DEPUTY COMMISSIONER OF INCOME-TAX vs. M/S. K.S. COLD STORAGE, NANDURBAR

आदेश / ORDER

PER R.S.SYAL, VP :

These two cross appeals - one by the assessee and other

by the Revenue arise out of the order passed by the CIT(A)-1,

Nashik on 03-06-2014 in relation to the Assessment Year

2010-11.

ITA No.1580/PUN/2014 - By Revenue :

against the deletion of addition of Rs.3,17,318/- made by the

Assessing Officer (AO) on account of disallowance of

interest.

claimed net deduction of Rs.3,17,318/- on account of interest.

On being called upon to substantiate the claim for deduction,

the assessee submitted its ledger account of interest which

transpired that there was payment of interest of

Rs.11,72,341/- and also receipt of interest amounting to

Rs.7,55,692/-. The net amount of interest paid in excess of

interest income was claimed as deduction. The assessee

explained that it re-started its cold storage on 16-03-2010 and

3 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

for that purpose it borrowed certain funds on which such

interest was paid. The AO disallowed the deduction of interest

amounting to Rs.3,17,318/- on the premise that the amount of

loan was utilised for the purposes of `creating of an asset’ and

consequently interest on such loan was not deductible . The

ld. CIT(A) overturned the assessment order on this point,

against which the Revenue has come up in appeal before the

Tribunal.

relevant material on record, it is noticed that the assessee’s

cold storage was destroyed by fire and it had to re-

construct/renovate the same. For that purpose, it arranged

certain loans on which the impugned interest was paid. The

AO has disallowed the interest by treating it as relatable to

creation of capital asset, which in our considered opinion, is

not a correct position. Proviso to section 36(1)(iii) of the

Income-tax Act, 1961 (hereinafter also called ‘the Act’)

provides that ‘any amount of interest paid in respect of capital

borrowed for acquisition of an asset (whether capitalized in the

books or not); for any period beginning from the date on

4 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

which the capital was borrowed for acquisition of the asset till

the date on which the said asset was first put to use, shall not

be allowed as deduction’. The crucial words used in the

proviso to section 36(1)(iii) are ‘capital borrowed for

acquisition of an asset’. Unless capital is borrowed for

‘acquisition of an asset’, any interest paid on such borrowing

till such asset is first put to use, cannot be covered within the

ambit of such proviso so as to qualify for disallowance. We

are confronted with a situation in which there is `no

acquisition’ of any asset by utilizing the amount borrowed on

which interest is paid. On the contrary, it is a case of re-

construction of the damaged cold store with the borrowed

capital. As such, re-construction or renovation of an existing

cold store plant, destroyed by fire, cannot be considered as

‘acquisition of an asset’, so as to fall within the purview of the

proviso. The Hon’ble Punjab & Haryana High Court in CIT

Vs. Bhupindra Flour Mills (P) Ltd. (2011) 59 DTR 307 (P&H-

HC), has held that an amount spent by the assessee on

demolition of structure which had caught fire and major repair

of the premises during the period when the business was in

existence, is admissible as a revenue expenditure. In view of

5 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

the above legal position, we are satisfied that the ld. CIT(A)

was justified in deleting the addition of Rs.3,17,318/- made

by the AO by disallowing the net interest paid.

is against deletion of addition of Rs.1,35,50,851/-, being, the

amount of insurance claim received by the assessee.

received certain amount of insurance claim for the loss of

goods and also cold storage plant. The amount of insurance

claimed in relation to plant at a sum of Rs. 1,35,50,851/- was

shown in the Schedule of fixed assets by means of reduction

from the Nil Opening Balance and addition to the block of

assets for a sum of Rs.3,55,56,948/-. The AO invoked the

provisions of section 45(1A) of the Act and held the amount of

Rs.1,35,50,851/- chargeable to tax. The ld. CIT(A) deleted the

disallowance by relying on an order passed by the Mumbai

Bench of the Tribunal in the case of J.R. Enterprises Vs. ACIT

(2009) 24 DTR 311 and also another order of the Chennai

Bench of the Tribunal in Chemfab Alkalis Ltd. (IT

6 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

No.563/Mds/2012) dated 24-08-2012. The Revenue is

aggrieved by the deletion of addition.

material on record, it is observed that the assessee received

insurance claim of Rs.1.35 crore on account of land and

incurred actual expenditure on renovation/re-construction of

Rs.3,55,56,948/-. The Mumbai Bench of the Tribunal in J.R.

