M/S TRIMURTY BUILDCON PVT.LTD.,JAIPUR vs. ITO, WARD, 2(2), JAIPUR

2. In the facts and circumstances of the case and in law, Id. CIT(A), has erred in coming to the conclusion that the appeal of the 2 ITA 46/JP/2021_ M/s Trimurty Buildcon P Ltd. Vs ITO assessee company was filed with delay, ignoring the fact that during such period there was complete national lockdown, owing to which the appeal could not be filed within time, for which, appropriate relief was provided through various notifications. The action of Id. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by setting aside the order of Id. CIT (A).

There is delay of 26 days in filing the present appeal, wherein it was stated that the Hon’ble Supreme Court in Suo Moto Writ Petition (Civil) No(s) 3/2020 dated 23/03/2020 has taken suo motu cognizance of the situation arising out of the challenge faced by the country on account of Covid-19 3 ITA 46/JP/2021_ M/s Trimurty Buildcon P Ltd. Vs ITO Virus and resultant difficulties that may be faced by litigants across the country in filing their petitions/applications/suits/appeals/all other proceedings within the period of limitation prescribed under the general law of limitation or under Special Laws (both Central and/or State). To obviate such difficulties and to ensure that lawyers/litigants do not have to come physically to file such proceedings in respective Courts/Tribunals across the country including this Court and the Hon’ble Supreme Court ordered that a period of limitation in all such proceedings, irrespective of the limitation prescribed under the general law or special laws whether condonable or not shall stand extended w.e.f. 15th March, 2020 till further order/s to be passed by this Court in present proceedings. The instant appeal has been filed on 11/06/2020, therefore, in view of the direction of the Hon’ble Supreme Court, there is no need to file condonation application and the delay in filing the present appeal is condonable and is hereby condoned.

In this appeal, the assessee is mainly aggrieved by the order imposing the penalty levied U/s 271(1)(c) of the Income Tax Act, 1961 (in short, the Act). The ld. AR appearing on behalf of the assessee has submitted that the quantum appeal from which the addition had been made, has already been decided in favour of the assessee by this Bench of the Tribunal vide its order dated 06/04/2021 passed in and the additions made by the A.O. and confirmed by the ld. CIT(A) were deleted by this Bench.

We have considered the rival contentions of both the parties and perused the material placed on record. From perusal of the record, we observed that this Bench of the Tribunal vide its order dated 06/04/2021 passed in has deleted the additions made and confirmed by the ld. CIT(A) by observing as under:

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.

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 such expenditure incurred and the loan so taken, was utilized for the purpose of business of the assessee company. In the Show Cause Notice issued by ld. CIT(A), u/s 251(2) of the Act, the sole basis through which ld. CIT(A) proposed to enhance the income of the assessee company, by disallowing interest expenses u/s 36(1)(iii) was that no business activities were carried out by the assessee company, during the relevant previous 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. This requirement has been included in 7 ITA 46/JP/2021_ M/s Trimurty Buildcon P Ltd. Vs ITO section 251(2), so that assessee, before its income getting enhanced, is given a reasonable opportunity to rebut/ make submissions against (i) quantum with which the income is proposed to be enhanced and also (ii) the reason because of which such enhancement is proposed to be done. 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. Ld. CIT(A) cannot “shift his goal posts” at his own will. Ld. CIT(A), although alleged that no business activities were carried out by the assessee company, however, he himself noted the fact of sale transaction undertaken by the assessee company, during the year of Rs. 24,64,224/-.

We further observe that any enhancement being made without giving the same basis in the Show Cause notice, would tantamount to no opportunity being given to the 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 8 ITA 46/JP/2021_ M/s Trimurty Buildcon P Ltd. Vs ITO 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 between the interest income and the interest expenses and whether such nexus was, at all, required to be proved.

It is an undisputed fact that the assessee company, being engaged in the Real Estate Development, in the preceding years, had taken loan from Shri Udai Kant Mishra for utilizing the same for the purpose of its business. Shri Udai Kant Mishra is the main person behind Trimurty Group, to which the assessee company belongs. The year wise details of loan taken from Shri Udai Kant Mishra by the assessee company is as under: - Particulars FY 2010-11 FY 2011-12 FY 2012-13 (Relevant Year) Outstanding balance as at the 1,54,26,352 3,61,15,187 3,72,21,141 end of the relevant year Rate of Interest paid on loan 18% 18% 15.25% outstanding As seen from the table above, there was no major increase in the outstanding loan amount taken by the assessee company from Shri Udai Kant Mishra, as seen during the relevant previous year vis a vis the immediately preceding year. For the reason of good market standing of Shri Udai Kant Mishra, the possibility of him getting loan from the market was more, in comparison to any of the group companies. Resultantly, on one hand, loan was taken by Shri Udai Kant Mishra and subsequently was passed on to different group companies, including the assessee company. Such loan amount was then utilized by the assessee company for the purpose of its business. The fact of loan from Shri Udai Kant Mishra having been taken for the purpose of business was even accepted by the Department for the immediately preceding two years, wherein, for both such years order u/s 9 ITA 46/JP/2021_ M/s Trimurty Buildcon P Ltd. Vs ITO 143(3) was passed by the AO. Details of the proceedings for the immediately two preceding years is as under: Particulars FY 2010-11 FY 2011-12 Date of order passed u/s 143(3) 27.03.2014 08.01.2015 Rate at which loan taken from Shri Udai 18% 18% Kant Mishra Rate % accepted by the ld. AO in 12.5% 12.5% assessment proceedings Date of order of ld. CIT(A) upholding the 01.01.2016 07.02.2017 rate % applied by the ld. AO Date of the order passed by the ITAT, 29.08.2017 Jaipur Bench 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) and accepted the loan to have been utilized for the purpose of business of the assessee company.

We have seen from the facts as stated hereinbefore that the loan outstanding in the books of the assessee company as taken from Shri Udai Kant Mishra was nothing but obtained in the preceding years. During the 10 ITA 46/JP/2021_ M/s Trimurty Buildcon P Ltd. Vs ITO current year, the interest expenses of Rs. 53,78,282/- incurred on the loan taken from Shri Udai Kant Mishra was credited to his account, which resulted into increase in the balance outstanding of such loan as at the end of the current year. The details of the same are as under: Particulars Amount Opening balance of loan outstanding as on Rs. 3,61,15,187 01.04.2012 Add: Interest expenses Rs. 53,78,282 Less: Closing balance of loan outstanding as on Rs. 3,72,21,141 31.03.2013 Payouts (Balancing Figure) Rs. 42,72,328 Thus, no fresh infusion of funds, in the form of loan taken from Shri Udai Kant Mishra had taken place during the year under reference. The funds as taken in the preceding years for the purpose of business, remained parked in different avenues for which they were taken. Undisputedly, the fact of the loans taken in the preceding years, having been utilized for the purpose of business, has even been accepted by the Department, the matter having attained finality. Therefore, the interest expenses incurred on the same loan amount during the relevant previous year were for the purpose of business, allowable u/s 36(1)(iii).

It is a trite law that both the Income Tax Authorities i.e. the AO as well as ld. CIT(A), having co-terminus powers, with that of the ld. AO, are bound by the Rule of Consistency. Thus, even if ld. CIT(A) exercised his power of enhancement, he was duty bound to follow the outcome of the proceedings, in the case of the assessee company, in the preceding two years. As per section 36(1)(iii) of the Act , any interest expense which has been incurred for the purpose of business is allowed as an expenditure under the head Business and Profession. This is irrespective of the fact whether the assessee has generated any corresponding income or not. However, in the case of the assessee company, revenue from operations of Rs. 24,64,224/- was booked. Ld. CIT(A) in linking the interest income of Rs. 53,74,368 received by the 11 ITA 46/JP/2021_ M/s Trimurty Buildcon P Ltd. Vs ITO assessee company on account of capital contribution in M/s Ambience Colonizers with the interest expense of Rs. 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 of making or earning such income” The pre requisite for claiming deduction u/s 36 is that the expenditure should be incurred “for the purpose of business”. There is no requirement of generating any corresponding income, as a result of such expenditure. For instance, if any assessee incurred expenditure on advertisement, then for claiming such expenditure the assessee need not demonstrate whether any corresponding revenue was generated, as a result of the advertisement. Till the time the advertisement is for the purpose of business the same would be allowed. However, for claiming expenditure u/s 57 under the head Income from Other Sources the assessee is required to showcase the corresponding income generated and then only expenditure is allowed to be claimed under such section.

We further observed that the ld. CIT(A) has himself with the deductibility of expenditure, interest or otherwise u/s 36 with the deductibility, as provided under the head ‘Income from Other Sources’ u/s 57 of the Act. It is pertinent 12 ITA 46/JP/2021_ M/s Trimurty Buildcon P Ltd. Vs ITO to note that ld. CIT(A) has not even changed the head of income of the assessee company while disallowing the interest expenditure. Ld. CIT(A) has even at Page 41 of his order given reference of Section 28 which falls under the head Profits and Gains from Business and Profession. The borrowings from Shri Udai Kant Mishra, on which interest expenses were incurred by the assessee company in the current and the preceding years, were all parked in various Fixed Assets, at different points of time during the current and the preceding years. None of the assets including investment in group companies or partnership firms have been held by the ld. CIT(A) to be not for the purpose of business. Unless there was any allegation that the borrowings were utilized for purposes other than for business, disallowance of interest expenses on such borrowings is unwarranted. For instance, an assessee has interest free funds, in the form of Share Capital of Rs. 100 and the same is invested in Interest bearing funds and interest income is received. Thereafter, say after a gap of six months, assessee borrows interest bearing loan of Rs. 100 and utilizes the same for making interest free investment. The balance sheet position would be as under: Liabilities Amount Assets Amount Interest Free Funds Rs. 100 Interest Bearing Funds Rs. 100 (Share Capital) Interest Bearing Loans Rs. 100 Interest Free Rs. 100 Investment Rs. 200 Rs. 200 Now assessee earns interest income of Rs. 18 and incurs interest expenditure of Rs. 15. In the present case Rs. 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).

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.

Since, we have already decided the quantum appeal in favour of the assessee, therefore, the penalty imposed by the A.O. has no legs to stand, therefore, we direct to delete the penalty levied U/s 271(1)(c) of the Act. We direct accordingly.

In the result, this appeal of the assessee is allowed.