TaxTMI 
TaxTMI 
2021 (4) TMI 450
X X X X Extracts X X X X
X X X X Extracts X X X X
....the powers of enhancement under section 251(1)(a). The action of ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the very action of enhancement being illegal and outside the scope of powers of CIT(A) in the instant case. 2. In the facts and circumstances of the case and in law, ld. CIT(A) has erred disallowing the interest expenditure, incurred by the assessee company, of Rs. 53,78,282, u/s 36(1)(iii). The action of the ld. CIT(A) is illegal, arbitrary, unjustified and against the facts of the case. Relief may please be granted by deleting the said disallowance of Rs. 53,78,282 as such interest expenses has been incurred for the purpose of business. 3. The assessee company craves its rights to add, amend or alter any of the grounds on or before the hearing." 2. The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic. 3. The brief facts of the case are that the assessee company is engaged in business of construction, purchase and sale of immovable properties. The assessee filed its return of income on 29/09/2013 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Singh in [2017] 82 taxmann.com 230 (Del-Trib) 1.4.ii. Sundaram Medical Foundation in (2016) 45 ITR (Trib) 500 (Chennai-Trib) 1.5. As per Explanation to Section 251 - "....in disposing of an appeal, CIT(A) may consider and decide any matter arising out of the proceedings, in which the order appealed against was passed....." Thus, if any matter is not arising "out of the proceedings" before the AO, ld. CIT(A) has no power of enhancement apropos such matters. In the present case, the issue of whether interest expenses incurred on loan taken from Shri Udai Kant Mishra was for the purpose of business or not was not arising out of the proceedings before the ld. AO. This is for the reasons that the ld. AO himself, in the past, in the preceding two years, had allowed the claim of such expenditure, by being fully aware that such expenditure incurred and the loan so taken, was utilized for the purpose of business of the assessee company. (Refer Para 1.1 to 1.6 below) 1.6. In the Show Cause Notice issued by ld. CIT(A), u/s 251(2), the sole basis through which ld. CIT(A) proposed to enhance the income of the assessee company, by disallowing interest expenses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing given to the assessee, before making such enhancement and thus would be against the legal position set out in section 251(2). 1.10. The specific requirement of issuing SCN contained in section 251(2) is issue based. The power of Enhancement is different from power of Assessment. In section 143, there is no specific requirement of SCN which is there in 251(2). The SCN issued on a particular aspect gets exhausted if ld. CIT(A) is convinced with the reply of the appellant on that issue. Ld. CIT(A) has to mandatorily issue a fresh SCN if ld. CIT(A) is changing the basis of enhancement. Therefore, in this view of the legal position, the power of enhancement is exercised by the ld. CIT(A) without jurisdiction and also against the principle of natural justice. 1.11. In the present case, in the SCN ld. CIT(A) raked up the issues of no business activities being undertaken by the assessee company, the entire reply to such SCN by the assessee company was based on explaining the legal position whether business activities and revenue generated out of it is pre-condition for claiming deduction u/s 36(1)(iii) or not. Whereas, no opportunity, at all, was provided to the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....utilized for the purpose of business. 1.17 Resultantly, interest expenses on such loan were allowed by the ld. AO u/s 36(1)(iii) for both the preceding years. The only quarrel of the ld. AO, in the preceding years, was with respect to the rate at which such loan was taken. Resultantly, part of such interest expenses was disallowed by the ld. AO u/s 40A(2)(b). 1.18 However, Hon'ble ITAT, Jaipur Bench, allowed the rate of interest on such loan taken from Shri Udai Kant Mishra to the extent of 14%. Even ld. CIT(A), in the preceding years, did not make any disallowance u/s 36(1)(iii) and accepted the loan to have been utilized for the purpose of business of the assessee company. 1.19 As can be seen from the facts stated, hereinbefore, the loan outstanding in the books of the assessee company, as taken from Shri Udai Kant Mishra, was nothing but obtained in the preceding years. During the current year, the interest expense of Rs. 53,78,282 incurred on the loan taken from Shri Udai Kant Mishra was credited to his account, which resulted into increase in the balance outstanding of such loan as at the end of the current year. Particulars Amount Opening b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssion. 1.25.A Section 36(1)(iii) allows deduction of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. 1.25.B On the contrary, Section 57 which allows deductions from the income chargeable under the head Income from Other Sources states that "any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income" 1.25.C The pre requisite for claiming deduction u/s 36 is that the expenditure should be incurred "for the purpose of business". There is no requirement of generating any corresponding income, as a result of such expenditure. 1.25.D For instance, if any assessee incurred expenditure on advertisement, then for claiming such expenditure the assessee need not demonstrate whether any corresponding revenue was generated, as a result of the advertisement. Till the time the advertisement is for the purpose of business the same would be allowed. 1.25.E However, for claiming expenditure u/s 57 under the head Income from Other Sources the assessee is required to showcase the corresponding income ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es were disallowed solely for the reason that no nexus could be proved by the assessee company of such expenditure with the earning of interest income from the partnership firm. 1.30 The fact that ld. CIT(A) deleted the disallowance, made by the ld. AO, u/s 14A, goes to prove that no part of the expenses so incurred were utilized for the purpose of earning exempt income. 