Enterprises (supra) has held that the provisions of section

45(1A) of the Act are inapplicable because of the receipt of

insurance claim of Rs.1.57 crore against the actual expenditure

incurred of Rs. 3.82 crore. The Chennai Bench of the

Tribunal in Chemfab Alkalis Ltd. (supra) also considered a

similar situation in which the amount of insurance claim was

less than the amount of actual expenditure incurred on re-

construction/renovation and it was held that no short term

capital gain u/s. 45(1A) of the Act can be charged under such

circumstances. No contrary decision has been brought to our

notice by the ld. DR. Respectfully following the precedent,

we uphold the impugned order on this score.

7 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

ITA No.1448/PUN/2014 - By Assessee :

the passing of the assessment order on the ground that no

notice u/s.143(2) of the Act was validly served.

mentioned in the assessment order, are that statutory notice

u/s. 143(2) was issued on 26-09-2011 and duly served fixing

the date of hearing on 05-10-2011, which was not attended to

by the assessee. Thereafter, a notice u/s. 142(1) was also

issued on 20-04-2012. The assessment was finalised at a total

income of Rs.1.28 crore and odd as against the returned loss

of Rs.10.38 lac and odd. The assessee challenged before the

ld. CIT(A) that the notice u/s. 143(2) was not served on

partners. The ld. CIT(A) took up the matter with the AO who

sent a copy of the notice u/s. 143(2) which was shown to have

been received by one Shri Harish C. Pawar, Manager of M/s.

K.S. Cold Storage on 28-09-2011. Since the notice was served

and the assessment proceedings were also attended by the

assessee, the ld. CIT(A) dismissed the assessee’s ground,

against which the assessee has approached the Tribunal.

8 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

served on the partners of the assessee firm as is the

requirement under the law. He submitted that the service of

notice on Shri Harish C. Pawar, Manager of the assessee did

not tantamount to a valid service and hence the assessment be

quashed. This was strongly opposed by the ld. DR.

relevant material on record. A copy of order sheet of the

assessment proceedings has been placed on record. Entry

dated 13-08-2012 of the assessment proceedings notes that

Shri D.P. Lunawat, Advocate attended on behalf of the

assessee. This order sheet entry further records that office

copy of notice u/s. 143(2) was shown to Shri D.P. Lunawat,

duly signed by the assessee firm and received by Shri Harish

C. Pawar, Manager. It goes on to state that the ld. AR was

asked if he still had any objection to the service of notice, to

which Shri Harish C. Pawar stated that ‘he has no objection’.

This shows that, firstly, the notice was addressed to the

assessee firm and served upon its Manager, who was available

at that time at the address of the assessee-firm and secondly,

9 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

the assessment was completed with due participation of the

assessee. Under these circumstances, a question arises as to

whether service of notice u/s. 143(2) on the Manager of the

assessee firm would invalidate the assessment proceedings?

In our considered opinion, the answer to this question needs to

be given in negative alone.

purpose reads as under :

“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.".

01-04-2008 and covers the assessment proceedings under

10 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

consideration. It provides that where an assessee appears in

any proceedings and cooperates in an inquiry relating to the

assessment etc., it shall be deemed that any notice issued

under any provisions of this Act, which is required to be

served, has been duly served upon him as per law. When it is

so, the assessee shall be prohibited from taking any objection

in any proceedings that the notice was not properly served

upon him. The proviso to this section states that if an assessee

raised an objection before the completion of assessment that

the notice was not properly served, then the provision deeming

a proper service on attending the assessment proceedings etc.,

shall not apply.

did raise objection before the AO during the course of

assessment proceedings itself that the notice was not properly

served upon him. However, the AR of the assessee appearing

before the AO, gave his ‘no objection’ for furthering the

assessment proceedings. When the second limb of the ld. AR

not objecting to the continuation of assessment proceedings

despite service of notice on the assessee’s manager is

11 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

considered in conjunction with the first limb of the assessee

initially objecting to the service of notice, the inference which

follows is that the assessee did raise objection initially but

withdrew the same before the AO. In such a scenario, the

initial objection stood withdrawn by the later ‘no objection’

tendered before the completion of the assessment, making it a

case of not objecting to the valid service of notice before the

AO. Thus, the proviso to section 292BB of the Act, which was

triggered by raising an initial objection before the AO, was

given a goby and got set to rest by the ld. AR not objecting to

such objection in terms of order sheet entry dated 13-08-2012.

Once the proviso is held to be inapplicable, the main provision

of section 292BB gets magnetized, which deems proper

service of notice on the assessee appearing before the AO in

the assessment proceedings, thereby debarring it from raising

any objection of improper service of notice before any

proceedings under the Act, including the Tribunal.

