TaxTMI 
TaxTMI 
2021 (2) TMI 581
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....ssioner of Income Tax (Appeals) erred in law and on facts in disallowing a sum of Rs. 17,12,616 (as per calculation of appellant) u/s 36(1)(iii) of Income Tax Act 1961 (Act) on the ground that the appellant has not put to use the asset even though the asset constitutes the stock in trade of the appellant. 3. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in holding that the disallowance of Rs. 17,12,616 (as per calculation of appellant) even though the loan has been taken for the purpose of purchasing assets which are stock in trade of the appellant. 4. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in disallowing a portion of the interest Rs. 48,20,663 (as per the calculations of the appellant) on the ground that the appellant had diverted the loans for non-business purposes and such a finding is perverse in law as being contrary to materials on record. 5. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in disallowing a portion of interest Rs. 48,20,663 (as per the calculations of the appellant) even though the total amounts paid to related parties is much l....
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....e above grounds is without prejudice to one another, the appellant craves the leave of the Hon'ble Income Tax Appellate Tribunal, Bangalore to add, delete, amend or modify otherwise all or any of the above grounds either before or at the time of hearing this appeal." 3. Ground No.1 is general in nature which do not require adjudication. 3.1 Ground Nos.2 & 3 are regarding disallowance of Rs. 17,12,616/- u/s. 36(1)(iii) of the Income Tax Act, 1961 ('the Act') for purchase of property in the Assessment Year 2014-15 and additional grounds of appeal in A.Y. 2014-15 which are inter related to these grounds are as follows : 4. The assessee has raised additional grounds which reads as under in Assessment Year 2014-15 : 1. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the disallowance to the extent of interest of Rs. 65,33,279/- (Rs. 17,12,616 + Rs. 48,20,663) u/s. 36(1)(iii) of the Act even though the total amounts advanced to related parties is much less than the capital and reserves and other interest free funds available with the appellant. 2. Without prejudice to the other grounds, that the learned Commi....
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....operties are treated as stock in trade by the assessee. The Assessing Officer disallowed interest cost to the extent of Rs. 82,49,994 on the ground that the funds borrowed have been utilized for giving interest free advances to related parties for purchase of property and these properties are in the nature of capital assets. Since the same has not been acquired and put to use during the year, the interest on such loans is disallowed u/s. 36(1)(iii) of the Act. The contention of the AR is that the above mentioned advances were also for the purpose of business and they are not classified as 'Capital WIP' or 'Capital Advance.' The ld. AR submitted that there is no dispute that the assessee is in real estate development. He submitted that the advances given to purchase the immovable property should not be considered as advances given for purchase of capital assets. He further submitted that the advances given to sister concerns for purchase of property will not fall under the purview of Section 36(1)(iii) of the Act. The ld. AR submitted that the advances given to related parties are to be presumed as interest free funds sufficient to meet the investments and advances to related partie....
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.... Explanation.-Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; The proviso was inserted by the finance Act, 2003 w.e.f. 1.4.2003. The words "for extension of existing business or profession" were omitted by the Finance Act, 2015 w.e.f 1.4.2016. The Hon'ble Supreme Court in the case of Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194/167 Taxman 206, has held that the newly inserted proviso will operate prospectively. Therefore Interest paid on capital borrowed for acquisition of an asset for any period beginning from the date on which the capital was borrowed for acquisition of the asset till date on which such an asset was put to use shall not be allowed as deduction only from AY 2016-17. For the period prior to AY 2016-17, the disallowance can be made only if the interest paid is in respect of capital borrowed for acquisition of an asset for extension of existing business or profession. Admittedly, the acquisition of capital asset is not for extension of existing business of the Assessee. Hence....
