2022 (5) TMI 518 - AT - Income Tax

Powers of CIT(A) u/s 251 - Enhancement of assessment - New source of income introduced by CIT(A) while deciding the appeal and enhancement of income - Deemed dividend u/s.2(22)(e) - enhancement of assessment on account of disallowance made being interest charged @ 12% p.a. on the presumption of diversion of borrowed capital for the purpose of advancing interest free loans to the extent of an average amount - HELD THAT - We have gone through the assessment order and noted that the above noted three disallowances i.e., disallowance u/s.40(a)(ia), disallowance u/s.40A(3) and disallowance u/s.40a(ii) of the Act are made by the AO and there is no discussion on the issue of disallowance of interest or allowance of interest in regard to diversion of funds for non-business purposes or on the issue of advance given to the wife of Managing Director in violation of provisions of section 2(22)(e) of the Act i.e., deemed dividend. As gone through the case law of Hon ble Supreme Court in the case of CIT vs. Shapoorji Pallonji Mistry, 1962 (2) TMI 12 - SUPREME COURT wherein the Hon ble Supreme Court has considered this issue and held that it would not be open to the first appellate authority to introduce into assessment a new source of income as his power of enhancement is restricted only to income which was subject matter of consideration for the assessment by the AO. Also Hon ble Delhi High Court in the case of Sardari Lal Co 2001 (9) TMI 1130 - DELHI HIGH COURT has considered the case laws cited by CIT(A) and the ld.Senior DR and finally held that no new source of income can be introduced by CIT(A) while deciding the appeal and enhancement of income. In view of the above case laws considered and facts of the case that the two issues i.e., disallowance of interest on diverted borrowed capital and advance of amount to the wife of the Director treated as deemed dividend u/s.2(22)(e) of the Act, were never subject matter of assessment order. Hence, we are of the view that enhancement made by CIT(A) on altogether new issues is without authority of law and accordingly, we quash the enhancement and allow these issues of assessee s appeal.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act.
2. Disallowance under Section 40(a)(ii) of the Income Tax Act.
3. Enhancement of assessment on account of disallowance of interest due to presumed diversion of borrowed capital for non-business purposes.
4. Taxation under deemed dividend provisions of Section 2(22)(e) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3):
The assessee initially raised the issue of the CIT(A) sustaining the addition of Rs. 1,00,679/- under Section 40A(3) of the Income Tax Act. However, the counsel for the assessee stated that they were not interested in prosecuting this issue, and thus, it was dismissed as "not-pressed."

2. Disallowance under Section 40(a)(ii):
Similarly, the issue concerning the CIT(A) sustaining the addition of Rs. 1,66,330/- by invoking the provisions of Section 40(a)(ii) was also not pursued by the assessee, leading to its dismissal as "not-pressed."

3. Enhancement of Assessment on Account of Disallowance of Interest:
The CIT(A) enhanced the assessment by disallowing Rs. 16,32,403/- as interest on the presumption that borrowed capital was diverted for non-business purposes. The CIT(A) observed that the assessee had diverted borrowed capital amounting to an average of Rs. 1,36,03,358/- during the year and disallowed interest at a conservative rate of 12% per annum. The assessee argued that the CIT(A)'s power of enhancement is restricted and should not introduce new issues not considered by the AO. The Tribunal noted that the AO had not deliberated on the diversion of interest-bearing funds or the applicability of deemed dividend provisions. Consequently, the Tribunal quashed the enhancement made by the CIT(A) on new issues, citing that the first appellate authority's power does not extend to introducing new sources of income.

4. Taxation under Deemed Dividend Provisions (Section 2(22)(e)):
The CIT(A) also directed that Rs. 24 lakhs advanced to the wife of the Managing Director be taxed as deemed dividend under Section 2(22)(e). The CIT(A) noted that the assessee company had advanced this amount without declaring it as required, and such advances should not be made from accumulated profits without paying dividend distribution tax. The assessee contended that the provisions of Section 2(22)(e) were not applicable, arguing that the advances were part of running account transactions. The Tribunal found that these issues were not part of the assessment order and ruled that the CIT(A) could not introduce new sources of income while enhancing the assessment. The Tribunal quashed the enhancement related to deemed dividend as well.

Conclusion:
The Tribunal concluded that the CIT(A) overstepped his authority by introducing new issues that were not part of the original assessment order. The enhancement of income on these new issues was quashed, and the appeal filed by the assessee was partly allowed. The Tribunal emphasized that the power of enhancement should be confined to the issues considered by the AO and not extend to new sources of income.