ORDER
Shailendra K. Yadav, J.M.
1. This appeal has been filed by the assessee against the order of the Commissioner (Appeals), for the assessment year 2003-04.
2. The first issue is against the confirmation of the assessed income at Pis. 4,99,260 as against the nil income declared in the return of income for the assessment year 2003-04 has been opposed.
2.1 The assessee company is in the business of construction. During the year, the assessee company had entered into an understanding with M/s Arora Builders (alias M/s Sukhmani Construction) for the development of immovable property situated at Andheri, Mumbai, vide development agreement dated 28-11-2003. The said agreement was registered with the office of the sub-Registrar, Mumbai. As per development agreement there are two phases of constructionone for rehabilitation and second for sale. The entire expenses for Phase-I, i.e. rehabilitation, were borne by the company on behalf of M/s Sukhmani Construction and for Phase-II, i.e. sale, the entire expenses were borne by the assessee company. As per the development agreement dated 28-11-2003, it was agreed upon that the developer would deposit with the owner a sum of Rs. 1,28,80,000, which is refundable to the owner in the manner as stated therein for the period of fifteen months as security deposit for the development of the project. The owner would pay to the developer with interest on the said sum of Rs. 1,28,80,000 at the rate of 12 per cent per annum from the date of payment of the said amount by the developer to the owner until completion of construction of the building. The assessee company has granted ten instalments of security deposit of Rs. 99,90,000 till March, 2003. However, no interest income had been offered for taxation accrued to the assessee as agreed upon as per the development agreement. The assessing officer, therefore, added Rs. 4,99,264 to the income of the assessee on account of interest accrued to the assessee in the year under consideration. According to the assessing officer, the assessee was following mercantile system of accounting and, therefore, he found that it was duty bound to disclose interest income on accrual basis on the amount deposited with the owners for the development of the said property, which was confirmed by the Commissioner (Appeals).
2.2 Before me, the learned Authorised Representative of the assessee has submitted that by virtue of the refusal of granting of FSI on the said plot of land for which the assessee company had entered into development agreement with M/s Arora Builders (Sukhmani Construction), the assessee could not develop the said property. The stand of the assessee was that by virtue of the terms and conditions as mentioned in Clause (1) of Phase-II, sale building of the agreement, the assessee company had agreed and confirmed having deposited with the owner a further sum of Rs. 1,28,80,000 refundable by the owner in the manner stated for a period of fifteen months as security deposit for the development of the project and the owners shall have to pay interest at the rate of 12 per cent per annum from the date of payment of the same amount by the developer to the owner until completion or the construction of the said building. However, on subsequent development, the Slum Rehabilitation Authority and the Urban Land Development department of Maharashtra refused to grant FSI vide letter dated 29-10-2003, as the project was legally not practicable and due to legal restriction the whole amount invested might not have been realised in the said project. In this regard, the assessee to strengthen its contention had furnished copy of the order passed by the Urban Land Development department dated 4-10-2004. Thus, the assessee has contended that it is well settled that the Act does not postulate taxability of notional income and, consequently, the IT authorities have no jurisdiction to assess the assessee on an item of income which neither accrued nor arisen or received by it. The learned Authorised Representative of the assessee has submitted that if the income does not result at all, there cannot be a tax even though in book keeping an entry is made which was not materialized. So the addition in question deserves to be deleted. On the other hand, the learned Authorised Representative of the assessee has supported the order of the authorities below.