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TMI Blog2021 (2) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of purchasing assets which are stock in trade of the appellant. 4. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in disallowing a portion of the interest ₹ 48,20,663 (as per the calculations of the appellant) on the ground that the appellant had diverted the loans for non-business purposes and such a finding is perverse in law as being contrary to materials on record. 5. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in disallowing a portion of interest ₹ 48,20,663 (as per the calculations of the appellant) even though the total amounts paid to related parties is much less than the capital and reserves and other interest free funds available with the appellant and he ought to have held that the advances are out of capital reserves and other interest free funds of the appellant. 6. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in disallowing a sum of ₹ 76,23,425 u/s 14A of the Act. 7. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in disallowing the interest u/s 14A of the Act even though the share capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditional grounds of appeal in A.Y. 2014-15 which are inter related to these grounds are as follows : 4. The assessee has raised additional grounds which reads as under in Assessment Year 2014-15 : 1. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the disallowance to the extent of interest of ₹ 65,33,279/- (₹ 17,12,616 + ₹ 48,20,663) u/s. 36(1)(iii) of the Act even though the total amounts advanced to related parties is much less than the capital and reserves and other interest free funds available with the appellant. 2. Without prejudice to the other grounds, that the learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the disallowance of to the extent interest of ₹ 17,12,616/- u/s. 36(1)(iii) of the Act on the ground that the borrowed funds have been utilized for acquisition of capital asset even though the said acquisition does not amount to extension of existing business. The above grounds are purely legal grounds. No new or fresh facts are required to be brought on record to decide the above grounds. The appellant has challenged the above disallowance in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of business and they are not classified as Capital WIP or Capital Advance. The ld. AR submitted that there is no dispute that the assessee is in real estate development. He submitted that the advances given to purchase the immovable property should not be considered as advances given for purchase of capital assets. He further submitted that the advances given to sister concerns for purchase of property will not fall under the purview of Section 36(1)(iii) of the Act. The ld. AR submitted that the advances given to related parties are to be presumed as interest free funds sufficient to meet the investments and advances to related parties. He relied on the judgment of Hon'ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. 410 ITR 466 (SC). On appeal, the CIT (Appeals) confirmed the disallowance on the ground that the borrowed funds have been utilized for purchase of capital assets. Hence, the interest on such borrowed funds have to be capitalized as per proviso to Section 36(1)(iii) of the Act. The proviso to Section 36(1)(iii) as is stood on that date clearly states that the interest on borrowed funds are not allowable as deduction if the same is ut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inserted proviso will operate prospectively. Therefore 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 of ₹ 82,49,994/- made by the AO and the action of the CIT(A) in sustaining a sum of ₹ 17,12,616/- out of the disallowance made by the AO, cannot be sustained and the same is directed to be deleted. 11. Gr.No.4 5 and Additional Ground No.1 are co-related to this issue which reads as follows : (in ITA No.1037/Bang/2019) 4. That the learned Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted parties and disallowance u/s. 36(1)(iii) of the Act cannot be made. He relied on the decision of Hon'ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. 410 ITR 466 (SC). On appeal, the CIT (Appeals) confirmed the disallowance. The learned Departmental Representative submitted that for determining proportion of the interest bearing funds given to the Related Parties, entire funds need to be considered and not only the interest bearing fund as in absence of specific detail the interest bearing funds as well as non-interest bearing funds would contribute to the interest free loans. He further submitted thatsince only interest expenditure of ₹ 2,00,54,050 is considered, so for purposes of total loan funds only corresponding loans need to be considered along with interest free funds. After excluding the CITI Bank loan balance and the Yes Bank Loan as on 31.03.2013 and 31.03.2014, the average total funds would work out to ₹ 2,53,83,67,900. The ratio of average interest free loans and that of average total fund can then be worked out and the proportionate disallowance of interest would accordingly be of ₹ 2,00,54,050. The ld. DR supported the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) Cheminvest Limited Vs/ CIT 378 ITR 33 (Del) (iii) ACIT Vs. Vireet Investments 58 ITR (Trib) 313 (Del.-SB) The learned Departmental Representative relied on the order of CIT (Appeals). 