I. Reassessment Notice in Name of Non-Existent Amalgamated Company is Null and Void
Issue:
Whether a notice issued under Section 148 of the Income-tax Act, 1961, for reopening a completed assessment (under Section 143(3)) in the name of an erstwhile company that has amalgamated with another entity, is valid, especially when the department was already intimated about the amalgamation.
Facts:
For assessment years 2013-14 and 2016-17, a notice under Section 148 was issued in the name of “WARPL,” an erstwhile company that had already amalgamated with “REPL” (the assessee). The fact of this amalgamation had been intimated to the department much earlier. Despite this, the notice to acquire jurisdiction to reopen the assessment was issued in the name of the non-existent entity.
Decision:
Yes, the court held that since the notice was issued under Section 148 in the name of a non-existing entity, despite the department having been intimated about the amalgamation much earlier, the impugned notice under Section 148 was null and void. Consequently, the reassessment order passed based on this invalid notice was quashed.
Key Takeaways:
- Notice to Correct Legal Entity is Jurisdictional: For reassessment proceedings, issuing the notice under Section 148 to the correct legal entity is a fundamental jurisdictional requirement. If the entity ceased to exist due to amalgamation and this fact was communicated to the department, a notice issued in the name of the defunct entity is invalid.
- Amalgamation and Non-Existent Entity: Upon amalgamation, the amalgamating company (WARPL in this case) ceases to exist, and its identity merges with the amalgamated company (REPL). All legal proceedings must then be against the amalgamated company.
- Department’s Knowledge: The fact that the amalgamation was “intimated to the department much earlier” is crucial. It implies the department had knowledge or constructive knowledge of the change in legal identity.
- Consequence of Invalid Notice: A notice issued to a non-existent entity is a nullity, rendering all subsequent reassessment proceedings and the final reassessment order void ab initio.
II. Interest Deduction on Subsequent Loan for Housing Permissible if Used to Repay Earlier Housing Loan
Issue:
Whether interest on a subsequent loan taken by an assessee can be claimed as a deduction under Section 24(b) (interest on borrowed capital for house property) if the subsequent loan was used to repay an earlier housing loan, especially when such substitution of loans for earlier years was accepted by the department.
Facts:
For the assessment year 2020-21, the assessee had originally taken a loan for investing in property. Subsequently, this original loan was repaid by taking a fresh loan from a bank. The assessee claimed a deduction for interest on this subsequent loan under Section 24(b). The Assessing Officer (AO) disallowed the claim, arguing that the assessee could not establish a nexus to prove that the subsequent loan was specifically used for the repayment of the earlier housing loan. However, it was noted that the substitution of loans had been accepted for repaying earlier loans in assessment orders for preceding years.
Decision:
Yes, the court held that since the substitution of the loan had been accepted for repayment of earlier loans in assessment orders for previous years, the Assessing Officer could not allege that in the relevant assessment year (2020-21), such a loan had not been used for that purpose and disallow the deduction under Section 24(b). The decision was in favor of the assessee.
Key Takeaways:
- Nexus for Interest Deduction: Section 24(b) allows deduction for interest on borrowed capital used for the acquisition, construction, repair, renewal, or reconstruction of a house property. The nexus between the borrowed funds and the housing purpose is essential.
- Substitution of Loans: It is a settled legal principle that a loan taken to repay an existing housing loan is also considered as having been utilized for the purpose of acquiring/constructing the house property. The source of the original housing loan remains the same.
- Principle of Consistency: If the department has accepted the substitution of loans for the purpose of Section 24(b) deduction in earlier assessment years, it cannot ordinarily take a contradictory stand in a subsequent year without bringing new material on record or demonstrating a change in facts.
- Burden on AO to Disprove: Once the assessee shows that the subsequent loan was taken to repay an earlier housing loan, the burden shifts to the AO to prove otherwise with concrete evidence.
- CBDT Circular No. 28, dated 20-8-1969: This circular, though old, supports the principle that interest paid on a fresh loan taken to repay the original loan for property acquisition is deductible.
III. Common Area Maintenance Charges as Business Income, Not Income from House Property
Issue:
Whether Common Area Maintenance (CAM) charges received by an assessee primarily engaged in the business of letting out immovable properties should be treated as “income from house property” (Section 22) or “business income” (Section 28).
Facts:
For the assessment year 2020-21, the assessee was in the business of letting out immovable properties on a lease and license basis. The assessee received reimbursement on account of Common Area Maintenance (CAM) charges, which had been netted off against the actual expenses incurred by the assessee and were thus not added to income during computation. The Assessing Officer (AO) considered these CAM charges as “income from house property.” However, the Commissioner (Appeals) directed the AO to tax the CAM charges as “business income,” as offered by the assessee. It was noted that the maintenance expenses were specifically for common areas such as lifts, electricity for common areas, security of common areas, and not pertaining to the maintenance of the area given in the lease structure itself.
Decision:
Yes, the court held that, on facts, the common area maintenance charges received by the assessee were to be treated as business income, as claimed by the assessee, and not as income from house property.
Key Takeaways:
- Primary Business Activity: When the letting out of property itself constitutes a complex business activity (e.g., involving provision of various services beyond mere letting, as is often the case with commercial properties or malls), income derived from ancillary services integral to that business, like CAM charges, is typically treated as business income.
- Distinction between Rent and Service Charges: “Income from house property” is specifically for income derived from the ownership of property. Payments for services provided in conjunction with the property, which are distinct from the pure rent for the bare property, are often classified as business income, especially if the provision of such services is a systematic business activity.
- Nature of Expense: The fact that the expenses were incurred for common area maintenance (lifts, electricity, security for common areas) and not for the leased space itself supports the argument that the reimbursement is for a service rendered as part of the business.
- Consistency with Commissioner (Appeals) Order: The High Court upheld the Commissioner (Appeals)’s direction, reinforcing that the specialized nature of property letting can lead to ancillary incomes being categorized as business income.
IV. Pre-Construction Interest on Borrowed Funds for Property Acquisition Fully Deductible
Issue:
Whether interest incurred on borrowed funds for the acquisition of property during the pre-construction period is fully allowable, even if part of the borrowed amount was subsequently refunded, and if the Assessing Officer can reduce the interest claim proportionately when a one-fifth deduction has already been allowed for four preceding years.
Facts:
The assessee had utilized borrowed funds for the acquisition of property and had incurred interest cost of ₹30 crores over a period of five years until the units were allotted. The Assessing Officer (AO) had allowed a deduction of one-fifth of this interest for four preceding years. However, in the year under consideration, the AO sought to reduce the interest claim on a proportionate basis, presumably implying that the full amount of ₹30 crores (or the interest thereon) was not fully deductible or that some part was refunded.
Decision:
Yes, the court held that interest had to be allowed for the pre-construction period even if part of the amount was refunded back, and the Assessing Officer could not reduce the interest claim on a proportionate basis in the year under consideration when one-fifth had already been allowed for four years by the Assessing Officer. Therefore, interest had to be allowed on the entire loan of ₹30 crores.
Key Takeaways:
- Pre-Construction Interest Deduction: Interest on borrowed capital used for the acquisition or construction of house property, incurred during the period prior to the completion of construction or acquisition, is generally allowed as a deduction in five equal installments from the year in which the property is acquired or construction is completed.
- Full Allowance of Pre-Construction Interest: The total eligible pre-construction interest is to be amortized over five years. The fact that a part of the original borrowed amount might have been “refunded back” (perhaps meaning not fully utilized or returned to the lender) does not retrospectively alter the interest liability incurred on the full borrowed amount for the period it was outstanding. The deduction is on the interest paid on the loan taken for the specific purpose.
- Consistency by AO: The AO had already allowed one-fifth of the interest for four preceding years, implying acceptance of the total pre-construction interest of ₹30 crores. Changing this stance in the final year without strong new facts is inconsistent.
