No Addition on a Different Issue if Reopened Issue Fails: ITAT Deletes ₹5.75 Crore Disallowance

Mellona Developers Pvt. Ltd. Vs ITO (ITAT Mumbai)

No Addition on a Different Issue if Reopened Issue Fails: ITAT Deletes ₹5.75 Crore Disallowance

In a significant ruling, the Mumbai ITAT held that when an assessment is reopened for a specific issue, the Assessing Officer cannot make an addition on an altogether different issue if no addition is ultimately made on the ground for which the reassessment was initiated. The Tribunal deleted a ₹5.75 crore disallowance of loan processing fees made in the case of a real estate developer.

The reassessment was initiated on the allegation that the assessee had earned interest income of ₹19.75 crore from inter-corporate deposits (ICDs) and had wrongly adjusted the same against project work-in-progress. According to the Assessing Officer, such interest income had escaped assessment and therefore proceedings under section 147/148 were initiated. However, after completing the reassessment, the Assessing Officer did not make any addition in respect of the alleged escaped interest income, which was the very basis for reopening. Instead, he disallowed ₹5.75 crore paid as loan processing fees on the ground that borrowed funds were not used for business purposes.

The Tribunal noted that the disallowance of processing fees was not the issue for which reasons were recorded while reopening the assessment. Relying on the Bombay High Court decision in Jet Airways (I) Ltd., it reiterated that where the Assessing Officer ultimately accepts that the income for which he formed the “reason to believe” has not escaped assessment, he cannot proceed to assess some other income independently without issuing a fresh notice under section 148.

Since no addition was made on the issue of ₹19.75 crore interest income, which formed the sole basis of reopening, the Tribunal held that the subsequent addition of ₹5.75 crore towards loan processing fees was without jurisdiction. Accordingly, the addition was deleted and the assessee’s appeal was allowed, without the Tribunal entering into the merits of the disallowance.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal has been preferred by the Assessee against the order dated 24.10.2025, impugned herein, passed by the National Faceless Appeal Centre (NFAC)/Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) u/s 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2017-18.

2. The Assessing Officer {in short ‘AO’} in the instant case observed that the Assessee is in the business of dealing, construction and development of property and purchased a property at Walkeshwar and is in process of developing the same.

3. The AO further observed that during the course of assessment proceedings, for A.Y.2015-16, it was held as under:

“That the Assessee company has taken loan of Rs.80 Crores from HDFC for purchase of property and paid interest on it, which was treated as project work in progress and capitalized the same as ‘WIP’. It is further seen that interest on FDR from Oriental Bank of Commerce has been shown as other income and transferred to Inventories project work in progress. The said interest income of Rs.1.56 Crore was reduced from the interest expenses on borrowed funds. Since, Investments in fixed deposits out of borrowed funds was not utilized for the business and development of properties, the same is treated as income from ‘other sources’.

Thus, the AO on the aforesaid analyzations completed the assessment on 22.12.2017 determining total income of Rs. 1,42,25,233/- and raising a demand of Rs.58,50,890/-.

The Assessing Officer further relying on the decision in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd. Vs. CIT (1997) 227 ITR 172 (SC) treated the interest received of Rs.1,56,56,467/- as Income from Other Sources.

Aggrieved by the said order the Assessee went in appeal before first appellate authority.

The then Ld. CIT(A) vide Order No. CIT(A), Mumbai-8/10193/2017-18 dated 05.02.2020, dismissed the appeal of the Assessee company relying on the following judgements:

(i) V.P. Gopinathan 116 Taxmann 489 (SC)

(ii) M/s.A.R. Enterprises [2011] 13 taxmann.com 227 (Madras)

(iii) Thermal Powertech Corporation India Ltd. [2017] 81 taxmann.com 168 (Hyderabad Trib.)

The Ld. then CIT(A) in his order dated 05.02.2020 stated that the Assessee company failed to substantiate the reason for which the funds were deposited in the bank. The Assessee was not able to substantiate that the excess funds are parked during the course of business. Therefore, it is to be assumed that surplus funds are parked for earning of interest income and confirmed the addition of Rs. 1,56,56,467/-.”

