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Facts
The assessee filed appeals for AY 2013-14 and 2014-15 with significant delays (1944 and 1596 days), attributing the delay to the former CA's failure to inform them about CIT(A) orders and non-receipt of physical copies, only learning of them via an outstanding demand email. The delay also included 715 days due to the COVID period. On merits, the Assessing Officer disallowed interest under Section 36(1)(iii) on the premise that interest-bearing funds were diverted for interest-free advances, which the assessee contested, asserting that advances were made in an earlier year (FY 2011-12) and it possessed sufficient interest-free funds to cover them without any proven nexus by the AO.
Held
The Tribunal condoned the delay in filing appeals, finding reasonable cause due to the former CA's negligence, non-service of physical orders, and the intervening COVID-19 period. On the merits of the disallowance, the Tribunal, relying on various High Court and Supreme Court precedents, held that the disallowance under Section 36(1)(iii) was not justified, as the assessee had sufficient interest-free funds to make the advances and no direct nexus was established between borrowed funds and the interest-free advances. The AO was directed to delete the disallowance.
Key Issues
1. Whether the significant delay in filing appeals before the ITAT should be condoned given the circumstances of former CA's negligence, non-receipt of physical orders, and the COVID-19 pandemic. 2. Whether the disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961, was justified when the assessee had adequate interest-free funds to cover the advances and the Assessing Officer failed to prove a direct nexus between borrowed funds and interest-free advances.
Sections Cited
Section 260A, Section 119, Section 253, Section 143(3), Section 36(1)(iii), Section 36(1)(va), Section 12AA
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Income Tax Appellate Tribunal, DELHI BENCH “SMC” NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD
सुनवाईक�तारीख/ Date of hearing: 01.07.2024 21.08.2024 उ�ोषणाक�तारीख/Pronouncement on आदेश /O R D E R
These two appeals are filed by the assessee against different orders of the Ld.CIT(A)-28, New Delhi for the assessment years 2013-14 and 2014-15.
These two appeals are filed with the delay of 1944 and 1596 days respectively. Ld. Counsel for the assessee referring to the affidavit of the Director of the assessee company submits that the Ld.CIT(A) disposed of the appeal filed by the assessee for the AY
I.T.A.Nos.3791 & 3792/Del/2023 2013-14 and 2014-15 by orders dated 28/06/2018 and 11/06/2019 respectively which were uploaded on ITBA portal. Ld. Counsel submits that the e-filing portal was earlier handled by Sh. Amit Gupta, CA who did not inform the assessee about the disposal of appeals by the Ld.CIT(A). Ld. Counsel submits that physical copy of appellate order was also not served on the assessee company. Ld.
Counsel submits that the assessee came to know about the orders of the Ld.CIT(A) only on 02/12/2023 through an e-mail intimating about the outstanding demand and thereafter the assessee immediately took steps for preparing appeals and filed the appeals on 22/12/2023 with a delay of 1944 and 1596 days respectively for the assessment years 2013-14 & 2014-15.
