE MALL AND THE AMOUNT WAS PAID TOWARDS NON REFUNDABLE LISTING FEES. THEREFORE NO TDS WAS DEDUCTIBLE FROM THE SAID PAYM ENT. ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 4 4. HOWEVER THE LD. CIT(A) WAS NOT CONVINCED WITH T HE EXPLANATION GIVEN BY THE ASSESSEE. HE NOTED THAT THE ASSESSEE COULD O NLY PRODUCE THE DOCUMENT COPY OF THE BILL FROM AV MENON WHICH IS S ELF SERVICE DOCUMENT AND DOES NOT IN ANY MANNER HOLD BRIEF FOR THE ASSES SEE. 4.1 AS REGARDS PAYMENT MADE TO HYPERCITY MALL THOU GH TERMED AS PRODUCT LISTING FEES IT IS ONLY IN THE NATURE OF A DVERTISEMENT AS HELD BY THE AO AND THEREFORE NEEDS NO INTERFERENCE. HE ACCORDI NGLY UPHELD THE ACTION OF THE AO. 4.2 AGGRIEVED WITH SUCH ORDER OF THE LD. CIT(A) TH E ASSESSEE IS IN APPEAL BEFORE US. 4.3 THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO P AGE NO.113 OF THE PAPER BOOK DREW THE ATTENTION OF THE BENCH TO THE B ILL ISSUED BY SHRI A. V. MENON ADVOCATE WHICH CLEARLY SHOWS THAT THE SAME I S TOWARDS EXPENSES AND COSTS INCURRED FOR PUBLISHING PUBLIC NOTICES TR ANSLATION 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 TH E 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 FR OM THE MANAGER CORPORATE AFFAIRS OF THE COMPANY TO MR.SURESH SERVE SETI OF HYPERCITY RETIAL (I) PVT. LTD. SHE SUBMITTED THAT THE ASSESSEE IS EN GAGED IN THE BUSINESS OF ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 5 MARKETING HEALTH DRINKS AND ITS PRODUCTS WERE TO BE DISPLAYED AT HYPERCITY MALL. THEREFORE HYPERCITY MALL CHARGES ONE TIME PA YMENT FOR SUCH DISPLAY. FINALLY THE COMPANY DID NOT DISPLAY ANY THING. EVEN THOUGH ALL THESE FACTS WERE BROUGHT TO THE NOTICE OF THE LOWER AUTHORITIES THEY DID NOT APPRECIATE THE SUBMISSIONS PROPERLY AND MADE THE ADDITIONS. SH E ACCORDINGLY SUBMITTED THAT THE ADDITION OF RS.65 000/- SHOULD B E DELETED. 5. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. SO FAR AS THE DISALLOWANCE OF RS.1 00 000/- PAID TO SHRI A. V. MENON ADVOCATE IS CONCERNED THE SAME A CCORDING TO THE LD. COUNSEL FOR THE ASSESSEE IS TOWARDS REIMBURSEMENT O F EXPENSES FOR PUBLISHING PUBLIC NOTICES. ADMITTEDLY NO BILLS ISSU ED BY SUCH NEWSPAPERS OR OF ANY AGENT HAS BEEN FILED EITHER BEFORE THE AO OR BEFORE THE LD. CIT(A) OR EVEN BEFORE US. THE AO HAD ALREADY GIVEN A FINDI NG THAT THE PUBLIC NOTICES ISSUED IN THREE SEPARATE NEWS PAPERS WERE I SSUED BY M/S. RAJASHREE NAIR ADVOCATE HIGH COURT ON BEHALF OF H ER CLIENT M/S. KUBER DEVELOPERS. UNDER THESE CIRCUMSTANCES THE PAYMENT MADE TO SHRI A. V. MENON TOWARDS REIMBURSEMENT OF EXPENSES APPEARS DOU BTFUL. WE THEREFORE CONCUR WITH THE FINDINGS OF THE LOWER AU THORITIES THAT THE SAME IS TOWARDS PROFESSIONAL FEES PAID TO SHRI A. V. MENON. THE BILL ISSUED BY SHRI A. V. MENON IN OUR OPINION IS MERELY A SELF SECUR ING DOCUMENT. SINCE THE PAYMENT MADE TO SHRI A. V. MENON IS LIABLE FOR DEDU CTION OF TAX THEREFORE THE LOWER AUTHORITIES ARE JUSTIFIED IN DISALLOWING THE SAME U/S.40(A)(IA) OF THE ACT. ACCORDINGLY THE ORDER OF THE LD. CIT(A) ON THIS ISSUE IS UPHELD. ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 6 5.1 SO FAR AS THE ADDITION OF RS.65 000/- IS CONCER NED WE FIND FROM THE COPY OF THE EMAIL THAT AN AMOUNT OF RS.50 000/- HAS BEEN PAID TO HPERCITY MALL FOR DISPLAY OF THE PRODUCTS OF THE COMPANY AT PROMINENT PLACES IN THE MALL. THE SAME IN OUR OPINION IS CLEARLY TOWARDS ADVERTISEMENT OF THE PRODUCT. SINCE THE ASSESSEE HAS VIOLATED THE PROVIS IONS OF LAW BY NOT DEDUCTING TAX THE SAME IS LIABLE FOR DISALLOWANCE U/S.40(A)(IA) OF THE ACT. FURTHER APART FROM AN EMAIL NO OTHER DOCUMENT HAS BEEN FILED. NO DETAILS FOR THE PAYMENT OF RS.15 000/- TO M/S. RADHA KRISHN A FOOD IS ALSO AVAILABLE. EVEN OTHERWISE ALSO THE SAME IS TOWARDS KEEPING THE GOODS OF THE COMPANY IN THE DISPLAY BOX WHICH IN OUR OPINION AMO UNTS TO ADVERTISEMENT. WE THEREFORE UPHOLD THE ORDER OF T HE LD. CIT(A) ON THIS ISSUE. THE GROUND RAISED BY THE ASSESSEE IS ACCORDI NGLY 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 FOLLOWIN G 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 & 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 WIT H THE APPELLANT. 3. THE CIT(A) GROSSLY ERRED IN CONFIRMING ADDITION OF RS.1 77 19 081/- ON ACCOUNT OF INTEREST ON PRESUMED ACCRUAL BASIS ON THE BASIS OF DEVELOPMENT AGREEMENT DATED ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 7 25.01.2007 WHICH WAS SUBSEQUENTLY TERMINATED AND H ENCE THE AGREEMENT WAS INOPERATIVE. AS SUCH THE INTEREST NEI THER ACCRUED NOR WAS RECEIVED BY THE APPELLANT. 