Facts of the Case

  • The assessee, engaged in real estate development, received funds through Compulsory Convertible Debentures (CCDs) for a commercial project.
  • These funds were temporarily parked in fixed deposits, generating interest.
  • The assessee adjusted such interest against project cost instead of crediting it to the Profit & Loss Account.
  • The Assessing Officer (AO) accepted this treatment after inquiry during assessment under Section 143(3).
  • The Principal Commissioner of Income Tax (PCIT) invoked Section 263, holding that:
    • No proper inquiry was conducted.
    • Interest should be taxed as “income from other sources.”
  • The ITAT set aside the PCIT’s order.
  • Revenue appealed before the Delhi High Court.

Issues Involved

  1. Whether the AO failed to conduct proper inquiry regarding interest income.
  2. Whether Section 263 can be invoked for alleged inadequate inquiry.
  3. Whether interest earned on fixed deposits had nexus with the business project.
  4. Whether the assessment order was erroneous and prejudicial to revenue.

Petitioner’s Arguments (Revenue)

  • AO failed to verify taxability of interest income.
  • Explanation 2 to Section 263 is retrospective and applicable.
  • Interest on fixed deposits is “income from other sources.”
  • Relied on judgments:
    • Conventional Fasteners v. CIT
    • CIT v. Jyot Apparels
    • CIT v. Mereena Creations

Respondent’s Arguments (Assessee)

  • AO conducted proper inquiry and applied mind.
  • Interest income had inextricable nexus with the real estate project.
  • Funds were not surplus but project-specific.
  • Section 263 cannot be invoked for inadequate inquiry.
  • Tribunal’s finding is factual and binding.

Court Findings / Analysis

  • AO had conducted detailed inquiries, including notices and responses regarding interest treatment.
  • Distinction emphasized:
    • Lack of inquiry vs. inadequate inquiry
  • Section 263 can only be invoked when:
    • Order is erroneous and
    • Prejudicial to revenue
  • AO’s view was a plausible view, hence cannot be substituted by PCIT.
  • Interest earned was inextricably linked to project funds, thus:
    • Not taxable as “income from other sources”
  • Relied on precedents:
    • CIT v. Bokaro Steel Ltd.
    • Indian Oil Panipat Power Consortium Ltd.
    • NTPC Sail Power Co.
  • Distinguished Tuticorin Alkali case (surplus funds situation).

Court Order / Decision

  • Appeals of Revenue dismissed.
  • No substantial question of law arose.
  • ITAT order upheld.

Important Clarifications

  • Section 263 cannot be used for mere disagreement with AO’s view.
  • If AO conducts inquiry, even if brief, revision is not justified.
  • Interest income:
    • If linked to project funds → capital receipt / adjustment permissible
    • If surplus funds → taxable as income from other sources
  • “Inextricable nexus” is the key determining test.

Sections Involved

  • Section 263 of the Income Tax Act, 1961
  • Section 143(3)
  • Section 144C
  • Section 154 & 155
  • Section 56 (referred contextually)
  • Section 80HHC & 80IC (discussed in comparative precedents)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:1942-DB/RAS05072021ITA1162021_103855.pdf


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