- No Proportional Reduction Based on Subsequent Events: Once the interest liability is legitimately incurred for the pre-construction period, its allowability over five installments should not be reduced proportionately in a later year based on subsequent events like partial refunds of the borrowed principal, unless specifically linked to a reduction in the interest obligation itself.
- Benefit to Assessee: The decision ensures the assessee gets the full benefit of the pre-construction interest deduction as intended by law.
IN THE ITAT MUMBAI BENCH ‘D’
Deputy Commissioner of Income- tax
v.
Raghuleela Estates (P.) Ltd.
Amit Shukla, Judicial Member
and Girish Agrawal, Accountant Member
and Girish Agrawal, Accountant Member
IT Appeal No. 5739 to 5741 (Mum.) OF 2024
CO No. 283 to 285 (Mum.) OF 2024
[Assessment years 2013-14, 2016-17 and 2020-21]
CO No. 283 to 285 (Mum.) OF 2024
[Assessment years 2013-14, 2016-17 and 2020-21]
MAY 21, 2025
Smt. Sanyogita Nagpal, CIT DR for the Appellant. Madhur Agrawalfor the Respondent.
ORDER
1. The aforesaid appeals have been filed by the Revenue and Cross Objection by the assessee for separate impugned orders of even date 05/08/2024 passed by ld. CIT(A)-53, Mumbai for the quantum of assessment passed u/s.147 /143(3) for the A.Y.2013-14 and 2016-17 and u/s.143(3) for the A.Y.2020-21.
2. We will take up the appeal for the A.Y.2013-14. In this case the Revenue has raised following grounds:-
| (i) | On the facts and circumstances of the case, the Ld. CIT(A) erred in holding that notice issued u/s 148 of the Act dated 30.07.2022 as invalid ignoring the fact that the original notice u/s 148 of the Act was issued on 10.05.2021 Le. within the extended time limit by TOLA, 2021 |
| (ii) | On the facts and circumstances of the case, the Id. CIM(A) erred in allowing the deduction claimed u/s. 24(b) of the Act of Rs. 7,14,84,210/-ignoring the fact that the assessee has failed to establish nexus between the house property income earned and interest expenditure which is wholly and exclusively for the purpose of earning house property income. |
| (iii) | On the facts and circumstances of the case, the Ld. CIT(A) erred in allowing the deduction claimed u/s. 24(b) of the Act of Rs. 7,14,84,210/-ignoring the fact that the assessee has failed to prove that second and subsequent loans were availed for payment of outstanding housing loan |
| (iv) | On the facts and circumstances of the case, the Ld. CIT(A) erred in allowing the deduction claimed u/s. 24(b) of the Act of Rs. 7,14,84,210/-ignoring the fact that the assessee has not fulfilled the conditions laid down in section for 24(b) of the Act for claiming deduction u/s 24(b) of the Act. |
| (v) | On the facts and circumstances of the case, the Ld. CIT(A) erred in allowing the interest expense of Rs. 3,55,32,152/ related to pre construction period without discussing the merits of the disallowance made in the assessment order. |
| (vi) | On the facts and circumstances of the case, the Ld. CIT(A) erred in allowing the interest expense of Rs. 3,55,32,152/ related to pre construction period ignoring the fact that the assessee had incurred expenses in FY 2004-05 and FY 2005-06 before commencement of project. |
| (vii) | On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 1,16,24,217/- assessed under house property income on account of maintenance charges without appreciating the fact that maintenance charge received by the assessee is part and parcel of the rent and maintenance charges received are rental income. |
| (viii) | On the facts and circumstances of the case, the Ld. CT(A) erred in deleting the addition of Rs. 1,16,24,217/- assessed under house property income on account of maintenance charges without appreciating the fact that common area maintenance charges were part of rent agreement. |
| (ix) | On the fact and circumstances of the case and in law, Ld. CIT(A) has erred relying on the decision of the Hon’ble Bombay High Court in the case of CIT v. Runwal Developers(p) Ltd. without appreciating the fact that the decision of Hon’ble High Court is not applicable to this case as the facts in the case of Runwal Developers are distinguishable from facts of instant case |
3. Whereas in the Cross Objection, the assessee has challenged-
| • | Firstly, the reopening u/s.148 is bad in law and in contravention of the Judgment of the Hon’ble Supreme Court in the case of Union of India v. Ashish Agrawal |
| • | Secondly, ld. AO has erred in issuing notice u/s.148 and passing order u/s.148A in the name of M/s. Wadhwa & Associates Realtors Private Limited, a non-existing entity as the same already stood amalgamated with “M/s. Raghuleela Estate Pvt. Ltd” on the date of issuance of such notice / order by the order of NCLT, Mumbai dated 11/02/2021 with appointed date 01/10/2019. |
| • | Thirdly, ld. AO has issued a notice u/s.148 dated 30/07/2022 without a valid DIN contrary to the instruction of CBDT Circular No.19 of 2019 dated 14/08/2019 and hence, it is in violation of provision of Section 151A. |
| • | Fourthly, ld. AO has erred in reopening the assessment without obtaining the necessary approval u/s.148A r.w.s. 151 as ld. AO has obtained approval from Pr. Commissioner of Income Tax as against Pr. Chief Commissioner of Income Tax as required u/s.151 (amended by Finance Act 2021; and |
| • | Lastly, reopening cannot be done on the behest of revenue audit. |
4. Since the legal issue raised in cross objection, especially that notice issued is in the name of non-existing entity, goes to the very root of the validity of the re-assessment order therefore, same has been taken it first.
5. The brief facts qua the issue involved as captured in the first paragraph of the assessment order is that, erstwhile assessee company, that is, “Wadhwa Associates and Realtors Pvt. Ltd” having PAN AAACW5273G amalgamated with “Raghuleela Estates Pvt. Ltd.” [AACCR6864N] w.e.f. 01/10/2019 (appointed date of the amalgamation) vide Order dated 11.02.2021, passed by the NCLT Mumbai Bench sanctioning the scheme of Amalgamation. Now pursuant to the amalgamation, Wadhwa Associates and Realtors Pvt. Ltd. (i.e., Amalgamating Company/Transferor Company) ceased to exist, and now the assessable entity was Raghuleela Estates Pvt. Ltd PAN-AACCR6864N, w.e.f. 01/10/2009. Erstwhile company had filed its return of income for the year under consideration on 26/11/2014 declaring total income of Rs.55,23,62,870/-, The case was selected for scrutiny under compulsory category and assessment u/s.143(3) was completed on 23/03/2016 accepting the returned income after examination of books of accounts, financial statements etc., Thereafter, on the basis of internal audit and audit objection which has been incorporated in the assessment order reads as under:-
2. In this case, the Internal Audit had raised the following objections:
“Note-1 On perusal of Tax audit report (at serial not 17(f)), it is noticed that amount of Rs. 37,743/- is shown as inadmissible u/s 40(a), however the assessee has not added the same to its computation of total income. Further, it should have been added back to the total income by the AO. Therefore, amount of Rs. 37,743/- needs to be added back in the income of the assessee. This has resulted into under assessment of Rs. 37,743/-
Note-2 On perusal of Tax audit report (at serial not 27(b)(i)), it is noticed that an amount of Rs. 755/- is shown as “tax deductible but not deducted at all”. However, as per the computation of income the assessee has not added back to the total income. Also the said amount is not added back while passing the assessment order. As this aforesaid amount has clearly been shown as inadmissible, it needs to be added back to the total income of the assessee.
