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TMI Blog2021 (4) TMI 450X X X X Extracts X X X X X X X X Extracts X X X X ..... vious 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, ld. CIT(A) has erred in exercising the powers of enhancement under section 251(1)(a). The action of ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the very action of enhancement being illegal and outside the scope of powers of CIT(A) in the instant case. 2. In the facts and circumstances of the case and in law, ld. CIT(A) has erred disallowing the interest expenditure, incurred by the assessee company, of ₹ 53,78,282, u/s 36(1)(iii). The action of the ld. CIT(A) is illegal, arbitrary, unjustified and against the facts of the case. Relief may please be granted by deleting the said disallowance of ₹ 53,78,282 as such interest expenses has been incurred for the purpose of business. 3. The assessee company craves its rights to add, amend or alter any of the grounds on or before the hearing. 2. The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic. 3. The brief facts of the case are that the assessee company is engaged in business of construction, purchase and sale of immovable properties. The assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l precedence: - 1.4.i. Bikram Singh in [2017] 82 taxmann.com 230 (Del-Trib) 1.4.ii. Sundaram Medical Foundation in (2016) 45 ITR (Trib) 500 (Chennai Trib) 1.5. As per Explanation to Section 251 .in disposing of an appeal, CIT(A) may consider and decide any matter arising out of the proceedings, in which the order appealed against was passed .. Thus, if any matter is not arising out of the proceedings before the AO, ld. CIT(A) has no power of enhancement apropos such matters. In the present case, the issue of whether interest expenses incurred on loan taken from Shri Udai Kant Mishra was for the purpose of business or not was not arising out of the proceedings before the ld. AO. This is for the reasons that the ld. AO himself, in the past, in the preceding two years, had allowed the claim of such expenditure, by being fully aware that such expenditure incurred and the loan so taken, was utilized for the purpose of business of the assessee company. (Refer Para 1.1 to 1.6 below) 1.6. In the Show Cause Notice issued by ld. CIT(A), u/s 251(2), the sole basis through which ld. CIT(A) proposed to enhance the income of the assessee company, by disallowing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, before making such enhancement and thus would be against the legal position set out in section 251(2). 1.10. The specific requirement of issuing SCN contained in section 251(2) is issue based. The power of Enhancement is different from power of Assessment. In section 143, there is no specific requirement of SCN which is there in 251(2). The SCN issued on a particular aspect gets exhausted if ld. CIT(A) is convinced with the reply of the appellant on that issue. Ld. CIT(A) has to mandatorily issue a fresh SCN if ld. CIT(A) is changing the basis of enhancement. Therefore, in this view of the legal position, the power of enhancement is exercised by the ld. CIT(A) without jurisdiction and also against the principle of natural justice. 1.11. In the present case, in the SCN ld. CIT(A) raked up the issues of no business activities being undertaken by the assessee company, the entire reply to such SCN by the assessee company was based on explaining the legal position whether business activities and revenue generated out of it is pre-condition for claiming deduction u/s 36(1)(iii) or not. Whereas, no opportunity, at all, was provided to the assessee company to explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date of the order passed by Hon ble ITAT, Jaipur Bench 29.08.2017 ITA No. 293/JP/2016 and 313/JP/2017 (PB : 3-5) Rate % upheld by Hon ble ITAT, Jaipur Bench 14% 14% 1.16 As can be seen from the table above, the loan obtained by the assessee company from Shri Udai Kant Mishra in the preceding years, the balance of which has been carried forward during the current year as well, has been accepted by the Department, to have been utilized for the purpose of business. 1.17 Resultantly, interest expenses on such loan were allowed by the ld. AO u/s 36(1)(iii) for both the preceding years. The only quarrel of the ld. AO, in the preceding years, was with respect to the rate at which such loan was taken. Resultantly, part of such interest expenses was disallowed by the ld. AO u/s 40A(2)(b). 1.18 However, Hon ble ITAT, Jaipur Bench, allowed the rate of interest on such loan taken from Shri Udai Kant Mishra to the extent of 14%. Even ld. CIT(A), in the preceding years, did not make any disallowance u/s 36(1)(iii) and accepted the loan to have been utilized for the purpose of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est income, of ₹ 53,74,368, received by the assessee company on account of capital contribution in M/s Ambience Colonizers, with the interest expense, of ₹ 53,78,282, on loan taken from Shri Udai Kant Mishra. Whereas, the fact remains that such interest expense incurred by the assessee company was on account of investments in avenues for the purpose of business in the preceding years and had no direct co-relation with the income generated. 1.25 Ld. CIT(A) also stressed upon the fact that no revenue was generated by the assessee company, without appreciating that generation of revenue is not the condition precedent for allowability of expenses under the head Profits and Gains from Business and Profession. 1.25.A Section 36(1)(iii) allows deduction of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. 1.25.B On the contrary, Section 57 which allows deductions from the income chargeable under the head Income from Other Sources states that any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest Free Funds (Share Capital) ₹ 100 Interest Bearing Funds ₹ 100 Interest Bearing Loans ₹ 100 Interest Free Investment ₹ 100 ₹ 200 ₹ 200 Now assessee, earns interest income of ₹ 18 and incurs interest expenditure of ₹ 15. In the present case, ₹ 15 cannot be disallowed for the reason that no nexus could be proved for earning interest income. Thus, till the time the money borrowed is utilized for making investment for the purpose of business, interest expenditure on such money borrowed cannot be disallowed u/s 36(1)(iii). 1.29 Even investment in the partnership firm from which interest income was earned was not held by the ld. CIT(A) to be not for the purpose of business. Interest expenses were disallowed solely for the reason that no nexus could be proved by the assessee company of such expenditure with the earning of interest income from the partnership firm. 1.30 The fact that ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he allegation of ld. CIT(A) is not that the interest expenses were not for the purpose of the business or that the borrowings, on which such expenses were incurred, were utilized for other than for the purpose of business. Ld. CIT(A), as stated above, has confused himself with the legal position u/s 36 with that u/s 57, for claiming deduction of expenses. In view of above, the disallowance of ₹ 53,78,282 deserves to be quashed and relief may be granted to assessee company. 