DLF INFO CITY DEVELOPERS (KOLKATA) LTD.,GURGAON vs. ACIT, CIRCLE- I, GURGAON

During the course of assessment proceedings the AO noted that the assessee has claimed deduction of Rs.24,56,00,048/- as deduction u/s. 80IA in respect of profit derived from the Industrial park unit computed as per Form No. 10 CCB duly certified by chartered accountant. He, therefore, asked the assessee to explain as to why the deduction u/s. 80IA should not be recomputed by allocating appropriate expenses of employees cost towards the profit of the Industrial Development Park Unit. He noted that the assessee company has worked out an amount of Rs.7,85,61,515/- out of other income of Rs.28,19,27,000/- as the income not qualifying for deduction u/s. 80IA. Further, the expenses to the tune of Rs. 20,33,65,000/- out of the expenses of Rs.110,18,44,000/- debited to the profit and loss account have been allocated towards the other income to avail the maximum benefit of deduction u/s. 80IA. He, therefore, allocated 10% of the expenses of employees cost of Rs.1,19,79,000/- i.e. 11,97,900/- out of the expenses to Rs.20,33,65,000/- allocated towards the other income as allocated towards the income derived from the Industrial park unit. He accordingly recomputed the deduction u/s. 80IA and made addition to Rs.11,97,900/- to the total income of the assessee.

In appeal the Ld. CIT(A) deleted the addition of Rs.11,97,900/- on account of allocation of 10% employees cost to the Industrial park. He, however, noted that the assessee had claimed interest expenditure of Rs.20,30,27,153/- against the Page | 2 interest income of Rs.28,15,88,633/- which according to him was not in accordance with the provisions of law. He, therefore, issued an enhancement notice to the assessee asking him to explain as to why the income of the assessee should not be enhanced to this extent as the interest income has to be taxed under “income from other sources” since the interest expenditure on term loan taken from the bank is not an allowable expenditure against the interest income which is on account of loans given to related parties.

The assessee objected to the proposed enhancement notice on the ground that the same is beyond the jurisdiction of the CIT(A) since he cannot introduce a new source of income. It was argued that the interest income in the case of the assessee was taxable under the head business income. It was further argued that even if the interest income is taxable under the head “income from other sources”, the interest expenditure amounting to Rs.2030.27 lacs is an allowable expenditure u/s.57 (iii) of the IT Act. Relying on various decisions, it was argued that such interest expenditure is allowable as expenditure u/s. 57 (iii) from such interest income.

However, the Ld. CIT(A) was not satisfied with the arguments advanced by the assessee. So far as the argument of the assessee that the Ld. CIT(A) cannot introduce a new source of income is concerned he held that there is no new sources of income proposed in the notice of enhancement. As per the return of income filed, the assessee had shown other income of Rs.2819.27 lacs. The assessee had claimed the interest expenditure of Rs.2030.27 lacs against the interest income and Page | 3 the balance amount of Rs.785.62 lacs was offered for taxation. He noted that the AO in the assessment order has held that out of this expenditure claimed of Rs.2030.27 lacs, an amount of Rs.11,97,900/- being proportionate employee cost was required to be allocated towards income from Industrial park. However, in the proposed notice of enhancement it was proposed that the whole of interest expenditure of Rs.2030.27 lacs was required to be allocated to Industrial Park and the interest income of Rs.2815.89 lacs is required to be taxed under the head “income from other sources”. Therefore, the contention of the assessee is not tenable. He held that the power of the first appellate authority is wide and cannot be curtailed. It has the power to adjudicate and decide everything necessary to ascertain the true and correct income of the assessee. His powers are coterminous with that of the AO and he can do anything which the AO failed to do.

So far as the argument of the assessee that the interest income in the assessee’s case is taxable under the head business income is concerned, he also rejected the same. Further argument that in the earlier years and in subsequent year such interest income has been taxed as business income was also rejected by him on the ground that the principle of re-judicata is not applicable to the proceedings under the income tax Act. Further when the previous decision is plainly erroneous there is a duty of the court to review it and not perpetuate the mistake.

So far as the argument of the assessee that such interest expenditure is an allowable expenditure u/s. 57 (iii) is concerned he also rejected the same by relying on the decision of Hon’ble Page | 4 Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. reported in 227 ITR 172 and various other decisions. He accordingly enhanced the income and directed the AO to compute the income of Rs.28,15,89,000/- as against the returned income of Rs.7,85,61,550/-.

Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds :-

That on facts and in the circumstances of the case the learned Assessing Officer while re-computing deduction u/s 80IA of the Act has erred in law, in making disallowance of Rs.11,97,900 on account of 10% of employee cost on wholly erroneous, illegal and untenable grounds. 2.1 That the Ld. Assessing Officer has failed to consider and appreciate that such sum has already been debited in the Profit and Loss Account and therefore, the disallowance has resulted into deduction of the same expenditure twice.

The Ld. Counsel for the assessee at the outset did not press ground of appeal No. 2 and 2.1 for which the Ld. DR has no objection. Accordingly the same are dismissed.

Referring to the decision of the coordinate bench of the Tribunal in the case of LG Electronics India Private Limited Vs. ACIT vide order dated 18.07.2018 for A.Y. 2005-06 and 2006-07, he submitted that the Tribunal relying on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Sardari Lal and Co. reported in 251 ITR 864 and the decision of the Pune Bench of the Tribunal in the case of Ram Infrastructure Limited Vs. JCIT vide ITA No.746/Del/2013 order dated 30.12.2016 has held that when there is no discussion of any such disallowance either in the return of income or in the assessment order the disallowance made by the CIT(A) by discovering a new source of income is not sustainable in law.

