2020 (4) TMI 720 - AT - Income Tax

Scope of rectification under Section 154 - Deduction claimed u/s. 80IAB - Claim disallowed by a rectification order passed by the AO u/s. 154 - HELD THAT - Eligibility of deduction u/s. 80IAB is governed by the true character of lease rental income derived. The CBDT circular albeit in the context of S. 80IA(4-(iii) has expressed its concern on litigation towards taxability of lease income under the appropriate head and granted relief to the taxpayer for eligibility of deduction. The issue thus cannot be said to be totally free of any debate. On the contrary, the debate, if any, leans in favour of the assessee. Thus, the rectification carried out u/s. 154 of the Act, in our view, is beyond the mandate of law and requires to be struck down. Deduction u/s 80IAB - HELD THAT - Find considerable merit in the plea of assessee for allowability of deduction claimed from income derived by way of letting out of properties. The assessee is entitled to benefit of deduction notwithstanding wrong classification of income under the head income from house property . The AO was under duty to examine the true nature and character of income while framing assessment regardless of error committed by the assessee in this regard. The claim of assessee u/s 80IAB thus deserves to be allowed on first principles. Wrong classification of income under the head income from house property , has resulted in wrong claim of deduction under S. 23/24 while computing income under the head house property and requires correction. Similarly, the normal business expenses incurred were also not claimed from lease rentals in view of restrictions placed under the head income from house property . The correct computation of business income on realignment of head of income would thus be required to correctly determine the quantum of income eligible for deduction under S. 80IAB - restore the issue back to the file of Assessing Officer for re-determination of taxable income in accordance with law, having regard to the true nature of income derived by the assessee. The AO shall grant deduction u/s. 80IAB. Allowability of interest expenditure u/s. 36(1)(iii) - HELD THAT - Issue towards claim of interest expenses is also required to be examined de novo by the AO in the light of overhaul and realignment of nature of SEZ income under the head business income. Accordingly, the issue of allowability of interest is restored to the file of AO for redetermination in accordance with the law in the light of provisions applicable in relation to income chargeable under the business income and in the light of observation noted above.

Summary

Issues Involved:
1. Authority of the AO to pass a rectification order denying deduction u/s. 80IAB.
2. Eligibility of deduction u/s. 80IAB for lease/rental income from SEZ.
3. Allowability of interest expenditure u/s. 36(1)(iii).

Issue-wise Detailed Analysis:

1. Authority of the AO to pass a rectification order denying deduction u/s. 80IAB:
The assessee challenged the authority of the AO to pass a rectification order u/s. 154 of the Income-tax Act, 1961, which disallowed the deduction claimed u/s. 80IAB. The AO had initially allowed the deduction during the assessment u/s. 143(3) but later sought to withdraw it on the grounds that the deduction is admissible only for profits & gains from SEZ business and not for income taxable under the head 'income from house property'. The Tribunal observed that the scope of rectification u/s. 154 is limited to correcting mistakes apparent from the record and does not extend to debatable issues. The Tribunal referred to the CBDT Circular No. 16/2017 and judicial precedents, concluding that the rectification action of the AO was beyond the mandate of law and required to be quashed.

2. Eligibility of deduction u/s. 80IAB for lease/rental income from SEZ:
The Tribunal examined whether the lease/rental income from SEZ, declared under 'income from house property', could be eligible for deduction u/s. 80IAB. The assessee argued that the income should be considered as business income based on commercial principles and the CBDT Circular No. 16/2017, which states that income from letting out premises in SEZ should be treated as business income. The Tribunal agreed with the assessee, noting that the true character of income should be determined based on commercial principles, regardless of its classification by the assessee. The Tribunal held that the benefit of deduction u/s. 80IAB could not be denied merely because the income was declared under 'income from house property'.

3. Allowability of interest expenditure u/s. 36(1)(iii):
The assessee also challenged the disallowance of interest expenditure u/s. 36(1)(iii). The AO had disallowed the interest expenditure on the grounds that the loans were taken for the construction of let-out property and not for business purposes. The CIT(A) had granted relief to the assessee without providing reasons. The Tribunal noted that the issue of interest expenditure should be examined de novo by the AO in light of the realignment of SEZ income under 'business income'. The Tribunal restored the issue to the AO for redetermination in accordance with the law.

Conclusion:
The Tribunal allowed the appeal of the assessee in ITA No. 202/Bang/2019, partly allowed the assessee's appeal in ITA No. 203/Bang/2019, and allowed the revenue's appeal in ITA No. 225/Bang/2019 for statistical purposes. The AO was directed to re-examine the issues concerning the deduction u/s. 80IAB and the allowability of interest expenditure in accordance with the law and the true nature of the income derived by the assessee.