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Facts
The Revenue appealed an order deleting an addition of Rs. 8,46,66,000/- made on account of notional interest. The assessee was engaged in constructing a 4-laning highway and had provided interest-free mobilization advances to its EPC contractor, while itself obtaining interest-bearing advances from financial institutions.
Held
The Tribunal held that the reopening of the assessment was based on a change of opinion, as the issue was already examined in scrutiny without addition. Furthermore, on merits, no addition can be made on notional income, especially when the mobilization advance was recoverable and interest expenditure was capitalized.
Key Issues
Whether reopening based on change of opinion is permissible? Whether notional interest on interest-free advances given to a contractor is taxable as income?
Sections Cited
147, 144B, 143(3), 143(2), 37
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Income Tax Appellate Tribunal, MUMBAI BENCHES “G”, MUMBAI
Before: Justice (Retd.) C V Bhadang, Hon’ble & Ms. Padmavathy S, Hon’ble
Per Justice (Retd.) C V Bhadang, President:
By this appeal, Revenue is challenging the order dated 11.04.2025 passed by the National Faceless Assessment Centre, Delhi, (‘CIT(A)’ for short). By the impugned order, learned CIT(A) has deleted the addition & CO. No. 212/Mum/2025 Solapur Yedeshi Tollway Limited of Rs.8,46,66,000/- made by the Assessing Officer towards notional interest received by the respondent-assessee. That order was passed on 31.03.2022 u/s 147 r.w.s. 144B of the Income Tax Act, 1961 (‘Act’ for short). The appeal relates to assessment year 2017-18.
The assessee is engaged in the business of construction of 4-laning of Solapur to Yedeshi section of NH-211 in Maharashtra. The assessee was incorporated by IRB Infrastructure Developers Limited (IRB) in compliance with National Highways Authority of India (NHAI) bid conditions, as a Special Purpose Vehicle (SPV) for the development, operation and maintenance of infrastructure facilities. The assessee has contracted out the construction of the road to IRB through Engineering, Procurement and Construction (EPC) agreement, vide EPC contract dated 29.03.2014. The project is a Build, Operate and Transfer (BOT) contract.
The assessee filed its Return of Income (RoI) for the relevant assessment year declaring a total income of Rs.2,04,23,100/-. The case was taken up for complete scrutiny and by virtue of order dated 19.07.2019 passed u/s 143(3) of the Act, there was no addition made and the returned income was accepted as it is. Subsequently, on the basis of information received and the material on record, the Assessing Officer found that substantial amount of income had escaped assessment and the case was accordingly reopened vide notice dated 31.03.2021. In response thereto, the assessee filed its RoI on 26.04.2021 declaring the same income as earlier. Subsequently, a notice u/s 143(2) of the Act was issued on 23.06.2021. The Assessing Officer completed the assessment & CO. No. 212/Mum/2025 Solapur Yedeshi Tollway Limited by the assessment order dated 31.03.2022 making the impugned addition by virtue of the order passed u/s 147 r.w.s 144B of the Act.
In appeal, the CIT(A) has deleted the addition on merits.
The assessee has filed the cross objection challenging the refusal by the CIT(A) to examine the issue of reopening.
The Assessing Officer has found that during the relevant year the assessee had given interest free advance to the principal EPC contractor when the assessee had obtained short-term and long-term advances from Bank/Financial Institutions, which carried interest @ 11% p.a. In that view of the matter, the Assessing Officer has computed the notional interest on the advances given to the principal EPC contractor @ 10.35% at Rs.8,46,66,000/- which is added as income u/s 37 of the Act.
According to the assessee, as per the EPC contract and the prevalent practice in the business and industry, the assessee was obliged to provide interest free mobilization advance to the EPC contractor which did not carry any interest. It was contended that unless and until income is actually received, no addition can be made on the basis of notional income. The assessee also challenged the reopening on the ground that it was a mere change of opinion, the issue already having been examined by the Assessing Officer in the scrutiny proceedings.