4. Thus, the AO in this case, from the profit and loss account and return of income for the AY under consideration, had observed that the Assessee has shown “other income” at 19,75,09,145/- as interest from inter-corporate deposit, which was reduced from project work in progress against the interest payment of Rs.25,49,38,675/- on borrowed funds. The Assessee has not shown any income from business and profession. The surplus funds, which were not immediately required by the Assessee, were kept invested in short term deposits with banks and earned interest income, which was capitalized and adjusted against the interest paid on borrowed funds. Since, the Assessee has not shown any income from business activity, thus the adjustment made by the Assessee is not allowable. Thus, the interest earned is clearly of ‘revenue nature’ and will have to be taxed in the hands of the Assessee. Further, the facts and circumstances of the Assessee for AY 2015-16 are similar to AY 2017­18, therefore, the interest income chargeable to tax has escaped assessment for the AY 2017-18 to the tune of Rs.19,75,09,145/-.

Further, in this case, return of income was filed for the year under consideration but no scrutiny assessment under Section 143(3) of the Act, was made. Accordingly, in this case, the only requirement of initiating proceeding under Section 147 of the Act, is reason to believe, which has been recorded above.

5. Thus, on the aforesaid reasons, the AO had observed that he is satisfied that this case is fit to issue notice under Section 148 of the Act and accordingly, after obtaining prior approval in accordance with Section 151 of the Act, the AO reopened the case of the Assessee by issuing a notice dated 31.03.2021 under Section 148 of the Act.

6. The Assessee in response to such notice u/s 148 of the Act, filed its ITR on dated 04.2021.

7. Thereafter, the AO issued various statutory notices to the Assessee, who in response, submitted the relevant details, which were considered by the AO. Further, the AO also issued a show cause notice dated 03.2022 which read as under: –

“As seen from the financial statements, Assessee had taken loan from HDFC bank and the same was lent to other companies on which interest of Rs. 19,74,03,768/- was earned. Further Assessee had debited interest expenses of Rs. 19,74,03,768/- and processing fee for loan of Rs. 5,75,00,000/-.”

8. The Assessee in response to said show-cause notice, made its submission on dated 03.2022, inter alia, claiming that the Assessee has purchased property at Walkeshwar, Mumbai and is in process of developing the same and purchasing tenancy rights from tenants of Indra Bhuvan building. As the Assessee had started the expenses related to it therefore, the same should be allowed.

9. The AO, though considered the aforesaid claim of the Assessee, however, not being satisfied with the same and perusing the financials held that the loans accepted have not been used for the activities claimed by the Assessee but straightaway parked in inter-corporate deposits and interest income was earned therefrom. Therefore, in view of the facts of the case, it is clear that in relation to the interest income earned of Rs. 19,74,03,768/-, the Assessee, has played the role of only accepting an advanced loan, without carrying out any business activities. Therefore, the excess expenditure of Rs.5,75,00,000/- is disallowed and added back to the total income of the Assessee.

10. Thus, the AO ultimately, made the addition of Rs.5,75,00,000/- being disallowance of excess expenditure, as loan processing fees.

11. The Assessee being aggrieved, challenged the said addition by filing first appeal before the ld. Commissioner, who vide impugned order, affirmed the same by observing and holding as under:-

“I have carefully perused the assessment order, the grounds of appeal, the written submissions of the appellant, and the material available on record. The issues raised for adjudication are:

1. Whether the reassessment proceeding initiated u/s 147 were valid and

2. Whether the disallowance of Rs.5,75,00,000/- towards loan processing fees is justified.

5.1 The appellant is engaged in the business of real estate development. For AY 2017-18, it filed its return declaring a loss of Rs. 5,89,04,142/-, which was processed u/s 143(1).

5.1.1 The case was reopened u/s 147 on the basis of information that the Assessee had earned interest income of Rs. 19,75,09,145/-on inter-corporate deposits, which was allegedly reduced from project work-in-progress against interest expenditure. During reassessment, the AO found that the Assessee had borrowed funds from HDFC Bank and, instead of utilizing the same for its construction project, advanced them as inter-corporate deposits to other entities on which interest income was earned.