Ld. Counsel further submits that out of these delay, 715 days were during the Covid period from 15/03/2020 to 28/02/2022. Ld. Counsel further placed reliance on the following decisions in support of his contention that the delay in filing appeals is neither intentional nor deliberate and, therefore, the assessee could not be prejudiced on account of an ignorance or an error committed by professional engaged by the assessee: -
I.T.A.Nos.3791 & 3792/Del/2023
“1. Senior Bhosale Estate (HUF) VS ACIT [2019] 112 taxmann.com 134 (SC) Section 260A of the Income-tax Act, 1961 - High Court, appeal to (Condonation of delay) -Assessee sought condonation of delay of 1754 days in filing appeals against order, dated 29-12-2003, passed by Tribunal - Assessee pleaded that it had no knowledge about passing of Tribunal's order, until it was confronted with auction notices in June, 2008, issued by competent authority, immediately upon which, assessee filed appeal with High Court - High Court by impugned order dismissed appeals, holding that these were not fit cases in which inordinate delay of 1754 days in filing appeals deserved to be condoned - However, it was found that respondent revenue did not expressly refute stand taken by assessee that they had no knowledge about passing of order, dated 29-12-2003, until June, 2008 - Whether unless that fact was to be refuted, question of disbelieving stand taken by assessee on affidavit, could not arise and for which reason, High Court should have shown indulgence to assessee by condoning delay in filing concerned appeal(s) - Held, yes - Whether said aspect having been glossed over by High Court, impugned order of High Court was to be set aside -Held, yes [Paras 5 and 6] [In favour of assessee/ matter remanded] II. A1 Jamia Mohammediyah Education Society vs CIT(E) [2024] 162 taxmann.com 114 (Bombay HC) Section 119, read with section 11, of the Income-tax Act, 1961 - Central Board of Direct Taxes- Instructions to subordinate authorities (Condonation of delay in filing Form 10B) -Assessment year 2016- 17 - Assessee, a charitable trust filed its return for assessment year2016-17 on 6-9-2016, declaring nil income and seeking a refund - However, assessee failed to submit Form No.lOB along with return, which was eventually filed on 15-2-2020, with a delay of approximately 1257 days - Despite explaining delay as an oversight by their Chartered
I.T.A.Nos.3791 & 3792/Del/2023
Accountant/Auditor, condonation application under section 119(2)(b) was rejected by CIT(E) -Whether since assessee had been filing its returns and Form 10B for subsequent years within due dates on this ground alone, delay condonation application should have been allowed because failure to file returns for AY 2016-17 could be only due to human error lacking any mala fide intention - Held, yes - Whether in instant case delay was not intentional or deliberate and therefore, assessee could not be prejudiced on account of an ignorance or error committed by professional engaged by it - Held, yes - Whether therefore, delay in filing Form 10B to be condoned - Held, yes [Paras 6, 7, 9 and 10] [In favour of assessee] III. Vijay Vishin Meghani vs-DCIT [2017] 86 taxmann.com 98 (Bombay HC) Section 253 of the Income-tax Act, 1961- Appellate Tribunal - Appeals to(Condonation of delay) - Assessment years 1994-95 and 1996-97- Whether where assessee filed appeal before Tribunal with a delay of 2984 days by taking a plea that he was wrongly advised by his Chartered Accountant earlier not to file appeal, in view of fact that assessee produced affidavit of Chartered Accountant in support of his plea and said affidavit was not contested by revenue authorities, Tribunal was not justified in refusing to condone delay in filing appeal - Held, yes [Paras 19, 21 and 22][In favour of assessee] IV. Shri Parveen vs ITO [ITA No. 1134/Del/2022] [Dt. 28/02/2023] 6. It is noticed that the appeal of the assessee was dismissed by the Id. CIT (Appeals) by order dated 19.12.2019 for non-prosecution and the due date for filing the appeal before the Tribunal was 19.02.2020. In the affidavit the assessee stated that the fact that the appeal was dismissed by the Id. CIT (Appeals) was not brought to the notice of the assessee and I.T.A.Nos.3791 & 3792/Del/2023 immediately thereafter in the month of March Covid- 19 spread across the country. There was complete lock-down for a very long period and there was no communication from the Chartered Accountants recording the status in his case. It is an averment of the assessee that he came to know the dismissal of the appeal when he received the demand notice on 11.02.2022 and immediately took steps for filing the appeal on consulting with newly hired Chartered Accountant to file the appeal before the Tribunal and the appeal was filed on 23.05.2022 with delay of 810 days. Ongoing through the affidavit and the petition for condonation of delay it is observed that the assessee was prevented with a reasonable cause for not filing the appeal in time. Thus, delay in filing the appeal before the Tribunal is hereby condoned. V. M/s Saravana Stocks - Investments (P) Ltd vs DCIT [ITA No. 2803/CHNY/2019] [Dt. 12/04/2023] 3.4 At this juncture, it is relevant to refer to the decision of the Hon’ble Bombay High Court in the case of Vijay Vishin Meghani v. DCIT reported in[2017] 398 ITR 250 (Bom.). The Hon’ble Bombay High Court very categorically held that wrong professional advice given by CA, which is supported by Affidavit of concerned CA, comes under the reasonable cause for condonation of delay and when the Revenue authorities was not contested said claim, Tribunal was not justified in refusing to condone delay in filing of the appeals. The Hon’ble Madras High Court in the case of United Christian Celebration Committee Charitable Trust v. ITO reported in [2017] 249 Taxmann.com 372 (Mad) had considered an identical issue and held that where assessee’s institution engaged Chartered Accountant who was unaware of fact that as a result of amendment made in Sec.253(l)(c), an appeal could be filed against the order of the Commissioner rejecting application u/s. 12AA of the Act, delay in filing of appeal against Commissioner’s order was to be condoned.
