MELONGOS INDIA PVT LTD,CHENNAI vs. ITO, CORP WARD -4(1), CHENNAI

आदेश /O R D E R

PER MAHAVIR SINGH, VP:

This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-8, Chennai in ITA No.43/15- 16, order dated 07.01.2019. The assessment was framed by the Income Tax Officer, Corporate Ward 4(1), Chennai for the

ITA No.863/Chny/2019 2 assessment year 2012-13 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide order dated 19.03.2015.

ITA No.863/Chny/2019 3 income, which are not considered by the AO. For this, assessee has raised Ground Nos.5 to 9 which read as under:- 5. The CIT (Appeals) erred in enhancing the assessment in making the disallowance of Rs. 16,32,4037- being interest rate of 12% per annum on the presumption of diversion of borrowed capital to the extent of an average amount of Rs.1,36,03,3587- in para 15 of the impugned order without assigning proper reasons and justification. 6. The CIT (Appeals) failed to appreciate that the power of enhancement should be reckoned as restricted and narrow and ought to have appreciated that the judicial trend on the said power of enhancement was completely overlooked and brushed aside in recording tangential findings in para 13 of the impugned order. 7. The CIT (Appeals) failed to appreciate that there could not any enhancement of assessment in reckoned an independent source of income, not considered by the Assessing Officer while framing the assessment and ought to have appreciated that the power of the First Appellate Authority as discussed in the impugned order as the co-terminus power should be considered in the context of issues/sources of income assessed in the assessment order while such co-terminus power should not be invoked for new issues/sources of income not considered by the Assessing Officer. 8. The CIT(Appeals) failed to appreciate that the presumption of diversion of interest bearing funds for non business purposes had no merit in view of lack of proper examination of the financial statements and facts available in relation thereto and ought to have appreciated that the misreading of the financial statements without examination of facts would vitiate the addition made using the power of enhancement on various facets. 9. The CIT (Appeals) erred in directing the the Assessing Officer in para 17 of the impugned order for taxing deemed dividend u/s 2(22)(e) of the Act without assigning proper reasons and justification and ought to have appreciated that the excessive use of power vested in him would defy the well settled powers of the appellate authority while vitiating the said direction which constituted the gross violation of the said appellate powers vested with him.

ITA No.863/Chny/2019 4 that the disallowances made by AO is restricted to following 3 heads :-

(i) Disallowance u/s 40(a)(ia) Rs.34,12,567/- (ii) Disallowance u/s 40A(3) Rs.1,00,679/- (iii) Disallowance u/s 40a(ii) Rs.1,66,330/-

The ld.counsel stated that the AO has not at all deliberated on the issues of diversion of interest bearing funds to advancement of interest free loans or applicability of deemed dividend provision of section 2(22)(e) of the Act. The ld.counsel for the assessee took us through the CIT(A) order and assessee has challenged only the three disallowances before CIT(A) out of which CIT(A) deleted the disallowance made by AO by invoking the provisions of section 40(a)(ia) of the Act, but retained the following two disallowances:- i) Disallowance u/s 40A(3) Rs.1,00,679/- ii) Disallowance u/s 40a(ii) Rs.1,66,330/-

Apart from the above, the CIT(A) independently gone through the balance sheet and corresponding schedules and considered the two new issues, which were never the subject matter of the assessment order

ITA No.863/Chny/2019 5 disallowed the interest at Rs.16,32,403/- and also invoking the provisions of deemed dividend u/s.2(22)(e)of the Act as the company has advanced an amount of Rs.24 lakhs to Smt. Chitra Mohan, the wife of the Managing Director of the company. The CIT(A) has disallowed the interest by observing in para 15 as under:- 15. It is further held that the assessee had diverted borrowed capital to the extent of an average amount of Rs. 1,36,03,358/-during the year towards non-business purposes. Taking a conservative interest rate of 12% per annum, the interest to be disallowed works out to Rs. 16,32,403/- . It is held that the borrowed capital is advanced to non-business purposes and the corresponding interest debited by the assessee to the extent of Rs.16,32,403/- is disallowed out of interest debited by the assessee for the year. The Assessing Officer is directed to note the enhancement of income ordered and is further directed to issue necessary demand notice u/s 156. Penalty proceedings u/s 271(l)(c) is also initiated for concealing the particulars of income.