1.31 Ld. CIT(A) in his entire order has confused himself with the correct legal and factual position, the same can be demonstrated as under: - Contention of CIT(A) CIT(A) Page No. There were no business activities during the relevant previous year Page 31 Assessee company could not prove nexus between earning of interest from M/s Ambience Colonizers and payment of interest on loan taken from Shri Udai Kant Mishra Page 40 There was no business activity except for a solitary sale transaction during the relevant previous year Page 40 The assessee has stopped its business activity of real estate Page 40 Thus, ld. CIT(A) was himself not sure of the reason making disallowance of the interest expenditure claimed by the assessee company u/s 36(1)(iii), thereby enhanc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the entire disallowance U/s 14A of the Act but enhanced the income of assessee company by making disallowance of Rs. 53,78,282/- u/s 36(1)(iii) of the Act on account of interest expenses incurred on loan taken. 8. From perusal of the record, we observe that the ld. CIT(A) had enhanced the income of the assessee by disallowing interest expenditure, which was not the subject matter of assessment. Whenever, the question of taxability of income from a new source is concerned, which had not been considered by AO, the right manner to tax such new source is by invoking Section 147/ 148 or Section 263 of the Act. In view of such specific provisions, it is inconceivable that a similar power is available to CIT(A) u/s 251 of the Act. In this regard, we draw strength from the decision of Coordinate Bench of this Tribunal in the case of Jagdish Narayan Sharma, ITA 751/JP/2015, wherein the Coordinate Bench has held as under "We have also look at the recent decisions on the subject and find that the Hon'ble High Court of Kerala in case of Commissioner of Income Tax, Thrissur v. B.P. Sherafudin reported in [2017] 87 taxmann.com 330 (Kerala) had an occasion to examine a similar is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m of such expenditure, by being fully aware that such expenditure incurred and the loan so taken, was utilized for the purpose of business of the assessee company. In the Show Cause Notice issued by ld. CIT(A), u/s 251(2) of the Act, the sole basis through which ld. CIT(A) proposed to enhance the income of the assessee company, by disallowing interest expenses u/s 36(1)(iii) was that no business activities were carried out by the assessee company, during the relevant previous year. However, ultimately, when such expenses were disallowed by the ld. CIT(A), the reason given was that such interest expenses claimed by the assessee company in its Profit and Loss account had no relation with the interest income earned by the assessee company, during the relevant previous year. The reason of no business being carried out by the assessee company changed to the nexus not being proved between the interest income and the interest expenses for the relevant previous year. Although, ld. CIT(A) u/s 251 has been given powers of enhancing the income of any assessee, however, such powers are not unfettered and come with riders. One such rider is that ld. CIT(A) before enhancing the income of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee company to explain the nexus between the interest income and the interest expenses and whether such nexus was, at all, required to be proved. 12. It is an undisputed fact that the assessee company, being engaged in the Real Estate Development, in the preceding years, had taken loan from Shri Udai Kant Mishra for utilizing the same for the purpose of its business. Shri Udai Kant Mishra is the main person behind Trimurty Group, to which the assessee company belongs. The year wise details of loan taken from Shri Udai Kant Mishra by the assessee company is as under: - Particulars FY 2010-11 FY 2011-12 FY 2012-13 (Relevant Year) Outstanding balance as at the end of the relevant year 1,54,26,352 3,61,15,187 3,72,21,141 Rate of Interest paid on loan outstanding 18% 18% 15.25% As seen from the table above, there was no major increase in the outstanding loan amount taken by the assessee company from Shri Udai Kant Mishra, as seen during the relevant previous year vis a vis the immediately preceding year. For the reason of good market standing of Shri Udai Kant Mishra, the possibility of him getting loan from the market was more, in com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....account, which resulted into increase in the balance outstanding of such loan as at the end of the current year. The details of the same are as under: Particulars Amount Opening balance of loan outstanding as on 01.04.2012 Rs. 3,61,15,187 Add: Interest expenses Rs. 53,78,282 Less: Closing balance of loan outstanding as on 31.03.2013 Rs. 3,72,21,141 Payouts (Balancing Figure) Rs. 42,72,328 Thus, no fresh infusion of funds, in the form of loan taken from Shri Udai Kant Mishra had taken place during the year under reference. The funds as taken in the preceding years for the purpose of business, remained parked in different avenues for which they were taken. Undisputedly, the fact of the loans taken in the preceding years, having been utilized for the purpose of business, has even been accepted by the Department, the matter having attained finality. Therefore, the interest expenses incurred on the same loan amount during the relevant previous year were for the purpose of business, allowable u/s 36(1)(iii). 14. It is a trite law that both the Income Tax Authorities i.e. the AO as well as ld. CIT(A), having co-terminus powers, with that of the ld. AO, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s the assessee is required to showcase the corresponding income generated and then only expenditure is allowed to be claimed under such section. 15. We further observed that the ld. CIT(A) has himself with the deductibility of expenditure, interest or otherwise u/s 36 with the deductibility, as provided under the head 'Income from Other Sources' u/s 57 of the Act. It is pertinent to note that ld. CIT(A) has not even changed the head of income of the assessee company while disallowing the interest expenditure. Ld. CIT(A) has even at Page 41 of his order given reference of Section 28 which falls under the head Profits and Gains from Business and Profession. The borrowings from Shri Udai Kant Mishra, on which interest expenses were incurred by the assessee company in the current and the preceding years, were all parked in various Fixed Assets, at different points of time during the current and the preceding years. None of the assets including investment in group companies or partnership firms have been held by the ld. CIT(A) to be not for the purpose of business. Unless there was any allegation that the borrowings were utilized for purposes other than for business, disallowance of ....