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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”: HYDERABAD
Before: SHRI LAXMI PRASAD SAHU & SHRI K. NARASIMHA CHARY
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) BEFORE SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER
ITA Nos. 1105 & 1106/Hyd/2018 Assessment Years: 2012-13 & 2013-14 Jt. Commissioner of Vs. M/s Amsri Builders, Income-tax, (OSD) Secunderabad. Central Circle – 1(2), Hyderabad. PAN – AAFFA 7515H (Appellant) (Respondent) Revenue by: S/Shri K.C. Devdas Assessee by: Shri Y.V.S.T. Sai Date of hearing: 28/04/2022 Date of pronouncement: 05/05/2022
O R D E R PER L.P. SAHU, A.M.: Both these appeals filed by the assessee are directed against CIT(A) – 11, Hyderabad’s separate orders, both dated 31/01/2018 for AYs 2012-13 & 2013-14 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act”. As the facts and grounds are identical in both these appeals, the same were clubbed and heard together and, therefore, a common order is passed for the sake of convenience.
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To dispose of these appeals, we refer to the facts from AY 2012-13 and the grounds raised in the appeal are as under, which are common in both the appeals, except the quantum of additions: i) Whether on the facts and circumstances of the case and in law, the Id. CIT(A) was correct in deleting the addition made towards disallowance of loss, when the assesse did not file the return of income u/s 139(1) and the return filed u/s 153A was beyond the time allowed. ii) Whether on the facts and circumstances of the case and in law the Id. CIT(A) is justified in deleting the addition made on account of interest attributable to the debit balance of the partner Rs. 85,52,144/- ? iii) Whether on the facts and circumstances of the case and in law the Id. CIT(A) failed to appreciate that the assessee has not furnished any fund flow statement which could show that the partners withdrawal were made out of the interest free advances available? iv) Whether on the facts and circumstances of the case and in law the Id. CIT(A) failed to appreciate that the total fund available with the assessee is Rs. 197.19 crores against the debit balance of the partners is at Rs. 138.09/- and it is not the case of the assessee that entire debit balance is out of interest free advances available. v) Without prejudice to the grounds at (i), (ii) & (iii) above, whether on the facts and circumstances of the case and in law the Id. CIT(A) ought to have disallowed the interest attributable to the debit balance of the partners in the ratio of total fund (interest free and interest bearing fund) to the total debit balance of the partners.
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vi) The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary.”
The decision taken in AY 2012-13, shall mutatis- mutandis apply to AY 2013-14 as well.
Briefly, the facts of the case are that the assessee company is engaged in the business of development, constructions and real estate activities. During the previous year, relevant to AY under consideration, the assessee company did not file original return of income for AY 2012- 13 u/s 139(1) of the Act. A search and seizure operation was conducted in the case of M/s Amsri Builders and its partners on 27/12/2013. In response to the notice u/s 153A, dated 10/11/2014, assessee filed its return of income on 07/08/2015 declaring loss at Rs. (-) Rs. 39,23,690/-. The AO completed the assessment u/s 143(3) r.w.s. 153A of the Act by making the following disallowances/additions.: 1. Loss declared by the assessee of Rs. 2,70,07,786/- 2. Interest expenditure – Rs. 83,71,583/- 3. Indirect expenses – Rs. 1,00,08,848/- 4. Addition of unaccounted income – Rs. 30,00,000/- 5. When the assessee preferred an appeal before the CIT(A), the CIT(A) partly allowed the appeal of the assessee by deleting the disallowances against the heads mentioned at Sl. No. 1 & 2 (supra).
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Aggrieved by the order of CIT(A), the revenue is in appeal before the ITAT.
As regards ground No. 1 against the action of CIT(A) in deleting the addition made towards disallowance of loss, the AO observed that from the return of income filed in response to notice u/s.153A, in schedule CYLA, the assessee had shown current year loss at Rs.2,70,07,786/-. further, he observed that as the assessee had not filed original return u/s.139(1) and also failed to file the return of income in response to notice u/s.153A within the due date specified, the loss declared by the assessee of (-)Rs.2,70,07,786/- is not allowable and accordingly, he disallowed the same.