6.1 FACTS OF THE CASE IN BRIEF ARE THAT THE ASSEES SEE HAS ENTERED INTO A DEVELOPMENT AGREEMENT WITH M/S. KUBER DEVELOPER ON 25.01.2007 AND PAID AN ADVANCE AMOUNT OF RS.7 01 00 000/- WHICH WA S REFLECTED IN ASSESSEES BALANCE SHEET. TO FINANCE THIS ADVANCE A SSESSEE HAS BORROWED FUNDS FROM DIRECTORS/SHAREHOLDERS OF THE COMPANY ON WHICH INTEREST HAS BEEN PAID. THE ASSESSEE HAS ALSO RECEIVED INTEREST ON THE ADVANCE PAID TO M/S. KUBER DEVELOPERS AND OFFERED THE SAME AS INCOM E IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE PAID INTEREST ON BORROWE D FUNDS AND ALSO INCURRED SEVERAL EXPENSES LIKE ADVERTISING LISTING FEES PRINTING & STATIONARY STAMP DUTY INTEREST ETC. AND CLAIMED T HE SAME AS EXPENSES IN THE PROFIT AND LOSS ACCOUNT. ACCORDING TO THE AO SI NCE THE ENTIRE ACTIVITY OF THE ASSESSEE APART FROM TRADING ACTIVITY IN IMPORT ED GOODS IS TOWARDS THE DEVELOPMENT OF THE PROPERTY (FOR WHICH THE DEVELOPM ENT AGREEMENT HAS BEEN ENTERED INTO) AND IS RELATED TO THE DEVELOPMEN T OF THE PROPERTY THE EXPENSES INCURRED ON THE SAME ARE REQUIRED TO BE CA PITALIZED TO THE PROJECT COST/PROPOSED PROJECT COST. HOWEVER THE ASSESSEE HA S TREATED THE AMOUNT PAID AS ADVANCE IN THE BALANCE SHEET AND CLAIMED TH E EXPENSES AS REVENUE EXPENSES IN THE PROFIT & LOSS ACCOUNT. THE AO THERE FORE ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE WHICH IS REPRODUCED AS UNDER : THE DETAILS FILED ON RECORD SHOWS YOU HAVE ENTERED INTO A DEVELOPMENT AGREEMENT WITH KUBER DEVELOPER AND REGI STERED THE SAME ON 25.01.2007 FOR DEVELOPMENT OF THE PROPE RTY. THE AMOUNT PAID IN PURSUANCE OF SUCH AGREEMENT HAS BEEN SHOWN ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 8 AS ADVANCE IN YOUR BALANCE SHEET. IN THIS REGARD YO U ARE REQUIRED TO EXPLAIN AND SHOW CAUSE AS TO WHY I) THE SAID AMOUNT PAID TOWARDS DEVELOPMENT SHOULD NOT BE TREATED AS PROJECT EXPENSES AND CAPITALIZED TO WORK -IN- PROGRESS ACCOUNT OF PROJECT. II) THE EXPENSES RELATED TO THE SAID DEVELOPMENT SUCH A S ADVERTISEMENT INTEREST STAMP DUTY & REGISTRATION CHARGES SHOULD NOT BE CAPITALIZED TO WORK-IN-PROGRE SS ACCOUNT. 6.2 IN RESPONSE TO THE SAME THE ASSESSEES REPRESE NTATIVE VIDE LETTER DATED 30.10.2009 MADE THE FOLLOWING SUBMISSION WHIC H 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 ASSE SSEE DID NOT WANT TO COMMENT ON THE ACCOUNTING OF THE EXPENSES AS CAPITA L OR REVENUE EXPENSES. MERELY CANCELING AN AGREEMENT DOES NOT ABSOLVE ASSE SSEE FROM FOLLOWING THE PRESCRIBED ACCOUNTING STANDARD FOR RECOGNIZING THE INCOME AND EXPENDITURE OR REVENUE AND CAPITAL EXPENDITURE IN I TS BOOKS. THE AO ACCORDINGLY DISALLOWED THE ENTIRE EXPENDITURE INCUR RED AND CLAIMED IN THE PROFIT & LOSS ACCOUNT AMOUNTING TO RS.60 13 660/- A ND ALLOWED THE SAME TO BE CAPITALIZED TO WORK-IN-PROGRESS ACCOUNT ALONG W ITH 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 & L A /C BEING THE INTEREST ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 9 RECEIVED FROM M/S. KUBER DEVELOPERS ON THE AMOUNTS PAID TOWARDS DEVELOPMENT AGREEMENT. THIS AMOUNT HAS BEEN ACCOUNT ED FOR AS BUSINESS INCOME AND THE ASSESSEE HAS CLAIMED VARIOUS EXPENSE S AGAINST THE SAME IN THE P & L A/C. THE AO OBSERVED FROM THE DEVELOPMENT AGREEMENT FILED ON RECORD THAT THE ASSESSSEE IS ENTITLED TO RECEIVE IN TEREST ON THE AMOUNTS PAID TO M/S. KUBER DEVELOPERS. THE ASSESSEE HAD HOWEVER OFFERED ONLY THE ACTUAL AMOUNT OF INTEREST RECEIVED DURING THE YEAR FOR TAX AND THE ACCRUED INTEREST HAS NOT BEEN ACCOUNTED FOR IN THE BOOKS. H E THEREFORE ISSUED A SHOW CAUSE NOTICE REQUIRING THE ASSESSEE TO EXPLAIN THE REASONS AS TO WHY THE ACCRUED INTEREST SHOULD NOT BE TAXED FOR THE YE AR. THE RELEVANT EXTRACTS OF THE LETTER DATED 09.10.2009 ARE REPRODUCED AS UN DER: I. INTEREST ON RS.7 00 00 000/- @ 12% FROM 14.02.06 TO 31.03.06 ON 4 CRORE (46 DAYS) 16.02.06 TO 31.03.06 ON 1.25 CRORE (45 DAYS) 23.02.06 TO 31.03.06 ON 1.75 CRORE (37 DAYS) RS.2 12 877/- RS.6 04 932/- RS.1 84 932/- RS.10 02 741/- II. INTEREST ON RS.7 CRORE @ 12% FROM 01.04.06 TO 31.07.06 RS.28 07 671/- INTEREST ON RS.8 21 58 172/- @ 12% FROM 01.08.06 TO 31.03.07 RS.65 63 650/- III. OTHER RECEIPTS BEING DIFFERENCE BETWEEN AMOUNT QUANTIFIED AS ON 31.07.06 AND INTEREST TILL DATE 12158172 3810412 = 8347760 RS.83 47 760/- RS.1 87 21 822/- AS PER THE ABOVE WORKING THE FOLLOWING AMOUNT ARE D UE TO YOUR COMPANY FROM M/S. KUBER DEVELOPERS A.Y. 2006-07 RS.10 02 741/- A.Y. 2007-08 RS.1 77 19 081/- WHERE AS ITS IS OBSERVED FROM YOUR RETURN FILED YO U HAVE NOT OFFERED ANY INCOME FOR A.Y. 2006-07 AND FOR ASSESS MENT YEAR 2007-08 YOU HAVE SHOWN ONLY RS.52 04 267/-. ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 10 6.5 IN RESPONSE TO THE ABOVE ASSESSEES REPRESENT ATIVE VIDE LETTER DATED 30.10.2009 MADE FOLLOWING SUBMISSIONS: AS PER CLAUSE 6 & 7 OF THE DEVELOPMENT AGREEMENT W ITH KUBER DEVELOPERS THE ASSESSEE WAS TO RECEIVE INTEREST AT THE RATE OF 12% WHICH WORKS OUT TO RS.1 87 21 822/- AS WORKED O UT BY YOUR HONOUR. BUT THE ASSESSEE HAS RECEIVED RS.54 04 267/- ONLY WHICH HAS BEEN OFFERED BY THE ASSESSEE. BECAU SE OF THIS ONLY THE ASSESSEE HAD TO TERMINATE THE AGREEMENT WI TH THEM. 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 INCO ME 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 T HE 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 INI TIATED REMEDIAL MEASURES U/S.148 OF THE ACT. 6.7 BEFORE THE LD. CIT(A) IT WAS SUBMITTED THAT SI NCE THE DEVELOPMENT AGREEMENT WAS TERMINATED THE EXPENSES WERE TREATED AS BUSINESS LOSS AND DEBITED TO THE PROFIT AND LOSS ACCOUNT. IT WAS SUBM ITTED THAT ON THE DATE OF FINALIZATION OF THE ACCOUNTS IT WAS WITHIN THE KNOW LEDGE OF THE ASSESSEE THAT THE BUSINESS VENTURE HAS BEEN DISCONTINUED AND THER EFORE 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 WO RK-IN-PROGRESS WITH ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 11 REGARD TO THE DEVELOPMENT AGREEMENT AND THE EXPENSE S THEREFORE WERE WRITTEN OFF AS BUSINESS LOSS. 6.8 AS REGARDS THE INTEREST INCOME IT WAS EXPLAINE D THAT PURSUANT TO THE TERMINATION OF THE DEVELOPMENT AGREEMENT WITH M/S. KUBER DEVELOPERS NO FURTHER INTEREST IS RECEIVABLE. ACCORDINGLY THE AC TUAL INTEREST RECEIVED AMOUNTING TO RS.52 04 267/- HAS CORRECTLY BEEN SHOW N. IT WAS SUBMITTED THAT THE AGREEMENT WAS TERMINATED TO PROTECT THE CA PITAL AND THEREFORE THE INTEREST ACTUALLY RECEIVED HAS BEEN TREATED AS FINA L. 6.9 HOWEVER THE LD. CIT(A) WAS NOT CONVINCED WITH T HE EXPLANATION GIVEN BY THE ASSESSEE. HE NOTED THAT DURING THE RELEVANT YEAR THE JOINT VENTURE PROJECT WAS NOT COMMENCED. THE EXPENSES INCURRED TO WARDS THE PROJECT ARE MAINLY IN THE NATURE OF INTEREST STAMP DUTY AND R EGISTRATION. AT THE SAME TIME THE ASSESSEE HAS CREDITED INTEREST RECEIVED A MOUNTING TO RS.52 04 267/-. AS THE PROJECT DID NOT COMMENCE TH E EXPENSES INCURRED TOWARDS THE SAME ARE IN FACT IN THE NATURE OF PRE-C OMMENCEMENT EXPENSES AND THEREFORE CANNOT BE TREATED AS REVENUE. APART FROM THE INTEREST THE OTHER MAJOR EXPENSES ARE STAMP DUTY AND REGISTRATIO N TOTALING TO RS.11 35 954/- AND THE BALANCE AMOUNT PERTAINING TO ADVERTISING EXPENDITURE LISTING FEES PRINTING AND STATIONERY SHOW THAT THESE ARE WITH REGARD TO EXPENSES PRIOR TO THE COMMENCEMENT OF BUS INESS OF CONSTRUCTION. THE ASSESSEE HAS CHARGED INTEREST AGAINST THE BORRO WINGS AND AT THE SAME TIME CREDITED INTEREST RECEIVED TO THE P & L A/C. T HE INTEREST HAS BEEN RECEIVED ON THE ADVANCE MADE AND THIS IS PRIOR TO C OMMENCEMENT OF ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 12 BUSINESS OF CONSTRUCTION. SINCE THE PROJECT HAS NOT YET COMMENCED THE ACTION OF THE AO IN TREATING THE EXPENSES AS CAPITA L IN NATURE IS CORRECT. HE ACCORDINGLY UPHELD THE ACTION OF THE AO. 6.10 SO FAR AS THE INTEREST INCOME ON ACCRUAL BASIS DETERMINED BY THE AO IS CONCERNED THE LD. CIT(A) NOTED THAT AS PER AGRE EMENT DATED 13.02.2006 THE ASSESSEE WHICH IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING IS ENTITLED TO CLAIM INTEREST @ 12% P.A. ON THE MONEY ADVANCED AND UNTIL THE SAID AMOUNT IS PAID BY THE JOINT DEVELOPER TO THE A SSESSEE THE JOINT DEVELOPER AND THE ASSESSEE HAS A CHARGE/LIEN UPON T HE IMPUGNED PROPERTIES. IN THE CANCELLATION AGREEMENT THERE IS NO MENTION AT ALL OF THE WITHDRAWAL IF ANY OF THE CHARGE/LIEN ON THE SAID PROPERTIES. THERE WAS NEITHER ANY AGREEMENT FOR GIVING UP THE INTEREST NO R WAS THE SAME GIVEN UP BEFORE THE RIGHT TO GET THE INTEREST 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 FAILUR E OF ASSESSEE TO ADVANCE FURTHER INSTALLMENTS AS CONTRACTED UPON. THE QUESTI ON WHETHER THE FUTURE INSTALLMENT WOULD BE MADE OR NOT IS WITHIN THE SPEC IAL 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 FAC T STOPPED MAKING FURTHER INSTALLMENTS. AT THIS POINT THE ASSESSEE ACQUIRED THE RIGHT TO RECEIVE ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 13 INTEREST AS AGREED UPON. ACCORDING TO HIM INCOME MA Y 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 REC EIVED. WHEN THE RIGHT TO RECEIVE INCOME BECOMES VESTED IN THE ASSESSEE INCO ME MAY BE