Note-3 it is revealed from the tax audit report (sr. no. 21(i)(b)) that assessee has no paid property tax of Rs. 4,57,04,325/- on or before aforesaid date. However the assessee while computing the total income has added only Rs. 4,41,05,279/- under the head “Municipal charges incl property tax”. Therefore the difference amount of Rs. 15,99,046/-, which has not been added back to the total income. This has resulted into under assessment of Rs. 15,99,046/-
Note-4 It is observed from AIR information that there is undisclosed TDS of Rs. 1,88,742/-. The details are as under:-
| Income as per ITR | 55,23,62,870 | TDS disclosed in ITR | 9,71,72,271 |
| Total receiptsas per 26AS | 98,61,90,942 | TDS as per 26AS | 9,73,61,013 |
| Difference | 43,38,28,072 | Total undisclosed TDS | 1,88,742 |
In reconciliation statement did. 04.12.2015, the assessee has given a comparison ie. ‘Income as per 26AS’ and ‘Income as per ERP (P/L account)’ For the difference in the income, only a note is written under the reconciliation statement that “the difference is on account of service tax which is collected and paid to the central government which is routed through current liability.” The assessee has reconciled breakup of the amounts of Rs. 98,61,90,942 as per 26AS and arrived/reconciled at a figure of Rs. 98,34,53,821 as per P/L account, the difference being claimed to be on account o service tax However, in the undisclosed TDS information as per AIR statement, the total income as shown at Rs. 55,23.62,870/- Neither the assessee nor the AO during the assessment proceedings has reconciled the breakup of Rs. 55,23,62,870/ shown in AIR statement and corresponding incomes as per P/L account. This is discrepancy noticed from the records, which needs to be ensuring that the corresponding incomes as per receipts reflected in 26AS are forming part of total income as per return of income.
6. Notice u/s.148 was issued on 10.05.2021 to erstwhile company, Wadhwa Associates and Realtors Pvt. Ltd., which has ceased to exist after the order passed by NCLT dated 11/02/2021. The Id. AO in view of the Hon’ble Supreme Court judgment in the case of Ashish Agarwal (supra), issued notice u/s. 148A (b) to the assessee on 26/05/2022 and in response to the said notice assessee categorically submitted that Wadhwa Associates and Realtors Pvt. Ltd. got amalgamated with Raghuleela Estate Pvt. Ltd., This fact has also been captured in the order u/s.148A(d) of the Assessing Officer. The relevant portion of which is reproduced hereunder:-
3. The notice u/s. 148 of the IT Act was issued to the assessee on 10.05.2021. Such matters were subject matter of litigation before the Hon’ble Supreme Court. The Hon’ble Supreme Court in Civil Appeal No. 3005/2022, vide order dated 04.05.2022, has directed that the above referred notice u/s 148 of the Act issued shall be construed or treated to be the show-cause notice in terms of Section 148A(b) of the (amended) Act.
4. Therefore as per the directions of the Hon’ble Supreme Court, information was provided u/s 148A(b) to the assessee on 26/05/2022. The said letter was sent to the assessee on his registered email through ITBA. The assessee replied to this notice online on 08.06.2022
5.1 The assessee submitted that Wadhwa Associates and Realtors Pvt. Ltd. got amalgamated with M/s Raghuleela Real Estates Pvt. Ltd. (PAN:AACCR6864N) vide order of Hon’ble National Company Law Tribunal, Mumbai Bench, Mumbai (NCLT) 11/02/2021. The appointed dated of amalgamation is 01/10/2019. Further the assessee also submitted that on the date of issue of notice u/s 148 of the Act le 10.05.2021, the assessee company had ceased to exist. The assessee requested to withdraw the notice issued us. 148 of the Act stating that the issue in consideration is not a res Integra and has already been decided by the Hon’ble Supreme Court in the case of PCIT v. Maruti Suzuki India Limited CIT v. Maruti Suzuki India Ltd. ITR 613 (SC) (SC)] wherein it was held by the Hon’ble Supreme Court that the assessment against a non-existing entity is a jurisdictional defect. The assessee has also challenged the reopening proceedings contending that the same is time barred. The other arguments regarding the validity of the proceedings relate to the legal position prevailing before the amendment and before the decision of the decision of the Hon’ble Supreme Court dated 04.05.2022.
5.2 The submissions of the assessee have been carefully considered but not found to be acceptable. At the outset, the proceedings cannot be regarded as invalid in view of the fact that the Hon’ble Supreme Court in its order dated 04.05.2022 has concluded in Para 10 that the notices issued during the extended period shall be construed to be notices issued u/s 148A(b) of the amended provisions. It is abundantly clear that the Hon’ble Supreme Court has upheld the validity of the notices Issued under the unamended provisions. The other arguments regarding the validity of the proceedings relate to the legal position prevailing before the amendment and before the decision of the decision of the Hon’ble Supreme Court dated 04.05.2022 and hence, do not require any specific rebuttal. The assessee’s objection as regards the validity of the notice/proceedings is hereby rejected.
5.3 The assessee’s argument that the Wadhwa & Associates Realtors Pvt. Ltd. had got amalgamated with Raghuleela Estates Pvt. Ltd. w.e.f. 01.10.2019 and hence notice should not have been issued in the case of a non-existent company, also cannot be accepted. The assessee has placed reliance on the decision of the Hon’ble Supreme Court in PCIT v. Maruti Suzuki India Limited CIT v. Maruti Suzuki India Ltd. ITR 613 (SC) (SC)]. However, in a recent decision, in the case of PCIT v. Mahagun Realtors Pvt. Ltd. in Civil SLP No. 4063 of 2020, the Hon’ble Supreme Court has cast the duty upon the assessee that due intimation of amalgamation must be given to the Revenue. In the present case, the original notice u/s 148 was issued on 29.06.2021 whereas the assessee intimated the fact of amalgamation on 21.04.2022.
Thus, as on the date of issue of notice on 29.06.2021, the fact of amalgamation of the assessee company, was not in the knowledge of the Revenue. Therefore, in view of the decision of the Hon’ble Supreme Court in the case of Mahagun Realtors Pvt. Ltd., the proceedings initiated are valid.
7. Thus, the contention of the ld. AO was that, the fact of amalgamation was not in the knowledge of the Revenue when the notice u/s.148 was issued on May 2021. Therefore, the decision of the Hon’ble Supreme Court in the case of Mahagun Realtors would apply.
8. Before the ld. CIT (A) this issue was specifically raised, however, the same has not been adjudicated properly and has allowed ground No.1 which consisted of various sub-grounds in the following manner:-
“7. Ground no.1: In this ground, the appellant has challenged the AO’s action of reopening the assessment. Various averments including (i) notice dated 30.07.2022 is barred by limitation u/s 149 (ii) absence of information (iii) DIN was communicated separately (iv) there is no escapement of income (v) reopening on the basis of audit objections (vi) notices were issued and assessment completed in the name of a non-existing entity have been made by the appellant. I do not agree with all the contentions of the appellant However, the assessment under reference is for A.Y 2013-14. The notice u/s 148 was issued on 30.07.2022. Thus, the case gets covered by the decision of Hon’ble Bombay High Court in the case of New India Assurance Company Limited v. ACIT 337 (CTR) 257 (2024), whereby the Hon’ble Court quashed the notices for the Assessment Year (AY) 2013-14 issued post 31st March 2021 and declared the Taxation Laws (Amendment) Act, 2021 (TOLA) as not applicable. The situation before us is similar. Hence, for all practical purposes this ground is treated as ALLOWED without going into each of the other arguments of the appellant which become academic in nature.”