5.1 Further, the CIT(A) hold that the advance of Rs.24 lakhs to the wife of Managing Director of the company is taxable u/s.2(22)(e) of the Act and for this, the CIT(A) observed in para 16 & 17 as under:- 16. It. had also been noted that the assessee company had advanced an amount of Rs.24,00,000/- to Mrs Chitra Mohan, who was the wife of Mr. Mohan , Managing Director of the Company. The assessee had been asked to explain whether this amount of Rs.24,00,000/- had been declared u/s 2(22)(e) of the IT Act either in the hands of Mrs Chitra Mohan or in the hands of Mr.Mohan, Managing Director. In response to the same, the assessee has claimed that the amounts had been advanced in the course of business over several assessment years and that the same amounted to running account transactions. The assessee has further argued that the provisions u/s 2(22)(e) are not applicable in the instant case of the assessee.

ITA No.863/Chny/2019 6 However, it is seen that the objections of the assessee cannot be accepted on merits. The accumulated profits of the assessee company cannot be advanced to share holders without paying dividend distribution tax on the same. The share holders and directors cannot borrow from the company in the guise of maintaining a running account.

Aggrieved against enhancement of income on these two new issues, the assessee came in appeal before the Tribunal.

ITA No.863/Chny/2019 7 concerned, which had not been considered by the AO in the assessment order, jurisdiction to deal with the same in appropriate cases may be dealt with u/s.147 or u/s. 263 of the Act as the law mandates and if the requisite conditions are fulfilled but it is inconceivable that in presence of such specific provisions a similar power is available to the first appellate authority u/s.251 of the Act.

ITA No.863/Chny/2019 8 of Managing Director in violation of provisions of section 2(22)(e) of the Act i.e., deemed dividend. We noted that this issue of power of enhancement was specifically raised before CIT(A) and CIT(A) simply brushed aside the arguments of assessee vide para 14 as under:- 14. As above, it is seen, that the courts have held in support of the wide powers of CIT(Appeals) to propose any enhancement on any issue which had not been raised by the Assessing Officer earlier. In view of the same, the objections of the assessee are over ruled.

8.1 As noted above, we find that these two issues are purely new issues raised by CIT(A) and these were never the subject matter of appeal before him or these were never discussed by the AO during assessment proceedings or even a whisper is not there in the assessment order about these two issues. Now, the question arises whether the CIT(A), whose powers are coterminous with those of the AO can go into the new issues altogether. We have gone through the provisions of section 251 of the Act and noted that the first appellate authority has plenary powers in disposing of an appeal and the scope of his powers is coterminous with that of the AO. He can do what the AO can do and can also direct the latter to do what the latter failed to do. This issue was considered by Hon’ble Madras High Court in the case of CIT vs. T.T Krishnamachari and Co., 223 ITR 224, wherein the Hon’ble High Court has held that

ITA No.863/Chny/2019 9 the first appellate authority has all the powers which the original authority may have. In the absence of any statutory provisions to the contrary, the appellate authority is vested with all the plenary powers which the sub-ordinate authority has in the matter. It was held by Hon’ble High Court that an item of income noticed by the officer, but not examined by him from the point of view of its taxability or non-taxability, cannot be said to have considered by him. Consideration does not mean incidental or collateral examination of any matter by the officer in the process of assessment. There must be something in the assessment order to show that the officer has applied his mind to a particular subject matter or the particular sources of income with a view to its taxability or to its non-taxability and not to any incidental connection. As in the present case, the Hon’ble Madras High Court has considered that the sources was not new and which was already noticed by the AO, the Hon’ble High Court has upheld the order of the first appellate authority for making enhancement but the ratio laid down by the Hon’ble Madras High Court is very clear and categorical.