I.T.A.Nos.3791 & 3792/Del/2023 3.5 The sum and substance 'of ratio laid down by various Courts is that no appeal should be thrown out of judicial scrutiny on technical reasons, and further, if there is a genuine reason for not filing appeals in time, the Courts and Tribunals should condone the delay and decide the appeals on merits. Therefore, we are of the considered view that the appeals filed by the assessee with a delay of 1526 days deserved to be condoned and thus, we condone the delay in filing of the appeals and admit appeals filed by the assessee for adjudication.”
On the other hand, the Ld. DR opposed for condoning the delay.
Heard rival submissions, perused the affidavit filed by the Director and the case laws relied on. The assessee filed affidavit of Shri Sanjiv Kumar Jain who is the Director of the assessee company deposing, explaining the delay in filing the appeals as under: -
“I, Sanjeev Kumar Jain aged about 55 years, son of Sh. Manmohan Jain, and resident of BQ - 55, 4th Floor, Shalimar Bagh, New Delhi - 110088 do solemnly affirm and state as under:
1. 1. That I am director of M/s Monica Gold Pipes Pvt. Ltd., the appellant company, and as such well conversant with the facts deposed to below.
2. That the appeal against the Assessment order dated 31/03/2016 passed u/s 143(3) of the Income Tax Act, 1961 was disposed-off by the CIT(A)-22, New Delhi vide order dated 28/06/2018 which was uploaded on ITBA portal. The said e-filling portal was being handled by Sh. Amit Gupta, Chartered Accountant and the physical copy of Appellate order was not served upon the appellant company.
I.T.A.Nos.3791 & 3792/Del/2023
3. That the case of the Appellant Company was earlier handled by Sh. Amit Gupta, Chartered Accountant and the management of the Appellant Company was unaware of the fact that the CIT(A) has dismissed the appeal and no subsequent appeal has been filed against the said CIT(A) Order.
4. That in absence of any specific intimation by Revenue authorities regarding the passing of the CIT(A) order and due to lack of proper advice by the earlier Chartered Accountant, we were not aware of the order passed by CIT(A) and same only came to our knowledge on 02nd December 2023 through an email intimating about the outstanding tax demand.
5. On receipt of the order, the process of appointing a counsel for preparation of filing of appeal before Hon’ble ITAT was swiftly initiated and the same was filed 22/12/2023. 6. That the delay in filing of appeal being of bonafide nature and is attributable to mistake on part of the Chartered Accountant who was engaged to handle the income tax matters. 7. That the Appellant has a strong case on merits and as such delay may be condoned and the Appeal be heard on merits. PRAYER That it is prayed that in view of the above factual and legal submissions, the delay in filing appeal may please be condoned.”