During the course of appellate proceedings, the assessee submitted as under: "At para 5 of the assessment order the assessing officer observed that in the return of income filed in response to notice u/s.153A of the IT Act the assessee declared loss pertaining to the current year at Rs.2,70,07,786/-. The assessing officer further observed that as the assessee did not file original return of income u/s.139(1) and also fail to file the return of income in response to notice u/s.153A within the due date specified the loss declared by the assessee was not allowable and therefore disallowed the same. From a reading of the observation of the assessing officer it appears that she arrived at the said conclusion on interpretation of provisions of section 139(3) of the IT Act. In this connection kind attention is
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drawn to section 139(3) and the same is extracted hereunder for kind perusal: If any person who 44[*** J has sustained a loss in any previous year under the head "Profits and gains of business or profession" or under the head "Capital gains" and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or sub-section (2) of section 73, or sub- section (1) 45[or sub-section (3)J of section 74, 46[or sub-section (3) of section 74AJ, he may furnish, within the time allowed under sub-section (1) 47[***J, a return of loss in the prescribed form48 and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub- section (1). A detailed reading of the section it is clear that loss claimed under the head "profits and gains" of business or under the head "capital gains" should not be allowed to be carried forward as envisaged u, '5.72(1) etc if the return of income was not filed within in due date mentioned u/s 139(1) of the IT Act. Thus, the prior condition is that a return of income declaring loss under above mentioned heads should be filed within in the due date as stipulated u/s.139(1). If the same were not filed the loss claimed cannot be allowed to be carryforward for subsequent years. If the return of income is taken for scrutiny and the computation results in positive income, then there is no bar to levy tax on the same. Thus, the loss should be setoff against the total income and the balance only should be brought to tax. Proceedings u/s.1S3A are meant for fresh computation of income / loss:
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After section 153 of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of June, 2003, namely :_ 'l53A. Assessment in case of search or requisition. Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall- (a ) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139; (b) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made: Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years: Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this section pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate.
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Explanation. - For the removal of doubts, it is hereby declared that,(i) save as otherwise provided in this section, section,lS3B and section lS3e, all other provisions of this Act shall apply to the assessment made under this section; (ii ) in an assessment or reassessment made in respect of an assessment year under this section, the tax shall be chargeable at the rate or rates as applicable to such assessment year. As already submitted, the assessee claimed loss to the tune of Rs.2,70,07,786/- on the basis of profit and loss account filed along with the return of income. The assessing officer concluded the same should not be allowed and therefore she proceeded to disallow the same. Thus, the assessing officer took an improper stand. The provisions of the Act says that the computation as per the belated return of income results in loss the same should not be allowed to be carryforward. Nowhere in the act it was mentioned that the loss itself should be ignored in respect of a belated return of income and the assessing officer should proceed with further computation of income on the basis of the same return of income. Thus, the stand taken by the assessing officer has no basis and is completely against the provisions of the act. It is further submitted that the loss of Rs. 2,70, 07,786/- includes unabsorbed depreciation of Rs.39,23,689/-. The assessing officer ought to have noted that section 139(3) prohibits only carry forward of loss pertaining to business or capital gains. Unabsorbed depreciation should be carry forward u/s.32(2) of the IT Act. Therefore, on that point also the assessing officer is not justified to ignore the same. "
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After considering the submissions of the assessee, the CIT(A) deleted the disallowance of loss made by the AO by observing as under: “4.2 I have considered the assessment order and submission of the assessee. The AO has simply disregarded the loss claimed by the assessee in the return of income filed as the assessee has not filed return ujs.139(1) or u/s.153A within the time allowed. This is not a valid ground to make addition/disregard the loss. The assessment is made ujs.143(3) r.w.s 153A, which mean that return filed (though belated) in response to notice u/s.153A has been considered valid by the AO. The books of account have not been rejected nor any case is made out for ignoring the loss. In view of the above, it is held that the action of AO is not justified. The disallowance of loss made by AO is deleted. Accordingly, the assessee gets relief. However, the resultant loss, finally arrived at, if any would not be carried forward to later years.”
Before us, the ld. DR besides relying upon the order of the AO, submitted that the assessee did not file return of income u/s 139(1) of the Act, and also failed to file the return of income in response to the notice u/s 153A within the due date specified, which is 30 days to file return of income. He referred to the provisions of section 139(3) regarding set off of carry forward loss. Referring to section 80A of the Act, he submitted that the assessee is not eligible to set off of carry forward loss.
