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Facts
The assessee challenged disallowance of expenses under Section 14A and disallowance of interest under Section 36(1)(iii). The assessee also challenged penalty levied under Section 270A.
Held
The Tribunal held that disallowance under Section 14A is not sustainable without exempt income. The disallowance of interest under Section 36(1)(iii) was also found to be unjustified in light of sufficient own funds. The penalty under Section 270A was deleted on a technical ground regarding the show cause notice.
Key Issues
Whether disallowance under Section 14A is permissible without exempt income. Whether disallowance of interest under Section 36(1)(iii) is justified when own funds were available. Whether penalty under Section 270A is valid when the show cause notice was not precise.
Sections Cited
14A, 143(3), 270A, 36(1)(iii), 271(1)(c), 274
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Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI YOGESH KUMAR U.S.
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in & 3690/Del/2023 for AY 2018-19, arise out of the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. NFAC’, in short] dated 07.11.2023 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.09.2021 and u/s 270A dated 16.03.2022 by the Assessing Officer, NFAC, Delhi (hereinafter referred to as ‘ld. AO’).
The Ground No. 1 raised by the assessee is general in nature and does not require any specific adjudication.
The Ground Nos. 2 and 3 raised by the assessee are challenging the disallowance of expenses under Section 14A of the Act. It is not in dispute that investments were made by the assessee company in foreign & 3690/Del/2023 SBS Transpole Lilgistics pvt. Ltd entities from which there would be no exempt income that could be derived by the assessee. Furthermore, there was no exempt income that had actually accrued to the assessee company during the year under consideration. Despite this, the Learned AO proceeded to make disallowance of expenses under Section 14A of the Act in the sum of Rs 39,79,299/- by applying the computation mechanism provided in Rule 8D(2) of the Income Tax Rules. This action of the Learned AO was upheld by the Learned CITA. Since there is no exempt income derived by the assessee during the year under consideration, the application of provisions of Section 14A of the Act cannot be pressed into service. Reliance in this regard is placed on the decision of Hon’ble Jurisdictional High Court in the case of PCIT Vs Era Infrastructure (India) Ltd reported in 141 taxmann.com 289 (Del HC) Respectively following the same, the Ground Nos. 2 and 3 raised by the assessee are hereby allowed.
The Ground No. 4 raised by the assessee is challenging the disallowance of interest of Rs. 12 crores under section 36(1)(iii) of the Act.
We have heard the rival submissions and perused the materials available on record. The Learned AO observed that assessee had suffered interest on its borrowings on one hand but on the other hand had advanced interest-free loans and advances to its subsidiary companies which amount to diversion of interest for non-business purposes. Accordingly, he proceeded to invoke the provisions of section 36(1)(iii) of the Act and made disallowance of interest in the sum of Rs. 12 crores, which was upheld by the Learned CITA. Before us, the Learned AR drew our attention to the availability of own funds with the assessee company and pleaded that there cannot be any disallowance of interest under section 36(1)(iii) of the Act in view of the decision of Hon’ble Supreme Court in the case of Reliance Industries Limited reported in 410 & 3690/Del/2023 SBS Transpole Lilgistics pvt. Ltd ITR 466 (SC). We have gone through the said workings and find that those workings are captured from the audited financial statements which are already part of the income tax return. We find that the assessee is having sufficient interest free funds of Rs 165.48 crores as on 31.3.2018 as against the loans and advances given to subsidiaries of Rs 102.40 crores. Hence it could be reasonably presumed that interest free loans to subsidiaries were advanced out of own funds of the assessee company and not out of borrowed funds in view of the decision of Hon’ble Supreme Court in the case of Reliance Industries Limited reported in 410 ITR 466 (SC). Hence there cannot be any disallowance of interest under section 36(1)(iii) of the Act. Respectfully following the same, the Ground No. 4 raised by the assessee is hereby allowed.
The Ground No. 5 raised by the assessee is general in nature and does not require any specific adjudication.
/Del /2023 - Penalty appeal under section 270A
Though the assessee had raised several grounds challenging the levy of penalty under section 270A of the Act, the preliminary issue to be decided is as to whether the penalty under section 270A of the Act could be levied when the inappropriate portion in the penalty notice had not been struck off by the Learned AO in the show cause notice issued for penalty proceedings.
We have heard the rival submissions and perused the materials available on record. We find that the ld. AR placed on record the show cause notice issued for penalty u/s 274 read with section 270A of the Act & 3690/Del/2023 SBS Transpole Lilgistics pvt. Ltd dated 28-09-2021 wherein it is very clear that the ld. AO had not specifically mentioned the offence committed by the assessee by striking off the irrelevant portion i.e. whether the assessee had under reported its income or misreported its income. Now the short question that arises is whether non-striking off of the irrelevant portion in the penalty notice by not specifically mentioning the offence committed by the assessee, would become fatal to the penalty proceedings ? This issue is no longer res integra in view of the Full Bench Decision of Hon’ble Bombay High Court in the case of Mohd. Farhan A Shaikh vs DCIT reported in 434 ITR 1 (Bom)(FB) dated 11.3.2021. The relevant operative portion of the said judgement is reproduced hereunder:-
“Question No. 3: What is the effect of the Supreme Court's decision in Dilip N. Shroff Case (supra) on the issue of non-application of mind when the irrelevant portions of the printed notices are not struck off ? 187 In Dilip N. Shroff case (supra), for the Supreme Court, it is of "some significance that in the standard Pro-forma used by the assessing officer in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs were to be deleted, but the same had not been done". Then, Dilip N. Shroff case (supra), on facts, has felt that the assessing officer himself was not sure whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars.
We may, in this context, respectfully observe that a contravention of a mandatory condition or requirement for a communication to be valid communication is fatal, with no further proof. That said, even if the notice contains no caveat that the inapplicable portion be deleted, it is in the interest of fairness and justice that the notice must be precise. It should give no room for ambiguity. Therefore, Dilip N. Shroff Case (supra) disapproves of the routine, ritualistic practice of issuing omnibus show- cause notices. That practice certainly betrays non- application of mind. And, therefore, the infraction of a mandatory procedure leading to penal consequences assumes or implies prejudice.
In Sudhir Kumar Singh, the Supreme Court has encapsulated the principles of prejudice. One of the principles is that "where procedural and/or substantive provisions of law embody the principles of natural justice, their infraction per se does not lead to invalidity of the orders passed. Here again, prejudice must be caused to the litigant, "except in & 3690/Del/2023 SBS Transpole Lilgistics pvt. Ltd the case of a mandatory provision of law which is conceived not only in individual interest but also in the public interest".
Here, section 271(1)(c) is one such provision. With calamitous, albeit commercial, consequences, the provision is mandatory and brooks no trifling with or dilution. For a further precedential prop, we may refer to Rajesh Kumar v. CIT [2007] 27 SCC 181, in which the Apex Court has quoted with approval its earlier judgment in State of Orissa v. Dr. Binapani Dei AIR 1967 SC 1269. According to it, when by reason of action on the part of a statutory authority, civil or evil consequences ensue, principles of natural justice must be followed. In such an event, although no express provision is laid down on this behalf, compliance with principles of natural justice would be implicit. If a statue contravenes the principles of natural justice, it may also be held ultra vires Article 14 of the Constitution.
As a result, we hold that Dilip N. Shroff Case (supra) treats omnibus show-cause notices as betraying non-application of mind and disapproves of the practice, to be particular, of issuing notices in printed form without deleting or striking off the inapplicable parts of that generic notice. Conclusion: We have, thus, answered the reference as required by us; so we direct the Registry to place these two Tax Appeals before the Division Bench concerned for further adjudication.”
Similar view was taken by the Hon’ble Jurisdictional High Court in the case of PCIT Vs Sahara India Life Insurance Co. Ltd reported in 432 ITR 84(Del) wherein it was held as under:-
“21. The Respondent had challenged the upholding of the penalty imposed under section 271(1) (c) of the Act, which was accepted by the ITAT. It followed the decision of the Karnataka High Court in CIT v. Manjunatha Cotton & Ginning Factory [2013] 35 taxmann.com 250/218 Taxman 423/359 ITR 565 and observed that the notice issued by the AO would be bad in law if it did not specify which limb of section 271(1)(c) the penalty proceedings had been initiated under i.e. whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. The Karnataka High Court had followed the above judgment in the subsequent order in CIT v. SSA's Emerald Meadows [2016] 73 taxmann.com 241, the appeal against which was dismissed by the Supreme Court of India in SLP No. 11485 of 2016 by order dated 5th August, 2016.
& 3690/Del/2023 SBS Transpole Lilgistics pvt. Ltd
On this issue again this Court is unable to find any error having been committed by the ITAT. No substantial question of law arises.
The appeals are accordingly dismissed.”
Though the aforesaid decisions were rendered in the context of penalty proceedings under section 271(1)(c ) of the Act, the ratio laid down thereon squarely applies to the facts of the instant case before us. Hence we direct the ld. AO to delete the penalty levied u/s 270A of the Act. Since the relief is granted on this preliminary technical ground, there is no need to separately adjudicate the other grounds raised by the assessee.
To sum up, both the appeals of the assessee are allowed.
Order pronounced in the open court on 09/05/2025.