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2021 (2) TMI 581 - AT - Income TaxDisallowance u/s 36(1)(iii) - 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 - as argued assessee is having capital and reserves and other interest free funds - HELD THAT - 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, the disallowance of interest cannot be sustained as otherwise the interest paid is regarded even by the AO as for the purpose of business of the Assessee. Therefore the disallowance made by the AO and the action of the CIT(A) in sustaining part out of the disallowance made by the AO, cannot be sustained and the same is directed to be deleted. Computation of deduction u/s 36(1)((iii) - HELD THAT - Contention of AR is that the assessee is having interest free funds to give advances to Related Parties and no disallowance u/s. 36(1)(iii) of the Act to be made, however, the assessee has not placed necessary details of availability of interest free funds in the form of reserves and surplus so as to make interest free advance to Related Parties. The assessee has to prove that it is having own funds to make advances to Related Parties for which the assessee has to furnish the fund/cash flow statements as on date of making such advance to Related Parties. The Assessing Officer on examining these statements has to decide whether the assessee is having enough interest free funds so as to make advance to Related Parties. The assessee shall prove its case of having interest free funds for making advance to Related Parties. Accordingly, this issue is remitted to the file of Assessing Officer for fresh consideration, as per law. Disallowance u/s. 14A - Assessee disallowance u/s. 14A submitted that the assessee has not earned any exempt income and disallowance u/s. 14A is not attracted - HELD THAT - As it prevails today and flowing from the judgments of various High Courts set out above that in the absence of exempt income having been earned by the Assessee there can be no disallowance of expenses u/s.14A of the Act. Consequently, we delete the disallowance. Validity of the order of assessment passed by the AO - no notice u/s.143(2) issued - HELD THAT - Since in the present case no valid notice u/s 143(2) was issued by the AO who held jurisdiction over the case of the Assessee the consequent order passed u/s 143(3) dated 7.12.2017 was legally unsustainable and therefore is null in the eyes of law and therefore quashed. The assessee accordingly succeeds on the preliminary legal issue raised before us - Decided in favour of assessee.
Issues Involved:
1. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961. 2. Disallowance under Section 14A of the Income Tax Act, 1961. 3. Validity of notice under Section 143(2) of the Income Tax Act, 1961. 4. Conversion of limited scrutiny to complete scrutiny. Detailed Analysis: 1. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961: The primary issue was the disallowance of interest expenses under Section 36(1)(iii) due to the alleged use of borrowed funds for non-business purposes. The Tribunal noted that the assessee was engaged in property development and treated immovable properties as stock in trade. The Assessing Officer (AO) disallowed ?82,49,994 on the grounds that the borrowed funds were used for interest-free advances to related parties for purchasing capital assets. The Tribunal, referencing the proviso to Section 36(1)(iii) and the Supreme Court's judgment in CIT vs. Reliance Industries Ltd., held that the disallowance could not be sustained because the acquisition of capital assets was not for the extension of the existing business. Consequently, the disallowance of ?17,12,616 was deleted. 2. Disallowance under Section 14A of the Income Tax Act, 1961: The assessee contested the disallowance under Section 14A, arguing that no exempt income was earned during the relevant assessment year, and therefore, the disallowance was not applicable. The Tribunal agreed with the assessee, referencing the Delhi High Court's judgment in Cheminvest Ltd. v. CIT, which held that Section 14A envisages actual receipt of income that is not includible in the total income during the relevant previous year. Since no exempt income was earned, the Tribunal deleted the disallowance of ?76,23,425. 3. Validity of notice under Section 143(2) of the Income Tax Act, 1961: For the Assessment Year 2015-16, the Tribunal examined the validity of the notice issued under Section 143(2). The notice was issued by an officer who did not have jurisdiction over the assessee, as the jurisdiction had been transferred. The Tribunal, referencing the Supreme Court's judgment in Hotel Blue Moon and the ITAT Kolkata Bench's decision in Rungta Irrigation Ltd., held that the absence of a valid notice under Section 143(2) renders the assessment order null and void. Consequently, the assessment order passed without a valid notice was quashed. 4. Conversion of limited scrutiny to complete scrutiny: The assessee raised concerns about the conversion of limited scrutiny to complete scrutiny without following CBDT guidelines. The Tribunal admitted the additional grounds related to this issue for adjudication but did not provide a detailed analysis in the judgment text provided. Conclusion: The Tribunal allowed the assessee's appeal for the Assessment Year 2014-15 partially for statistical purposes and fully for the Assessment Year 2015-16. The disallowances under Sections 36(1)(iii) and 14A were deleted, and the assessment order for the Assessment Year 2015-16 was quashed due to the invalidity of the notice under Section 143(2).
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