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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 ..... in disallowing a sum of Rs. 17,12,616 (as per calculation of appellant) u/s 36(1)(iii) of Income Tax Act 1961 (Act) on the ground that the appellant has not put to use the asset even though the asset constitutes the stock in trade of the appellant. 3. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in holding that the disallowance of Rs. 17,12,616 (as per calculation of appellant) even though the loan has been taken for the 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 Rs. 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elete, amend or modify otherwise all or any of the above grounds either before or at the time of hearing this appeal." 3. Ground No.1 is general in nature which do not require adjudication. 3.1 Ground Nos.2 & 3 are regarding disallowance of Rs. 17,12,616/- u/s. 36(1)(iii) of the Income Tax Act, 1961 ('the Act') for purchase of property in the Assessment Year 2014-15 and additional 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 Rs. 65,33,279/- (Rs. 17,12,616 + Rs. 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 Rs. 17,12,616/- u/s. 36(1)(iii) of the Act on the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest free advances to related parties for purchase of property and these properties are in the nature of capital assets. Since the same has not been acquired and put to use during the year, the interest on such loans is disallowed u/s. 36(1)(iii) of the Act. The contention of the AR is that the above mentioned advances were also for the 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 bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e; The proviso was inserted by the finance Act, 2003 w.e.f. 1.4.2003. The words "for extension of existing business or profession" were omitted by the Finance Act, 2015 w.e.f 1.4.2016. The Hon'ble Supreme Court in the case of Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194/167 Taxman 206, has held that the newly 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 Rs. 82,49,994/- made by the AO and the action of the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) of the Act. He submitted that the order of Hon'ble Karnataka High Court did not speak about transactions with other related parties. Further he submitted that it must be presumed that the interest free funds have been utilized for giving advances to related 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 Rs. 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. The contention of the ld. AR is that the interest cost has to be considered as Rs. 2,00,54,050. He relied on the following judgments :- (i) DCIT Vs. Ambuthirtha Power Pvt. Ltd. in ITA No.2324/Bang/2019 (Bang-Trib.) (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 prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to income which does not form part of the total income under this Act". Axiomatically, it is that 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of exempt income there can be disallowance of expenses u/s.14A of the Act. This aspect will be clear from the facts of the case of Maxopp Investments Ltd. one of the appellant in the group of appeals decided by 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment had not been made only for earning tax free income; that the tax free income was only incidental to the assessee's main business of sale and purchase of securities 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in ITA No.1037/Bang/2019, only change in figures. 17. The assessee has raised the additional grounds as follows : 1. " Grounds regarding validity 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as AY 2015-16 is concerned, we shall take up for consideration Additional Ground No.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered the rival submissions. Section 127 of the Act reads as follows: "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] Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have held valid jurisdiction. In this case the 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 the basis of territorial jurisdiction. 2. On 08.10.2008 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout 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 Tribunal also noticed that it's view in the case of Hotel Blue Moon (supra) was reiterated by the Hon'ble Apex Court in the case of CIT Vs Laxman Das Khandelwal(108 taxmann.com 183). The relevant observations of the Hon'ble Supreme Court were extracted and are as follows: "5. At the outset, it must be stated that out of two questions of law that arose for consideration in Hotel Blue Moon's case the first question was whether notice under Section 143(2) would be mandatory for the purpose of making the assessment under Section 143(3) of the Act. It was observed:- "3. The Appellate Tribunal held while affirming the decision of CIT (A) that non-issue of notice under Section 143(2) is only a procedural irregularity and the same is curable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B 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 assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice was - (a) Not served upon him; or (b) Not served upon him in time; or (c) Served upon him in an improper manner: Provided that nothing contained in this section shall apply where the assessee has raised such objection before the completion of such assessment or reassessment." 7. A closer look at Section 292BB shows that if the assessee has participated in the proceedings it shall be deemed that any notice which is required to be served upon was duly served an the assessee would be precluded from taking any objections that the notice was (a) not served upon him; or (b) not served upon him in time; or (c) served upon him in an improper manner. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessment and was the AO who had jurisdiction with the Assessee w.e.f. 27.5.2013. In those circumstances, the decision of the ITAT Kolkata Bench rendered in the case of Rungta Irrigation Pvt.Ltd. (supra) will be clearly applicable to the facts of the present case. 19.12. We also find that the Hon'ble Karnataka High Court in the case of Nittu Vsanth Kumar Mahesh Vs. ACIT W.P.No.2387/2019(T-IT) in its judgment dated 11.4.2019 reported in (2019) Taxman 277 (Karnataka) has taken a view that non-service of notice u/s.143(2) of the act renders the order of assessment bad in law and that the provisions of Sec.292BB of the Act cannot cure such a defect. Therefore the decision of the Hon'ble Kerala High Court in the case of Pandinjarekara Agencies Pvt.Ltd. (supra) on which the learned CIT(A) placed relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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