& CO. No. 212/Mum/2025 Solapur Yedeshi Tollway Limited 8. The CIT(A) while deleting the addition has observed that the assessee having succeeded on merits, the technical ground of challenge to the reopening need not be adjudicated upon.
We have heard parties. Perused record.
It is submitted by the learned DR that the assessee has obtained interest paying short-term and long-term advance @11% p.a. At the same time the assessee has made advances to the related parties viz. Principal EPC Contractor without interest. He therefore, submitted that the Assessing Officer was justified in re-opening the case and making the impugned addition.
The learned AR has submitted that the issue was already examined by the Assessing Officer in the scrutiny proceedings and no addition was made vide order passed u/s. 143(3) of the Act on 19.07.2019. He submitted that there was no tangible material before the Assessing Officer to have come to the conclusion of the income having escaped assessment. He, therefore, submitted that the re-opening itself was bad and it is clearly based on a change of opinion, which is not permissible.
On merits it is submitted that an addition cannot be made on the premise of there being a notional income. It is submitted that even otherwise the assessee was having sufficient interest free funds. It is submitted that the mobilization advance was given to EPC Contractor, & CO. No. 212/Mum/2025 Solapur Yedeshi Tollway Limited which is a normal practice and was also one of the conditions of the EPC contract dated 29.03.2014.
We have considered the submissions made. In this case, the record discloses that the case was taken up for a complete scrutiny and eventually the Assessing Officer passed an order on 19.07.2019 without making any addition. Although, the Assessing Officer has subsequently observed that there was certain material and information on the basis of which he came to the conclusion that income assessable to tax had escaped assessment, no such information or material is pointed out particularly when the case was subjected to scrutiny earlier. We, therefore, find that the re-opening was merely based on change of opinion. The CIT(A) has refused to examine the challenge to the re- opening on the ground that on merits the assessee had succeeded. Be that as it may, we find that the Assessing Officer was not justified in re- opening the assessment and the cross-objection deserves to succeed.
14. Coming to the merits, Clause 6 of EPC Contract reads as under:
“6. Mobilization/ Other Advances i. 15% of the Contract Price shall be payable in advance as an interest free mobilization advance upon signing of this Agreement and before issue of Notice to Proceed to the Principal EPC Contractor. The Mobilization advance will be recovered on pro-rata basis from the bills of the Principal EPC Contractor.
& CO. No. 212/Mum/2025 Solapur Yedeshi Tollway Limited ii. The Concessioner shall provide advance to Principal EPC Contractor in addition to mobilization advance as and when required to complete construction work within schedule time and these advances shall be recovered prorata basis from subsequent bills of the Principal EPC Contractor.”
A plain reading of Clause 6 indicates that the assessee was obliged to pay 15% of the contract price as interest free mobilization advance upon signing of the agreement, which mobilization advance was recoverable on pro-rata basis from the bills of the Principal EPC Contractor. The Concessioner shall provide advance to Principal EPC Contractor in addition to the mobilization advance as and when required to complete the work within scheduled time and the same shall be recovered on prorata basis from subsequent bills of the Principal EPC contractor. It is trite that no tax can be levied on hypothetical or notional income or the income which is not actually earned or accrued. That apart, learned CIT(A) has found on facts that substantial portion of the mobilization advance has been recovered and upon completion of the project 95% of the mobilization as well as additional advance has been recovered by 30.09.2017. He has found on the basis of the ledger account produced by the assessee, that subsequently the balance amount has also been settled by 01.12.2019. Further, the assessee has not claimed any interest expenditure for the interest paid on the short-term/long-term advances from the banks/financial institutions. It is pointed out that the interest expenditure has been capitalized as a part of the project cost, which would be amortized over the concession period post the completion of the EPC contract. In that view of the matter, the CIT(A) has found, and in our & CO. No. 212/Mum/2025 Solapur Yedeshi Tollway Limited view rightly so, that the impugned addition cannot be sustained. We see no reason to interfere with the order of the CIT(A). The appeal is without any merit and is accordingly, dismissed.
The cross-objection is allowed to the extent as indicated in para 13 above. Order pronounced in the open court on 18th September,2025.