15.1. The Assessee has contended that the Assessee did not earn any exempt income during the previous year relevant to AY 2014-15 and therefore there can be no disallowance u/s.14A of the Act in the absence of any exempt income having been earned by the Assessee. On this issue, the undisputed fact is that the Assessee did not earn any exempt income during the relevant previous year. Now it is settled position of law that whenever assessee did not earn any exempt income, no disallowane could be made u/s. 14A of the Act. The Hon ble Delhi High Court in the case of Cheminvest Ltd. v. CIT, 378 ITR 33 (Del) has categorically held that section 14A envisages that there should be actual receipt of income which was not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure in relation to the said income. Wherever there is no exempt income includible in the total income of the assessee, the provisions of section 14A cannot be invoked. The rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at expenditure alone which has been incurred in relation to the income http://www.itatonline.org 33 which is includible in total income that has to be disallowed. ..we are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word in relation to the income that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. ..where the assessee would continue to hold those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Hon ble Supreme Court which was as follows: 5. The appellant company is engaged, inter alia, in the business of finance, investment and dealing in shares and securities. The appellant holds shares/securities in two portfolios, viz. (a) as investment on capital account; and, (b) as trading assets for the purpose of acquiring and retaining control over investee group companies, particularly Max India Ltd., a widely held quoted public limited company. Any profit/loss arising on sale of shares/securities held as investment is returned as income under the head capital gains , whereas profit/loss arising on sale of shares/securities held as trading assets (i.e. held, inter alia, with the intention of acquiring, exercising and retaining control over investee group companies) has been regularly offered and assessed to tax as business income under the head profits and gains of business or profession . Consistent with the aforesaid treatment regularly followed, the appellant filed return for the previous year relevant to the Assessment Year 2002-03, declaring income of ₹ 78,90,430/-. No part of the interest expenditure of ₹ 1,16,21,168/- debited to the profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities and, therefore, no expenditure had been incurred for earning such exempt income; the expenditure would have remained the same even if no dividend or interest income had been earned by the assessee from the said securities and that no expenditure on proportionate basis could be allocated against exempt income. The assessee also contended that in any event it had acquired the securities from its own funds and, therefore, section 14A was not applicable. The AO restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D holding that Section 14A would be applicable . 15.6. The Assessee in the appeal before Hon ble Supreme Court State Bank of Patiala also earned Dividend income which was exempt. Therefore it is clear that the Hon ble Supreme Court in the aforesaid decision was not confronted with an issue as to whether in the absence of exempt income there could be a disallowance u/s.14A of the Act or not. If the entire paragraph-32, 34 and 40 from which the aforesaid passages are extracted, it would be clear that the observations quoted from these paragraphs have nothing to do with the issue before this tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lidity of notice u/s. 143(2) of Income-tax Act, 1961 (Act) 1.1 That the order of the learned lower authorities erred in law and on facts in making an assessment without issuing a valid notice u/s 143(2) of the Act and therefore, the assessment is bad in law. 1.2 That the learned lower authorities erred in law and on facts in concluding the assessment even though the notice u/s 143(2) issued by the officer not having the jurisdiction over the appellant. 1.3 That the learned Commissioner of Income-Tax (Appeals) erred in law and on facts in holding that the provisions of section 292BB are applicable since the appellant has participated in the assessment proceedings. 1.4 That the learned Commissioner of Income-Tax (Appeals) erred in law and on facts in holding that the appellant has not challenged the validity of jurisdiction during the assessment proceedings and therefore, the same cannot be entertained during the appellate proceedings. 2 Grounds regarding conversion of limited scrutiny to complete scrutiny 2.1 That the order of the learned lower authorities erred in law and on facts in not following the CBDT guidelines for converting the limited scrutiny ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.1 raised by the Assessee. In Additional Ground No.1 the Assessee has raised an issue with regard to validity of the order of assessment passed by the AO on the ground that no notice u/s.143(2) of the Act was issued by the AO having jurisdiction over the Assessee and that an order of assessment passed without issuing a valid notice u/s.143(2) of the Act is bad in law and is liable to annulled. The further plea of the Assessee is that the provisions of Sec.292BB of the Act will not be applicable in the case on the ground that the Assessee participated in the Assessment proceedings The issue sought to be raised in the additional ground was raised before the CIT(A). The CIT(A) did not agree with the plea of the Assessee in this regard. The facts with regard to the aforesaid grounds of appeal. The additional grounds were already admitted by us. 19.2. The facts with regard to the aforesaid additional grounds of appeal are that the Assessee was assessed to income tax by the Deputy Commissioner of Income Tax (DCIT)- Central Circle (CC)-1 (3) Bangalore. By a notification in exercise of powers u/s.127(4) of the Act dated 30.4.2013, the jurisdiction of the Assessing officer of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Power to transfer cases. 