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Facts
The assessee, an LLP engaged in real estate, earned interest income as a partner in another LLP and also incurred interest expenditure on partners' capital. The AO added the interest income of Rs.4,90,58,992/- under 'Income from other sources' and denied the set-off of interest expenditure, treating some of it as capital. The Ld. CIT(A) subsequently deleted this addition, allowing deduction under Section 57.
Held
The Tribunal found the Ld. CIT(A)'s order ambiguous regarding the capitalization of interest expenditure. It remanded the case back to the Ld. CIT(A) for a thorough re-examination to determine if the interest expenditure was a deductible business expense or if it should be capitalized against ongoing projects, allowing the assessee to provide further evidence. The Revenue's appeal was allowed for statistical purposes.
Key Issues
Whether interest expenditure incurred by an LLP, which also earned interest income from another LLP, is a deductible business expense under Section 57 or should be capitalized against ongoing real estate projects.
Sections Cited
144, 164, 144B, 263, 142(1), 57, 46A(3), 40(b), 28, 143(3), 271(1)(c)
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Income Tax Appellate Tribunal, PUNE BENCHES “B”, PUNE
Before: DR.MANISH BORAD & SHRI VINAY BHAMORE
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
This appeal filed at the instance of Revenue pertaining to the Assessment Year 2015-16 is directed against the order dated 17.04.2024 passed by National Faceless Appeal Centre, Delhi which in turn is arising out of the Assessment order dated 31.03.2022 passed u/s.144 r.w.s.164 r.w.s.144B of the of the Act.
2. Revenue has raised following grounds of appeal :
“1. On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in directing the JAO to consider the plea of the assessee for deduction u/s 57 of the Act and re-compute the income from other source.
On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in ignoring the fact that addition of interest income of Rs.4.90.58.992/- under the head income from other sources was made by the AO only after providing opportunity to the assessee and considering all the facts of the case.
3. On the facts and in the circumstances of the case and in law, the Ld CIT(Appeals) erred in accepting fresh submission from the assessee and not allowing the AO to examine the additional evidence admitted by him as per the provisions u/s 46A(3) of the I.T.Rules 1962.
The appellant craves leave to add, alter, amend and modify any of the above all grounds raised at the time of proceedings before the Hon'ble Tribunal which may please be granted.”
Brief facts of the case are that the assessee is a Limited Liability partnership concern engaged in the business of Real Estate and also earned income as a partner in another LLP. Return of income for A.Y. 2015-16 electronically filed on 27.09.2015 declaring Nil income. Case selected for Limited Scrutiny for the reasons (i) Interest Expenses (ii) low income and high loans/advances/investments (iii) low income and high investments and (iv) increase in capital. Thereafter, the assessment was completed on 23.10.2017 determining Nil income. The assessment records for A.Y. 2015-16 were examined by the ld.PCIT invoking jurisdiction u/s.263 of the Act and after observing some issues regarding taxability of interest income of Rs.4,90,58,992/- under the head ‘Income from other sources” and then setting it off against the interest paid to partners, set aside the assessment order vide order dated 15.03.2021. In compliance, ld.AO carried out the proceedings u/s.263 of the Act r.w.s.144B of the Act and also issued notice u/s.142(1) to the assessee to explain as to why the total amount of interest paid on partners capital account at Rs.13,34,43,160/- has not been transferred to the work in progress account of project site at Wagholi and Bhukum rather than transferring only Rs.8,54,37,097/-. The assessee filed a reply stating that expenditure on interest paid to partners has been set off against the interest income which is in the nature of business income as it has been earned during the year from LLP in which the assessee is a partner. Ld. AO further called certain more informations about the capitalisation of part of the interest expenditure and setting off the remaining amount to the extent of interest income. But thereafter assessee did not filed any reply and ld. AO had to pass the best judgment assessment u/s.144 r.w.s.263 of the Act and added the income from interest at Rs.4,90,58,992/- under the head “Income from other sources” and denied the benefit of set off of interest expenditure against the interest income.