SAID TO ACCRUE OR ARISE. HE WAS OF THE OPINION THAT BY VIRT UE OF CLAUSE 4 OF THE JOINT VENTURE AGREEMENT DATED 13 TH FEBRUARY 2006 THE RIGHT TO RECEIVE THE SAME BECAME VESTED IN THE ASSESSEE WHICH RIGHT GOT FURTH ER VESTED WITH THE CURTAILMENT OF MAKING FURTHER INSTALLMENTS. HENCE DESPITE THE NON-RECEIPT THE INTEREST INCOME DUE HAS BECOME TAXABLE. IN THE INSTANT CASE THE ASSESSEE HAS CHOSEN TO WAIVE/RELINQUISH INCOME AFTE R IT HAS ACCRUED AND HENCE IS OF NO EFFECT. THE VERY FACT THAT THE ASSES SEE HAS CHOSEN TO WAIVE THE INTEREST ONLY AFTER IT HAS BECOME DUE IS EVIDEN CED BY ITS OWN ACTION IN CHOOSING TO TREAT AS INCOME PART OF THE AMOUNT AS R ECEIVED ON RECEIPT BASIS. THE FACT THAT THE ASSESSEE HAS NOT MADE ANY ENTRIES IN THE BOOKS OF ACCOUNT DOES NOT IN ANY MANNER MAKE THE SUMS ANY LE SS TAXABLE. 6.12 RELYING ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ED SASSOON & CO. LTD. REPORTED IN 26 ITR 27 AND THE DECISION OF CALCUTTA HIGH COURT IN THE CASE OF JAMES FINLAY & CO. VS. CI T REPORTED IN 137 ITR 698 THE LD. CIT(A) UPHELD THE ACTION OF THE AO IN BRINGING TO TAX THE AMOUNT OF RS.1 77 19 081/- ON ACCRUAL BASIS. 6.13 AS REGARDS THE TREATMENT OF THE SAME AS INCOME FROM OTHER SOURCES HE HELD THAT SINCE THE JOINT VENTURE DID NOT IN FAC T COMMENCE THE AO WAS ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 14 CORRECT IN ASSESSING THE SAID SUM UNDER OTHER SOURC ES. HE OBSERVED THAT DURING THE COURSE OF HEARING OF THE APPEAL AN ALTE RNATIVE PLEA WAS TAKEN BY THE ASSESSEE THAT IF THE INTEREST INCOME IS BROUGHT TO TAX UNDER OTHER SOURCES THEN THE INTEREST EXPENDED ON THE BORROWIN GS FOR THE PURPOSE OF RAISING THE FINANCE OUGHT TO BE ALLOWED AS A DEDUC TION. ACCORDING TO THE LD. CIT(A) IN ACCORDANCE WITH CLAUSE (III) OF S.57 ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING SUCH INCOME IS ALLOWABLE AS DEDUCTION. SINCE THE PLEA HAS BEEN MADE DURING THE COURSE OF HEARING OF THE APPEAL THE AO DID NOT HAVE AN OCC ASION TO EXAMINE THE SAID CONTENTION. THEREFORE IN THE INTEREST OF GIVI NG SUBSTANTIAL JUSTICE HE ADMITTED THE SAME PLEA AND DIRECTED THE AO TO VERIF Y THE NEXUS BETWEEN THE BORROWINGS AND THE MONEY ADVANCED AND TO ALLOW AS D EDUCTION INTEREST PAYMENTS FROM THE INTEREST INCOME BROUGHT TO TAX UN DER OTHER SOURCES. 6.14 AGGRIEVED WITH ORDER OF THE LD. CIT(A) THE AS SESSEE IS IN APPEAL BEFORE US. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE NATURE OF BUSINESS OF THE ASSESSEE IS THAT OF TRADING AND FIN ANCIAL TRANSACTION. THE ASSESSEE HAD NOTHING TO DO WITH CONSTRUCTION ACTIVI TY. REFERRING TO THE AGREEMENT OF JOINT DEVELOPMENT (PAPER BOOK PAGES 1 26) DATED 13.02.2006 SHE SUBMITTED THAT MR. MAHINDRA ARORA O F M/S. KUBER DEVELOPERS IS THE DEVELOPER WHEREAS THE ASSESSEE M/S. FOBEOZ INDIA IS THE JOINT DEVELOPERS. SHE SUBMITTED THAT AN AGREE MENT FOR DEVELOPMENT OF THE PROPERTY SITUATED AT MALAD WAS ENTERED INTO BETWEEN M/S. KUBER ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 15 DEVELOPERS AND THE OWNERS OF THE LAND ON 29.12.2005 . REFERRING TO PG.NO.5 OF THE JOINT DEVELOPMENT AGREEMENT SHE SUBMITTED T HAT THE DEVELOPERS AGREED TO PROCURE THE CO-OPERATION AND CO-ORDINATIO N FROM THE ASSESSEE SO THAT THE APPROPRIATE TECHNICAL KNOWHOW FINANCE MAN AGEMENT SKILL TO BE SUCCESSFULLY COMPLETED. SHE SUBMITTED THAT AS PER C LAUSE 4 OF THE JOINT DEVELOPMENT AGREEMENT THE ASSESSEE WAS SUPPOSED TO GIVE AGGREGATE FINANCE OF RS.20 00 00 000/- TO THE DEVELOPERS IN I NSTALLMENTS AND IN TURN THE ASSESSEE WAS TO BE ALLOTTED 46 FLATS & 2 SHOPS DULY COMPLETED. SHE SUBMITTED THAT ACCORDINGLY THE ASSESSEE HAD GIVEN 7 CRORES AS THE FIRST INSTALLMENT. REFERRING TO CLAUSE 4 OF THE SAID AGRE EMENT WHICH CONTAINS INTEREST CLAUSE ALSO SHE SUBMITTED THAT IN THE EVE NT THE JOINT DEVELOPERS FAIL TO MAKE THE PAYMENT OF FURTHER AMOUNTS AS SET OUT IN THE SCHEDULE III BY INSTALLMENTS FOR ANY REASON WHATSOEVER THE JOINT DEVELOPERS ARE ENTITLED TO GET INTEREST @ 12% P.A. TILL THE MONEY IS RETURNED TO THE JOINT DEVELOPERS BY THE DEVELOPERS. SHE SUBMITTED THAT AS PER AGREEMENT FOR DEVELOPMENT DATED 07.08.2006 IF THE CONSTRUCTION D OES NOT START WITHIN A CERTAIN PERIOD OF TIME THE AMOUNT HAS TO BE RETAIN ED ALONG WITH INTEREST. HOWEVER IN THE INSTANT CASE THE AMOUNT OF RS. 7 CR ORES PAID WAS NOT RETURNED TO THE ASSESSEE. SHE SUBMITTED THAT ACCORD INGLY AS PER CANCELLATION AGREEMENT DATED 17.08.2007 (PAPER BOOK PAGES 58 TO 69) THE ASSESSEE GOT BACK THE AMOUNT OF RS.7 CRORES ADVANCE D ALONG WITH THE INTEREST OF RS.52 02 