ITAT Mumbai Strikes Down ₹5.75 Crore Disallowance: Reassessment Cannot Travel Beyond the Reasons Recorded Under Section 148
Overview of the Case
The Mumbai Bench of the Income Tax Appellate Tribunal delivered a significant ruling in Mellona Developers Pvt. Ltd. Vs ITO, reinforcing a well-settled but frequently violated principle of reassessment law — that once the Assessing Officer fails to make any addition on the very issue for which a reassessment was triggered, he cannot substitute an entirely different addition in its place without issuing a fresh notice under Section 148 of the Income Tax Act, 1961.
The Tribunal set aside a disallowance of ₹5.75 crore on account of loan processing fees, holding that the addition was wholly without jurisdiction given the circumstances under which the reassessment proceedings had been initiated and concluded.
Background: Who is the Assessee and What Was the Business?
Mellona Developers Pvt. Ltd. is a private limited company engaged in the business of real estate development, specifically dealing in the construction and development of property. For the Assessment Year 2017-18, the assessee had filed its return of income declaring a loss of ₹5,89,04,142/-, which was processed under Section 143(1) of the Income Tax Act, 1961. No scrutiny assessment under Section 143(3) was undertaken for that year.
The assessee had acquired property at Walkeshwar, Mumbai, and was actively pursuing the development of the same, including acquisition of tenancy rights from occupants of the Indra Bhuvan building. During the course of this activity, it had availed of a loan of ₹80 crores from HDFC Bank, which was deployed in inter-corporate deposits (ICDs) with other entities, generating interest income of ₹19,75,09,145/-. This interest income was adjusted against the interest expenditure of ₹25,49,38,675/- payable on the borrowed funds and was reduced from project work-in-progress rather than being separately offered to tax.
Historical Context: Parallel Proceedings for AY 2015-16
To appreciate the genesis of the reassessment for AY 2017-18, it is important to understand what had transpired in the assessment proceedings for AY 2015-16, which directly influenced the Assessing Officer's thinking.
During the AY 2015-16 assessment, the AO had examined a broadly similar factual matrix. The assessee had taken a loan from HDFC Bank for property acquisition and had capitalized the interest against project work-in-progress. Interest earned from Fixed Deposits with Oriental Bank of Commerce amounting to ₹1,56,56,467/- had been reduced from interest expenses on borrowed funds. The AO held that since these deposits were funded by borrowed capital that was not being used for business development, the interest income was taxable as income from other sources under the principles laid down in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC).
The assessment was completed on 22.12.2017, determining a total income of ₹1,42,25,233/- and raising a demand of ₹58,50,890/-. The first appellate authority, CIT(A) Mumbai-8, dismissed the assessee's appeal vide Order No. CIT(A), Mumbai-8/10193/2017-18 dated 05.02.2020, relying on the decisions in:
- V.P. Gopinathan 116 Taxmann 489 (SC)
- M/s. A.R. Enterprises [2011] 13 taxmann.com 227 (Madras)
- Thermal Powertech Corporation India Ltd. [2017] 81 taxmann.com 168 (Hyderabad Trib.)
The CIT(A) held that the assessee had failed to demonstrate that the funds deposited in the bank were parked in the ordinary course of business, and accordingly sustained the addition of ₹1,56,56,467/-.
Initiation of Reassessment for AY 2017-18 Under Section 147/148
Drawing a direct parallel between AY 2015-16 and AY 2017-18, the Assessing Officer formed the view that the facts and circumstances were substantially identical. He observed that for AY 2017-18 as well: