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Dy. Commissioner of Income Tax Versus M/s. Rattha Holdings Company Pvt. Ltd. Vice-Versa

2016 (5) TMI 1129 - ITAT CHENNAI

Reopening of assessment - non-deduction of TDS - Held that:- If the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso. So long as the ingredients of section 147 are fulfilled, the Assessing Officer .....

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Disallowance u/s.40(a)(ia) - Held that:- The issue in dispute is squarely covered by the decision of Co-ordinate Bench of Tribunal in the case of Shri N.Palanivelu Vs. ITO [2015 (10) TMI 1415 - ITAT CHENNAI] wherein held that section 40(a)(ia) is not applicable when there is no outstanding balance at the end of the close of the year relevant to the assessment year in respect of these payments. However, the assessee has not brought on record, the details of outstanding expenses or sched .....

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siderable investments at the opening as well the close of the year under consideration. Therefore, the portion of expenditure attributable to the investments made by the assessee has to be computed as per Rule 8D of the I.T Rules. Therefore, the Assessing Officer was of the opinion that it is a clear diversion of interest bearing funds to other purposes. The assessee would be entitled to claim deduction of interest under section 36(1)(iii) of the Act on the borrowed funds utilized for business p .....

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om the above properties to be assessed as business income and not as income from house property. - Decided against revenue - I.T.A. Nos. 2220 & 2221/Mds./2015, I.T.A.Nos.2055,2051,2052,2056/Mds./2015 - Dated:- 13-4-2016 - Shri Chandra Poojari, Accountant Member And Shri Duvvuru RL Reddy, Judicial Member For the Revenue : Mr. Pathlavath Peerya, CIT, D.R For the Assessee : Mr. B. Ramakrishnan, C.A ORDER Per Chandra Poojari, Accountant Member These two appeals i.e. ITA Nos.2220 & 2221/Mds./15 .....

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, for the sake of convenience the all the appeals are heard together and disposed off by this common order. 2.1 First we take ITA No.2055/Mds./2015 (A.Y.2008-09) The first ground in this appeal is with regard to reopening of assessment. 2.2. The facts of the case are that the assessee is a domestic company engaged in the business of building promotion. The assessee filed its return of income on 31.10.2008 and the assessment u/s.143(3) of the Act was completed on 30.12.2010 by disallowing the ent .....

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8 dated 20.03.2013 on the ground that the TDS on the selling expenses debited in P&L needs to be verified. The AO relying upon the decision of Hon ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd. reported in 259 ITR 019 completed the assessment u/s.143(3) r.w.s.147 on 25.03.2014 by disallowing the certain expenditures u/s.40(a)(ia) of the Act. Aggrieved by the reopening of the assessment, the assessee preferred an appeal before the Ld.CIT(A). On appeal, Ld.CIT(A) observed th .....

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se on the issue of jurisdiction. Hence, Ld.CIT(A) confirmed the action of AO. Against this, the assessee is in appeal before us. 3.1 We have heard both the parties and perused the material on record. In our opinion, Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or .....

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bserved by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue .....

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ect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied : firstly the Assessing Off .....

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148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso. So long a .....

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rding the reasons, s such we confirm the same. This ground is rejected. 4. The next ground is with regard to confirm the disallowance u/s.40(a)(ia) of the Act. 5. The facts of the case are that the assessee has not deducted TDS with following payments. Commission & Brokerage 24,13,459 Advertisement expenses 1,89,461 Professional charges 19,78,881 Other charges 1,45,73,086 Total 1,91,54,887 At the time of hearing, ld.A.R submitted that this amount was not outstanding at the end of the close o .....

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vered by the decision of Co-ordinate Bench of Tribunal in the case of Shri N.Palanivelu Vs. ITO reported in [2015] 40 ITR (Trib) 325 (ITAT[Chen]) vide order dated 29.04.2015 wherein held that:- 4. We have heard both sides and perused the material on record. We find that the Special Bench of the Tribunal in the case of Merilyn Shipping and Transports v. Addl. CIT [2012] 16 ITR (Trib) 1 (Visakhapatnam) [SB] and judgment of the Gujarat High Court in the case of CIT v. Vector Shipping Services (P.) .....

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ear either in the name of the party or outstanding expenses. Hence, in the interest of justice, we are remitting the issue back to the file of the Assessing Officer with direction to verify the claim of the assessee and the assessee shall place necessary evidence in support of his claim. 5. Further, we make it clear that if the impugned amount is not outstanding at the end of the close of the assessment year in respect of the expenses either as outstanding expenses or as sundry creditors, this a .....

