2025 (6) TMI 39 - AT - Income Tax

Accrual of income - subsidy received - grant received from Government of Telangan - whether it is not income in the hands of the Appellant particularly in view of the fact the Appellant is acting as a nodal agency? - HELD THAT - entire amount of Rs. 150 crores grant received from the Government has been transferred to the Commissioner GHMC on three different dates i.e. on 18.01.2021 28.01.2021 and 06.03.2021. Therefore we are of the considered view that once the grant received from the Government has been transferred back-to-back to the implementing agencies in our considered view the argument of the assessee that the subsidy received from government is not it s income is acceptable. Further assuming for a moment the version of the Assessing Officer is correct that as per sec.2(240(xviii) r.w.s.145B(3) the assessee shall account as it s income in our considered view it is a tax neutral exercise because whatever amount received by the assessee from the Government has been transferred in total to the Commissioner GHMC on the very same day. Even if we consider the amount of grant received from the Government as the income of the assessee the Assessing Officer also should treat the amount paid to Commissioner GHMC as it s expenditure. We are of the considered view that the AO and the learned CIT(A) erred in making addition towards grant received from Government of Telangana as income of the assessee. We find that those case laws are rendered on different set of facts and contexts and cannot be made applicable to the facts of the present case. Therefore we direct the Assessing Officer to delete the addition towards grants for Rs. 150 crores as income u/sec.2(24)(xviii) of the Act. Disallowance paid to HUDCO u/sec 43B(d) read with Explanation-3C of the Income Tax Act 1961 - HELD THAT - In the present case although the assessee has not shown the loan as it s liability and repayment of loan is directly debited to said liability account but claimed deduction towards interest expenditure contrary to it s own accounting treatment given in it s books of accounts. Further it is not a case of the assessee that whatever grant received from the Government towards repayment of loan and interest has been accounted as income and corresponding interest payment has been treated as its expenditure. Since the assessee has not considered the amount received from the Government as it s income to meet the expenditure of interest payment in our considered view the claim of deduction towards interest expenditure cannot be allowed. Although the Assessing Officer has not examined the issue on these lines but disallowed the expenditure by invoking provisions of sec.43B(d) and Explanation-3C of the Act deduction claimed by the assessee towards interest expenditure of Rs. 547.50 crores cannot be allowed as deduction. Therefore matter needs to be examined by the Assessing Officer in light of our discussion given hereinabove and to decide the issue in accordance with law. Thus we set aside the order of the learned CIT(A) on this issue and restore the issue back to the file of AO and also direct the AO to re-decide the issue in light of our discussion given hereinabove. Addition u/sec.68 - evidences filed by the assessee including ledger account of HUDCO loan account and confirmation from the HUDCO - HELD THAT - Although the assessee claimed that HUDCO has given incentive in respect of loan account for early payment of instalment but on perusal of relevant evidences filed by the assessee it is difficult for us to verify the claim of the assessee with corresponding computation. Therefore in our considered view this issue needs to go back to the file of Assessing Officer for fresh examination of the facts. Addition invoking the provisions of section 69 - unexplained investment - HELD THAT - There is no concept of any negative difference in loan account. AO has grossly misunderstood the accounting principles itself and arrived at conclusion that there is negative difference and invoked provisions of sub-sec.69 of the Act. Since the assessee is a State Government undertaking and the entire loans borrowed from HUDCO is guaranteed by the State Government in our considered view the question of making an unexplained investment in the form of loan does not arise and therefore we are of the considered view that the Assessing Officer has grossly erred in invoking the provisions of sec.69 of the Act. Assessee has explained the reasons for differences in light of explanation and as per the assessee there are few loans on which the HUDCO has granted moratorium and same has been treated as FITL loan. Although the assessee has furnished relevant evidences but we cannot verify the claim of the assessee at this stage. Therefore we are of the considered view that the issue needs to go back to the file of AO for fresh verification of facts. Unrecorded rent from National Housing Board NHB - Assessee fairly admitted that by an inadvertent error although the assessee has received rental income of Rs. 10, 89, 330/- but has accounted a sum of Rs. 6, 28, 560/- only. We find that since the assessee has already accounted rental income of Rs. 6, 28, 560/- the Assessing Officer cannot make addition towards the total rent on the basis of Form-26AS without considering the rent already accounted by the assessee in its books of accounts. Since the assessee has already accounted rental income of Rs. 6, 28, 560/- the AO is directed to verify the rental income accounted by the assessee and sustain the addition to the balance rental income of Rs. 4, 60, 770/- only. Not allowing set-off of brought forward business loss as appearing in the return of income filed by the assessee - We find that assessee claimed to have reported brought forward business loss shown in the return of income filed u/sec.139(1) of the Act. Therefore we direct the AO to verify the claim of the assessee in accordance with law and in case the claim of the assessee is found to be correct then the Assessing Officer should have to allow set-off of brought forward business loss as per law. Charging of interest u/sec. 234A and 234B are consequential in nature and depends upon the total income computed by the Assessing Officer. Therefore we direct the AO to re-compute the total income of the assessee and charge interest if any u/secs. 234A and 234B of the Act in accordance with Law.