The ld. AR of the assessee, on the other hand, filed a paper book and relied on the order of the CIT(A). He
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contended that the assessee is eligible to set off of from the current year’s income and assessee not claimed any carried forward loss of current year. He further submitted that though the return was not filed in time, the CIT(A) after examining the issue in detail has deleted the disallowance made by the AO on this count.
We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. It is observed that the assessee has not filed the return of income u/s 139(1) of the Act.. The return of income u/s 153A was filed on 07/08/2015, which was beyond the time granted by the AO vide notice dated 10/11/2014. As per section 139(3) of the Act, if the assessee did not file return of income within the due date, the loss for the current year’s cannot be carried forward. On perusal of the paper book filed by the assessee, we find that the assessee set off of loss for current year from the other heads of income and there is a brought forward loss of Rs. 53,15,526/- from AY 2011-12, which has been carried forward. We also find from the copy of the acknowledgment of return that there is a current year’s loss of Rs. 39,23,689/-. Since this is a searched case, as per the provisions of section 153A(1a), provisions of section 139 would apply. But, in the impugned case, the assessee has not filed its return of income as specified in the notice issued u/s 153A read with section 139(3) and, therefore,
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loss claimed in the return of income for the current AY cannot be carried forward. The AO has disallowed current year’s entire loss and he has not given set off of loss of the current year from the other heads of income. During the course of hearing, the ld. DR vehemently supported the order of AO and the ld. AR of the assessee submitted that current year’s loss has not been carried forward to the next year and only the assessee has set off the current year’s loss from the other heads of income, which are allowed as per the provisions of the Act. Under Chapter VI, under the head, the assessee can set off, or carry forward and set off of loss as per section 70, 71, 71A, 71B, 72, 72A, 72AA, 72AB, 73, 73A, 74, 74A, 75, 78 & 79. We make it clear that the assessee can set off of current year’s loss from other heads of income and assessee is not eligible to carry forward the balance loss of the current year for the reason that it did not file return of income within the due date of filing of return of income as mentioned in the notice dated 10/11/2014 issued u/s 153A of the Act. We find that the submissions made by both the sides are contrary In nature and, therefore, we deem fit and proper to restore this issue back to the file of the AO with a direction to find out or verify the exact claim of the set off of loss and carried forward, if any, and decide the issue in accordance with law and on merits after providing opportunity of hearing to assessee. Thus, this ground raised by the revenue is treated as allowed for statistical purposes.
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As regards ground No. ii) to v) relating to the addition of Rs. 85,52,144/- made on account of interest attributable to the debit balance of the partners, the AO observed that the assessee had claimed/debited financial charges of Rs.85,52,144/- in the consolidated P&L A/c which included interest on loans of Rs.83,71,583/-. He noted that from the partners capital accounts in the Balance Sheet that there were huge debit balances at the end of the year as under, on which no interest was charged:
13.1 From the above, he observed that the partners had withdrawn huge funds from the firm but no interest was charged on these drawings. Thus, according to AO, the interest bearing funds were diverted/misutilised by the partners in the form of interest free drawings. In this connection, during the course of assessment proceedings the assessee was asked as to why the interest expenditure claimed should not be disallowed. In, response, the assessee submitted as under:
"Shri P.Amruth Prasad and Uppu Srinivas are the main partners in M/s.Amsri Builders. The said firm is the flag bearer of the Amsri Group." Basically the partners acquired or entered several development agreements for the land bank through Mis. Amsri Builders. Further,
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the partners have contemplated Mis. Amsri Builders as their main firm. Thus, the partners made the firm as instrumental to get the funds received and temporarily parked in the Amsri Builders account on various occasions. Subsequently, the partners ploughed back the funds through their capital account to the required destinations as per the understanding. This becomes customary practice in the real estate industry. It is to be noted that the firm has received huge interest free advances for the purpose of investment in the firm or in other companies I firms. The said interest free advances routed through partners capital account hence the partners accounts standing huge debit balances. However, the partners have not diverted any interest bearing funds for their personal use or to invest in other companies / firms. It is very pertinent to mention that during the scrutiny proceedings the Department has raised the issue of routing the funds through the partners capital accounts and investing the said amounts in destined companies. On several occasions we have explained the process of pipe lining the funds to the companies from its very source of funds originated to destination. It is evident that the partners never drawn interest bearing funds to their personal use or to invest in other companies / firms. Thus, there is no nexus between the interest bearing funds in Amsri Buiiders and partners debit balances in their capital accounts. Hence, the disallowance of interest expenses shall not arise.” 13.2 The AO observed that the above contentions of the assessee were examined but not acceptable. He pointed out that if the assessee firm really wanted to invest in other related companies, it can directly invest and there was no
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need to invest the same through partners capital accounts. He observed that for the purpose of Income Tax Act the partnership firm and the partners are distinct and different. Moreover, when the investment was made through partner's capital account then it will be their own contribution / capital in the books of investee company and any gains thereon will be enjoyed by the partner only in his individual capacity. Moreover, the assessee could not furnish supporting documentary evidence / cash flow statement that the interest bearing funds were not withdrawn by the partners and hence this contention is not acceptable. Since partners and partnership firm were different entities, the assessee is required to charge interest on the debit balances of the partners, more particularly when interest bearing funds were withdrawn by the partners. Hence, the interest expenditure claimed by the assessee amounting to Rs.83,71,583/- was disallowed. By the AO.