5.1.2 The AO noted that no actual development activity had commenced, and the Assessee had effectively functioned as a financier rather than a real estate developer. The AO therefore disallowed Rs.5,75,00,000/- claimed as loan processing fees and reduced the loss accordingly.

5.2 The reassessment was initiated after recording reasons and obtaining necessary sanction under section 151. The basis for reopening was tangible material – interest income earned on inter-corporate deposits not properly offered to tax. The appellant has not shown any factual inaccuracy in the reasons recorded.

5.2 The reassessment was initiated after recording reasons and obtaining necessary sanction under section 151. The basis for reopening was tangible material – interest income earned on inter-corporate deposits not properly offered to tax. The appellant has not shown any factual inaccuracy in the reasons recorded.

5.2.1 The Hon’ble Supreme Court in Raymond Woollen Mills Ltd. v. IΤΟ (1999) 236 ITR 34 (SC) held that at the stage of reopening, what is required is only a prima facie belief that income has escaped assessment, and sufficiency or correctness of the reasons cannot be gone into at that stage. Accordingly, the reopening of assessment u/s 147 is valid in law.

5.3 Disallowance of loan processing fees:

5.3.1 It is an admitted fact that the Assessee borrowed funds from HDFC Bank and placed the same as inter-corporate deposits (ICDs) with other companies, thereby earning interest income. The funds were not utilized for the construction or development of the project during the year.

5.3.2 The appellant claimed that since it had already purchased property and commenced preliminary activities, the loan was used for business purposes, and the processing fees should be allowed as a revenue expenditure.

5.3.3 However, the evidence on record does not support the claim that any construction activity or development expenditure was carried out during the year. The funds borrowed were entirely diverted to ICDs, and no part of the loan was shown to have been used for project execution.

5.3.4 The Hon’ble Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) held that where borrowed funds are parked in short-term deposits pending utilization, the interest earned thereon is assessable as “Income from Other Sources”, and the corresponding expenses cannot be set off against such income unless they are directly incurred to earn it.

5.3.5 In the present case, the AO found that the Assessee’s activity for the year was confined to borrowing and lending funds, and there was no evidence of business operations. The appellant’s reliance on Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151 (Bom) is misplaced, since in that case, the business was held to have been “set up” once operational steps were taken. Here, no operational activity was shown only financial transactions.

5.3.6 Further, while courts have held that expenditure incurred for raising a loan is revenue in nature, that principle applies only when the loan is taken for business purposes. In this case, the borrowed funds were not used for business but advanced.

5.2.1 The Hon’ble Supreme Court in Raymond Woollen Mills Ltd. v. IΤΟ (1999) 236 ITR 34 (SC) held that at the stage of reopening, what is required is only a prima facie belief that income has escaped assessment, and sufficiency or correctness of the reasons cannot be gone into at that stage. Accordingly, the reopening of assessment u/s 147 is valid in law.

5.3 Disallowance of loan processing fees:

5.3.1 It is an admitted fact that the Assessee borrowed funds from HDFC Bank and placed the same as inter-corporate deposits (ICDs) with other companies, thereby earning interest income. The funds were not utilized for the construction or development of the project during the year.

5.3.2 The appellant claimed that since it had already purchased property and commenced preliminary activities, the loan was used for business purposes, and the processing fees should be allowed as a revenue expenditure.

5.3.3 However, the evidence on record does not support the claim that any construction activity or development expenditure was carried out during the year. The funds borrowed were entirely diverted to ICDs, and no part of the loan was shown to have been used for project execution.

5.3.4 The Hon’ble Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) held that where borrowed funds are parked in short-term deposits pending utilization, the interest earned thereon is assessable as “Income from Other Sources”, and the corresponding expenses cannot be set off against such income unless they are directly incurred to earn it.

5.3.5 In the present case, the AO found that the Assessee’s activity for the year was confined to borrowing and lending funds, and there was no evidence of business operations. The appellant’s reliance on Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151 (Bom) is misplaced, since in that case, the business was held to have been “set up” once operational steps were taken. Here, no operational activity was shown only financial transactions.