Summary

Issues Presented and Considered

The core legal questions addressed by the Tribunal in this appeal include:

• Whether the subsidy/grant of Rs. 150 crores received from the State Government and passed on to executing agencies by the assessee, acting as a nodal agency, constitutes income under section 2(24)(xviii) of the Income Tax Act, 1961.
• Whether the interest payment of Rs. 547.50 crores to HUDCO can be disallowed under section 43B(d) read with Explanation 3C, on the ground that the interest was repaid out of fresh loans, thereby not constituting actual payment.
• The validity of additions under section 68 regarding differences in principal loan amounts between the assessee's books and HUDCO's ledger, particularly a disputed amount of Rs. 5,84,403/-.
• The correctness of additions under section 69 amounting to Rs. 193.88 crores out of Rs. 214.59 crores for unexplained differences in closing balances of loans from HUDCO and LIC/GIC, including the treatment of moratorium loans converted into Fund Interest Term Loan (FITL).
• The legitimacy of addition of Rs. 10.89 lakhs as unrecorded rental income from National Housing Bank (NHB).
• Whether the assessee is entitled to set off brought forward business losses amounting to Rs. 474.75 crores.
• The consequential charging of interest under sections 234A and 234B of the Act.

Issue-wise Detailed Analysis

1. Treatment of Subsidy/Grant of Rs. 150 Crores under Section 2(24)(xviii)

Legal Framework and Precedents: Section 2(24)(xviii) defines income to include assistance in the form of subsidy or grant or cash incentive by the Central or State Government or any authority, except where such subsidy or grant is considered for determination of actual cost of an asset under Explanation 10 to Section 43(1). The Income Computation and Disclosure Standards (ICDS) and amendment to section 145B(3) require such grants to be accounted as income in the year of receipt if not taxed earlier. Judicial precedents cited include Sahney Steel and Press Works Ltd. and Ponni Sugars & Chemicals Ltd., which affirm that government grants/subsidies are taxable income.

Court's Interpretation and Reasoning: The Tribunal acknowledged the statutory mandate that government grants are income. However, it gave significant weight to the factual matrix: the assessee is only a nodal agency receiving the grant and immediately transferring the entire amount to the executing agencies (Commissioner GHMC and District Collectors) on the same day, as evidenced by Government Orders and bank statements. The grant was routed through the assessee's balance sheet as a current liability, and payments to implementing agencies were debited to this liability account, not treated as income.

The Tribunal reasoned that since the grant was not retained or used by the assessee but passed on back-to-back, it cannot be treated as income of the assessee in any meaningful sense. Even if the grant were considered income under the statute, the corresponding payment to implementing agencies would be a matching expenditure, resulting in no net income.

Key Evidence and Findings: Government Orders issued by the Telangana Housing Department, bank statements showing immediate transfer of funds, and receipts from the Finance Department corroborated the assessee's claim.