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Act. 7.1. The facts of the case are that the ld. Assessing Officer had worked out the disallowance based on an formula mandated by the Act and provided for disallowance @ 0.5% of the average of the value of the investment as in Rule 8D(iii). Against this the assessee was in appeal before the Ld.CIT(A). On appeal, Ld.CIT(A) observed that similar issue was also adjudciated by ITAT Chennai in the case of Southern Petrochemical Industries in 93 TTJ 161 as under:- …Whether to invest or not to .....

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ed by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. Accordingly, the Ld.CIT(A) observed that the AO has correctly applied the provisions of the section 14A read with Rule 8D as mandated by the Act as against the claim of nil expenditure by the assessee. Hence, the Ld.CIT(A) dismissed this ground. Against this, the assessee is in appeal before us. 8.1 We have heard both the parties and perused the material on record. Ld.A.R pl .....

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The assessee would be entitled to claim deduction of interest under section 36(1)(iii) of the Act on the borrowed funds utilized for business purpose. The only benefit the assessee derived was the dividend income which was not assessable under the Act, we are of the opinion that the disallowance under section 14A of the Act was squarely attracted and the Assessing Officer has rightly disallowed the claim. Our views are fortified by the decision in the case of Pradeep Kar v. ACIT 319 ITR 416 [Ka .....

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cond appeal before the Income-tax Appellate Tribunal, hereinafter called as "the Tribunal" in short. The Tribunal reversed the decision of the first appellate authority and restored the order of the assessing authority. Being aggrieved by the same, the assessee is before us by filing this appeal framing substantial questions of law and urged the grounds in support of the same. Smt. Anuradha, learned counsel for the appellant relied upon the decision reported in CIT Vs. Rajendra Prasad .....

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nal are erroneous and contrary to the aforementioned decisions. Therefore, she submits that substantial questions (i) and (ii) framed in the appeal memorandum arise for consideration of this court and requested to set aside the order passed by the Tribunal. The substantial questions of law framed in the appeal are extracted as hereunder. "(i) Whether or not the Tribunal was right in not allowing the interest incurred by the assessee as expenditure in computing income of the assessee? (ii) W .....

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to the facts on hand by distinguishing the decision of the Hon'ble Supreme Court, which is squarely applicable?" With reference to the contentions urged, we have perused the orders passed by the assessing authority, the first appellate authority and the Tribunal with a view to find out as to whether the substantial questions of law framed in this appeal would arise for consideration of this court. It is not in dispute that the assessee had borrowed loans and invested the same in shares .....

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d counsel and held that it is not applicable to the fact situation. The reasons assigned for such a conclusion in the assessment order are extracted hereunder: "The decision is with reference to deduction allowable under section 57(iii) of the Income-tax Act. The decision relates to an assessment year where dividend income was taxable in the hands of the assessee. With the introduction of section 10(33) of the Income-tax Act from the assessment year 1998-99 the position of law in regard to .....

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ase." Therefore, the dividend income is exempted from the tax liability under section 10(33) of the Act. Under section 14A of the Act, expenditure relating to exempted income is not allowable. The assessing authority has considered the above relevant factor and disallowed the claim of the assessee. The first appellate authority reversed the order of the assessing authority by applying the decision in Rajendra Prasad Moody's case [1978] 115 ITR 519 (SC), referred to supra, which was rend .....

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aim of the assessee is wholly untenable and the decisions relied upon by the learned counsel on behalf of the appellant are not applicable to the fact situation. We are in agreement with the orders passed by the assessing authority and the Tribunal and differ from the view taken by the first appellate authority. For the reasons stated supra, interference with the impugned order of the Tribunal is not warranted in this case. No substantial questions of law much less the questions of law framed by .....

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th the borrowed funds was for the purpose of controlling the company and since the borrowed funds were utilised for the acquisition of shares of the company under the control of the assessee, the utilisation of the borrowed funds was for business purpose entitling the assessee to deduction of interest under section 36(1)(iii) of the Income-tax Act, 1961. The Assessing Officer held that the assessee made investments by utilising the borrowed funds ill the form of acquisition of shares in the comp .....

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dividend income of ₹ 3 lakhs earned by the assessee from the leasing company during the previous year. On appeal: Held, allowing the appeal, that any expenditure incurred for earning any income which was not taxable under the Act was not an allowable expenditure. Dividend income was exempt under section 10(33) of the Act and the dividend earned by the assessee on the shares acquired by her with the borrowed funds did not constitute part of the total income in the hands of the assessee. Th .....