8.2 We have also gone through the case law of Hon’ble Supreme Court in the case of CIT vs. Shapoorji Pallonji Mistry, [1962] 44 ITR

ITA No.863/Chny/2019 10 891 (SC), wherein the Hon’ble Supreme Court has considered this issue and held that it would not be open to the first appellate authority to introduce into assessment a new source of income as his power of enhancement is restricted only to income which was subject matter of consideration for the assessment by the AO and for this, the Hon’ble Supreme Court noted the reasoning as under:- “In our opinion, this Court must be held not to have expressed its final opinion on the point arising here, in view of what was stated at pp. 709 and 710 of the Report. This Court, however, gave approval to the opinion of the learned Chief Justice of the Bombay High Court that s. 31 of the Income- tax Act confers not only appellate powers upon the Appellate Assistant Commissioner in so far as he is moved by an assessee but also a revisional jurisdiction to revise the assessment with power to enhance the assessment. So much, of course, follows from the language of the section itself. The only question is whether in enhancing the assessment for any year he can travel outside the record, that is to say, the return made by the assessee and the assessment order passed by the Income-tax Officer with a view of finding out new sources of income, not disclosed in either. It is contended by the Commissioner of Income-tax that the word "assessment" here means the ultimate amount which an assessee must pay, regard being had to the charging section and his total income. In this view, it is said that the words "enhance the assessment" are not confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. There is no doubt that this view is also possible. On the other hand, it must not be overlooked that there are other provisions like s. 34 and 33B which enable escaped income from new sources to be brought to tax after following a special procedure. The assessee contends that the powers of the Appellate Assistant Commissioner extend to matters considered by the Income-tax Officer, and if a new source is to be considered, then the power of remand should be exercised. By the exercise of the power to assess fresh sources of income, the assessee is deprived of a finding by two tribunals and one right of appeal.

ITA No.863/Chny/2019 11 The question is whether we should accept the interpretation suggested by the Commissioner in preference to the one, which has held the field for nearly 37 years. In view of the provisions of section 34 and 33b which escaped income can be brought to tax, there is reason to think that the view expressed uniformly about the limits of the powers of the Appellate Assistant Commission to enhance the assessment has been accepted by the legislature as the true exposition of the words of the section. If it were not, one would expect that the legislature would have amended section 31 and specified the other intention in express words. The Income-tax Act was amended several times in the last 37 years, but no amendment of section 31(3) was undertaken to nullify the rulings, to which we have referred. In view of this, we do not think that we should interpret section 31 differently from what has been accepted in India as its true import, particularly as that view is also reasonably possible.”

8.3 Further, as cited by ld.counsel for the assessee, the Hon’ble Delhi High Court in the case of Sardari Lal & Co, supra, wherein the Hon’ble Delhi High Court has considered the case laws cited by CIT(A) and the ld.Senior DR and finally held that no new source of income can be introduced by CIT(A) while deciding the appeal and enhancement of income. The Hon’ble Delhi High Court has considered this issue in great detail in para 6, 7 & 8 as under:-