9. We have heard both the parties and also perused the relevant documents placed before us and the findings given in the impugned order. It is an undisputed fact that first notices u/s.148 was issued on 10/05/2021 in the name of “Wadhwa Associates and Realtors Pvt. Ltd. PAN: AAACW5273G” and approval u/s.151 was also sought on the same date in the name of erstwhile company. Later on show-cause notice u/s. 148A(b) also issued in the name of Wadhwa Associates and Realtors Pvt. Ltd., a non-existing entity at that time. Even when assessee raised this objection before the ld. AO, order u/s.148A(d) and final notice u/s.148 dated 30/07/2022 has again been issued in the name of Wadhwa Associates and Realtors Pvt. Ltd., Once the ld. AO himself has noted in his order u/s.148A(d) about the factum of amalgamation in the order of the NCLT that the erstwhile company has been amalgamated with M/s. Raghuleela Estate Pvt. Ltd., then also he issued the notice u/s.148 in the name of the non-existing entity. Here in this case as noted above NCLT has approved the scheme of amalgamation vide its order dated 11/02/2021 appointed date of the scheme was 01/10/2019. It has been brought on record that this fact was duly disclosed by the assessee to the department by way of following letters which has been placed in the paper book before us. The relevant letters filed before the ld. AO and the intimation about the amalgamation have been elaborated before us in the following manner:-
“- The Appellant vide letter dt.29.10.2020 and mails dated 21″ August 2020 and 4a November 2020 intimated the Income Tax Officer, Ward No.13(3)(1), Mumbai i.e. the then Assessing Officer of WARPL about the proposed amalgamation in pursuance to Section 230(5) of the Companies Act, 2013 (Refer Page No. 149-153 of the Paper Book).
– Letter dated 28.7.2021 in response to notice dated 29.6.2021 issued under 143(2) of the Act addressed to Circle 13(3)(2) intimating about the merger of WARPL with the Appellant Company during the assessment proceedings of WARPL for the A.Y. 2020-21 along with the Copy of NCLT order. (Refer Page No 154-156). It is submitted that at the point of time, the jurisdiction of WARPL was with circle 13(3)(2) even for the relevant assessment year i.e AY 2016-17. The same is apparent from the fact that the notice u/s 143(2) dated 24.12.2021 was issued by the circle 13(3) (2) (Refer Pg No. 86-87). Even after the intimation vide letter dated 28.07.2021, notice u/s 143(2) was in the name of WARPL i.e. the non existing entity. Therefore, notice u/s 143(2) is invalid and consequently the assessment order is also invalid.
– During the course of assessment proceedings the Appellant in response to the notices of the AO and the FAO had replied on the letter head of the Appellant Company – REPL and while signing had disclosed that WARPL (amalgamated with the Appellant Company (Refer page No.101,105-109,122-124 of the Paper Book).”
10. Thus, it is seen that the assessee had intimated to the Jurisdictional Assessing Officer and then there was no obligation upon the assessee again to intimate the FAO merely because the Jurisdiction was transferred by the department from JAO to FAO. Apart from that, it is seen that despite several intimations, the ld. AO has issued notice u/s.148A in the name of a nonexisting entity. It has also been brought on record that on 28/07/2021 during the course of the assessment proceedings for A.Y. 2020-21, the assessee had again intimated to the FAO about the amalgamation and the same was duly considered and has been mentioned in the assessment order passed u/s.143(3) dated 31/03/2022 for A.Y.2020-21. Thus, not only the JAO but also the FAO was well aware of merger of WARPL with the assessee company.
11. Now, it is a well settled law and this issue stands covered by several decisions of the Tribunal and the Hon’ble Bombay High Court wherein the judgment of the Hon’ble Supreme Court in the case of Pr. CIT v. Maruti Suzuki India Ltd. ITR 613 (SC) has been discussed and relied upon and distinguishing the judgment of the Hon’ble Supreme Court in the case of Pr. CIT v. Mahagun Realtors (P.) Ltd.ITR 194 (SC). For the sake of ready reference, latest judgment of the Hon’ble Bombay High Court in the case of Reliance Industries Ltd. v. P. L. Roongta (Bombay) judgment dated 14/02/2025 is referred, wherein the Hon’ble high Court has discussed the ratio and principle of Mahagun Realtors (P.) Ltd. (supra), and Maruti Suzuki in the following manner:-
“28. The reliance placed by the respondent-revenue on the decision of the Supreme Court in the case of Mahagun Realtors (P) Ltd. (supra) is distinguishable. This decision was rendered on 5 April 2022 and in which the decision of the Supreme Court in the case of Maruti Suzuki India Ltd. (supra) was also considered. In the case of Mahagun Realtors (P) Ltd. (supra), after the merger order, return of income was filed in the name of the amalgamating company. In the said return of income, PAN of the amalgamating company was mentioned. In the return of income, the date of incorporation of the amalgamating company was mentioned and in the form of return of income to a specific query ‘Business Reorganization (a).(b) In case of amalgamated company, write the name of amalgamating company” the reply mentioned was “NOT APPLICABLE”. The appeal before the Tribunal was also filed in the name of amalgamating company. It was on these facts that the Supreme Court observed that since the amalgamating company did not inform the revenue about the amalgamation but held out to the revenue as if the amalgamating company is in existence, the Supreme Court did not accept the submission made by the assessee that the proceedings were taken against the nonexisting company. In the present case before us, the respondentrevenue has not pointed out how the facts in the present case are identical to the facts of Mahagun Realtors (P) Ltd. (supra) which was the basis of the decision of the Supreme Court. These facts are absent in the present matter before us, but on the contrary the respondent-revenue had knowledge about the amalgamation/ merger as observed by us above and, therefore, the decision of Mahagun Realtors (P) Ltd. (supra) is not applicable to the facts before us.
29. We may observe that the Supreme Court in the case of Mahagun Realtors (P) Ltd. (supra) gives an indication of dissent from the decision in the case of Maruti Suzuki India Ltd. (supra) but after giving such an indication does not dissent from the decision in the case of Maruti Suzuki India Ltd. (supra) but on facts distinguishes it to reject the contentions of the assessee therein.
30. We may, however, note that a reading of paragraph Nos.18 to 33 of the Hon’ble Supreme Court in the case of Mahagun Realtors (P) Ltd. (supra) does indicate that the Hon’ble Supreme Court in Mahagun Realtors (P) Ltd. (supra) did not agree with the proposition that the proceedings taken against the non-existing company would be void. In paragraph 32 of Mahagun Realtors (P) Ltd. (supra), it is observed that the legislative change, by way of introduction of Section 2(1A), defining “amalgamation” was not taken into account in the earlier decision of the Hon’ble Supreme Court. Further, tax treatment in the various provisions of the Act was not brought to the notice of this Court in the previous decisions. In paragraph 30 of Mahagun Realtors (P) Ltd. (supra), the Hon’ble Supreme Court observed that the combined effect of Section 394(2) of the Companies Act, 1956, Section 2(1A) and various other provisions of the Income-tax Act, 1961 is that unlike a winding up, there is no end to the enterprise, with the entity. The enterprise in the case of amalgamation continues. In paragraph 18 of Mahagun Realtors (P) Ltd. (supra), the Hon’ble Supreme Court observed that it is essential to look beyond the mere concept of destruction of corporate entity which brings to an end or terminates any assessment proceedings. The Supreme Court further observed that there are analogies in civil law and procedure where upon amalgamation, the cause of action or the complaint does not per se cease – depending of course, upon the structure and objective of enactment. It is further observed that broadly, the quest of legal systems and courts has been to locate if a successor or representative exists in relation to the particular cause or action, upon whom the assets might have devolved or upon whom the liability in the event it is adjudicated, would fall.
31. In our view after making various observations from paragraphs 18 to 32, the Supreme Court in the case of Mahagun Realtors (P) Ltd. (supra) distinguishes the applicability of the decision in the case of Maruti Suzuki India Ltd. (supra) to the facts before them which we have already observed above. The subsequent decision of the Supreme Court in the case of Mahagun Realtors (P) Ltd. (supra) does not dissent from the decision in the case of Maruti Suzuki India Ltd. (supra) but the observations made from paragraphs 18 to 32 do give an indication in that direction. However, the decision of various High Courts and the decision of the Supreme Court in the case of Maruti Suzuki India Ltd. (supra) holds the field today and therefore we have to consider the effect of the decision in the case of Maruti Suzuki India Ltd. (supra) to the facts of the present case.