4. Aggrieved assessee preferred appeal before ld.CIT(A) and filed detailed submissions on the basis of which ld.CIT(A) deleted the impugned addition. Ld.CIT(A) discussed about the 263 proceedings and the observation of AO and finally concluded the appellate proceedings by observing as follows :
“Decision The Assessment order passed by the Assessing Officer should have dealt with the expenditure side of the interest income sue-moto while passing best judgement order u/s 144 of the Income Tax Act, 1967 as reiterated by the assessee in para 8 above:- "Hence, the Net Interest Income for the assessee is ZERO for the year under consideration as interest paid and interest income both are at the rate of 12% i.e. within the allowable limit u/s 40(b) of the Act. Hence for earning the interest income of Rs.4,90,58,992/-, the assessee firm has incurred expenditure of Rs.4,90,58,992/- which is allowed as a deduction under section 57, and hence, there would be no effect on the profitability of the firm." The provision of S.57(iii) provides for:- "Deduction for any Other Income [Sec 57(iii)] Any expenditure incurred to earn any other income that is subject to tax under this head can be deducted from that income. The following conditions must be met to claim this deduction:
The expense should be incurred wholly and exclusively to earn this income. It shouldn't be a capital expense of any kind It shouldn't be considered a personal expenditure It must be incurred in the relevant accounting year"
The AO in the assessment order has further rationalised the addition by observing as under: "Furthermore, the interest expense claimed by the assessee has already been capitalized by the assesse itself, however, the amount mentioned as interest income (Rs.4,90,58,992/-) has been appropriated against the work in progress. It is imperative to point out here that the capital expenditure cannot be merged with other receipts. The WIP shown against the Wagholi and Bhukum projects are work in progress and all the expenses incurred shall be capitalized till the completion of the project. Since the interest income received is not capital in nature, it cannot be appropriated against the work in progress mentioned".
Also to mention revision order u/s 263 fully setting aside the Assessment Order u/s 143(3), Ld. Pr.CIT has mentioned following:-
3.1. On subsequent perusal of the assessment records, it was noticed that the assessment order suffered from infirmities mainly attributable to omissions on the part of the Assessing officer. As seen from the Profit & Loss account, the assessee shown income of Rs.4,90,58,992/- by way of interest on capital contribution in partnership firm. Against the same, the assessee has claimed expenditure of Rs. 13,34,43,160/- on account of interest paid on partners' capital. The assessee has further capitalized the balance amount of Rs. 8,54,37,097/- as WIP to its two project at Wagholi and Bhukum. The assessee ought to have capitalize the entire expenditure, including the interest payment of Rs. 13,34,43,160/- to its ongoing projects and the interest income of Rs.4,90,58,992/- was required to offered to tax under the head 'income from other sources'. The Assessing Officer should have considered this aspect and brought the interest income of Rs.4,90,58,992/- to tax under the head 'income from other sources'. Failure on the part of the assessee has resulted in under assessment of income to the extent of Rs.4,90,58,992/-."
Hence the Assessing Officer proceeded with the revision order. While disallowing Assessing Officer mentions in the order:
"4. Accordingly, this office has issued notice u/s 142(1) of the IT Act dated 22.02.2022 asking the assessee to furnish certain specific information on or before 28.02.2022. The assessee did not respond to the above notice.
5. In this case it is seen that the facts are as follows: a. Assessee claimed the interest expenditure [on account of interest paid on partners' capital]: Rs 13,34,43,160/- b. Assessee declared interest income in P&L A/c [received on capital contribution in partnership firm): Rs 4,90,58,992/- c. Transfer of project site A/C Wagholi &
Bhukum: Rs 8,54,37,097/- [capitalised] The assesse has arrived at figure shown in point (c) above by subtracting interest income (b) from interest expense (a) and capitalizing the remaining shown at (c). The point of contention here is that the interest income received on capital contribution in partnership firm. The assesse in its reply dated 03.08.2020 (in response to the notice u/s 263) has stated that the interest income of Rs 4,90,58,992/- is incorporated as part of the business income u/s 28. The relevant portion of the assessee's reply is replicated below:
However, since the LLP is engaged in business of acquiring land, development, sale and purchase of land, construction activities etc. the claim of the assesse that the interest income received shall not be part of section 28 business income. Reason being the assesse is not involved in the business of lending. Therefore, the income received shall not form part of business income rather shall be charged under the head income from other sources. Furthermore, the interest expense claimed by the assesse has already been capitalized by the assesse itself. however, the amount mentioned as interest income (Rs.4,90,58,992/-) has been appropriated against the work in progress. It is imperative to point out here that the capital expenditure cannot be merged with other receipts. The WIP shown against the Wagholi and Bhukum projects are work in progress and all the expenses incurred shall be capitalized till the completion of the project. Since the interest income received is not capital in nature, it cannot be appropriated against the work in progress mentioned. Owing to these factors the amount received as interest income is being added back to the income of the assesse and charged under the head income from other sources accordingly.
It is reiterated that the assessee has not responded to the 142(1) notice issued to him and failed to make use of the opportunities provided to it. Therefore, it is brought on record that assessee is non-cooperative and not providing any response to the notice served. Owing to the fact that the assessee chosen not to respond to the notice, it is taken that the assessee has no objection in finalizing the assessment proceedings initiated based on the material available on record.