So far as the deduction u/s. 57 (iii) is concerned the Ld. Counsel for the assessee referring to various decisions submitted that when there is a direct nexus between earning of interest on loan advanced by the assessee and payment of interest to the bank on loan drawn in terms of sanction letter, assessee is entitled to netting off interest in terms of section 57 (iii) and such claim was to be allowed. He accordingly submitted that both legally and factually the Ld. CIT(A) is not justified in enhancing the income and not allowing netting off. He also relied on the following decisions :-

The ld. DR on the other hand heavily relied on the order of the CIT(A). She submitted that the Ld. CIT(A) has not introduced any new source of income and has only recalculated / recomputed such income. Further the Ld. CIT(A) has given valid reasons as to why such interest income cannot be treated as “business income” and why principle of re-judicata will not be applicable. He has also given justifiable reasons as to why the interest expenditure of Rs.2030.27 lacs is not an allowable expenditure u/s. 57 (iii) of the IT Act. She accordingly submitted that the order of the CIT(A) be upheld.

We have considered the rival arguments made by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case has recomputed the deduction claimed by the assessee u/s.80IA and allocated 10% of expenses of the employee cost to the other income and thereby reducing the deduction claimed u/s. 80IA to the extent of Rs.11,97,900/-. He accordingly made addition of Rs.11,97,900/- to the total income Page | 8 of the assessee. We find the Ld. CIT(A) deleted the above addition made by the AO but issued an enhancement notice to the assessee on the ground that assessee has claimed interest expenditure of Rs.2030.27 lacs from the interest income of Rs.2819 lacs is not in accordance with law. According to the CIT(A) the interest income Rs.2815.89 lacs is required to be taxed under the head “income from other sources” and the assessee is not entitled to deduction u/s. 57 of the interest expenditure. While doing so he relied on the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkai Chemicals and Fertilizers (supra) and distinguished the decision of Hon’ble Supreme Court in the case of Bokaro Steels Limited reported in 102 taxman.com 94. He also rejected the argument of the assessee that such interest was always treated as business income by the AO in the preceding and subsequent years on the ground that principle of re-judicata is not applicable to income tax proceedings and if the previous decision is plainly erroneous, it is the duty of the court to rectify it and not perpetuate the mistake. 16.1 It is the argument of the Ld. Counsel for the assessee that when there is no discussion of such disallowance in the assessment order, the Ld. CIT(A) cannot issue the enhancement notice by discovering a new source of income. It is also his submission that such interest income was always offered and taxed as business income and, therefore, in view of the consistent view of the department in the preceding as well as subsequent years the interest income has to be taxed as Page | 9 business income by following rule of consistency. It is also his submission that the assessee is entitled to claim deduction u/s.57 (iii) in respect of such interest expenditure out of the interest income even if such interest income is taxable under the head from “income from other sources”.

We find merit in the arguments advanced by the Ld. Counsel for the assessee that such interest expenditure is an allowable expenditure u/s.57 (iii) even if the said interest income is considered as income from other sources by deviating from the stand of the department in the preceding as well as subsequent assessment years when such interest income has been treated as business income.

A perusal of the order of CIT(A) shows that assessee had given the bifurcation of interest income on loans and advances to parties and the interest expenditure on such borrowings and has shown net interest income of Rs. 7,85,61,480/- on which no deduction u/s. 80 IA has been claimed. The computation of net interest income as reproduced by CIT(A) at page 5 of his order is as under :-

We find the Hon’ble Delhi High Court in the case of Vodafone South limited Vs. CIT (supra), after considering the decision of Hon’ble Supreme Court in the case of Tuticorin Alkai Chemicals and Fertilizers Ltd. (supra) has held that where assessee having availed of loan from HSBC, advanced said amount to its holding company, i.e. SCL and since there was a direct nexus between earning of interest on loan advanced by assessee to SCL and payment of interest to HSBC on loan drawn in terms of sanction letter, assessee’s claim for netting off of interest in terms of section 57 (iii) was to be allowed.

Similarly the Hon’ble Delhi High Court in the case of PCIT Vs. Jubilant Energy Nelp – V P Ltd. (supra) has held that where assessee paid interest to sister concern on money borrowed and subsequently it earned interest income on Inter-Corporate Deposits (ICD’s), since there was direct nexus between interest paid and interest earned, interest paid to sister concern was deductable under section 57 while bringing interest income to tax as ‘Income from other sources.

The various other decisions relied by the ld. Counsel for the assessee also support his case that such interest expenditure has to be allowed as deduction from such interest income if such interest income is treated as income from other sources. We, therefore, hold that the assessee is entitled to netting of off interest expenditure and interest income.

We further find the assessee before the CIT(A) has given the following details and contended that in the earlier years and subsequent years the interest income and interest expenditure was allowed for netting off.

Therefore, even if the proposition laid down by the CIT(A) that principle of rejudicata is not applicable to the income tax proceedings is accepted, however, the rule of consistency has to be followed. Since the revenue in the preceding as well as subsequent years has accepted such netting off of interest expenses from such interest income, therefore, on this score also the assessee is entitled to netting off. We, therefore, set aside the order of the CIT(A) and allow the grounds on this issue. Since the assessee succeeds on the alternate ground as per ground appeal No. 1.1 to 1.6 except 1.3, the ground challenging the power of the CIT(A) to enhance the income by introducing a new source of income as per the ground of appeal No. 1.3 is not adjudicated being academic in nature.

In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 20.11.2019.