CIT(A) Order based on fresh evidence without opportunity to AO is unsustainable

DCIT Vs Ansaldo Caldaie Boilers India Private Limited (ITAT Chennai)

ITAT Chennai held that CIT(A) deleted disallowance of interest made u/s 36(1)(iii) based on the fresh evidences furnished by the assessee. However, CIT(A) failed to afford an opportunity to AO to verify the fresh evidence which is in violation of Rule 46A and hence order remanded back to AO to verify the evidences.

Facts- AO noted that the assessee has claimed a sum of ₹.8,59,47,532/- as finance cost for the year under consideration. The interest bearing funds borrowed by the assessee as on 31.03.2015 includes long term loans at ₹.32,18,49,972/- and the short term loans at ₹.19,92,21,313/-totalling to ₹.52,10,71,285/-. The assessee has incurred interest expenses to the tune of ₹.8,59,47,532/- as finance cot in respect of the above borrowings and has charged off the same to profit and loss account. AO has also noted that the assessee has advanced a sum of ₹.15,00,00,000/- as advance for purchase of land for which an agreement has been entered into but no registration has been taken place and therefore, not put to use by the assessee. From the balance sheet, AO has noted that the assessee has utilized interest bearing funds for the advance given for purchase of land and during the course of scrutiny the assessee was asked to show-cause as to why proportionate interest should not be disallowed u/s. 36(1)(iii) of the Act.

AO disallowed the sum of ₹.2,47,41,586/- [computed as ₹.8,59,47,532 x (₹.15,00,00,000/ ₹.52,10,71,285] proportionate to the amounts advanced not for the purpose of business and added back to the total income.

CIT(A) allowed the appeal. Being aggrieved, revenue has preferred the present appeal.

Conclusion- Held that against the disallowance of interest made under section 36(1)(iii) of the Act, by considering the fresh evidences furnished by the assessee during the course of appellate proceedings, the ld. CIT(A) has deleted the addition made towards disallowance of interest without affording an opportunity to the Assessing Officer to verify the additional evidences submitted by the assessee is in violation of Rule 46A of the Income Tax Rules. Accordingly, we set aside the order of the ld. CIT(A) on this issue and remit the matter back to the file of the Assessing Officer to verify the additional evidences/bank statements, etc. and decide the issue afresh in accordance with law by affording an opportunity of being heard to the assessee.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals) 1, Chennai, dated 29.03.2019 relevant to the assessment year 2015-16. The grounds raised by the Revenue are as under:

1. The order of the Ld. CIT(A) is contrary to law, facts and circumstances of the case.

2.1 The CIT(A) erred in deleting the disallowance made u/s 36(1)(iii) of the Act based on the fresh evidences furnished by the assessee during the course of appellate proceedings, without affording any opportunity to the AO under Rule 46A for verifying the additional evidences submitted by the assessee based on which relief was given.

2.2 The CIT(A) erred in deleting the disallowance made u/s 36(1)(ii) of the Act by accepting the assessee’s contention that the payment of advance of Rs. 15 crores in FY 2010-11 was from share capital to its sister concern for purchase of land to make manufacturing unit, without appreciating the fact that it is clear from the assessment order, as well as the submission by the assessee that the assessee had taken loan also in FY 2010-11 to make manufacturing unit hence the debt fund was utilized for making advance and invocation of section 36(1) (iii) was justified.

2.3 The CIT(A) erred in deleting the disallowance made u/s 36(1)(iii) of the Act without appreciating the fact that the advance was given in FY 2010­11 for purchase of land to make manufacturing unit, which did not materialize ultimately and the same advance lying tor so long that too with sister concern and also without any claim of interest from sister concern hence debt fund was utilized for making interest free advance and invocation of section 36(i)(iii) was justified.