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....harges of Rs. 10,36,36,607 was accordingly deleted from the above interest cost of Rs. 12,81,90,657 while computing the disallowance u/s. 36(1)(iii) of the Act. The remaining interest cost of Rs. 2,00,54,050 was considered in the computation of disallowance u/s. 36(1)(iii) of the Act. He submitted that the order of Hon'ble Karnataka High Court did not speak about transactions with other related parties. Further he submitted that it must be presumed that the interest free funds have been utilized for giving advances to related parties and disallowance u/s. 36(1)(iii) of the Act cannot be made. He relied on the decision of Hon'ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. 410 ITR 466 (SC). On appeal, the CIT (Appeals) confirmed the disallowance. The learned Departmental Representative submitted that for determining proportion of the interest bearing funds given to the Related Parties, entire funds need to be considered and not only the interest bearing fund as in absence of specific detail the interest bearing funds as well as non-interest bearing funds would contribute to the interest free loans. He further submitted thatsince only interest expenditure of....
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....ncome was earned during the previous year ended on 31.03.2014, value of investments in the numerator of formula u/r 8D is NIL and there can be no disallowance. The interest cost of Rs. 12,81,90,657 has been considered as interest cost in the computation of disallowance u/s.14A of the Act. The contention of the ld. AR is that the interest cost has to be considered as Rs. 2,00,54,050. He relied on the following judgments :- (i) DCIT Vs. Ambuthirtha Power Pvt. Ltd. in ITA No.2324/Bang/2019 (Bang-Trib.) (ii) Cheminvest Limited Vs/ CIT 378 ITR 33 (Del) (iii) ACIT Vs. Vireet Investments 58 ITR (Trib) 313 (Del.-SB) The learned Departmental Representative relied on the order of CIT (Appeals). 15.1. The Assessee has contended that the Assessee did not earn any exempt income during the previous year relevant to AY 2014-15 and therefore there can be no disallowance u/s.14A of the Act in the absence of any exempt income having been earned by the Assessee. On this issue, the undisputed fact is that the Assessee did not earn any exempt income during the relevant previous year. Now it is settled position of law that whenever assessee did not earn any exempt income....
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.... was submitted that the following observations of the Hon'ble Supreme Court in the case of Maxopp Investments Ltd. Vs. CIT (2018) 91 taxmann.com 154(SC) suggests that even in the absence of exempt income having been earned by an Assessee, still a disallowance could be made u/s.14A of the Act. "....as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to income which does not form part of the total income under this Act". Axiomatically, it is that expenditure alone which has been incurred in relation to the income http://www.itatonline.org 33 which is includible in total income that has to be disallowed." .....we are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income,....
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.... cases pertain to dividend income, whether it was for the purpose of investment in order to retain controlling interest in a company or in group of companies or the dominant purpose was to have it as stock-in-trade." 15.4. It is clear from the above paragraph that the Hon'ble Supreme Court was not considering question whether in the absence of exempt income there can be disallowance of expenses u/s.14A of the Act. This aspect will be clear from the facts of the case of Maxopp Investments Ltd. one of the appellant in the group of appeals decided by the Hon'ble Supreme Court which was as follows: "5. The appellant company is engaged, inter alia, in the business of finance, investment and dealing in shares and securities. The appellant holds shares/securities in two portfolios, viz. (a) as investment on capital account; and, (b) as trading assets for the purpose of acquiring and retaining control over investee group companies, particularly Max India Ltd., a widely held quoted public limited company. Any profit/loss arising on sale of shares/securities held as 'investment' is returned as income under the head 'capital gains', whereas profit/loss arising on sale of shares/se....
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.... section 10(34) and (35) of about Rs. 11.07 crores and net interest income exempt under section 10(15)(iv) (h) of about Rs. 1.12 crores. The total exempt income claimed in the return was, therefore, Rs. 12,19,78,015/-. The assessee while claiming the exemption contended that the investment in shares, bonds, etc. constituted its stock-in-trade; that the investment had not been made only for earning tax free income; that the tax free income was only incidental to the assessee's main business of sale and purchase of securities and, therefore, no expenditure had been incurred for earning such exempt income; the expenditure would have remained the same even if no dividend or interest income had been earned by the assessee from the said securities and that no expenditure on proportionate basis could be allocated against exempt income. The assessee also contended that in any event it had acquired the securities from its own funds and, therefore, section 14A was not applicable. The AO restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D holding that Section 14A would be applicable......." 15.6. The Assessee in the appe....