32. The Supreme Court in the case of Maruti Suzuki India Ltd. (supra) in paragraph 19 has adverted to various facts of the assessee before them, which we propose to advert here for deciding whether the case of the appellant falls within the facts of Maruti Suzuki India Ltd. (supra).
| (i) | The income which was sought to be subjected to tax was of the erstwhile entity prior to amalgamation. In the instant case before us also the assessment order by which the demand is raised is in the name of the erstwhile entity. |
| (ii) | Under the scheme of amalgamation, the amalgamated company has assumed the liabilities of the amalgamating company, including tax liabilities. This fact is also present in the case before us. |
| (iii) | The Supreme Court after referring to the decision in the case of Saraswati Industrial Syndicate Ltd. v. Commissioner of Income-taxITR 278 (SC) observed that the consequence of the scheme of amalgamation is that the amalgamating company ceased to exist. In the instant case before us also, this would be the consequence insofar as RPEL and RPPL are concerned. |
| (iv) | Upon ceasing to exist, an entity cannot be regarded as a “person” under Section 2(31) of the Act against whom an assessment order can be passed. In the instant case before us also the amalgamating companies are RPEL and RPPL which have ceased to exist on account of amalgamation, but still the assessment order is passed in the names of RPEL and RPPL. |
| (v) | The scheme of amalgamation in the present case before us was approved on 11 January 1995 with effect from 1 January 1995 by the order of this Court and the assessment orders were passed after 1 January 1995. |
| (vi) | Inspite of the Assessing Officer being aware of the fact of amalgamation, the assessment order was passed on an entity which had ceased to exist. |
| (vii) | The assessment orders are passed in the name of RPEL and RPPL only without mentioning anything about RIL. This fact is identical to Maruti Suzuki’s case whereas in Mahagun s case, assessment orders contained names of both amalgamating and amalgamated company. |
33. In our view, the facts of the present appellant-assessee before us are similar to the significant facts in the case of Maruti Suzuki India Ltd. (supra) on the basis of which the Supreme Court has held that inspite of the fact of the Assessing Officer being informed of the amalgamating company having ceased to exist as a result of the scheme of amalgamation, if the proceedings are initiated against the non-existing companies, then such proceedings are void ab initio although the amalgamated company participated in the proceedings. In our view, in the present case also although RIL-amalgamated company participated in the proceedings, the respondent-revenue having knowledge of the amalgamation still passed an order in the name of the amalgamating companies which would make the assessment order dated 27 March 1997 void ab initio.
34. The appellant-assessee is justified in relying on the decisions of the High Courts of Gujarat, Calcutta, Delhi and Madras, which are referred to in the paragraph dealing with the submissions made on behalf of the appellant-assessee. These have considered the decisions in the cases of Maruti Suzuki India Ltd. (supra) and Mahagun Realtors Pvt. Ltd. (supra), and have come to a conclusion that proceedings against non-existing entities are bad in law. In our view, the reliance placed on these decisions by the appellant-assessee supports the submissions made by them on the proposition that the proceedings against an amalgamating company post the amalgamation orders are void ab initio if the revenue had knowledge of the amalgamation prior to the proceedings.
35. In view of above, assessment orders dated 27 March 1997 passed by the Assessing Officer in the name of RPEL and RPPL is held to be bad in law and quashed and set aside and consequently all the proceedings before the appellate authorities would also stand quashed. In view of above, question of law framed by our order dated 20 January 2025 is answered in favor of the appellant-assessee and against the respondent revenue and the appeals filed by the appellant-assessee for assessment year 1994-95 are allowed.
12. These principles have been reiterated earlier also by the Hon’ble Jurisdictional High Court in the case of Uber India Systems (P.) Ltd. v. Asstt. CIT 2024[] (Bombay)/Writ Petition (L.) No. 23562 of 2024]. Apart from that, this Tribunal has discussed in detail the principles laid down by the Hon’ble Supreme Court in the case of Maruti Suzuki and Mahagun Realtors Pvt. Ltd., in a detailed manner and their applicability under various situations, in the case ofACITv. Candor Renewable Energy (P.) Ltd[IT Appeal No.2560 & 2561/Mum/2021 and 697 & 698(Mum) of 2022, dated 19-10-2022]. Thus, we hold that the notice issued u/s.148 for acquiring jurisdiction to reopen the completed assessment u/s. 143(3) in the name of a non-existing entity despite the fact that this was intimated to the department much earlier, the impugned notice u/s.148 is held as „null and void’ and consequently, re-assessment order is quashed. Since we have quashed the assessment on the aforesaid ground, therefore, the grounds for appeal raised by the Revenue as well as other cross objections raised by the assessee are treated as academic and hence, infructuous.
13. In the result, the appeal of the Revenue is dismissed and cross objection of the assessee is allowed.
14. Now coming to the appeal for A.Y.2016-17, the brief facts are that the returned income was filed on 16/10/2016 declaring income of Rs.39,64,07,570/- and the said return was selected for scrutiny assessment u/s.143(3) was completed on 29/12/2018 determining total income of Rs.40,30,07,860/-. The assessee’s case was reopened u/s.147 and notice u/s.148 was issued on 31/03/2021. In the name of M/s. Wadhwa & Associates Realtors Private Limited and despite all the intimation by the assessee about the fact of amalgamation of WARPL with Raghuleela Estate Pvt. Ltd., (all the fact of intimation has already been noted in the appeal for the A.Y.2013-14 including various dates), it is seen that the ld. AO has even passed the order u/s.147 r.w.s. 144B in the name of erstwhile company, M/s. Wadhwa & Associates Realtors Private Limited which has ceased to exist. Thus, here in this case not even the notice u/s.148 but also re-assessment order u/s.147 dated 27/03/2022 has been passed in the case of a non-existing entity and accordingly, our finding given in the appeal for A.Y.2013-14 will apply mutatis mutandis. Accordingly, the entire re-assessment order passed by the ld. AO is quashed.
15. In view of the above, the cross objection raised by the assessee is allowed and Revenue’s appeal is dismissed.
16. Now, we will take up the Revenue appeal and Cross objection of the assessee for A.Y. 2020-21.
17. The Revenue has raised following grounds:-
“i) On the facts and circumstances of the case, the Id. CIT(A) erred in allowing the deduction claimed u/s. 24(b) of the Act of Rs. 25,53,51,042/-ignoring the fact that the assessee has failed to establish nexus between the house property income earned and interest expenditure which is wholly and exclusively for the purpose of earning house property income.
(ii) On the facts and circumstances of the case, the Ld. CIT(A) erred in allowing the deduction claimed u/s. 24(b) of the Act of Rs. 25,53,51,042/-ignoring the fact that the assessee has failed to prove that second and subsequent loans were availed for repayment of outstanding housing loan.
(iii) On the facts and circumstances of the case, the Ld. CIT(A) erred in allowing the deduction claimed u/s. 24(b) of the Act of Rs. 25,53,51,042/-ignoring the fact that the assessee has not fulfilled the conditions laid down in section for 24(b) of the Act for claiming deduction u/s 24(b) of the Act.
(iv) On the facts and circumstances of the case, the Id. CIT(A) erred in deleting the addition of Rs. 1,98,89,541/- assessed under house property income on account of maintenance charges without appreciating the fact that maintenance charge received by the assessee is part and parcel of the rent and maintenance charges received are rental income.
(v) On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 1,98,89,541/- assessed under house property income on account of maintenance charges without appreciating the fact that common area maintenance charges were part of rent agreement.
(vi) On the fact and circumstances of the case and in law, Ld. CIT(A) has erred relying on the decision of the Hon’ble Bombay High Court in the case of CIT v. Runwal Developers(p) Ltd. without appreciating the fact that the decision of Hon’ble High Court is not applicable to this case as the facts in the case of Runwal Developers are distinguishable from facts of instant case.”