267/- AS FULL AND FINAL SETTLE MENT. AS PER THE SAID CANCELLATION DEED ALL PRIOR AGREEMENTS WERE TREATED AS CANCELLED. THE ASSESSEE OFFERED TO TAX THE AMOUNT OF INTEREST ACTU ALLY RECEIVED AT RS.52.04 ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 16 LACS. SHE HOWEVER SUBMITTED THAT THE ASSESSEE IS NO T AWARE OF THE BASIS OF CALCULATION OF INTEREST OF RS.52.04 LACS BY M/S. KU BER DEVELOPERS. REFERRING TO THE INTEREST CONFIRMATION LETTER FROM M/S. KUBER DEVELOPERS A COPY OF WHICH IS PLACED AT PAPER BOOK PG. NO. 70 SHE SUBMI TTED THAT M/S. KUBER DEVELOPERS HAS CONFIRMED THAT DUE TO FINANCIAL PROB LEMS THEY COULD PAY INTEREST OF RS.52 04 267/- ONLY ALONG WITH THE ADVA NCE OF RS.7 00 00 000/- AND THE JOINT VENTURE AGREEMENT IS TERMINATED. 7.1 REFERRING TO THE VARIOUS CLAUSES OF THE FIRST A GREEMENT DATED 13.02.2006 SHE SUBMITTED THAT THESE ARE NOT THE FE ATURES OF A JOINT VENTURE. SHE SUBMITTED THAT THE ASSESSEE IN THE BAL ANCE SHEET HAS SHOWN THE AMOUNT PAID TO M/S. KUBER DEVELOPERS AS ADVANCE . IN THE PROFIT & LOSS ACCOUNT THE INTEREST HAS BEEN SHOWN AS OTHER INCO ME. SHE SUBMITTED THAT SINCE NOTHING HAPPENED FOR EIGHT MONTHS AFTER THE FIRST AGREEMENT WAS ENTERED INTO THE SUPPLEMENTARY AGREEMENT DATED 07. 08.2006 WAS ENTERED INTO WHICH IS A TRIPARTITE AGREEMENT BETWEEN THE O WNER OF THE LAND THE ASSESSEE AND M/S. KUBER DEVELOPERS. REFERRING TO PA GE. 32 OF THE PAPER BOOK SHE SUBMITTED THAT THE CONFIRMING PARTY I.E. M/S. KUBER DEVELOPERS HAD AGREED TO PAY THE INTEREST @ 12% ON THE SAID AM OUNT OF RS.7 CRORES. SHE SUBMITTED THAT THE ASSESSEE IS NEITHER A DEVELO PER NOR CONSTRUCTION WAS ITS BUSINESS ACTIVITIES. REFERRING TO THE PG. N O. 59 OF THE PAPER BOOK SHE DREW THE ATTENTION 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 FO R DEVELOPMENT DATED ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 17 07.08.2006 HAS BEEN CANCELLED / REVOKED / TERMINATE D. ACCORDINGLY THE ASSESSEE HAS RECEIVED BACK THE AMOUNT OF RS.7 CRORE S AND THE INTEREST AMOUNTING TO RS.52 04 267/- FROM M/S. KUBER DEVLOPE RS. UNDER THESE CIRCUMSTANCES SHE SUBMITTED THAT THE QUESTION OF C APITALIZATION OF INTEREST IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE DOES NOT A RISE. IT CAN ONLY BE CAPITALIZED IN THE BOOKS OF THE JOINT VENTURE. SHE SUBMITTED THAT SINCE THE ASSESSEE IS NOT A CONTRACTOR THE ACCOUNTING STANDA RDS REFERRED TO BY THE AO ARE ALSO NOT APPLICABLE. 7.2 REFERRING TO THE DECISION OF THE HON'BLE CALCUT TA HIGH COURT IN THE CASE OF CIT VS. BALARAMPUR COMMERCIAL ENTERPRISES L TD. REPORTED IN 262 ITR 439 SHE SUBMITTED THAT EVEN THOUGH THE DECISIO N 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 PRANAV VIKAS INDIA LTD. VS. ACIT REPORTED IN 116 ITD 141 SHE SUBMITTED THAT WHEN THE RIGHT TO RECEI VE A PARTICULAR INCOME VESTED IN THE ASSESSEE IS WAIVED BY HIM AS A RESULT OF THE REVISED AGREEMENT OR UNDERSTANDING ENTERED INTO IN THE RELEVANT YEAR THE INCOME SO WAIVED CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE IN T HAT YEAR AND ACCORDINGLY THE SAME CANNOT BE ASSESSED TO TAX IN HIS HANDS FOR THAT YEAR. SHE ACCORDINGLY SUBMITTED THAT NO REAL INCOME HAS ACCRUED TO THE ASSESSEE. FURTHER EVEN IF THE WAIVER IS AFTER THE ACCOUNTING PERIOD IT HAS GOT RETROSPECTIVE EFFECT. SHE SUBMITTED THAT IN THE INSTANT CASE IN THE FIRST 8 MONTHS NOTHING HAPPENED FOR WHICH THE SUBSEQUENT A GREEMENT WAS ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 18 ENTERED INTO AND THE ASSESSEE GET DEVELOPMENT RIGH TS. SHE SUBMITTED THAT WHEN THE RECOVERY OF THE PRINCIPAL AMOUNT WAS DOUB TFUL QUESTION OF ANY INTEREST INCOME DOESNT ARISE. THEREFORE SUBSEQUEN T EVENTS THAT OCCURRED AFTER THE BALANCE SHEET DATE HAS TO BE CONSIDERED. SHE SUBMITTED THAT WHEN THERE IS UNCERTAINTY THE INCOME SHOULD NOT BE RECOGNIZED AS PER THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHA RTERED ACCOUNTANTS OF INDIA. SHE SUBMITTED THAT THE BASIS OF THE ASSESSME NT ORDER THAT ASSESSEE HAS DEVIATED FROM THE ACCOUNTING STANDARD AND THE O BSERVATION OF THE AO THAT THE ASSESSEE IS A DEVELOPER IS ERRONEOUS. SHE SUBMITTED THAT EVEN IF THE ASSESSEE IS TREATED AS A DEVELOPER THE EXPENSE S CAN BE CAPITALIZED IN THE BOOKS OF ACCOUNTS OF THE JOINT VENTURE ONLY. SH E SUBMITTED THAT THE INTEREST HAS BEEN PAID TO DIRECTORS AND OTHERS FOR MONEY BORROWED AND ADVANCED TO M/S. KUBER DEVELOPERS. THE VARIOUS EXPE NSES ARE NORMAL ROUTINE EXPENSES. SHE ACCORDINGLY SUBMITTED THAT AD DITION MADE BY THE AO AND CONFIRMED BY THE LD. CIT(A) SHOULD BE DELETED. SHE ALSO RELIED ON VARIOUS OTHER DECISIONS. 