2025 (5) TMI 1658 - AT - Income Tax

Reassessment notice issued is in the name of non-existing entity - amalgamation scheme approved - HELD 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. Denial of deduction claimed u/s. 24(b) - 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 - HELD THAT - When the substitution of loan has been accepted for the repayment earlier loans in the assessment orders for the earlier years then the 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 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. Direction of AO on account of recovery of common maintenance charges considering the same as income from house property as against income from business and profession - This issue stands covered by the decision of Runwal Developers Pvt. Ltd 2011 (10) TMI 35 - BOMBAY HIGH COURT wherein collection and maintenance charges from lessees which was held to be taxable under the head income from house property by the ld.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. Disallowance of pre-construction interest 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 - 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.

Summary

The core legal questions considered by the Tribunal in these appeals and cross objections primarily revolve around the validity of reopening assessments under section 148 of the Income Tax Act, 1961 ("the Act") in the context of amalgamation of companies, and the allowability of deductions claimed under section 24(b) of the Act relating to interest on borrowed capital for income from house property. Additionally, issues concerning the classification of maintenance charges and the treatment of pre-construction interest were also examined.

Validity of Reopening Assessments under Section 148 in the Context of Amalgamation

The principal legal issue was whether the reopening notices issued under section 148 of the Act in the name of a non-existing entity-being the amalgamating company-were valid when the amalgamation had been sanctioned by the National Company Law Tribunal (NCLT) and the amalgamating company had ceased to exist as a separate legal entity from the appointed date of amalgamation.

Relevant Legal Framework and Precedents: The Tribunal considered the provisions of the Income Tax Act relating to reassessment and reopening of assessments under section 148 and the amendments introduced by the Taxation Laws (Amendment) Act, 2021 ("TOLA"). The Supreme Court judgments in Union of India vs. Ashish Agrawal, PCIT vs. Maruti Suzuki India Ltd., and PCIT vs. Mahagun Realtors Pvt. Ltd. were pivotal. The Maruti Suzuki judgment held that assessment proceedings against a non-existing entity post-amalgamation are void ab initio if the revenue had knowledge of the amalgamation. The Mahagun Realtors decision nuanced this by emphasizing the duty of the assessee to intimate the revenue about amalgamation timely.

Court's Interpretation and Reasoning: The Tribunal noted that the original notice under section 148 was issued on 10.05.2021 in the name of the amalgamating company, which had ceased to exist by virtue of the NCLT order dated 11.02.2021 with effect from 01.10.2019. The assessee had repeatedly intimated the department about the amalgamation through letters and emails prior to and during assessment proceedings. Despite such intimation, notices and assessment orders were issued in the name of the non-existing entity.

The Tribunal distinguished the facts from the Mahagun Realtors case by observing that in the present case, the revenue had knowledge of the amalgamation well before issuing the notices. The Supreme Court's decision in Maruti Suzuki was considered binding and applicable, which holds that proceedings against a non-existing entity despite the revenue's knowledge are void ab initio. The Tribunal also relied on the recent decision of the Bombay High Court in Reliance Industries Ltd. vs. P.L. Roongta Ltd., which analyzed the interplay between Maruti Suzuki and Mahagun Realtors and upheld the principle that reopening proceedings against a non-existing entity with prior knowledge of amalgamation are invalid.

Key Evidence and Findings: The Tribunal examined multiple communications from the assessee to the assessing officers informing them about the amalgamation. It was found that both the Jurisdictional Assessing Officer (JAO) and the First Appellate Officer (FAO) were aware of the amalgamation. Despite this, notices and orders were issued in the name of the amalgamating company. The Tribunal also noted that the revenue did not dispute the intimation but proceeded with reopening.

Application of Law to Facts: Applying the binding precedents, the Tribunal held that the reopening notices and assessment orders issued in the name of the amalgamating company were null and void. The Tribunal quashed the reassessment orders for the assessment years 2013-14 and 2016-17 on this ground, holding that the Revenue's appeals were to be dismissed and the assessee's cross objections allowed.

Treatment of Competing Arguments: The Revenue argued that the notice was valid as the amalgamation was not intimated timely and relied on Mahagun Realtors. The Tribunal rejected this, emphasizing the repeated intimation by the assessee and the knowledge of the revenue. The Revenue's reliance on TOLA and extended limitation was also negated by the Tribunal, which relied on the Bombay High Court decision holding TOLA not applicable for notices issued post 31 March 2021 for AY 2013-14.

Conclusions: The Tribunal concluded that reopening assessments in the name of a non-existing amalgamating company after the revenue had knowledge of the amalgamation is void ab initio. The assessment orders and notices were quashed accordingly, rendering other grounds academic.

Allowability of Deduction under Section 24(b) of the Act for Interest on Borrowed Capital

The second major issue concerned the allowability of deduction claimed under section 24(b) for interest paid on loans taken for acquiring or constructing house property, including subsequent loans taken to repay earlier loans, and the nexus between such interest and house property income.

Relevant Legal Framework and Precedents: Section 24(b) allows deduction of interest on borrowed capital used for acquisition or construction of house property. CBDT Circular No. 28 dated 20/08/1969 clarifies that interest on subsequent loans taken to repay earlier loans is allowable. The Tribunal relied on its own earlier decisions including the assessee's case for AY 2015-16 and other authoritative pronouncements.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee had consistently claimed and been allowed interest deductions under section 24(b) for loans taken initially for acquisition/construction and for subsequent loans taken to repay earlier loans. The assessee produced sanction letters for subsequent loans showing their purpose to repay earlier housing loans. The Tribunal noted that there was no evidence that loan funds were diverted for non-business or personal purposes.

