Tribunal clarifies authority limits in deduction rectification under section 80IAB, directs reassessment on SEZ income.

The Tribunal held that the AO exceeded authority in rectifying a deduction denial under section 80IAB, emphasizing rectification is for correcting clear errors, not debatable issues. Lease/rental income from SEZ was deemed eligible for deduction under section 80IAB, irrespective of classification. The Tribunal directed reevaluation of interest expenditure disallowance under section 36(1)(iii) in light of SEZ income reclassification. The appeal was allowed in part, with directions for reassessment by the AO based on income nature.

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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.

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