6. On the other hand, the ld. DR has vehemently supported the order of the ld. CIT(A) and submitted that the ld. CIT(A) has power for enhancing the income of the assessee U/s 251 of the Act. 7. We have heard the rival contentions and perused the material available on record. As per facts of the present case, the assessee company is engaged in business of Real Estate development and filed its Return of Income on 29.09.2013 at total income of ₹ 18,610. Assessment was completed u/s 143(3) of the Act vide order dated 12.03.2016, resulting into addition of ₹ 10,32,329 on account of disallowance u/s 14A, read with Rule 8D. The ld. CIT(A) had deleted the deleted the entire disallowance U/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent of displacing powers under, say, sections 147, 148 and 263. 9. It is a trite law that the ld. CIT(A) cannot touch upon issues which do not arise from the order of assessment and was outside the scope of order of assessment. In this regard, we draw strength from the following decisions of different Coordinate Benches of the Tribunal. (i) Bikram Singh in [2017] 82 taxmann.com 230 (Del-Trib) (ii) Sundaram Medical Foundation in (2016) 45 ITR (Trib) 500 (Chennai Trib) 10. We observe that as per Explanation to Section 251 .in disposing of an appeal, CIT(A) may consider and decide any matter arising out of the proceedings, in which the order appealed against was passed .. Thus, if any matter is not arising out of the proceedings before the AO, ld. CIT(A) has no power of enhancement apropos such matters. In the present case, the issue of whether interest expenses incurred on loan taken from Shri Udai Kant Mishra was for the purpose of business or not was not arising out of the proceedings before the AO. This is for the reasons that the AO himself, in the past, in the preceding two years, had allowed the claim of such expenditure, by being fully aware that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, before making such enhancement and thus would be against the legal position set out in section 251(2) of the Act. The specific requirement of issuing SCN contained in section 251(2) is issue based. The power of Enhancement is different from power of Assessment. In section 143, there is no specific requirement of SCN which is there in 251(2). The SCN issued on a particular aspect gets exhausted if ld. CIT(A) is convinced with the reply of the appellant on that issue. Ld. CIT(A) has to mandatorily issue a fresh SCN if ld. CIT(A) is changing the basis of enhancement. Therefore, in this view of the legal position, the power of enhancement is exercised by the ld. CIT(A) without jurisdiction and also against the principle of natural justice. In the present case, in the SCN, ld. CIT(A) raked up the issues of no business activities being undertaken by the assessee company, the entire reply to such SCN by the assessee company was based on explaining the legal position whether business activities and revenue generated out of it is pre-condition for claiming deduction u/s 36(1)(iii) or not. Whereas, no opportunity, at all, was provided to the assessee company to explain the nexus b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of ld. CIT(A) upholding the rate % applied by the ld. AO 01.01.2016 07.02.2017 Date of the order passed by the ITAT, Jaipur Bench 29.08.2017 ITA No. 293/JP/2016 and 313/JP/2017 Rate % upheld by the ITAT, Jaipur Bench 14% 14% As can be seen from the table above, the loan obtained by the assessee company from Shri Udai Kant Mishra in the preceding years, the balance of which has been carried forward during the current year as well, has been accepted by the Department, to have been utilized for the purpose of business. Resultantly, interest expenses on such loan were allowed by the AO u/s 36(1)(iii) for both the preceding years. The only quarrel of the AO, in the preceding years, was with respect to the rate at which such loan was taken. Resultantly, part of such interest expenses was disallowed by the AO u/s 40A(2)(b). However, the Coordinate Bench of this Tribunal allowed the rate of interest on such loan taken from Shri Udai Kant Mishra to the extent of 14%. Even ld. CIT(A), in the preceding years, did not make any disallowance u/s 36(1)(iii) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erations of ₹ 24,64,224/- was booked. Ld. CIT(A) in linking the interest income of ₹ 53,74,368 received by the assessee company on account of capital contribution in M/s Ambience Colonizers with the interest expense of ₹ 53,78,282 on loan taken from Shri Udai Kant Mishra. Whereas, the fact remains that such interest expense incurred by the assessee company was on account of investments in avenues for the purpose of business in the preceding years and had no direct co-relation with the income generated. Ld. CIT(A) also stressed upon the fact that no revenue was generated by the assessee company without appreciating that generation of revenue is not the condition precedent for allowability of expenses under the head Profits and Gains from Business and Profession. Section 36(1)(iii) allows deduction of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. On the contrary, Section 57 which allows deductions from the income chargeable under the head Income from Other Sources states that any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest Free Funds (Share Capital) ₹ 100 Interest Bearing Funds ₹ 100 Interest Bearing Loans ₹ 100 Interest Free Investment ₹ 100 ₹ 200 ₹ 200 Now assessee earns interest income of ₹ 18 and incurs interest expenditure of ₹ 15. In the present case ₹ 15 cannot be disallowed for the reason that no nexus could be proved for earning interest income. Thus, till the time the money borrowed is utilized for making investment for the purpose of business, interest expenditure on such money borrowed cannot be disallowed u/s 36(1)(iii). 16. Even investment in the partnership firm from which interest income was earned was not held by the ld. CIT(A) to be not for the purpose of business. Interest expenses were disallowed solely for the reason that no nexus could be proved by the assessee company of such expenditure with the earning of interest income from the partnership firm. The fact that ld. CIT(A) deleted the disallowance made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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