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2025 (4) TMI 467 - AT - Income TaxScope of limited scrutiny - addition made on account of cessation of liability u/s 41(1) and disallowance of transmission charges - HELD THAT - Since the addition made on account of cessation of liability u/s 41(1) of the Act and disallowance of transmission charges were admittedly beyond the scope of limited scrutiny those additions are liable to be deleted as the same has been made in violation of aforesaid CBDT instructions and the decisions of Hon ble Jurisdictional High Court and Hon ble Supreme Court. Hence we hold the addition made u/s 41(1) of the Act and disallowance of transmission charges are hereby deleted on this preliminary legal issue without going into the merits of such addition. Accordingly the Ground raised by the assessee are allowed on the technical issue. Notional interest income addition made on account of investment in 9% compulsorily convertible debentures (CCDs) - HELD THAT - We hold that this issue would certainly fall within the scope of one of the parameters selected and reflected in the limited scrutiny. Hence there could be no objection for the assessee in this regard. It is not in dispute that the entire investment in CCDs of group concerns were made out of own funds and not out of borrowed funds. The waiver of interest stipulated is always at the discretion of the debenture holders. We find that the waiver of interest by the assessee was a bona fide commercial decision to support the group concerns as mutually agreed neither the assessee has provided interest income nor has the borrower DJ Windfarm / Jasdan etc. provided any interest expenditure. Entire investment in CCDs was out of own non-interest bearing funds of the assessee. With regard to taxation of notional interest income in the case of Shiv Nandan BuildCon Pvt. Ltd. 2015 (5) TMI 192 - DELHI HIGH COURT had observed where assessee-company gave interest-free advance to another company in absence of any specific provision under Income-tax Act notional interest income computed by AO on said advance was to be deleted. We have no hesitation to delete the addition made in the sum towards interest income on notional basis. Accordingly the Ground raised by the assessee is allowed.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment revolve around the following issues: 1. Whether the Assessing Officer (AO) exceeded the scope of limited scrutiny by making additions related to cessation of liability under Section 41(1) and disallowance of transmission charges without obtaining prior approval from the Principal Commissioner of Income Tax (Pr CIT). 2. The validity of the addition of notional interest income on Compulsorily Convertible Debentures (CCDs) as real income taxable under the Income Tax Act. 3. Whether the cessation of liability under Section 41(1) was correctly applied to an advance from a customer that was under dispute and subsequently settled. 4. The appropriateness of disallowing transmission charges payable to Gujarat Energy Transmission Corp. Ltd. (GETCO) and whether such charges should be added to work-in-progress if not allowed as a period cost. ISSUE-WISE DETAILED ANALYSIS 1. Scope of Limited Scrutiny: - Legal Framework and Precedents: The case was initially selected for limited scrutiny under Section 143(2) of the Income Tax Act. CBDT Instructions No. 20/2015 and No. 5/2016 mandate that any expansion of the scope from limited to complete scrutiny requires prior approval from the Pr CIT. - Court's Interpretation and Reasoning: The Tribunal found that the AO did not obtain the necessary approval to expand the scope of scrutiny. The Tribunal relied on precedents from the Hon'ble Jurisdictional High Court and the Supreme Court, which held that CBDT instructions are binding on the Income Tax Department. - Conclusion: The Tribunal concluded that the additions made under Section 41(1) and disallowance of transmission charges were beyond the scope of limited scrutiny and were therefore invalid. 2. Notional Interest on CCDs: - Legal Framework and Precedents: The issue pertains to the addition of notional interest income on CCDs. The Tribunal referenced the principle that only real income can be taxed, as established in the Supreme Court case CIT vs Shoorji Vallabhdas & Co. - Court's Interpretation and Reasoning: The Tribunal noted that the assessee had waived the right to interest before the end of the financial year, and the investment was made from the assessee's own funds. The Tribunal found that no real income accrued to the assessee. - Conclusion: The Tribunal deleted the addition of notional interest income, upholding the principle that notional income cannot be taxed. 3. Cessation of Liability under Section 41(1): - Legal Framework and Precedents: Section 41(1) pertains to the cessation of liability and its tax implications. The Tribunal considered whether the advance from a customer, which was under dispute, constituted a cessation of liability. - Court's Interpretation and Reasoning: The Tribunal found that the advance was under dispute and was subsequently settled, indicating no cessation of liability occurred during the relevant assessment year. - Conclusion: The Tribunal held that the addition under Section 41(1) was unjustified and should be deleted. 4. Disallowance of Transmission Charges: - Legal Framework and Precedents: The issue involved the disallowance of transmission charges payable to GETCO. The Tribunal considered whether these charges should be allowed as a period cost or added to work-in-progress. - Court's Interpretation and Reasoning: The Tribunal found that the disallowance did not align with the scope of limited scrutiny and should be deleted based on procedural grounds. - Conclusion: The Tribunal deleted the disallowance of transmission charges, allowing them on the technical issue without delving into the merits. SIGNIFICANT HOLDINGS - The Tribunal emphasized the binding nature of CBDT instructions on the Income Tax Department, stating, "Circulars and instructions issued by CBDT are binding on the officers of the Income Tax Department." - It reinforced the principle that only real income is taxable, quoting the Supreme Court: "If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise." - The Tribunal concluded that procedural violations in expanding the scope of limited scrutiny warranted the deletion of certain additions, affirming that procedural adherence is crucial in tax assessments. In conclusion, the Tribunal allowed the appeal, deleting the contested additions and disallowances based on procedural grounds and the principle of real income taxation.
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