5.3.6 Further, while courts have held that expenditure incurred for raising a loan is revenue in nature, that principle applies only when the loan is taken for business purposes. In this case, the borrowed funds were not used for business but advanced as ICDs for earning interest; hence, the processing fee cannot be said to have been incurred “for the purpose of business”.

5.3.7 Therefore, the AO’s finding that the processing fees of Rs.5,75,00,000/- are not allowable as business expenditure is factually and legally correct.

5.4 The reopening of assessment is valid. The disallowance of loan processing fees of Rs.5,75,00,000/- is justified, as the borrowed funds were not utilized for business purposes, and the appellant has not substantiated its claim with verifiable evidence.

5.5 Accordingly, the addition made by the AO is sustained.

6. The appeal is dismissed. The assessment order passed u/s 147 r.w.s. 144B dated 30.03.2022 is confirmed in full.

12. Thus, the Assessee being aggrieved, has challenged the impugned order passed and addition affirmed, by filing the instant appeal.

13. Heard the parties and perused the material available on record. The case of the Assessee was reopened mainly on the reason that though the Assessee has not shown any income from profession, however, reduced the interest of 19,75,09,145/- earned on inter-corporate deposit, from project work in progress, against the interest payment of Rs.25,49,38,675/- on borrowed funds. Since the Assessee has not shown any income from business activities, the adjustment made by the Assessee is not allowable and thus, the interest earned is clearly of ‘revenue nature’ and will have to be taxed in the hands of the Assessee.

14. Accordingly, the AO observed that interest income to the tune of 19,75,09,145/- chargeable to tax, has escaped assessment for the AY 2017-18 and accordingly, the AO reopened the case of the Assessee u/s 148 of the Act by issuing a notice under Section 148 of the Act.

15. Admittedly, the AO at last, made no addition on account of other income at 19,75,09,145/-, as interest earned on inter-corporate deposit. However, made the addition of Rs.5,75,00,000/-only, being an expenditure incurred by the Assessee, as processing fee for loan. Thus, the Assessee before this Court has raised legal issue, inter alia, relying on the judgment by the Hon’ble Jurisdictional High Court in the case of Commissioner of Income Tax-5, Mumbai vs. Jet Airways (i) LTT 331 ITR 236 (Bombay).

16. On the contrary, the ld. D.R. vehemently supported the impugned order by claiming that the impugned order does not suffers from any perversity, impropriety and legality.

17. We have given thoughtful consideration to the peculiar facts and circumstances of the case and rival claims of the parties. As observed above, the case of the Assessee was reopened by issuing a notice dated 03.2021 under Section 148 of the Act, mainly on the reason that interest income chargeable to tax has escaped assessment for the AY 2017-18 to the tune of Rs.19,75,09,145/-. Whereas, it is fact that no addition has been made on the account, but in fact, the AO ultimately made the addition of Rs.5,75,00,000/-being processing fee for loan, which was claimed as expenditure by the Assessee, for which no notice under Section 148 of the Act was ever issued and /or no reasons for reopening the case were recorded for such issue and therefore, in view of the dictum laid down by the Hon’ble Jurisdictional High Court in the case of Jet Airways (supra), wherein it has been held “that after issuing a notice under Section 148 of the Act, the AO accepted the contention of the Assessee and holds that income for which he has initially formed the reason to believe had escaped assessment, as a matter of fact, not escaped assessment, it is not open to the AO independently, to assess some other income. If he intends to do so, a fresh notice under Section 148 of the Act would be necessary, the legality of which would be tested in the event of a challenge by the Assessee.” the addition being sans recording the proper satisfaction and /or reason as mandated for issuance under Section 148 of the Act, made by the AO in this case, as affirmed by the ld. Commissioner, is liable to be deleted and thus, the same is deleted.

18. As we have deleted the addition on this legal aspect itself, hence, deem it appropriate not to delve into other issues/merits of the case, as adjudication of the same would be futile exercise.

19. In the result, Assessee’s appeal is allowed.

Order pronounced in the open court on 15.06.2026.