18. In the cross objection, the assessee has raised the following grounds:-
1)The Commissioner of Income Tax (Appeals) 53, Mumbai [CIT(A)] erred in confirming the AO’s action of disallowing preconstruction interest of Rs 51,40,617 claimed under section 24(b) of the Act on the ground that preconstruction interest shall be allowed only to the extent of the cost of the property which is finally acquired/constructed.
Your Appellant submits that on the facts of the case the preconstruction interest has been rightly claimed by the Appellant, being one-fifth of the interest paid on funds utilized for acquiring the property.
19. The brief facts are that the assessee has filed its return of income for A.Y.2020-21 on 10/02/2021 declaring total income of Rs.7,11,96,580/-. The ld. AO noted that assessee has claimed interest u/s. 24(b) and had offered following income under the head „income from house property’ during the relevant assessment year:
| Property | Gross Rent received | 30% Standard Deduction | Interest u/s 24(b) – | Net Income offered under House Property |
| HDD Building | 17,30,99,292 | 5,19,29,788 | 4,31,24,423 | 7,80,45,081 |
| Trade Centre | 4,20,72,213 | 1,26,21,664 | 53,89,795 | 2,40,60,754 |
| The Capital | 2,85,62,233 | 85,68,670 | 5,19,90,621 | -3,19,97,058 |
| Platina | 51,02,49,543 | 15,30,74,863 | 18,28,07,339 | 17,43,67,341 |
| Total | 75,39,83,281 | 22,61,94,985 | 28,33,12,178 | 24,44,76,118 |
20. The facts qua the issue of claim of interest u/s. 24(b) are that, assessee had originally taken loan from WGHPL for investing in property and subsequently, the same was repaid through taking a loan from bank of Baroda. The ld. AO issued a detailed show-cause notice which has been incorporated in the assessment order and in response to the same, assessee vide letter dated 16/05/2022 submitted that assessee has leased out its unit at Trade Centre of building Platina and received rental income which have been assessed under the head „income from house property’. The interest has been claimed u/s. 24(b) and such a claim of interest has been consistently allowed by the department in all the previous years. Assessee also filed interest certificates from Wadhwa Group Holding Pvt. Ltd., and Bank of Baroda and also stated that loan from BOB was to repay the earlier loan. However, the ld. AO has disallowed the claim of interest on the ground that assessee could not establish the nexus to prove that subsequent loan of which interest has been claimed was used for repayment of earlier housing loan. AO further noted that the assessee has given interest free loan amounts of Rs 444,22,12,728 as on 31.03.2020 to Group Concern Wadhwa Construction and Infrastructure Limited (WCIPL) out of the interest bearing fund. The assessee on the other hand submitted that, it has in fact received interest of Rs. 249,855,463 from WCIPL on the above loan given to them and thus the observation of the AO that the assessee has given interest free loan to WCIPL is factually incorrect and based on assumptions and without appreciating the facts of the case.
21. AO further observed that the Assessee has not claimed interest u/s 24(b) for the A.Y. 2011-12, A.Y. 2012-13 2013-2014 and earlier years on the property 601/602 Trade Centre and 202/1502 Capital which establishes that the assessee has made payments of borrowed loans for acquisition of the above mentioned properties, hence, during the year there is no question of claiming deduction. The assessee’s claim before the ld. AO was that it has been claiming deduction u/s. 24(b) on the properties from the date of acquisition / construction till the date including A.Y.2011-12 to 2013-14 and has also submitted the details of deduction in respect of three properties in the paper book. It was clarified before us that assessee while filing of return for the above three properties has inadvertently clubbed the income and deduction claimed under one property i.e. the HDO building, however, the assessee received rental income from all the three properties and continues to receive in the year under consideration also. However, the ld. AO disallowed the claim of the assessee.
22. The ld. CIT(A) allowed the disallowance after referring and relying upon the decision of the Tribunal in assessee’s own case for A.Y.2015-16 after observing as under:-
8.1. In the case of the appellant for A.Y 2015-16, vide ITA No. 2157/Mum/2023 dated 19.03.2024, the Hon’ble ITAT held as under
“12. There should not be any dispute that the interest expenditure is allowable as deduction
| (a) | u/s 24(b) while computing income under the head Income from House Property |
| (b) | u/s 36(1)(iii) while computing income under the head Income from Other business and (c) u/s 57(iii) while computing income under the head ‘Income from Other Sources |
| Further | the allowance of interest expenditure is not related to the quantum of income earned under each of the head, le, the entire amount of interest expenditure is allowable as deduction, even if the income earned is lesser than the amount of interest expenditure. The only condition is that the loan funds should have been used |
| (a) | for acquiring House Property, in the case of Income from House Property: |
| (b) | for the purpose of business, in the case of Income from business and |
| (c) | for earning interest income, in the case of Income from Other sources |
| We | have noticed earlier that the entire loan funds have been used for income generating activity of the assessee only The question of disallowing part of interest expenditure shall arise only if it established that the interest bearing funds have been diverted for personal purposes of the directors or for non- business (nonincome earning activity) purposes. In the instant case, the case of the AO is not of that kind According to AO, the non-interest bearing lease advances received by the assessee has been used to give short term loans, Le loan funds have not been used to give short term loans. For this purpose, the AO has examined immediate source of funds used for giving loans and not the overall position of funds. We have earlier noticed that all types of funds are fungible in nature when they were put in a common pot. It is the prerogative of the business man to use the funds in the best interest of his income earning activities. |
13. We have noticed earlier that it is not the case of the AO that the interest bearing funds have been used for personal purposes or for non- income earning activity. Hence, under these set of facts, we are of the view that the AO has missed a moot point that the entire interest expenditure shall be allowable as deduction either under the head Income from House Property’ or under the head “Income from Business” so long as it is not shown that the loan funds have been diverted for non-income earning/personal purposes. Hence, even if the AO considers that a part of interest expenditure is not allowable under the head Income from Other sources”, then the same shall be allowable as deduction either under the head Income from House Property’ or under the head “Income from Business”.
14. Since the assessee has generated income from three sources, it has followed a consistent methodology for allocating interest expenditure between three heads of income. This is for the reason that the assessee is of the opinion that all types of funds, viz., own funds, loan funds and interest free lease advances have been used for generating income from all the three heads of income. We notice that the very purpose of giving short term loans is for the purpose of generating income from idle funds, which are not immediately required for its activities. Since the assessee is having liability to pay interest expenditure on borrowed funds, it has taken prudent decision to generate income by giving short term loans. This is exclusive prerogative of the assessee and the tax man cannot question the wisdom of the businessman.
15. Hence, in our view, so long as the assessee has not diverted the loan funds for non-income earning activities/personal purposes, the entire interest expenditure is allowable as deduction. Since the assessee has allocated the interest expenditure on a methodology consistently followed and since the same has been approved by the co-ordinate bench in the earlier year, the question of disallowing interest expenditure claimed u/s 57(iii) does not arise. Accordingly, we are of the view that the order passed by Ld CIT(A) does not call for any interference. Accordingly, we uphold the same.”
8.2. During the year the appellant has claimed finance cost of Rs. 68,00,80,024/- in its P&L account. It claimed Rs. 25,53,42,224/-u/s 24(b) of the Act while a sum of Rs.21,58,74,140/- was claimed u/s. 57 (iii). The appellant itself has not claimed the balance amount of Rs. 20,88,74,072/- as deduction and disallowed the same while computing its taxable income. In the light of these facts, it becomes evident that the ratio of Hon’ble Tribunal discussed above applies to the case of the appellant. This is not a case where the funds are alleged to be diverted for nonbusiness or personal purposes. Thus, the allowability of the claim whether under section 24(b) or under section 36(1)(iii) or under section 57 does not alter the total income of the appellant. Hence, the entire issue becomes academic in nature. Respectfully following the decision of Hon’ble Tribunal referred above, the addition made by the AO is deleted.