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....nses u/s.14A of the Act. Consequently, we delete the disallowance of a sum of Rs. 76,23,425 and allow Gr.No.8 raised by the Assessee in the appeal for AY 2014-15 and further hold that in view of the decision on Gr.No.8, Grounds No.6,7 and 9 to 14 does not require any adjudication. ITA No.1038/Bang/2019 (A.Y. 2015-16) 16. The assessee has raised the identical grounds on merit as in ITA No.1037/Bang/2019, only change in figures. 17. The assessee has raised the additional grounds as follows : 1. " Grounds regarding validity of notice u/s. 143(2) of Income-tax Act, 1961 (Act) 1.1 That the order of the learned lower authorities erred in law and on facts in making an assessment without issuing a valid notice u/s 143(2) of the Act and therefore, the assessment is bad in law. 1.2 That the learned lower authorities erred in law and on facts in concluding the assessment even though the notice u/s 143(2) issued by the officer not having the jurisdiction over the appellant. 1.3 That the learned Commissioner of Income-Tax (Appeals) erred in law and on facts in holding that the provisions of section 292BB are applicable since the appellant has partici....
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....allenged the above disallowance in the appeal before ITAT vide ground nos. 2 to 5. However, it was advised to raise specific grounds." 18. Now we take up the additional grounds raised in ITA No.1038/Bang/2019. In view of the Hon'ble Supreme Court in the case of NTPC Ltd. Vs. CIT 229 ITR 383 (SC), we are inclined to admit the additional grounds as argued by the learned Authorised Representative. Accordingly, the additional grounds are admitted for adjudication. 19.1 As far as AY 2015-16 is concerned, we shall take up for consideration Additional Ground No.1 raised by the Assessee. In Additional Ground No.1 the Assessee has raised an issue with regard to validity of the order of assessment passed by the AO on the ground that no notice u/s.143(2) of the Act was issued by the AO having jurisdiction over the Assessee and that an order of assessment passed without issuing a valid notice u/s.143(2) of the Act is bad in law and is liable to annulled. The further plea of the Assessee is that the provisions of Sec.292BB of the Act will not be applicable in the case on the ground that the Assessee participated in the Assessment proceedings The issue sought to be raised in the additi....
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....ated in the proceedings and there is no prejudice caused to the Assessee and that provisions of Sec.292BB of the Act will come to the rescue of the revenue to cure defect of non service of notice u/s.143(2) of the Act by the AO having jurisdiction over the Assessee. The CIT(A) in coming to the above conclusion placed reliance on a decision of the Hon'ble Kerala High Court in the case of Padinjarekara Agencies (P) Ltd. Vs. CIT (2017) 85 taxmann.com 129(kerala). 19.7. We have carefully considered the rival submissions. Section 127 of the Act reads as follows: "Power to transfer cases. 127. (1) The Principal Director General or Director General or Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, transfer any case from one or more Assessing Officers subordinate to him (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) also subordinate to him. (2) Whe....
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....under this Act in respect of any year which may be pending on the date of such order or direction or which may have been completed on or before such date, and includes also all proceedings under this Act which may be commenced after the date of such order or direction in respect of any year." 19.8. It can be seen from the provisions of Sec.127(4) of the Act that the necessity of re-issuing any notice already issued by transferor AO by the transferee AO is not necessary but on the date on which a notice is issued the transferor AO should have held valid jurisdiction. In this case the notice u/s.143(2) of the Act was issued by the transferor AO on 26.4.2016 whereas he had no jurisdiction over the Assessee as early as 27.5.2013. Therefore the provisions of Sec.127(4) of the Act cannot come to the rescue of the revenue. 19.9. We find the facts of the present case are identical to the case already decided by the ITAT Kolkata Bench in the case of Rungta Irrigation Ltd. (supra). The issue in the case before the ITAT Kolkata Bench in the case of M/S.Rungta Irrigation Ltd. Vs. ACIT in ITA No.1224/Kol/2019 order dated 6.9.2019 was whether, non-issue of notice u/s.143(2) by the AO who p....
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.... the assessee's case to DCIT, Central Circle, Ranchi, the CIT, Delhi became functus officio and thereby his subordinate officers viz., ACIT, Circle 21(1), New Delhi, could not have issued notice u/s. 143(2) dated 28.07.2016 and in that view of the matter the notice issued by the ACIT, Circle-21(1), New Delhi u/s 143(2)was without jurisdiction and, therefore, non-est in the eyes of law. The Tribunal held that the ACIT, Central Circle-3(1), Kolkata who framed the assessment order dated 29.12.2017 pursuant to transfer of case ordered by PCIT, Central Patna dated 03.11.2017 u/s. 127 of the Act, without there being valid issuance of notice u/s 143(2) of the Act and therefore the said order is bad in law as held by the Hon'ble Supreme Court in CIT V Hotel Blue Moon (2010) 321 ITR 362 (S.C) wherein the Hon'ble Supreme Court has held that issue of a legally valid notice u/s. 143(2) is mandatory for usurping jurisdiction to frame scrutiny assessment u/s. 143(3) of the Act and absence of a valid notice u/s 143(2) is not a curable defect. The Tribunal also noticed that it's view in the case of Hotel Blue Moon (supra) was reiterated by the Hon'ble Apex Court in the case of CIT Vs Laxman Das Kh....
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....Section 142, sub-sections (2) and (3) of Section 143 strictly for the purpose of block assessments. We do not agree with the submissions of the learned counsel for the Revenue, since we do not see any reason to restrict the scope and meaning of the expression "so far as may be, apply". In our view, where the assessing officer in repudiation of the return filed under Section 158-BC(a) proceeds to make an enquiry, he has necessarily to follow the provisions of Section 142, sub-sections (2) and (3) of Section 143." 6. The question, however, remains whether Section 292BB which came into effect on and from 01.04.2008 has effected any change. Said Section 292BB is to the following effect:- "292BB. Notice deemed to be valid in certain circumstances.-Where an assessee has appeared in any proceeding or cooperated in any inquiry relating to an assessment or reassessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon him, has been duly served upon him in time in accordance with the provisions of this Act and such assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the....
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....43(2) of the Act was ever issued by the Department, the findings rendered. by the High Court and the Tribunal and the conclusion arrived at were correct. We, therefore, see no reason to take a different view in the matter." 19.11. In the present case, admittedly no notice u/s.143(2) was issued by the AO who had jurisdiction over the Assessee at all material point of time. The Assessee filed return of income on 30.9.2015, with the DCIT-Circle-11(3), Bangalore. A notice u/s.143(2) of the Act, dated 26.4.2016 was issued by the DCIT, CC-1(3), who ceased to have jurisdiction over the Assessee w.e.f 27.5.2013. Thereafter notice u/s.142(1) dated 5.10.2017 was issued by the Deputy Commissioner of Income Tax (DCIT)- Circle -11 (3) (Presently Circle-3(1)(2), Bangalore). An order of Assessment dated 7.12.2017 was passed u/s.143(3) of the Act by the Deputy Commissioner of Income Tax (DCIT)- Circle -11 (3) (Presently Circle-3(1)(2), Bangalore). As already stated, Admittedly there was no notice issued by the Deputy Commissioner of Income Tax (DCIT)- Circle -11 (3) (Presently Circle-3(1)(2), Bangalore) who completed the Assessment and was the AO who had jurisdiction with the Assessee w.e.f. 27....