Real Estate Company Faced Rs. 5.75 Crore Tax Addition After Reassessment; ITAT Deletes Addition as It Was Not Part of Reopening Reasons

The ITAT Mumbai had deleted an addition of Rs 5.75 crore made by the Income Tax Department in the case of Mellona Developers Private Limited, providing significant relief to the assessee company.

In the present case, the assessee (Mellona Developers Private Limited) had shown an income amounting to Rs 19.75 crores under the head of “other income” as interest from an intercorporate deposit during the Income Tax Return (ITR) filing for the Assessment Year 2017-18.

The tax authorities had observed that, “the Assessee company has taken loan of Rs.80 Crores from HDFC for purchase of property and paid interest on it, which was treated as project work in progress and capitalized the same as ‘WIP’. It is further seen that interest on FDR from Oriental Bank of Commerce has been shown as other income and transferred to Inventories project work in progress. The said interest income of Rs.1.56 Crore was reduced from the interest expenses on borrowed funds. Since, Investments in fixed deposits out of borrowed funds was not utilized for the business and development of properties, the same is treated as income from ‘other sources’.”

Based on this, the assessee’s case was reopened under Section 147, based on the information that the Assessee had earned interest income of about Rs 19.75 crore on inter-corporate deposits, which was allegedly reduced from project work-in-progress against interest expenditure. The AO alleged that interest income of Rs 19.75 crore had escaped taxation and cannot be considered as “Income from Other Sources“.

However, during the reassessment proceedings, the tax authorities did not make any addition concerning the alleged escaped interest income; instead, they disallowed Rs 5.75 crore claimed by the company as loan processing fees, holding that the borrowed funds were not used for business purposes but were advanced as intercorporate deposits to earn interest income. When approached, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the impugned disallowance.

Thereafter, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT) Mumbai, arguing that the reassessment proceedings were initiated solely based on the issue of escaped interest income, but no addition was ultimately made on that issue. Therefore, the tax authorities could not make an addition on a completely different matter without the issuance of a fresh notice.

The tribunal endorsed the assessee’s argument. By relying on the earlier ruling of the Bombay High Court in the case titled CIT v. Jet Airways (I) Limited, the tribunal held that when an assessment is reopened for a specific reason, and the AO ultimately finds that no income has escaped assessment on that issue, he cannot independently assess another issue unless a fresh notice under Section 148 is issued.

Since the tax authorities had not made any additions initially on the grounds for which the case was reopened, the tribunal concluded to quash the impugned disallowance of Rs 5.75 crore towards loan processing fees, which was unsustainable in law. Accordingly, the assessee’s appeal was allowed.