23. We have heard both the parties and also perused the relevant finding given in the impugned orders as well as material referred to before us. It is an undisputed fact that assessee earned rental income offered to tax under the head “Income from House Property” from its properties situated at Trade Centre, HDO and the Capital building which were held as investments in the Assessee Company prior to amalgamation and the property Platina was acquired by the Assessee by virtue of amalgamation of WARPL. The Ld. Counsel for the assessee before us submitted that it is not in dispute that initially the loans were utilized for the purpose acquiring/Constructing the property, interest on the same has been allowed as deduction in earlier years and the same were replaced time and again for better interest rates and increase in the sanction limits. The subsequent loans were for replacing the existing loans and for general corporate purposes. Since the loans obtained subsequently were for replacing old loans the interest paid on such loans were claimed as a deduction under section 24(b) of the Act while computing Income from House Property. He aslo relied upon and he referred to CBDT Circular No. 28 dated 20/08/1969 which clarifies that fresh loans raised to repay the earlier loans taken on the property, then the interest paid on subsequent loan shall be allowed as deduction. There is no restriction placed in the Circular that second or third loan shall not be eligible for claiming deduction u/s. 24(b). He further submitted that all the sanction letters were filed before the ld. AO for subsequent loans which notes that loan was taken for the purpose of repayment of earlier loans. The ld. AO has only drawn his own inference and made an allegation that assessee has not established the nexus of loan and the possession / construction of the property without even considering the said sanction letters or anything to bring on record that assessee did not pay the original loans from any subsequent loans. When the substitution of loan has been accepted for the repayment earlier loans in the assessment orders for the earlier years, then the ld. AO cannot allege that in the relevant assessment year such loan has not been used and to disallow the deduction u/s. 24(b). It has also been clarified by the Ld. Counsel before us that the loans which had not been used for this purpose, assessee had suomoto disallowed more than 30% of the total interest expenditure incurred by the assessee. The assessee had claimed deduction u/s. 24(b) purely on the properties which have been acquired/ constructed within borrowed capital. The details of which are as under:-
| Sr No | Property Details | Details | Year of Capitaliz ation | Cost | Amount on which deduction u/s 24(b) claimed |
| 1 | Unit No 601 Trade Centre | Purchased | 2007-08 | 125,675,619 | 20,000,000 |
| 2 | Unit No 602 Trade Centre | Purchased | 2007-08 | 65,753,543 | 20,000,000 |
| 3 | HDO Building | Constructed | 2004-05 | 348,854,986 | 320,045,000 |
| 4 | Unit No – 202 -The Capital | Purchased | 2015-16 | 178,639,049 | 99,705,750 |
| 5 | Unit No 1502B The Capital | Purchased | 2015-16 | 140,846,049 | 78,627,426 |
| 859,769,246 | 538,378,176 | ||||
| 6 | Platina, Bandra Kurla Complex | Acquired in Amalgamation from WARPL from 1.10.2019 (Cost in the Books of WARPL is RS JA847,436,004]_ | 2019-20 | 13,920,000,000 | 3,556,563,021 |
| 14,779,769,246 | 4,094,941,197 |
24. Apart from that various chronologies of events and facts relating to each of the property which was held as Investment’ has been narrated in the following manner:-
Trade Centre and HDO
The assessee Company has purchased/ constructed the properties and have been receiving lease rental income on these properties year on year. The Assessee Company has claimed deduction under section 24(b) of the Act to the extent of Interest bearing borrowed funds were used for the construction/acquisition of the property. Initial loans for constructing/acquiring the property were taken from HDFC Ltd. The total borrowed funds utilized for the properties was Rs 360,045,000, Subsequently the Loans were replaced by Loan taken from India Bulls Financial Services (IBFS) then by PNB Housing Finance Ltd and Laxmi Villas Bank, loan from Wadhwa Group Holding Private Limited and finally by loan taken from Bank of Baroda.
The Capital
The Assessee Company has booked a property in the Project “The Capital” situated at C-70, Bandra Kurla Complex in the year 2010 out of borrowed funds of Rs 30 crores from HDFC Bank. The Assessee Company was allotted Unit No.1502 and 202 in the year 2014-15 and the same was capitalized in the year 2014-15 at Rs 43,46,72,365 which included interest cost of Rs. 189,826,961 The Unit 1502 was spilt in to Unit 1502A and 1502 B and the Unit 1502A was sold in the year 2016-17. Thus the investment in Project Capital currently consists of Unit No 202 and 1502B standing in the books at Rs 319,485,098 as on 31.3.2020 and the Assessee Company is claiming deduction of interest under section 24(b) to the extent of Cost of Property Rs 178,333,176. (Refer Page no 45 of the Paper Book). Initial loans of Rs 30 cores was borrowed from HDFC Ltd which were replaced by Loan taken from India Bulls Financial Services (IBFS). Subsequently the IBFS loan was replaced by loans taken from PNB Housing Finance Ltd and Laxmi Villas Bank, then by loan from Wadhwa Group Holding Private Limited and finally from Bank of Baroda
Thus in the given facts of our case initially the loans were utilized for the purpose of acquiring/Constructing the property and the subsequent loans were for replacing the existing loans and for general corporate purposes. Since the loans obtained subsequently were for replacing old loans the interest paid on such loans were claimed as a deduction under section 24(b) of the Act while computing Income from House Property
PLATINA, BKC
The Company Wadhwa Associates and Realtors Private Limited (WARPL) was engaged in the business of leasing the commercial properties to earn lease rentals and for capital appreciations and has constructed the Property “Platina” situated at Bandra BKC. The construction activity started in the year 2004-05 and the total investments in the property stood at Rs. 3,847,436,004 in the books of accounts of the Company WARPL as on March 2011. The Company has leased out its units of Property “Platina” and Rental Income on the same is assessed to tax under the head “Income from House Property”. Initially the construction of the Building was financed partly by funds taken from HDFC Ltd and partly by Interest free unsecured loans. Subsequently the unsecured loans got replaced by Interest Bearing loans from HDFC Ltd. The assessee Company was granted top up loans over a period of time and was lastly sanctioned a loan amount of Rs. 1100 crores on 16th March 2018 by HDFC Ltd. The Loans granted were in the nature of top up loans from HDFC Itd and secured against discounting of receivables of the Project ‘Platina’. The Assessee Company in the earlier years had allocated interest paid on loans borrowed under two heads i.e. Deduction of interest u/s 24(b) against Rental Income assessed under the head “Income from House Property and deduction of interest u/s 57(iii) against the Interest offered under the head “Income from Other Sources” and disallowed balance interest while computing the taxable income. In the year under consideration WARPL was amalgamated with Raghuleela Estate Pvt. Ltd (REPL) as per the order dated 11/02/2021 issued by the National Company Law Tribunal, Mumbai Bench, Mumbai. The appointed date of amalgamation is 01/10/2019. On merger the property “Platina” standing in the books of WARPL was fair valued to 13,920,000,000 along with liabilities of Loan of Rs 1183,68,55,248 taken by WARPL from HDFC Ltd. The deduction of interest under section 24(b) was taken by the Company WARPL (till 30.09.2019 i.e the date of merger) and the assessee Company for the period from 1.10.2019 to 31.3.2020 from the Rental Income received from the Property. In the assessment of WARPL for the period till 30.09.2019 i.e part of the year the claim of interest under section 24(b) was allowed, thus there cannot be a question of disallowance of interest for remaining part of the year in the hands of the assessee company.
25. In view of the above facts and material placed on record, it is clear that the subsequent loan were taken for the repayment of earlier loans which were used for acquisition /construction of the properties and this fact has been accepted in the earlier years given by the Tribunal for A.Y.2015-16. Therefore, we do not find any infirmity in the order of the ld. CIT(A) and the same is confirmed.