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ould arise only if the assessee was engaged in trading in shares. So far as the acquisition of shares was in the form of investment and the only benefit the assessee derived was the dividend income which was not assessable under the Act, the disallowance under section 14A was squarely attracted and the Assessing Officer rightly disallowed the claim. 8.3 Further, in the case of Lakshmi Ring Travellers v. ACIT in I.T.A. No. 2083/Mds/2011 vide order dated 02.03.2012 for the assessment year 2008-09, .....

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ion as far as sec.14A is concerned. In that provision, it has been provided that if the Assessing Officer is not satisfied with the correctness of the computations made by an assessee, he shall compute the quantum in accordance with the method that may be prescribed. For this matter, Rule 8D has already been prescribed. Sub-sec.(3) further provides that even in a case where an assessee claims that no expenditure was incurred, the assessing authority has to presume the incurring of such expenditu .....

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l evidence is replaced by statutory presumption and the Assessing Officer has to follow the consequences stated in the statute. It means that even in a case where no expenditure is stated to have been incurred, the assessing authority has to apply Rule 8D. As the statutory presumption substitutes the requirement of factual evidence, the question of enquiry does not arise. Therefore, we are unable to agree with the argument of the learned CA. 7. In result, this appeal filed by the assessee is dis .....

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essee is not acceptable for the reasons hereinafter. The order passed by the AO goes to show that AO has complied with the requirement of section 14A of the Act by observing that as to why he is not satisfied with the correctness of claim of the assessee that no expenditure was incurred. The AO has recorded the findings that earning of dividend was not an automatic process and the assessee was required to keep regular control over the investments made. 5.1. The contention put forth by the ld. AR .....

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ny out of its pocket. Such decisions are highly strategic in nature and are required to be made by highly qualified and experienced professionals. The same would also require market research and analysis. The assessee company by acquiring controlling interest in the subsidiary companies would also be required to attend board meetings and make policy decisions with regard to the aforesaid huge amount of investments made. By no stretch of imagination, it can be assumed that such activities were do .....

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produced herein below : 17. The insertion of S. 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dt. 22nd Nov., 2001). In other words, S. 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxa .....

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empt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of s. 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by de .....

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f income as prescribed under Chapter IV would fall within s. 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of s. 14A. Further, s. 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Secs. 15 to 59 lay d .....

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not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it is clear that the words "expenditure incurred" in s. 14A refers to expenditure on rent taxes, salaries, interest, etc. in respect of which allowances are provided f .....

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ng financial services like commercial vehicle financing, equipment finance, advances against financial assets and inter-corporate loans and deposits. During the course of the assessment proceedings, the AO noticed that the assessee had earned dividend of ₹ 4,85,24,362 which was exempt from tax. Taking note of s. 14A of the IT Act, he called upon the assessee to furnish the details of expenditure incurred in earning the aforesaid dividend and also to explain as to why expenditure on pro rat .....

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the receipts (total receipts being ₹ 119,48,19,592 including dividend receipts of ₹ 4,85,24,362). In this manner, he quantified the expenditure at ₹ 3,68,02,411 being 4.06 per cent of total expenditure as having been incurred in relation to earning the dividend and therefore disallowed the same while computing non-exempt income. On appeal, the learned CIT(A),by his order dt. 16th June, 2003, directed the AO to allow deduction on the gross amount of dividend without allocating .....

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not earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally tak .....

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ch has held that 8 ITA Nos.1032&1238/Kol/2012 M/s.Coal India Ltd. A.Yr.2008-09 investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt vs. ITO (2004)85TT](Ahd) 872 : (2004) 91 ITD 311 (Ahd), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under S. 10(33), the interest on capi .....

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d are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by the assessee in relation to income which does not form part of the total income" in s. 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision of the Hon'ble Supreme Court in CI Tvs. United General Trust .....

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Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of s. 14A would not apply to that extent. In Asstt.CIT vs. Premier Consolidated Capital Trust (I) Ltd. (2004) 83 TTJ (Mumbai)843,the Mumbai Bench of this Tribunal has held that the AO is justified in attributing a part of the financial and administrative expenses as expenditure in relation to exempt income and disallowing the sam .....

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produced as under :- 6. We have considered the rival submissions and perused the records of the case. Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the 9 ITA Nos.1032&1238/Kol/2012 M/s.Coal India Ltd. A.Yr.2008-09 records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of ₹ 19 crores. Whether to invest or not to invest .....