The Tribunal held that interest expenditure is allowable as deduction so long as the loan funds are used for income-generating activities, regardless of the quantum of income earned from such property. The fungibility of funds was recognized, and the Tribunal emphasized the business prerogative in deploying funds.

Key Evidence and Findings: The assessee submitted detailed loan sanction letters and interest certificates from banks and group companies. The Tribunal considered the rental income earned from various properties, the capitalized cost of properties, and the history of loan replacements. The Tribunal also noted the assessee's self-disallowance of a portion of interest not related to income-earning activities.

Application of Law to Facts: Applying the legal principles, the Tribunal upheld the CIT(A)'s order allowing the deduction under section 24(b) for interest on subsequent loans. The Tribunal rejected the AO's disallowance for failure to establish nexus, stating that the assessee had adequately demonstrated the use of loans for acquisition/construction and replacement of earlier loans.

Treatment of Competing Arguments: The Revenue contended that the assessee failed to establish the nexus and did not fulfill conditions under section 24(b). The Tribunal rejected these contentions as the assessee had furnished adequate evidence and the AO's observations were based on assumptions without appreciating the facts.

Conclusions: The Tribunal confirmed the CIT(A)'s order allowing the interest deduction under section 24(b) on the entire interest paid on loans used for acquisition/construction and for repayment of earlier loans.

Classification and Taxation of Maintenance Charges

The issue was whether common area maintenance (CAM) charges received from tenants should be treated as income from house property or income from business.

Relevant Legal Framework and Precedents: The Tribunal referred to the decision of the Hon'ble Bombay High Court in CIT vs. Runwal Developers Pvt. Ltd. and the Tribunal's own decision in DCIT vs. Arham IT Infrastructure (P) Ltd., which held that CAM charges relate to maintenance of common areas and are business income, not rental income.

Court's Interpretation and Reasoning: The Tribunal noted that the lease agreements specifically required tenants to pay maintenance charges proportionate to their leased area, and the assessee was under an obligation to maintain the common areas. The CAM charges were reimbursed expenses and not part of rent.

Key Evidence and Findings: The Tribunal examined the lease agreements and the accounting treatment showing that maintenance expenses were borne by the assessee and reimbursed by tenants. The assessee had not claimed any loss on shortfall of reimbursement.

Application of Law to Facts: The Tribunal held that CAM charges are business income and not income from house property. The CIT(A)'s order deleting the addition made by the AO was upheld.

Treatment of Competing Arguments: The Revenue argued that CAM charges formed part of rent and hence taxable under house property income. The Tribunal rejected this, relying on the lease terms and judicial precedents.

Conclusions: The Tribunal confirmed that CAM charges are business income and not rental income under the head "income from house property".

Allowability of Pre-Construction Interest

The assessee challenged the disallowance of pre-construction interest claimed under section 24(b) on the ground that such interest should be allowed only proportionate to the cost of property finally acquired or constructed.

Relevant Legal Framework and Precedents: Explanation to section 24(b) allows pre-construction interest to be claimed for the period prior to acquisition/construction but only to the extent of the cost of property finally acquired. The Tribunal also considered the CBDT Circular and earlier Tribunal decisions allowing pre-construction interest.

Court's Interpretation and Reasoning: The Tribunal found that the assessee had incurred interest on Rs. 30 crores for five years until the units were allotted, and the cost of property included interest cost capitalized. The AO's disallowance on a proportionate basis was inconsistent with prior years' allowance of one-fifth of the interest each year. The Tribunal also noted that a revisionary proceeding under section 263 was set aside by the Tribunal in the assessee's favor on similar grounds.

Key Evidence and Findings: The Tribunal considered the MOU, allotment letters, interest certificates, and the capitalized cost of property including interest. It noted that the actual outflow of interest was on the full Rs. 30 crores until allotment.

Application of Law to Facts: The Tribunal held that the pre-construction interest should be allowed as claimed, without proportionate reduction, especially since the assessee had been allowed similar claims in earlier years consistently.

Treatment of Competing Arguments: The Revenue argued for proportionate disallowance based on the reduced cost of property finally acquired. The Tribunal rejected this, emphasizing consistency and actual interest outflow.

Conclusions: The Tribunal allowed the pre-construction interest claimed under section 24(b) in full as per the assessee's claim.

Significant Holdings

"The reopening notices and reassessment orders issued in the name of the amalgamating company which had ceased to exist as a separate legal entity after the NCLT sanctioned amalgamation order, despite repeated intimation of such amalgamation to the revenue, are null and void and the reassessment proceedings are quashed."

"Interest expenditure under section 24(b) is allowable on subsequent loans taken to repay earlier loans used for acquisition or construction of house property, and the entire interest expenditure is deductible so long as the loan funds are not diverted for non-income earning or personal purposes."

"Common area maintenance charges received from tenants, which reimburse expenses incurred by the assessee for maintenance of common areas, are business income and not income from house property."

"Pre-construction interest claimed under section 24(b) should be allowed in full to the extent of actual interest paid on borrowed funds utilized for acquisition/construction of property, and cannot be proportionately disallowed merely because the cost of property finally acquired is less."

"The principle established by the Hon'ble Supreme Court in PCIT vs. Maruti Suzuki India Ltd. remains binding and applicable, holding that assessment proceedings against a non-existing entity post-amalgamation with knowledge of the revenue are void ab initio."