2012 (5) TMI 201 - AT - Income Tax

Challenge to notice u/s 143(2) on CA of the assessee - held that - the CA representing the assessee received the notice and thereafter the assessee ratified the notice by filing various submissions. Thus, these estoppels from challenging such service of notice as held in the case of Y. Rajendra, Dy. CIT v. Khoday Eshwarsa & Sons (2004 -TMI - 10101 - KARNATAKA High Court). Interest Expenditure u/s 36(1)(iii) - held that - even if the assessee has capitalized its interest expenditure in the books of account, the same is eligible for claim of deduction u/s 36(1)(iii) of the Income-tax Act, 1961. Since this is a purely legal claim and entire facts are available on record, the CIT(A) was not justified in not admitting the purely legal ground raised before him for the first time. - matter restored before CIT(A). Netting off of Interest - Interest received and Interest Paid - held that - view of the decisions in ACG Associate Capsules (P.) Ltd. (2012 -TMI - 210468 - SUPREME COURT OF INDIA) and Shriram Honda Power Equip (2007 -TMI - 2891 - HIGH COURT, DELHI) the Hon ble High Court held that where the assessee is paying interest expenditure and also in receipt of interest income, net interest income is to be arrived at after excluding the interest expenditure incurred for earning such interest income. - matter remanded back to CIT(A).

Issues Involved:
1. Non-admission of additional grounds of appeal by CIT(A).
2. Disallowance of interest expenditure under Section 36(1)(iii).
3. Disallowance of employer's contribution to PF under Section 36(1)(iv) read with Section 43B.
4. Non-setting off of carried forward unabsorbed depreciation under Section 32(2).
5. Validity of service of notice under Section 143(2).
6. Treatment of interest accrued on FDRs as income from other sources.
7. Non-allowance of set off of carried forward unabsorbed business loss and depreciation.
8. Levy of interest under Section 234B.

Issue-wise Detailed Analysis:

1. Non-admission of Additional Grounds of Appeal by CIT(A):
The assessee raised additional grounds before the CIT(A) regarding the disallowance of interest expenditure and employees' contribution to PF. However, the CIT(A) did not admit these grounds. The Tribunal held that the CIT(A) was not justified in not admitting purely legal grounds raised for the first time, especially when all facts were on record. The case was remanded to the Assessing Officer (AO) for examination under Section 36(1)(iii).

2. Disallowance of Interest Expenditure under Section 36(1)(iii):
The assessee capitalized the interest expenditure in its books but claimed it as a deduction under Section 36(1)(iii) for the first time before the CIT(A). The Tribunal emphasized that the allowability of expenditure under the Income-tax Act, 1961, is independent of the entries in the books. The case was remanded to the AO to examine the eligibility for deduction under Section 36(1)(iii).

3. Disallowance of Employer's Contribution to PF under Section 36(1)(iv) read with Section 43B:
The AO disallowed the employer's contribution to PF deposited after the due date but before the filing of the return. The Tribunal directed the AO to reconsider this disallowance in light of the amended provisions of Section 43B by the Finance Act, 2003, which omitted the second proviso.

4. Non-setting off of Carried Forward Unabsorbed Depreciation under Section 32(2):
The AO did not allow the set-off of carried forward unabsorbed depreciation. The Tribunal noted that this issue is linked to the treatment of interest income. Since the interest income treatment was remanded, the AO was directed to decide the set-off issue afresh.

5. Validity of Service of Notice under Section 143(2):
The assessee contended that the notice under Section 143(2) was not served properly. The Tribunal found that the notice was served on the assessee's CA, who represented the assessee before the AO, and the notice was duly complied with. Thus, the ground regarding the validity of service of notice was dismissed.

6. Treatment of Interest Accrued on FDRs as Income from Other Sources:
The assessee argued that the interest on FDRs should be treated as business income. The Tribunal noted that if FDRs are made out of business compulsion, the interest income should be set off against interest expenditure. The case was remanded to the AO to examine the business compulsion of making FDRs and the consequential interest earned thereon, in light of the Supreme Court decision in ACG Associated Capsules (P.) Ltd. v. CIT.

7. Non-allowance of Set Off of Carried Forward Unabsorbed Business Loss and Depreciation:
The AO did not allow the set-off of carried forward unabsorbed business loss and depreciation against the interest income treated as income from other sources. The Tribunal directed the AO to decide this issue afresh, considering the treatment of interest income.

8. Levy of Interest under Section 234B:
The AO levied interest under Section 234B. The CIT(A) upheld this levy, stating it was automatic with reference to the determination of income. The Tribunal did not find any merit in the ground challenging the levy of interest under Section 234B.

Conclusion:
The Tribunal allowed the appeal in part and remanded several issues back to the AO for fresh consideration, ensuring that the legal and factual aspects are thoroughly examined in light of the relevant provisions and judicial precedents.

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