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e assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), applying the decision of Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC), reversed the decision of the Hon'ble Bombay High Court in CIT vs. United General Trust (P) Ltd. (supra), wherein the question was as un .....

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gement expenses ?" Thus, when the decision of the Hon'ble Bombay High Court has been reversed, the proportionate management expenses are required to be deducted while computing the dividend income. In the decision of the Hon'ble Calcutta High Court, relied upon by the learned counsel for the assessee, Mr. Dastur, in the case of CIT vs. United Collieries Ltd. (supra), it has been held that if the facts of a particular case so warrant, the allocation can be made towards expenses. In v .....

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as incurred, the assessing authorities were correct to estimate the incurring of such expenditure u/s 14A read with Rule 8D. It is pertinent to refer to the observations made by ITAT Chennai Bench in the case of Lakshmi Ring Travellers vs ACIT in ITA No.2083/Mads/2011 dated 2nd March,2012 wherein it was held as under (relevant portion reproduced) :- Therefore, it becomes clear that even in a case where the assessee claims that no expenditure was so incurred, the statute has provided for a presum .....

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of appeal are distinguishable on facts and law and does not help the cause of assessee. The assessee relied upon the decision of various courts of law listed as under : (i) Maxopp Investments Ltd. Vs CIT 347 ITR 272 (Del) (ii) Godrej & Boyce Mfg.Co.Ltd. vs DCIT 328 ITR 81 (Bom) (iii) Relaxo Footwears Ltd. Vs Addl.CIT (2012) 50 SOT 102 (iv) REI Agro Ltd. Kolkata vs D CIT ITA No.1331/Kol/2011 (v) DCIT vs Ashish Jhunjhunwala In all of the aforesaid judgements, the ratio was that the AO failed t .....

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he expenditure incurred for earning the exempt income there must be a nexus between the two. To substantiate the same, the assessee has relied upon the decisions of various courts listed as under: (i) Balram Chinni Mills Ltd. Vs DCIT in ITA NO.504/Kol/2011 (ii) CIT vs Hero Cyccles Ltd. 323 ITR 518 (Pun&Har) (iii) Saurabh Agrotech (P) Ltd vs DCIT in ITA No.786/JP/2011 (iv) Hindusthan paper Corporation Ltd. In ITA No.47/Kol/2012. The aforesaid judgements will not support the case of the assess .....

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s of the ld. CIT(A) will not help the assessee as the same has no bearing on the present case. 5.8. The ld. AR submitted without prejudice to the aforesaid grounds that there is a computational error in calculation under rule 8D(iii) and the AO has included the investments of the subsidiaries, which have not paid dividends to the assessee. In view of submission made, the said issue is remanded to the file of AO to make a correct computation without including the investments of companies which ha .....

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in the case of Pradeep Kar v. ACIT (supra), we reverse the findings of the ld. CIT(A) on this issue and restore the order passed by the Assessing Officer. Accordingly, the common ground raised in both the appeals is dismissed. 9.1 The next common ground in ITA No.2052/Mds/15 & 2056/Mds./2015 is with regard to disallowance of interest paid on loans taken. 9.2. At the time of hearing the appeals, this common is not pressed by the ld.A.R. Accordingly this ground is dismissed as not pressed. Bot .....

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9.10.2015, the assessee met one new C.A Shri B.Ramakrishnan to file and requested to file against these two assessment years. At that time, Shri B.Ramakrishnan C.A asked the details of the appeal and it was stated to him by the assessee no appeal was filed against the order of Ld.CIT(A) for assessment year 2009-10. At that time, ld.A.R advised the assessee to file appeal against the order of the Ld.CIT(A) for assessment year 2009-10. Hence, there was a delay of filing the appeal before the Tribu .....

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er. The sufficient cause within the contemplation of the limitation provision must be a cause which is beyond the control of the party invoking the aid of the provisions. Where no negligence, nor inaction, or want of bona fides can be imputed to the assessee a liberal construction of the provisions has to be made in order to advance substantial justice. Seekers of justice must come with clean hands. The reasons advanced by the assessee clearly show that the delay was due to the negligence and in .....

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nt received from two properties i.e., Tek Medows and Tek Towers as income from house property, but Ld.CIT(A) treated it as business income as claimed by the assessee. The Ld.CIT(A) allowed the appeal of the assessee by placing reliance with the order of the Tribunal in ITA No.995 to 997/Mds./2011 dated 28.08.2013 for assessment year 2005-06 to 2008-09 wherein held that income from the above properties to be assessed as business income and not as income from house property. Against this Revenue i .....

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