Accordingly, assessment order is proposed to be passed u/s 144 r.w.s. 263 of the IT Act by making an addition to the total income as shown below. Income processed under 143(1)-(-) Rs.NIL Add: Income from other sources as per Para 5 -- Rs. 4,90,58,992/--------------- Assessed Income Rs.4,90,58,992/- 8. The assessment of income is done as per computation sheet and the sum payable is determined as per the demand notice.
9. Assessee has undisclosed income amounting to Rs.4,90,58,992/- during the year as per the provisions of the IT Act. Hence, penalty proceedings u/s. 271(1)(c) of the IT Act are being initiated separately for having furnished inaccurate particulars of such income."
So while passing the Best Judgement Order it is imperative to consider all facts and replies available on record and then to proceed with the assessment order. While passing the order, assessing officer has not considered the deductions of the expenses made :-
The expense should be incurred wholly and exclusively to earn this income It shouldn't be a capital expense of any kind It shouldn't be considered a personal expenditure It must be incurred in the relevant accounting year" Therefore the Assessing Officer is Directed to consider the plea of the assesse with regard to point 8 mentioned above while computing the taxable income of the assessee. If after giving the effect to the Direction, no loss to the revenue results, the order cannot be the subject matter of the revision u/s 263 of the Income Tax Act, 1967 as it is not prejudicial to the interest of the revenue. Hence, other grounds do not need adjudication at this stage hence not considered for decision. In result the appeal is partly allowed subject to direction to be followed by the Assessing Officer.”
However from going through the above finding, it is not clear as to whether he has allowed the assessee’s appeal or whether he has given direction to the AO to compute the taxable income of the assessee because only Revenue has filed the appeal and there is no cross appeal/cross objection from assessee’s side.
6. Aggrieved Revenue is now in appeal before this Tribunal.
7. Ld. Departmental Representative vehemently argued supporting the order of the AO and stated that the assessee has on its own will had set off part of the interest expenditure against the interest income earned during the year and the remaining amount has been apportioned as Capital expenditure and added it to the work in progress of the sites. He further submitted that ld.CIT(A) has not passed a speaking order dealing with the merits of the case and the matter needs to be restored back to the ld.CIT(A) for examining the issue afresh.
On the other hand, ld. Counsel for the assessee though supporting the order of ld.CIT(A), was fair enough to accept that matter needs to be restored to the CIT(A) for one more round of adjudication.
We have heard the rival contentions and perused the record placed before us. We observe that the assessee which itself is an LLP is also a partner in other LLP. During the year, it has earned interest income as a partner of another LLP at Rs.4,90,58,992/-. It is not in dispute that this interest income is earned from partnership LLP and therefore it is business income. We further note that the assessee has also incurred expenditure towards interest paid to partners at Rs.13,34,43,160/- during the year. Now out of the interest expenditure of Rs.13.34 crore (approx.) to the extent of the interest income received by it from LLP, assessee has claimed expenditure and the balance amount of Rs.8,54,37,097/- has been transferred to the work in progress account for the two projects at Wagholi and Bukum.
Now going through the impugned order as well as the details placed before us, we notice that there is no clear finding of ld.CIT(A) as to why the total interest expenditure of Rs.13.34 should not have been capitalised towards the work in progress of the two projects. If the assessee had invested the funds borrowed from the partnership for the purpose of the projects which are under construction, then the interest amount calculated on the amount invested in such project needs to be capitalised as the cost of the project. But the assessee in the instant case inspite of giving specific details about the funds borrowed from the partners and the funds invested in the projects and the proportionate interest expenditure which needs to be capitalised, has straight away set off the part of the interest expenditure incurred during the year against the interest income so as to arrive at Nil income and had declared Nil income in the income-tax return.
We are therefore of the considered view that the matter needs to be re-examined with all necessary details and if it is found that the interest expenditure of Rs.13.34 crore (approx.) is wholly and exclusively incurred on the funds applied for the purpose of two projects at Wagholi and Bukum which are under progress then the same needs to be capitalised and in case the partial amount has been utilised then the assessee will be eligible to claim it as a business expenditure against the business income earned by it during the year in the form of interest income from LLP. The assessee will be at liberty to file additional evidence. Ld.CIT(A) shall grant reasonable opportunity to the assessee and also call for a remand report from the AO in case the documents/additional documents have been filed for the first time before the ld.CIT(A). Grounds of appeal raised by the Revenue are allowed for statistical purposes.
In the result, the appeal of the Revenue is allowed for statistical purposes.
Order pronounced on this 21st day of April, 2025.