On careful perusal of the affidavit filed by the Director of the assessee company it is noticed that the e-filing portal of the assessee company was handled by one Shri Amit Gupta, CA and the assessee was not aware of the fact that the disposal of the appeal by the Ld.CIT(A) and no further appeal has been filed against the 7
I.T.A.Nos.3791 & 3792/Del/2023 Ld.CIT(A) orders. The appellant came to know of the fact of disposal of appeals by Ld.CIT(A) only on 02/12/2023 when it was intimated about the outstanding tax demand. It is also noticed that the physical copy of the orders of the Ld.CIT(A)-28, New Delhi dated 28/06/2018 and the order of the Ld.CIT(A)-6, Delhi dated 11/06/2019 was physically not served on the assessee.
I find that there is reasonable cause in filing the appeals for the assessment years 2013-14 and 2014-15 with delay by the assessee. In the circumstances, the delay in filing the appeals by the assessee is condoned. Thus, the delay in filing of appeal by the assesse is condoned for the assessment years 2017-18 and 2014-15.
Coming to merits of the case the Ld. Counsel for the assessee submits that in these two assessment years the AO disallowed interest of Rs.37,46,010/- and Rs.5,43,927/- u/s 36(1)(iii) of the Act on the loans and advances given by the assessee during these two assessment years.
Ld. Counsel for the assessee referring to page 16 of the assessment order submits that the AO observed that interest bearing funds borrowed by the assessee company from banks and financial institutions have been utilized for making interest free
I.T.A.Nos.3791 & 3792/Del/2023 advances without any business purposes. The AO has given the list of parties to whom the advances were made. Ld. Counsel submits that all these advances were made in the FY 2011-12 relevant to the AY 2012-13 and there was no interest disallowance in respect of such advances during the AY 2012-13.
Ld. Counsel further submits that during the assessment years 2013-14 and 2014-15 which are under consideration the assessee has not advanced any loans to these parties and as a matter of fact during the AY 2014-15 part of the loan advanced to Sh. Mahesh Chand Jain was repaid to the assessee. Ld. Counsel submits that during the assessment years 2013-14 and 2014-15 there were no short-term borrowings and only in the AY 2014-15 there was a long term borrowing of Rs.9 lakhs only. Therefore, the observations of the AO that the assessee has advanced loans to these parties are from interest bearing borrowed funds from banks and financial institution is not correct.
Ld. Counsel further submits that the assessee had sufficient interest free funds available for making advances to these parties and further the AO has not proved any nexus between the borrowed monies and amounts advanced to these parties and, therefore, there is no justification in making any interest disallowance u/s 9
I.T.A.Nos.3791 & 3792/Del/2023 36(1)(iii) of the Act. Ld. Counsel for the assessee placing reliance on the decision of the Hon’ble Supreme Court in the case of CIT Vs.
Reliance Industries Ltd. (410 ITR 466) submits that if the assessee has sufficient interest free funds available with it for making interest free advances to subsidiaries there cannot be any interest disallowance u/s 36(1)(iii) of the Act on the ground that interest would not have been payable to banks if funds were not provided to the subsidiaries. Reliance was also placed on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Bharti Televentures Ltd. (331 ITR 502) and the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Golden Tobacco Ltd. (82 taxmann.com 11).
Ld. DR strongly supported the orders of the authorities below.