26. Now coming to the issue of direction of the ld. AO on account of recovery of common maintenance charges of Rs. 1,98,89,541/-considering the same as „income from house property’ as against income from business and profession considered by the assessee, the ld. AO has noted that maintenance charges received of Rs.1,98,89,541/- from the tenants has been considered as part and parcel of the rent by the ld. AO on which already statutory deduction @ 30% u/s. 24(a) has been allowed which comes to Rs.59,66,862/-. Thus, ld. AO has considered the maintenance charges as part of rent assessable under the head „income from house property’.
27. The ld. CIT(A) has allowed the claim of the assessee relying upon the decision of the Hon’ble Bombay High Court in the case of CIT v. Runwal Developers (P) Ltd(Bombay)and Dy. CIT v. Arham IT Infrastructure (P) LtdITD 657 (Delhi – Trib.). The CIT(A) observed that the common maintenance charges for which recovery has been made from the occupants has been offered as business income and the short fall of Rs. 1,47,25,623/- reimbursement receipts has not been claimed as a loss but has been disallowed while computing the business income. Hence, the CIT(A) directed the AO to tax the common maintenance charges as business income, as offered by the Assessee.
28. We have heard both the parties and also perused the relevant finding given in the impugned order. As noted above, assessee is engaged in the business of letting out the immovable properties on lease and license basis. It has received reimbursement on account of Common Area maintenance Charges which has been netted off against the Actual expenses incurred by the Assessee of Rs. 1,47,25,623/- which has been disallowed while computing the total income. It has been pointed out before us that the relevant clauses in agreements specifically states that the licensee shall pay to the licensor the maintenance charges for common area maintenance on actual, on the basis of proportion of let out area to the licensee and the CAM charges shall increase where the actual expenses are higher. As per the agreement the Assessee was under an obligation to maintain the said premises and bear the cost of maintenance and the licensee was under obligation to reimburse the proportionate share in respect of the maintenance charges. It is to be noted here that the maintenance expenses is on account of maintenance of common area, such as lift, electricity, security of common area and not pertaining to the maintenance of area given in lease structure. Thus, it has been stated that the common area maintenance cannot be taxed under the head „income from house property’. Before us assessee has also relied upon the decision of the Tribunal in the case of group entities Wadhwa group Holdings Private Limited v. ACIT [LT.A. No. 1988(Mum) of 2024) dated 28-02-2025] wherein similar issue has been decided in favour of the Assessee. The ITAT declined to interfere with the findings of the Id. CIT (A) in deleting the additions made by the AO for CAM charges and hence dismissed the departments appeal on the above said ground that it is consistently treated as business income in earlier years.
29. We find that this issue not only stands covered by the decision of the Tribunal in the aforesaid case but also the principle is squarely covered by the decision of the Hon’ble Bombay High Court in the case of. Runwal Developers (P.) Ltd. (supra) wherein collection and maintenance charges from lessees which was held to be taxable under the head „income from house property’ by the Id.AO. The Hon’ble High Court upheld the finding of the Tribunal holding that maintenance charges received towards maintenance of common area and therefore, business received liable to be assessed under the head „income from business’, accordingly, finding of the ld. CIT(A) is upheld and the grounds raised by the Revenue is dismissed.
30. Now, coming to the cross objection raised by the assessee i.e. disallowance of pre-construction interest of Rs.51,40,617/-claimed u/s.24(b) on the ground that pre-construction interest shall be allowed only to the extent of cost of property which is finally acquired / constructed. The ld. AO in his order has discussed this issue in para 4 observing that Explanation to Section 24(b) clearly states that pre-construction interest is allowed only for property which is acquired / constructed. In this case assessee has paid advance of Rs.30 Crores, but it has acquired property only for Rs.24,48,45,404/- even though assessee has taken loan of Rs.30 Crores, it would be only allowed proportionate interest deduction on Rs.24,48,45,404/-and therefore, he determined proportionate interest of Rs.2,28,20,519/- and disallowed Rs.51,40,617/-. This finding of the ld. AO has been upheld b the ld. CIT (A).
31. The brief facts qua the issue as stated before us are that the Assessee has entered into MOU with Raghuleela Leasing and Real Estates Private Limited (RLREPL) wherein the assessee agreed to an option to purchase 12000 sq. ft. of the carpet area in the Building known as “The Capital”, for which the Assessee utilized borrowed funds from HDFC Bank of Rs. 30,00,00,000/-. The total interest capitalized on the property was Rs 18,98,26,961 till 31.3.2015. Subsequently vide letter dated 30.3.2015, RLREPL (known as Wadhwa Group Holding Private Limited – WGHPL w.e.f 1.4.2012) agreed to allot Unit No 202 and Unit No 1502 aggregating to 8744 sq ft. of the carpet area to the Assessee. The Assessee has claimed 1/5th of the said interest from A.Y 2016-17 onwards. Since part of the unit was sold off in AY 2018-19, it had claimed Rs. 2,79,61,136/- as preconstruction interest u/’s 24(b) and this being the 5th year of claim. However, the AO allowed only a sum of Rs. 2,28,20,519/- and disallowed the sum of Rs. 51,40,617/- having worked out the total interest on cost on property acquired of Rs.24,48,45,404 as against Rs.30 crores initially paid on booking of property.
32. Assessee’s case before us is that it had incurred interest cost on Rs. 30 crores for 5 years until the units were allotted and money was refunded back. The funds were used by RLREPL till date of allotment and in 2015 the same were refunded back. Hence the actual outflow of interest for the year 2010-11 to 2014-15 was on Rs 30 crores and not on Rs. 24,48,45,404 till the units were finally allotted. The total property value stood in the books at Rs. 43,46,72,365 which included interest cost of Rs. 18,98,26,961. Thus, it has been stated that cost of property acquired includes actual interest cost borne by the assessee of Rs.30 Crores for the period of 5 years till acquisition of the property and it was much later when the area was reduced and money was refunded back. It has been brought on record and pointed out that a revisionary proceedings u/s.263 was undertaken in the assessee’s case for the A.Y 2018-19 by the PCIT on the same issue following the disallowance of current year. The ITAT Mumbai vide order Raghuleela Estates (P.) Ltd. v. Pr. CIT [IT Appeal No. 2595 (Mum.) of 2024, dated 20-8-2024] has set aside the order of the PCIT dated 26/03/2024 and restored the order of the AO and allowed the assessee appeal besides deciding on the technical ground, on merits Tribunal held that the claim of interest even if not allowable u/s 24(b) of the Act, certainly allowable under section u/s 36/37 of the Act and thus no prejudice is caused to the interest of the revenue as the interest would have been allowed in any case in other provisions of the Act.
33. We hold that, once the claim of the assessee u/s. 24(b) was never disputed and have been accepted year after year by the department for the last four years and 1/5th has been allowed in each year, then pre-construction interest on the 5th year claimed by the assessee cannot be disallowed or denied in this year. Though before us various judgments have been relied upon of various Tribunal, however on merits also, we find that once assessee had utilized borrowed funds for the acquisition of the property and has incurred interest cost of Rs.30 Crores for five years until the units were allotted, then interest has to be allowed for pre-construction period. It was a subsequent event that part of the amount was refunded back, but the actual outflow of interest from the year 2011-12 to 2014-15 was calculated on Rs.30 Crores till the units were finally allotted. The cost of the property acquired includes actual interest cost of Rs. 30 Crores for the period of 5 years till the acquisition of the property. Further, it is seen that total property value in the books was at Rs. 43,46,72,365 which included interest cost of Rs. 18,98,26,961/-. Accordingly, we hold that ld. AO cannot reduce the interest claim on proportionate basis in this year because when 1/5th have been allowed for 4 years by the ld. AO, then he cannot disallow 1/5th in this year. The interest has to be allowed on the entire loan of Rs.30 Crores. Accordingly, cross objection raised by the assessee is allowed.
34. In the result, all the appeals of the Revenue are dismissed and Cross Objections of the assessee are allowed.