127. (1) The Principal Director General or Director General or Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, transfer any case from one or more Assessing Officers subordinate to him (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) also subordinate to him. (2) Where the Assessing Officer or Assessing Officers from whom the case is to be transferred and the Assessing Officer or Assessing Officers to whom the case is to be transferred are not subordinate to the same Principal Director General or Director General or Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,- (a) where the Principal Directors General or Directors General or Principal Chief Commissioners or] Chief Commissioners or Principal Commissioners or] Commissioners to whom such Assessing Officers are subordinate are in agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notice u/s.143(2) of the Act was issued by the transferor AO on 26.4.2016 whereas he had no jurisdiction over the Assessee as early as 27.5.2013. Therefore the provisions of Sec.127(4) of the Act cannot come to the rescue of the revenue. 19.9. We find the facts of the present case are identical to the case already decided by the ITAT Kolkata Bench in the case of Rungta Irrigation Ltd. (supra). The issue in the case before the ITAT Kolkata Bench in the case of M/S.Rungta Irrigation Ltd. Vs. ACIT in ITA No.1224/Kol/2019 order dated 6.9.2019 was whether, non-issue of notice u/s.143(2) by the AO who passed the assessment order will render the order of assessment void or was it a curable defect. It was the plea of the Assessee that as held by the Hon ble Supreme Court in Hotel Blue Moon 321 ITR 362 (SC), non-issue of notice u/s.143(2) by the AO who passed the order of assessment renders the order of assessment a nullity. The factual details in that case were as follows: Sl. No. Date Events 1. Upto 08.10.2008 DCIT, Circle-15(1), New Delhi was the AO of assessee on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from whom the case is transferred. The Tribunal held that after the order of the CIT-V, New Delhi dated 08.10.2008 transferring the jurisdiction of the assessee s case to DCIT, Central Circle, Ranchi, the CIT, Delhi became functus officio and thereby his subordinate officers viz., ACIT, Circle 21(1), New Delhi, could not have issued notice u/s. 143(2) dated 28.07.2016 and in that view of the matter the notice issued by the ACIT, Circle-21(1), New Delhi u/s 143(2)was without jurisdiction and, therefore, non-est in the eyes of law. The Tribunal held that the ACIT, Central Circle-3(1), Kolkata who framed the assessment order dated 29.12.2017 pursuant to transfer of case ordered by PCIT, Central Patna dated 03.11.2017 u/s. 127 of the Act, without there being valid issuance of notice u/s 143(2) of the Act and therefore the said order is bad in law as held by the Hon ble Supreme Court in CIT V Hotel Blue Moon (2010) 321 ITR 362 (S.C) wherein the Hon ble Supreme Court has held that issue of a legally valid notice u/s. 143(2) is mandatory for usurping jurisdiction to frame scrutiny assessment u/s. 143(3) of the Act and absence of a valid notice u/s 143(2) is not a curable defect. The Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the expression so far as may be, apply indicates that it is not expected to follow the provisions of Section 142, sub-sections (2) and (3) of Section 143 strictly for the purpose of block assessments. We do not agree with the submissions of the learned counsel for the Revenue, since we do not see any reason to restrict the scope and meaning of the expression so far as may be, apply . In our view, where the assessing officer in repudiation of the return filed under Section 158-BC(a) proceeds to make an enquiry, he has necessarily to follow the provisions of Section 142, sub-sections (2) and (3) of Section 143. 6. The question, however, remains whether Section 292BB which came into effect on and from 01.04.2008 has effected any change. Said Section 292BB is to the following effect:- 292BB. Notice deemed to be valid in certain circumstances.-Where an assessee has appeared in any proceeding or cooperated in any inquiry relating to an assessment or reassessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon him, has been duly served upon him in time in accordance with the provisions of this Act and such assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since the facts on record are clear that no notice under Section 143(2) of the Act was ever issued by the Department, the findings rendered. by the High Court and the Tribunal and the conclusion arrived at were correct. We, therefore, see no reason to take a different view in the matter. 19.11. In the present case, admittedly no notice u/s.143(2) was issued by the AO who had jurisdiction over the Assessee at all material point of time. The Assessee filed return of income on 30.9.2015, with the DCIT-Circle-11(3), Bangalore. A notice u/s.143(2) of the Act, dated 26.4.2016 was issued by the DCIT, CC-1(3), who ceased to have jurisdiction over the Assessee w.e.f 27.5.2013. Thereafter notice u/s.142(1) dated 5.10.2017 was issued by the Deputy Commissioner of Income Tax (DCIT)- Circle -11 (3) (Presently Circle-3(1)(2), Bangalore). An order of Assessment dated 7.12.2017 was passed u/s.143(3) of the Act by the Deputy Commissioner of Income Tax (DCIT)- Circle -11 (3) (Presently Circle-3(1)(2), Bangalore). As already stated, Admittedly there was no notice issued by the Deputy Commissioner of Income Tax (DCIT)- Circle -11 (3) (Presently Circle-3(1)(2), Bangalore) who completed the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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