ITA No.863/Chny/2019 12 Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC). That also related to a case under section 31(3) of the old Act. It was held that the power of enhancement under section 31(3) of the old Act was restricted to the subject-matter of the assessment or the source of income, which had been considered expressly or by clear implication by the assessing officer from the point of view of taxability and that the Appellate Assistant Commissioner had no power to assess the source of income, which had not been taken into consideration by the assessing officer. It is to be noted that strong reliance was placed by learned counsel for the revenue on the decision of the Apex Court in CIT v. Nirbheram Daluram (1997) 224 ITR 610. It was submitted that a different view was expressed about the scope and ambit of the power of the first appellate authority vis-a-vis the sources considered by the assessing officer and even if the action of the first appellate authority related to a new source of income not considered by the assessing officer, it was not impermissible. It is to be noted that in Union Tyres' case (supra), this decision was also considered by this court in the background of what had been stated in Daluram's case (supra) and it was observed that there was really no difference from the view expressed earlier in Shapoorji Pallonji Mistry’s case (supra) and Rai Bahadur Hardutroy Motilal Chamaria's case (supra). 7. The learned counsel for the revenue also submitted that this conclusion of the Division Bench needs a fresh look. We have considered this submission in the background of what had been stated by the Apex Court in Jute Corporation's case (supra) and Daluram's case (supra). In Jute Corporation's case (supra), the Apex Court while considering the question whether the Appellate Assistant Commissioner has the jurisdiction to allow the assessed to raise an additional ground in assailing the order of assessment before it, referred to Shapoorji's case (supra), and drew a distinction between the power to enhance tax on discovery of a new source of income and granting a deduction on the admitted facts supported by the decision of the Apex Court. Relying on certain observations made by the Apex Court in CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC), the Apex Court held that powers of the first appellate authority are coterminous with those of the assessing officer and the first appellate authority is vested with all the wide powers, which the subordinate authority may have in the matter. In Daluram's case (supra), the decisions of Kanpur Coal's case (supra) and Jute Corporation's case (supra) were also considered and it was observed by the Apex Court that the appellate powers conferred on the first appellate authority under section 251 of the Act were not confined to the matter, which had been considered by the Income Tax Officer, as the first appellate authority is vested with all the wide powers of the assessing officer may have while making the assessment, but the issue whether these wide powers also include the power to discover a new source of income was not commented upon. Consequently, the view expressed in Shapoorji Pallonji Mistry’s case (supra) and Rai Bahadur Hardutroy Motilal Chamaria's case

ITA No.863/Chny/2019 13 (supra) still holds the feet. It may be noted that the issue was considered in CIT v. McMillan and Co. (1958) 33 ITR 182 (SC). Referring to a decision of the Bombay High Court in Narondas Manordass v. CIT (1957) 31 ITR 909 (Bom), it was held that the language used in section 31 of the old Act is wide enough to enable the first appellate authority to correct the Income Tax Officer not only with regard to a matter which has been raised by the assessed but also with regard to a matter which has been considered by the assessing officer and determined in the course of the assessment. It is also relevant to note that in the Jute Corpn. of India Ltd.’s case (supra), the Apex Court, inter alia, observed as follows :

"…… The AAC, on an appeal preferred by the assessed, had jurisdiction to invoke, for the first time, the provisions of rule 33 of the Indian Income Tax Rules, 1922 (hereinafter referred to as 'the Rules'), for the purpose of computing the income of a non-resident even if the Income Tax Officer had not done so in the assessment proceedings. But, in Shapoorji Pallonji Mistri [1962] 44 ITR 891, this court, while considering the extent of the power of the Appellate Assistant Commissioner, referred to a number of cases decided by various High Courts including the Bombay High Court judgment in Narrondas Manordass [1957] 31 ITR 909 and also the decision of this court in McMillan & Co. [1958] 33 ITR 182 and held that, in an appeal filed by the assessed, the AAC has no power to enhance the assessment by discovering new sources of income not considered by the Income Tax Officer in the order appealed against. It was urged on behalf of the revenue that the words 'enhance the assessment' occurring in section 31 were not confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. The court observed that there was no doubt that this view was also possible, but having regard to the provisions of sections 34 and 33B, which made provision for assessment of escaped income from new sources, the interpretation suggested on behalf of the revenue would be against the view which had held the field for nearly 37 years…." (p.692) [Emphasis, supplied].

ITA No.863/Chny/2019 14 authority. That being the position, the decision in Union Tyres' case (supra) of this court expresses the correct view and does not need reconsideration. This reference is accordingly disposed of.

8.4 In view of the above case laws considered and facts of the case that the two issues i.e., disallowance of interest on diverted borrowed capital and advance of amount to the wife of the Director treated as deemed dividend u/s.2(22)(e) of the Act, were never subject matter of assessment order. Hence, we are of the view that enhancement made by CIT(A) on altogether new issues is without authority of law and accordingly, we quash the enhancement and allow these issues of assessee’s appeal.

Order pronounced in the court on 6th May, 2022 at Chennai.

Sd/- Sd/- (महावीर �सह ) (मनोज कुमार अ�वाल) (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा�य� /VICE PRESIDENT लेखा सद�य /ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated, the 6th May, 2022 RSR आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु� /CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.