8. THE LD. DR ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE LD. CIT(A). HE SUBMITTED THAT THE ASSESSEE HAD NOT SHOW N ANY ACCRUED INTEREST FOR THE A.Y. 2006-07 WHICH ACCORDING TO THE AO COME S TO RS.10 02 741/-. HE SUBMITTED THAT NOW THE LD. COUNSEL FOR THE ASSES SEE IS TELLING THAT THEY ARE ONLY FINANCER BUT NOT DEVELOPERS. BUT THIS FACT WAS NEVER BROUGHT TO THE NOTICE OF THE AO. THE VARIOUS CLAUSES OF THE JO INT DEVELOPMENT AGREEMENT SHOW THAT THE ASSESSEE WAS IN POSSESSION OF THE SAID PROPERTY FOR FULL DEVELOPMENT ALONG WITH M/S. KUBER DEVELOPE RS. THEREFORE THE ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 19 ASSESSEE CANNOT SAY THAT IT IS ONLY A FINANCER AND NOT FOR JOINT DEVELOPMENT. EVEN IF THE CONTENTION OF THE LD. COUN SEL FOR THE ASSESSEE IS ACCEPTED THEN THERE WAS NO NEED FOR THE ASSESSEE T O INCUR VARIOUS EXPENSES. HE SUBMITTED THAT TILL THE CANCELLATION O F THE AGREEMENT ON 17.08.2007 THE DEVELOPMENT RIGHT OF THE PROPERTY W AS WITH THE ASSESSEE. THEREFORE THERE WAS ABSOLUTELY NO ERROR ON THE PAR T 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 ACCO UNTING OR ATLEAST THE INTEREST INCOME IS BEING OFFERED ON RECEIPT BASIS W HICH CANNOT BE ACCEPTED. FURTHER THE CONFIRMATION LETTER ISSUED BY M/S. KUBE R DEVELOPERS IS DATED 02.11.2009. HE ACCORDINGLY SUBMITTED THAT THE ORDE R OF THE LD. CIT(A) BEING REASONABLE AND IN ACCORDANCE WITH LAW SHOULD BE UPHELD. 9. THE LD. COUNSEL FOR THE ASSESSEE IN HER REJOINDE R SUBMITTED THAT THE ASSESSEE HAS CREDITED THE INTEREST ACTUALLY RECEIVE D ON THE BASIS OF REAL INCOME THEORY. FOR THIS PREPOSITION SHE RELIED ON T HE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. BOKARO STEEL LTD. REPORTED IN 236 ITR 315. SHE SUBMITTED THAT IN VIEW OF THE CANCELLATION OF THE AGREEMENT DURING AUGUST 2007 NO INCOME WAS ACCRUED TO THE ASSESSEE DURING THIS YEAR. SHE SUBMITTED THAT TO PROTECT ON PAPER THE PRINCIPAL AM OUNT THE ASSESSEE HAD ENTERED INTO A SUBSEQUENT AGREEMENT. REFERRING TO T HE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF SUSHILA SH ANTILAL JHAVERI VS. UNION OF INDIA & ANOTHER REPORTED IN 286 ITR 428 S HE SUBMITTED THAT SUBSEQUENT EVENTS OCCURRING PENDENT LITE CAN BE CON SIDERED IF THEY HAVE ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 20 THE EFFECT OF OVERSHADOWING THE ORIGINAL CASE FOUND BY THE COURT BELOW. REFERRING TO THE VARIOUS EXPENSES DEBITED IN PROFIT AND LOSS ACCOUNT SHE SUBMITTED THAT THE ADVERTISEMENT EXPENDITURE IS FOR PUBLIC NOTICE RELATING TO THE MONEY THE ASSESSEE ADVANCED. THE LISTING FEE PAID TO HYERCITY MALL IS NOTHING TO DO WITH THE DEVELOPMENT. THE PRINTING AN D STATIONERY IS A NORMAL ROUTINE EXPENDITURE. THE STAMP DUTY AND REGI STRATION EXPENSES ARE INCURRED TO SECURE THE PRINCIPAL AMOUNT ADVANCED S INCE THE FIRST AGREEMENT WAS NOT REGISTERED AND ONLY THE SECOND AN D THIRD AGREEMENTS WERE REGISTERED. THE INTEREST ON LOAN HAS BEEN PAID TO BORROWERS FROM WHOM MONEY WAS OBTAINED. ALL THESE THINGS DO INDICA TE THAT THE ASSESSEE WAS NOT A DEVELOPER. THEREFORE THE LOWER AUTHORITI ES WERE NOT JUSTIFIED IN CAPITALIZING VARIOUS EXPENSES. 10. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES PERUSED THE ORDERS OF THE AO AND THE LD. CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. IN THE IMPUGNED GROUNDS WE HAVE TO DECID E TWO THINGS I.E. (1) WHETHER THE LOWER AUTHORITIES ARE JUSTIFIED IN CAPI TALIZING THE EXPENSES TO WORK-IN-PROGRESS AND (2) WHETHER THE INTEREST INCOM E HAS TO BE TAKEN AT RS.52 04 267/- AS SHOWN BY THE ASSESSEE OR RS.1 77 19 081/- CONSIDERED BY THE REVENUE. 10.1 THE VARIOUS EXPENSES DEBITED TO THE PROFIT & L OSS ACCOUNT (EXCEPT AS CONFERRED IN GROUND OF APPEAL NO.1) ARE NOT DISPUTE D. THE ONLY DISPUTE IS WHETHER THE SAME HAS TO BE ALLOWED AS NORMAL BUSINE SS EXPENSES OR TO BE ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 21 CAPITALIZED AS WORK-IN-PROGRESS TREATING THE ASSESS EE AS A DEVELOPER. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING AND FINANCIAL TR ANSACTIONS. IT HAS NOTHING TO DO WITH CONSTRUCTION ACTIVITY. AS PER TH E AGREEMENT 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 DEVELOPM ENT AGREEMENT READS AS UNDER :- 4. THE JOINT DEVELOPERS HAVE AGREED TO GIVE AGGRE GATE FINANCE OF RS.20 00 00 000/- (RUPEES TWENTY CRORE O NLY) TO THE DEVELOPERS BY INSTALLMENTS AS SET OUT IN THE SCHEDU LE III HEREIN FROM TIME TO TIME. THE JOINT DEVELOPER AGREES TO PA Y A SUM OF RS.7 CRORES (RUPEES SEVEN CRORES ONLY) TO THE DEVEL OPER AGAINST THE DEVELOPERS PRODUCING A CONFIRMATION LETTER FROM M/S. KESHVI DEVELOPERS. ALL THE DOCUMENTS EXECUTED EARLIER WHIC H ARE NOT REGISTERED AS STATED IN THE LETTER DT. 06.02.06 BY M/S. M. DHRUVA & CO. (ADVOCATES AND SOLICITORS) WILL BE REGISTERED AS PER THE COMPLIANCE REQUIREMENTS CONTAINED THEREIN. THE JOIN T DEVELOPERS SHALL PROVIDE TO THE DEVELOPERS FURTHER SUM OF RS.1 3 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 I NSTALLMENTS FOR ANY REASONS WHATSOEVER THE JOINT DEVELOPERS SH ALL NOT BE ENTITLED TO THE BENEFITS OF THE DEVELOPMENT AND IN SUCH EVENT THE JOINT DEVELOPERS SHALL BE ENTITLED TO CLAIM INTERES T AT THE RATE OF 12% PER ANNUM OF SUMS PAID TILL THEN TO THE DEVELOP ERS TILL THE REPAYMENT BY THE DEVELOPERS AND TILL THE SAID AMOUN T IS PAID THE JOINT DEVELOPER SHALL HAVE A CHARGE/LIEN UPON THE P ROPERTIES SET OUT IN THE SCHEDULES I & II HERETO ANNEXED TO THE EXTENT OF AMOUNT PAID BY THE JOINT DEVELOPERS TO THE DEVELOPE RS. 10.3 SIMILARLY CLAUSE NO. 8 OF THE JOINT DEVELOPMEN T AGREEMENT READS AS UNDER:- ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 22 8. IT IS AGREED BY THE DEVELOPERS THAT THEY SHALL ALLOT 46 FLATS & 2 SHOPS DULY COMPLETED ON THE SAID PROPERTIES SET OUT IN THE SCHEDULES III HEREIN WHICH IS ON THE BASIS POPULARL Y KNOWN AS OWNERSHIP BASIS TO THE JOINT DEVELOPERS AND EACH FLAT ADMEASURING 34 500 SQUARE FEET IN BUILT UP AREA AND SHOP ADMEASURING 6000 SQ. FT. IN BUILT UP AREA IN THE N EW BUILDINGS TO BE CONSTRUCTED UPON THE SAID PROPERTIES SET OUT IN THE SCHEDULE I AND II HEREIN AT THE AGREED CONSIDERATIO N AMOUNT OF RS.20 00 00 000/- (RUPEES TWENTY CRORES ONLY) CALCU LATED ON THE AVERAGE BASIS OF RS.5 000/- (RUPEES FIVE THOUSA ND ONLY) PER SQUARE FEET AREA. 10.4 THE CLAUSE NO. 16 OF THE JOINT DEVELOPMENT AGR EEMENT READS AS UNDER :- 16. IT IS AGREED BY AND BETWEEN THE PARTIES HERET O THAT OVER AND ABOVE THE PREMIUM MENTIONED THEREIN THE DEVELO PERS SHALL ALLOT 24300 SQUARE FEET BUILT UP AREA IN THE NEWLY CONSTRUCTED BUILDINGS TO THE JOINT DEVELOPERS BEING FULLY CONST RUCTED FLATS SET OUT IN THE PLAN AND SCHEDULE III HEREIN. THE JOINT DEVELOPERS SHALL BE ENTITLED TO TRANSFER SELL DISPOSE OF THE SAID FLATS TO ANY THIRD PARTY OF THEIR CHOICE AT THE PRICE THEY DEEM FIT. 10.5 THE ABOVE CLAUSES READ ALONG WITH THE VARIOUS OTHER CLAUSES IN THE DEVELOPMENT AGREEMENT SUPPLEMENTARY AGREEMENT AND THE CANCELLATION AGREEMENT SUPPORTS THE CONTENTION OF THE LD. COUNSE L FOR THE ASSESSEE THAT THE ASSESSEE IS ONLY A FINANCER AND NOT A DEVELOPER . FURTHER FROM THE DETAILS OF EXPENSES FURNISHED IN THE PAPER BOOK WE FIND FORCE IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THESE ARE NOTHING TO DO WITH THE DEVELOPMENT OF PROPERTY. WE ALSO FIND FORC E IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT EVEN IF THE E XPENDITURE HAS TO BE CAPITALIZED THE SAME HAS TO BE CAPITALIZED IN THE BOOKS OF THE JOINT VENTURE ACCOUNT AND NOT IN THE BOOKS OF THE ASSESSEE. WE T HEREFORE CONCUR WITH THEE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE LOWER ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 23 AUTHORITIES WERE NOT JUSTIFIED IN CAPITALIZING THE VARIOUS EXPENSES TO WORK- IN-PROGRESS. 10.6 NOW COMING TO THE QUESTION AS TO HOW MUCH INTE REST HAS TO BE CONSIDERED AS INCOME DURING THE YEAR WE FIND THE A SSESSEE HAS CREDITED AN AMOUNT OF RS.52 04 267/- AS INTEREST INCOME WHICH T HE ASSESSES HAS ACTUALLY RECEIVED DURING THE YEAR. IT IS THE CASE O F THE REVENUE THAT THE ASSESSEE BEING A COMPANY WHICH FOLLOWS MERCANTILE S YSTEM OF ACCOUNTING SHOULD HAVE ACCOUNTED THE INTEREST FOR THE WHOLE Y EAR. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN VIEW OF THE SUBSEQUENT TERMINATION OF THE AGREEMENT THE ASSESSEE WAS JUST IFIED IN ACCOUNTING FOR ONLY THE ACTUAL INTEREST RECEIVED IN VIEW OF THE T HEORY OF REAL INCOME. 11. WE FIND THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF SUSHILA SHANTILAL JHAVERI (SUPRA) AT PG. NO.431 HAS HELD AS UNDER :- HAVING HEARD MR. JHAVERI LEARNED CIT(A) COUNSEL F OR THE PETITIONER; HAVING SEEN THE IMPACT OF THE SUBSEQUEN T EVENTS ON THE OPERATIVE PART OF THE IMPUGNED ORDER THE SUBMI SSION MADE BY MR. JHAVERI NEEDS ACCEPTANCE. THE APEX COURT IN THE CASE OF GAYA PRASAD AIR 2001 SC 803 RULED THAT SUBSEQUENT EVENTS OR DEVELOPMENTS OCCURRED PENDENT LITE CAN BE CONSIDERE D; IF IT HAS THE EFFECT OF OVERSHADOWING THE ORIGINAL CASE FOUND BY THE COURT BELOW. IN THE CASE OF HASMAT RAI V. RAGHUNATH PRASA D AIR 1981 SC 1711 THE APEX COURT HELD THAT THE MAGNITUDE OF S UBSEQUENT EVENTS OR THE DIMENSION THEREOF SHOULD BE SUCH THAT IT SHOULD HAVE THE EFFECT OF COMPLETELY CHANGING THE COLOUR O F THE ORIGINAL FINDINGS EXTRACTED IN PARA 2 SUPRA. IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THIS CASE WE FEEL THAT IT WOULD B E NECESSARY TO DIRECT THE COMMISSIONER OF INCOME-TAX TO RECONSIDER THE APPLICATION FILED AND THE SUBMISSIONS MADE BY THE P ETITIONER ON ITS OWN MERITS IN THE LIGHT OF THE SUBSEQUENT EVENT S SINCE THE HAVE DISLODGED THE VALIDITY OF THE ADVERSE FINDINGS SUFFERED BY THE PETITIONER. ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 24 11.1 WE FIND THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF BALARAMPUR COMMERCIAL ENTERPRISES LTD. (SUPRA) AFTER CONSIDERI NG THE DECISION REPORTED IN 137 ITR 698 AND AS RELIED ON BY THE LD. CIT(A) H AS OBSERVED AS UNDER : THE CONCEPT OF REAL INCOME IS NOW AN ACCEPTED PROP OSITION. BUT IT HAS TO BE APPLIED IN A GIVEN CASE DEPENDING ON THE FACTS AND CIRCUMSTANCES. NO STRAIGHT-JACKET FORMULA CAN BE EV OLVED. IF A DEBT BECOMES BAD AND THE ASSESSEE TREATS THE SAME A S A BAD DEBT AND SUCH TREATMENT IS APPARENT FROM THE FACTS OF THE CASE AND THE CONDUCT OF THE ASSESSEE SUBSEQUENT ATTEMPT S TO RECOVER THE BAD DEBT WOULD NOT MEAN THAT THE INCOME HAD ACC RUED IN THAT PARTICULAR PREVIOUS YEAR. FILING OF A SUIT FOR RECO VERY OF THE AMOUNT WOULD DEFINITELY BE A FACTOR COUPLED WITH TH E CONDUCT OF THE PARTIES TO ESTABLISH THAT THE DEBTS HAD BECOME A BAD DEBT AND REQUIRED TO BE RECOVERED THROUGH THE LONG DRAWN PROCEEDING OF A SUIT. WHEN THE ASSESSEE TREATS A DEBT TO HAVE BECOME BAD AND WAIVES THE ACCRUAL OF THE INCOME BY OMITTING TO ENTER THE INCOME IN THE BOOKS OF ACCOUNT THEN THE CONCEPT OF REAL INCOME COMES INTO PLAY. THE ACCOUNTING IS FINALIZED AT THE END OF THE PREVIOUS YEAR. THEREFORE EVEN IF A DECISION IS TAK EN AFTER THE END OF THE PREVIOUS YEAR BUT WITHIN A REASONABLE PROXI MITY PURSUANT TO A CONSIDERATION WHICH WEIGHED WITH THE ASSESSEE DURING THE COURSE OF THE PREVIOUS YEAR FRUCTIFYING INTO A FORM AL RESOLUTION AFTER THE CLOSE OF THE PREVIOUS YEAR THE DECISION CANNOT BE SAID TO BE INAPPLICABLE IN RESPECT OF THE RELEVANT PREVIOUS YEAR FOR WHICH THE DECISION WAS TAKEN. .... . HELD THAT THE DECISION TO WAIVE INTEREST WAS TAKEN ON AUGUST 1 1981 YET IT WOULD BE APPLICABLE IN RESPECT OF THE PREVIOUS YEAR BEGINNING FROM JULY 1 1986. THE ASSESSEE HAD OMITT ED TO ENTER THE ACCRUAL OF THE INCOME IN THE BOOKS OF ACCOUNT A ND THEREFORE ITS CONDUCT HAD SUPPORTED ITS CASE. THERE WAS NO AL LEGATION THAT THERE WERE ANY MALA FIDES ON THE PART OF THE ASSESS EE IN POSTPONING OR SHIFTING THE INCOME TO SUBSEQUENT YEA RS FOR THE PURPOSE OF TAXATION. IN FACT THE SUIT WAS STILL PE NDING AND WAS YET TO BE DECIDED. ON THE FACTS AND IN THE CIRCUMST ANCES OF THE CASE THE INCOME-TAX APPELLATE TRIBUNAL WAS JUSTIFI ED IN DELETING THE ADDITION OF RS.2 04 000 MADE BY THE ASSESSING O FFICER AND CONFIRMED AND ENHANCED BY THE COMMISSIONER (APPEALS ) TO RS.2 69 685 ON ACCOUNT OF INTEREST FROM THE HINDU U NDIVIDED FAMILY. ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 25 12. IN VIEW OF THE ABOVE CITED DECISIONS AND IN VIE W OF THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCO UNTANTS OF INDIA EVENTS OCCURRING AFTER THE BALANCE SHEET DATE HAS GOT SOME BEARING ON THE INCOME / EXPENDITURE OF THE FINANCIAL YEAR PRECEDING TO TH E DATE OF SUCH HAPPENING. WHEN THE ASSESSEE IS AWARE THAT IT IS NOT GOING TO RECEIVE ANYTHING OVER AND ABOVE WHAT HAS ALREADY BEEN RECEIVED AND CREDITED I N THE BOOK OF ACCOUNTS AND WHEN THE AGREEMENTS AND CORRESPONDENCES BETWEEN THE PARTIES DO INDICATE SUCH THINGS ALTHOUGH AFTER THE BALANCE SH EET DATE THEREFORE INCOME ON NOTIONAL BASIS IN OUR OPINION CANNOT BE BROUGHT TO TAX. IN THIS VIEW OF THE MATTER WE SET ASIDE THE ORDER OF THE L D. CIT(A) AND DIRECT THE AO TO ALLOW THE VARIOUS EXPENSES CLAIMED BY THE ASS ESSEE OTHER THAN THE EXPENSES DISALLOWED AS PER GROUND OF APPEAL NO. 1. WE HOLD AND DIRECT ACCORDINGLY. THE GROUNDS OF APPEAL NO. 2 & 3 RAISED BY THE ASSESSEE ARE ACCORDINGLY PARTLY ALLOWED. 13. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 29 TH DAY OF JULY 2011. SD/- ( R.V. EASWAR ) PRESIDENT SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI DATED : 29/07/2011 ITA NO:9231/MUM/2010 M/S. FOBEOZ INDIA PVT. LTD. 26 COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE C.I.T. 4. CIT (A) 5. THE DR F- BENCH ITAT MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI ROSHANI