9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2021 (4) TMI 450 - AT - Income TaxCIT(A) enhancing the income u/s 251(1)(a) - disallowing interest expenditure u/s 36(1)(iii) - as per CIT-A no business activities were carried out by the assessee company - HELD THAT - 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. See SH. JAGDISH NARAYAN SHARMA VERSUS ITO WARD-7 (2) 2018 (7) TMI 1398 - ITAT JAIPUR . 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 assessee is duty bound to give reasonable opportunity to the assessee of showing cause against such enhancement. The reason in the Show Cause Notice is vital so that the assessee can make a pointed rebuttal and convince the CIT(A), if possible, with the legal or factual position involved in the case. Thus, if a particular basis has been given by ld. CIT(A) in the Show Cause notice, the ld. CIT(A) has to stick to the same basis while ultimately making the enhancement. Ld. CIT(A) cannot shift his goal posts at his own will. Ld. CIT(A), although alleged that no business activities were carried out by the assessee company, however, he himself noted the fact of sale transaction undertaken by the assessee company, during the year of ₹ 24,64,224/-. 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 enhancing its income . On one hand ld. CIT(A) stated that no business activities were carried out by the assessee company, however on the other hand ld. CIT(A) himself at page 40 of his order referred to the sale of inventory by the assessee company. Ld. CIT(A) at page 39 of his order, for no reason has made irrelevant reference to the Audit Report. The observation of ld. CIT(A) that the assessee company stopped its business operations is un-warranted and devoid of the business realties. Business is a complex affair. Lot of factors such as the market condition, availability of funds, risk taking capacity etc. drives the business decision. Simply because less revenue/ no revenue is generated by the assessee, that does not mean that the business of the assessee has been stopped - Thus , we found merit in the contentions of the ld. AR of the assessee and we set aside the order of the ld. CIT(A) and direct to delete the disallowance made and confirmed by the ld. CIT(A) - Decided in favour of assessee.
Issues Involved:
1. Enhancement of income by disallowing interest expenditure of ?53,78,282. 2. Legality of exercising enhancement powers under Section 251(1)(a) of the Income Tax Act, 1961. 3. Disallowance of interest expenditure under Section 36(1)(iii). Detailed Analysis: 1. Enhancement of Income by Disallowing Interest Expenditure: The assessee challenged the enhancement of income by the CIT(A) through the disallowance of interest expenditure amounting to ?53,78,282. The CIT(A) had enhanced the income by invoking Section 36(1)(iii) of the Income Tax Act, 1961, on the grounds that the interest expenses incurred on the loan taken from Shri Udai Kant Mishra were not related to the business activities of the assessee. 2. Legality of Exercising Enhancement Powers Under Section 251(1)(a): The assessee argued that the CIT(A) erred in exercising enhancement powers under Section 251(1)(a) as the matter of interest expenditure was not a subject matter of the original assessment. The correct procedure for taxing a new source of income, which was not considered by the AO, should be through Sections 147/148 or Section 263. Judicial precedents such as Bikram Singh (2017) and Sundaram Medical Foundation (2016) were cited to support this argument. 3. Disallowance of Interest Expenditure Under Section 36(1)(iii): The CIT(A) disallowed the interest expenditure on the grounds that there was no nexus between the interest income earned and the interest expenses incurred. The assessee contended that the interest expenses were incurred for the purpose of business and should be allowed under Section 36(1)(iii). It was highlighted that the AO had allowed similar expenditures in the preceding years, and the CIT(A) should have adhered to the principle of consistency. Tribunal’s Observations and Decision: 1. Enhancement of Income: The Tribunal observed that the CIT(A) had enhanced the income by disallowing an interest expenditure that was not part of the original assessment. The CIT(A) should have invoked Sections 147/148 or Section 263 for taxing a new source of income. The Tribunal cited the case of Jagdish Narayan Sharma, ITA 751/JP/2015, and the decision of the Kerala High Court in BP Sherafudin (2017) to support this view. 2. Legality of Enhancement Powers: The Tribunal emphasized that the CIT(A) cannot touch upon issues that do not arise from the order of assessment. The enhancement powers under Section 251(1)(a) are not unfettered and must be exercised with due adherence to the principles of natural justice. The CIT(A) must provide a reasonable opportunity to the assessee to rebut the basis of enhancement. 3. Disallowance of Interest Expenditure: The Tribunal noted that the interest expenditure incurred on the loan from Shri Udai Kant Mishra was for the purpose of business, as accepted by the Department in the preceding years. The CIT(A) had confused the provisions of Section 36(1)(iii) with Section 57, which pertains to deductions under the head "Income from Other Sources." The Tribunal highlighted that under Section 36(1)(iii), the expenditure need not generate corresponding income to be allowable. Conclusion: The Tribunal found merit in the assessee's contentions and set aside the order of the CIT(A). It directed the deletion of the disallowance of ?53,78,282, allowing the appeal in favor of the assessee. The Tribunal reiterated the importance of adhering to the rule of consistency and ensuring that enhancement powers are exercised within the legal framework and principles of natural justice.
|