Application of Law to Facts: The Tribunal applied the statutory provisions but emphasized the principle of substance over form, holding that the grant was not income of the assessee since it was immediately passed on. The case law cited by the Revenue was distinguished on facts, as those cases did not involve a nodal agency passing on the grant without retention.

Treatment of Competing Arguments: The Revenue's strict interpretation of section 2(24)(xviii) was rejected in light of the factual evidence. The Tribunal found the Assessing Officer and CIT(A) erred in treating the grant as income.

Conclusion: The addition of Rs. 150 crores as income under section 2(24)(xviii) was deleted.

2. Disallowance of Interest Payment of Rs. 547.50 Crores under Section 43B(d) read with Explanation 3C

Legal Framework: Section 43B(d) allows deduction for interest payable on loans from public financial institutions only if actually paid before the due date for filing return. Explanation 3C disallows deduction if interest is converted into a loan or borrowing.

Court's Interpretation and Reasoning: The Assessing Officer disallowed the interest deduction on the ground that the assessee repaid interest out of fresh loans, implying non-actual payment. The assessee contended that the interest payment was directly made by the State Government (guarantor) to HUDCO from budgetary support, and the fresh loan was unrelated to interest repayment.

The Tribunal found that the interest payment was not made from the assessee's own funds but directly by the State Government. The fresh loans were for different projects and not linked to repayment of interest. The assessee's books reflected the loans as liabilities and interest as finance charges, but the actual payment was by the State Government. The Tribunal observed that the Assessing Officer erred in invoking section 43B(d) and Explanation 3C, as the interest was effectively paid, albeit not by the assessee but by the guarantor State Government.

However, the Tribunal noted that the assessee's accounting treatment was inconsistent: it did not treat the grant from the Government for repayment as income, yet claimed interest deduction. Since the interest payment was not borne by the assessee's own funds and no corresponding income was accounted, the interest deduction claim was not sustainable.

Key Evidence: Ledger extracts, loan agreements, Government Orders, and finance department payment records.

Application of Law to Facts: While the interest payment was made, it was not from the assessee's own resources, and the accounting treatment did not reflect this correctly. The Tribunal directed reassessment of the issue considering these aspects.

Treatment of Competing Arguments: The Revenue's reliance on strict statutory interpretation was moderated by the facts of actual payment by the State Government. The assessee's inconsistent accounting treatment was also noted.

Conclusion: The disallowance under section 43B(d) was set aside, and the matter remanded for fresh consideration in light of the Tribunal's observations.

3. Additions under Section 68 for Differences in Loan Principal Amounts (Rs. 5,84,403/-)

Legal Framework: Section 68 deals with unexplained cash credits, where unexplained differences in loan accounts can be treated as income.

Court's Interpretation and Reasoning: The Assessing Officer made additions for differences between the assessee's books and HUDCO's ledger. The assessee explained that the difference of Rs. 5,84,403/- arose from an incentive given by HUDCO for early repayment, which was not accounted due to lack of information at the time.

The CIT(A) sustained the addition, finding the explanation insufficient. The Tribunal found the evidence filed insufficient to verify the claim conclusively and directed the Assessing Officer to re-examine the matter on the basis of the evidences, including confirmations from HUDCO.

Application of Law to Facts: The Tribunal emphasized the need for proper reconciliation and evidence to avoid unwarranted additions under section 68.

Conclusion: The issue was remanded for fresh examination.

4. Additions under Section 69 for Unexplained Differences in Closing Loan Balances (Rs. 193.88 Crores)

Legal Framework: Section 69 pertains to unexplained investments, where unexplained differences in loans can be added to income.

Court's Interpretation and Reasoning: The Assessing Officer found negative differences in loan balances, partly due to moratorium granted by HUDCO during Covid-19, converted into Fund Interest Term Loans (FITL). The assessee had not bifurcated these fresh loans in its books, causing discrepancies.

The CIT(A) partly sustained the additions. The Tribunal held that negative differences in loan accounts are not conceptually valid and arise from accounting errors or lack of bifurcation. The Tribunal found the Assessing Officer's approach fallacious and the invocation of section 69 erroneous, especially since the loans were guaranteed by the State Government and repayments were made by the Government directly.