Heard rival submissions, perused the orders of the authorities below. It is observed that the Assessing Officer made disallowance of interest expenses in these two assessment years u/s 36(1)(iii) of the Act on the ground that the assessee has taken interest bearing loans on which interest has been paid and claimed as business expenditure during the year but these loans have been diverted towards non business advances/loans to various parties on which no interest has been charged. The contention of the assessee is that 10
I.T.A.Nos.3791 & 3792/Del/2023 all these advances were made during the FY 2011-12 relevant to the AY 2012-13 and not during the assessment years under consideration i.e. 2013-14 and 2014-15. The contention of the assessee is that it had sufficient capital reserves and surplus to make interest free advances and no borrowed funds have been utilized for making such advances. It is also observed that the AO did not prove any nexus between the borrowed funds and the amounts advanced by the assessee to various parties and all these advances were made during the FY 2011-12 relevant to the AY 2012-13. Perusal of the financial statement of the assessee for the AY 2013-14 and 2014-15 reveals the following details: -
I.T.A.Nos.3791 & 3792/Del/2023
On careful perusal of the above details, it is noticed that all these advances were made during the FY 2011-12 relevant to the AY 2012-13. The total advances made to various parties amounted to Rs.3,67,49,130/- and whereas the assessee had interest free funds available in the form of share capital, reserves and surplus to the extent of Rs.6,64,77,148/-. It is also further noticed that the AO did not make any disallowance of interest u/s 36(1)(iii) of the Act during the AY 2012-13. The assessee has no short term borrowings in the assessment years 2013-14 and 2014-15. Long term borrowings were made only to the extent of Rs.9 lakhs during the AY 2014-15.
In the case of CIT Vs. Reliance Industries Ltd. (supra) the Hon’ble Supreme Court held as under: -
(Head note) “Section 36(l)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital (Interest free loans to subsidiaries) - Assessment years 2003-04 to 2006-07 - In course of assessment, Assessing Officer rejected assessee's claim under section 36( 1)(iii) taking a view that interest would not have been payable to banks if funds were not provided to subsidiaries - Tribunal finding that interest free funds were available to assessee which were sufficient to meet its investment in subsidiaries, allowed assessee's claim - High Court upheld order passed by 12
I.T.A.Nos.3791 & 3792/Del/2023
Tribunal - Whether on facts, impugned order passed by High Court did not require any interference - Held, yes [Para 8] [In favour of assesse]” 16. In the case of CIT Vs. Bharti Televenture Ltd. (supra) the Hon’ble Delhi High Court held as under:
(Head note) “Section 36(l)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 2001-2002 - Assessee claimed deduction of amount being interest paid on borrowings - Assessing Officer rejected its claim on ground that assessee had made interest free advances to its subsidiary companies out of funds borrowed by it on interest - However, Commissioner(Appeals) and Tribunal allowed its claim on ground that assessee had explained sources of advances and investments made in its subsidiaries, which could not be linked to borrowed funds and that advances were made out of assessee's own capital - It was found that at relevant time assessee was having adequate non-interest bearing funds by way of share capital and reserves - Further, advances were found to have been made to its subsidiaries on business considerations which were nothing but commercial expediencies of assessee - Whether findings recorded by Commissioner(Appeals) as well as Tribunal were not to be interfered with - Held, yes.”
In the case of CIT Vs. Golden Tobacco Ltd. (supra) the Hon’ble Bombay High Court held as under: -
(Head note) “Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital (Interest free advances) - Assessment years 1996-97 and 1997- 98 - Assessee- company borrowed funds and claimed deduction on interest paid - Assessee had given advance to its I.T.A.Nos.3791 & 3792/Del/2023 group concern on account of share application money - Advance was given from its reserves and not from borrowed funds - Assessing Officer disallowed interest paid on ground that advances were given for non- business purposes - No efforts to show nexus between borrowing and subsequent advancing of loans to subsidiary was made by Assessing Officer - Whether since it was ascertained that no interest bearing funds were released for advancing sum to subsidiary company or its related company on account of share application money, interest could not be disallowed – Held, yes [Para 9] [In favour of assessee].”
Similar view has been taken by the Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities (313 ITR 340), wherein the Hon’ble High Court held that where the assessee has his own funds as well as borrowed funds the presumption can be made that the advances for non business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose, accordingly, the disallowance of interest on the borrowed funds is not justified.
The ratios of the above decisions applies squarely to the facts of the assessee’s case. Thus, respectfully following the said decisions grounds raised by the assessee are allowed and the AO is directed to delete the disallowance made u/s 36(1)(va) of the Act for the assessment years 2013-14 and 2014-15.
I.T.A.Nos.3791 & 3792/Del/2023
In the result, appeals of the assessee are allowed.