Court in the case of Himalayan Cooperative Group Housing

Society Vs. Balwant Singh (Civil Appeal Nos. 4360-61 of

12 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

2015) to contend that the concession given by the Authorised

Representative before the AO had no legal legs to stand on and

the same cannot bind the assessee. Facts of the Himalayan

Cooperative Group Housing Society (supra) are that the

appellant-society in that case raised a demand on its members

for payment towards allotment of residential

quarters/apartments on 28-05-1998. The respondents failed to

comply with the demand. The appellant-society, after

following the due procedure, passed a resolution expelling the

respondents from the membership of the society. The

resolution required confirmation of the Registrar of

Cooperative Societies, who approved the resolution but gave

one more opportunity to the respondents to pay their

outstanding dues. No such payment was made and the

resolution got confirmed. As a result, the respondents ceased

to be the members of the appellant-society. The order of the

Registrar was challenged before the Writ Court. The Writ

Court approved the order of the Registrar. However, on the

request made by the respondents seeking issuance of direction

to the appellant-society for consideration of their request to

construct and allot additional quarters, the court issued certain

13 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

directions, as the ld. Counsel appearing for the appellant-

society agreed and did not object to the same. When the

matter finally came up before the Hon’ble Supreme Court, the

ld. Counsel appearing for the appellant-society contended that

the society had, at no point of time, authorised its counsel to

make any concession before the Writ Court. Their Lordships

observed that the Writ Court ought not to have issued the

impugned directions merely on the basis of concession of the

ld. Counsel.

advance the case of the assessee any further. It is so for the

reason that in that case the : ‘appellant-Society at no point of

time had authorised the learned counsel for the appellant-

Society to make any concession before the Writ court’. When

the attention of the ld. AR was drawn towards the fact that

normally a Power of attorney issued for income-tax

proceedings contains an undertaking by the assessee to ratify

all the acts of its authorised representative, no material could

be brought to our notice that the power of attorney issued by

the assessee to its Authorized representative before the AO

14 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

was an exception and did not contain such a ratification clause.

Notwithstanding the same, day-in and day-out, ld. counsel

appearing for the assessees do not press certain grounds at

various legal forums, which are dismissed on their concession.

If the contention of the ld. AR is taken to a logical conclusion,

that even if an authorised representative, duly empowered, is

making any concession, the court must invariably call upon

the concerned-assessee in person and seek concession from

him rather than the counsel, then the proceedings would be

needlessly delayed, causing unwarranted waste of the precious

time of the courts. In our considered opinion, once an assessee

empowers his authorised representative to appear before the

AO or for that purpose, any other appellate court in the income

tax proceedings and undertakes to ratify his acts, there is no

need to ignore any concession made by the ld. Authorised

representative and personally call upon the assessee to make

concession in every case. The ld. AR could not draw our

attention towards any decision under the income-tax

proceedings in which the concession given by the ld. AR was

successfully challenged by the assessee before the higher court

on the ground that such concession by the ld. AR was invalid.

15 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

In view of the foregoing discussion, we are of the considered

opinion that there is no merit in the grounds raised by the

assessee in this regard, which are hereby dismissed.

certain remarks made by the ld. CIT(A) in his order.

relevant material on record, we find that the ld. CIT(A), after

dismissing the assessee’s ground of non-service of notice

u/s.143(2), also made certain remarks about the ld. ARs

advising them not to raise frivolous grounds of appeal and

verifying the facts doubly before filing Form No.35. In our

considered opinion, such remarks were not called for. It is the

duty of every appellate authority to consider the issue raised

before it and decide the same rather than commenting on the

conduct of the ld. AR, unless such a conduct is specifically

under challenge before it. We, therefore, expunge the

following lines from page 16 of the impugned order, which

read as under :

“ARs of the appellant firm are also advised to not raise frivolous grounds of the appeal and verify the facts doubly before filing Form No.35 and contesting the issue in the appeal.”

16 ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

Order pronounced in the Open Court on 28th November, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 28th November, 2018 सतीश आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / 3. The CIT (Appeals)-1, Nashik आयकर आयु� / The CIT-1, Nashik 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “ए” / DR ‘A’, ITAT, Pune; गाड� फाईल / Guard file. // True copy // 6.

आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार आदेशानुसार //True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA Nos.1448 & 1580/PUN/2014 M/s. K.S. Cold Storage

Date 1. Draft dictated on 27-11-18 Sr.PS 2. Draft placed before author 28-11-18 3. Draft proposed & placed before the second member 4. Draft discussed/approved by Second Member. 5. Approved Draft comes to the Sr.PS/PS 6. Kept for pronouncement on 7. File sent to the Bench Clerk 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.

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