The CIT(A) extracted the submissions of the assessee at pages 7 to 9 in his order and after considering the same, he deleted the disallowance made towards interest by observing as under:
“5.2 P I have considered the assessment order and submissions of the assessee. The AO made the disallowance as there are huge debit balances outstanding in partners capital accounts whereas the
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assessee is paying interest on the borrowals. The AO concluded that the assessee ought to have charged interest on capital account debit balances and disallowed the interest claimed. The assessee is not obligated to charge interest and debit balances and further, the interest can be disallowed only if the direct connection between the loan and the withdrawals by the assessee can be established. It is seen from the details filed that the assessee has received huge amounts free of interest which are also outstanding. The direct connection between the withdrawals by the partners and interest bearing loans has not been established by the AG. In view of the factual position as above disallowance of interest is not justified/warranted. Accordingly, the addition made on account of the above is deleted.” 15. The ld. DR submitted that partners have withdrawn excess money and no interest has been charged by the assessee on the excess withdrawal as there are no interest free funds available with the assessee. Further, he submitted that interest bearing funds taken by the assessee has not been utilized for the purpose of business. He, therefore, submitted that the AO has rightly disallowed the interest paid by the assessee on the withdrawals by the partners.
The ld. AR of the assessee, on the other hand, submitted that there is no authorization in the partnership regarding charging of interest to the partners and the entire debit balance in the partners capital acocunt has not been withdrawn in this impugned AY. Referring to page no. 4 of the paper book at Para No. 3, he submitted that there
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was no disallowance on the debit balance of partners in the AY 2007-08 to 2011-12, which was already accepted by the department. Alternatively, he submitted that interest can be disallowed on the excess withdrawal in the current AY, but, not on the entire debit balance of the partnership capital account. He relied on various case law, which are filed in the paper book.
We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. On perusal of the balance sheet, it clearly shows that the assessee’s capital account is showing debit balance and further observed that no interest has been charged by the assessee on the debit balance of the partner’s capital account whereas the assessee is paying interest on loans. We observe that both the parties were unable to establish that the interest bearing funds were given to the partners by the assessee and also unable to substantiate that there was direct nexus between the interest bearing loans were given to partners. In view of these observations and considering the totality of the facts and circumstances of the case, we restore this issue to the file of the AO with a direction to examine whether the assessee has given interest bearing loans to the partners and thereafter decide the issue in accordance with law after providing opportunity of being heard to assessee. The assessee is directed to substantiate its claim
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that no interest bearing funds were utilizied by the partners before the AO. Thus, the grounds raised on this issue are treated as allowed for statistical purposes.
In the result, appeal of the revenue is allowed for statistical purposes in above terms.
As the facts and grounds are materially identical in AY 2013-14 to that of AY 2012-13, following the conclusions drawn therein, the grounds raised by the revenue are allowed for statistical purposes.
To sum both the appeals of revenue are allowed for statistical purposes. A copy of this common order be placed in the respective case files.
Pronounced in the open court on 5th May, 2022.
Sd/- Sd/- (K. NARASIMHA CHARY) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 5th May, 2022.
kv
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Copy to : 1 JCIT (OSD), Central Circle – 1(2), 7th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad. 2 M/s Amsri Builders, D.No. 9-1-164, 5th floor, Amsri Plaza, SD Road, Secunderabad. 3 CIT(A) – 11, Hyderabad 4 Pr. CIT(Central), Hyd. ITAT, DR, Hyderabad. 5 6 Guard File.