However, the Tribunal noted that verification of the moratorium and FITL loans and bifurcation of loans between Telangana and Andhra Pradesh required detailed examination. The matter was remanded for fresh verification with all relevant evidence.

Application of Law to Facts: The Tribunal emphasized proper accounting treatment and verification of supporting documents before making additions under section 69.

Conclusion: The issue was remanded for fresh adjudication.

5. Addition of Rs. 10.89 Lakhs as Unrecorded Rental Income from NHB

Legal Framework: Income not recorded in books but evidenced by external documents can be added as income.

Court's Interpretation and Reasoning: The assessee admitted an inadvertent omission of part of the rental income (Rs. 4.60 lakhs) but had accounted Rs. 6.28 lakhs in its books. The Tribunal held that the Assessing Officer cannot add the entire rental income ignoring the amount already accounted.

Application of Law to Facts: The addition should be restricted to the unaccounted portion.

Conclusion: The addition was directed to be limited to Rs. 4.60 lakhs.

6. Allowance of Set-off of Brought Forward Business Loss

Legal Framework: Under the Income Tax Act, brought forward business losses can be set off against current income subject to conditions.

Court's Interpretation and Reasoning: The assessee claimed brought forward business losses of Rs. 474.75 crores, which the Assessing Officer did not allow. The Revenue conceded that the claim should be verified and allowed if correct.

Conclusion: The Assessing Officer was directed to verify and allow the set-off as per law.

7. Charging of Interest under Sections 234A and 234B

Legal Framework: Interest under these sections is consequential and depends on the final assessment of income.

Conclusion: The Assessing Officer was directed to recompute interest based on the final income determined.

Significant Holdings

On the issue of government grant treated as income under section 2(24)(xviii), the Tribunal held:

"Once the grant received from the Government has been transferred back-to-back to the implementing agencies, in our considered view, the argument of the assessee that the subsidy received from government is not its income is acceptable."

"Even if we consider the amount of grant received from the Government as the income of the assessee, the Assessing Officer also should treat the amount paid to Commissioner, GHMC as its expenditure. Once the grant and amount transferred to Commissioner, GHMC has been considered, then, there is no surplus to the assessee to treat it as its 'income'."

Regarding disallowance of interest under section 43B(d) read with Explanation 3C, the Tribunal observed:

"Once it is proved that the payment of interest of Rs. 547.50 crores is not by the assessee from its own funds and further, such payment has been directly paid by the State Government, in our considered view, the Assessing Officer erred in invoking provisions of sec.43B(d) and Explanation-3C of the Act."

"Although the Assessing Officer has not examined the issue on these lines, but, disallowed the expenditure by invoking provisions of sec.43B(d) and Explanation-3C of the Act, in our considered view, the deduction claimed by the assessee towards interest expenditure of Rs. 547.50 crores cannot be allowed as deduction."

On the issue of unexplained differences in loan accounts under sections 68 and 69, the Tribunal held that:

"There is no concept of negative difference in any loan account. If at all any negative difference is there, it is only on account of not passing proper journal entries in the books of account of the assessee either borrower or lender."

"The Assessing Officer has grossly misunderstood the accounting principles itself and arrived at conclusion that there is negative difference of Rs. 214,59,47,070/- and invoked provisions of sub-sec.69 of the Act."

On unrecorded rental income:

"Since the assessee has already accounted rental income of Rs. 6,28,560/-, the Assessing Officer is directed to verify the rental income accounted by the assessee and sustain the addition to the balance rental income of Rs. 4,60,770/- only."

On brought forward losses:

"We direct the Assessing Officer to verify the claim of the assessee in accordance with law and in case the claim of the assessee is found to be correct, then, the Assessing Officer should have to allow set-off of brought forward business loss as per law."

The Tribunal's final determinations were to delete the addition of Rs. 150 crores as grant income, set aside and remit the interest disallowance issue for fresh consideration, remit the loan account difference issues for re-examination, restrict rental income addition to unaccounted portion, and direct verification and allowance of brought forward losses and consequential interest computations.