3.1 The CIT(A) erred in deleting the addition of income received in advance, by relying upon the assessee’s contention that the assessee has followed AS& regarding disclosure of expenses in other projects and as arbitration proceeding is still pending regarding the income received in as cessation of liability, without advance, it cannot be treated appreciating the fact that it is clear from the assessment order that there was a supplementary agreement for the project of Nagai Power Plant entered after FY 2010-11 in FY 2011-12 for which the advance was received and assessee after getting several opportunities had not submitted any details regarding billing, work progress, receipts of Nagai Project and also not explained the matching concept regarding Rs. 1.5 crores of income as against Rs. 17.31 crores of expenses, hence AO has rightly treated the advance outstanding for more than 3 years as income of the assessee.

3.2 The CIT(A) failed to appreciate that no documentary evidences was submitted by the assessee either before the AO or before the CIT(A) with regard to its claim of arbitration.

4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) be set aside and that of the AO restored.

2. The appeal filed by the Revenue is delayed by one day in filing the appeal and filed a petition for condonation of delay in the form of an affidavit to which; the ld. Counsel has not raised any serious objection. Consequently, since the Revenue was prevented by sufficient cause, the delay of one day in filing of the appeal stands condoned and the appeal is admitted for adjudication.

3. Brief facts of the case are that the assessee filed its return of income for the assessment year 2015-16 on 30.11.2015 admitting NIL income and current year loss of ₹.7,87,45,865/-. The case was selected for scrutiny through CASS and the assessee filed the details against the statutory notices. From the details filed by the assessee, the Assessing Officer has noted that the assessee has claimed a sum of ₹.8,59,47,532/-as finance cost for the year under consideration. The interest bearing funds borrowed by the assessee as on 31.03.2015 includes long term loans at ₹.32,18,49,972/- and the short term loans at ₹.19,92,21,313/-totalling to ₹.52,10,71,285/-. The assessee has incurred interest expenses to the tune of ₹.8,59,47,532/- as finance cot in respect of the above borrowings and has charged off the same to profit and loss account. The Assessing Officer has also noted that the assessee has advanced a sum of ₹.15,00,00,000/- as advance for purchase of land for which an agreement has been entered into but no registration has been taken place and therefore, not put to use by the assessee. From the balance sheet, the Assessing officer has noted that the assessee has utilized interest bearing funds for the advance given for purchase of land and during the course of scrutiny the assessee was asked to show-cause as to why proportionate interest should not be disallowed under section 36(1)(iii) of the Act. After considering the submissions and examining the details furnished by the assessee, the Assessing Officer has observed that the assessee has disguised an interest free loan to fellow subsidiary as an advance for purchase of land. As per section 36(1)(iii) of the Act, the amount of the interest paid in respect of capital borrowed for the purpose of the business or professional one shall be allowed as a deduction. However, since the assessee has claimed interest on sums advanced to fellow subsidiary which has no connection with the business of the assessee, as per section 36(1)(iii) of the Act, the Assessing Officer disallowed the sum of ₹.2,47,41,586/- [computed as ₹.8,59,47,532 x (₹.15,00,00,000/ ₹.52,10,71,285] proportionate to the amounts advanced not for the purpose of business and added back to the total income.

5. On appeal, after considering the particulars and evidences to substantiate the fact that the payment of advance of ₹.15 crores were from the proceeds of the equity share capital, which were received from the parent company during the financial year 2010-11 as well as bank statements in support of assessee’s claim, the ld. CIT(A) allowed the  ground raised by the assessee by deleting the disallowance made under section 36(1)(iii) of the Act.

6. Aggrieved, the Revenue is in appeal before the Tribunal. The ld. DR has submitted that based on the fresh evidences furnished by the assessee during the course of appellate proceedings, the ld. CIT(A) has deleted the disallowance made under section 36(1)(iii) of the Act without affording an opportunity to the Assessing Officer to verify the additional evidences submitted by the assessee is in violation of Rule 46A of the Income Tax Rules. When the above fact was put to the notice of the ld. Counsel for the assessee, the ld. Counsel has submitted that the issue may be remitted back to the file of the Assessing Officer.

7. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. Against the disallowance of interest made under section 36(1)(iii) of the Act, by considering the fresh evidences furnished by the assessee during the course of appellate proceedings, the ld. CIT(A) has deleted the addition made towards disallowance of interest without affording an opportunity to the Assessing Officer to verify the additional evidences submitted by the assessee is in violation of Rule 46A of the Income Tax Rules. Accordingly, we set aside the order of the ld. CIT(A) on this issue and remit the matter back to the file of the Assessing Officer to verify the additional evidences/bank statements, etc. and decide the issue afresh in accordance with law by affording an opportunity of being heard to the assessee.

8. The next ground raised in the appeal of the Revenue relates to deletion of addition of income received in advance. The assessee has reported a sum of ₹.10,15,70,004/- as on 31.03.2015 as income received in advance under Current Liabilities. As per the Notes to Accounts, the assessee has submitted that the assessee recognizes revenue based on Percentage Completion basis as mentioned in AS-7. But as per the disclosure made in the Notes as required by Accounting Standard – AS7 “Construction Contracts” issued by the (companies Accounting Standard Rules) 2006, details are as under:

As on 31.03.2015, the assessee has recognized a revenue of ₹.1,50,67,913/- and claimed expenses to the tune of ₹.17,31,54,878/-.

Further, the Assessing Officer has noted that the opening & closing stock has not undergone any change during the year. It is also to be noted that the assessee has debited all expenses during the year while corresponding revenue has not been recognized. Thus, the Assessing Officer observed that the assessee cannot claim that the assessee is following percentage completion method, which has resulted in huge losses reported during the current year. Accordingly, the assessee was asked to explain the same. After considering the submissions of the assessee, by elaborately discussing the observations, the Assessing Officer has held that the sum of ₹.10,15,70,004/- was deemed to be the income of the assessee for the assessment year 2015-16 and added back to the total income returned. On appeal, after considering the submissions of the assessee and referring to various case law, the ld. CIT(A) has held that section 41(1) of the Act cannot be invoked in this case and allowed the ground raised by the assessee.

8. Aggrieved, the Revenue is in appeal before the Tribunal. The ld. DR has submitted that the CIT(A) deleted the addition of income received in advance, by relying upon the assessee’s contention that the assessee has followed AS7 regarding disclosure of expenses in other projects and as arbitration proceeding is still pending regarding the income received in as cessation of liability, without advance, it cannot be treated appreciating the fact that it is clear from the assessment order that there was a supplementary agreement for the project of Nagai Power Plant entered after FY 2010-11 in FY 2011-12 for which the advance was received. It was further submission that the assessee has not furnished any details regarding billing, work progress, receipts of Nagai Project and also not explained the matching concept regarding ₹.1.5 crores of income as against ₹.17.31 crores of expenses and hence Assessing Officer has rightly treated the advance outstanding for more than 3 years as income of the assessee. The ld. DR has further submitted that no documentary evidences was submitted by the assessee either before the Assessing Officer or before the CIT(A) with regard to its claim of arbitration.

9. On the other hand, the ld. Counsel for the assessee has submitted that the Indian Council of Arbitration has passed its order in 2022 and filed copies of the order along with balance sheet and profit & Loss account as on 31.03.2012.

10. We have heard the rival contentions. When the queries raised by the ld. DR during the course of hearing were put to the notice of the ld. Counsel for the assessee, the ld. Counsel for the assessee has filed copy of the balance sheet and profit & loss account as on 31.03.2012 with Schedule and orders of the Indian Counsel of Arbitration vide order No. 2144 dated 12.11.2022 and dated 13.11.2022. We have perused the same and find that the matter pending before the Indian Council of Arbitration has not attained its finality as the hearing of the case has been fixed as 31t January, 2023 and 1^st February, 2023. In view of the above, we remit the matter back to the file of the Assessing Officer to decide the issue afresh in accordance with law after considering the submissions made before the ld. CIT(A) as well as the final decision of the Indian Council of Arbitration. The assessee is also directed to produce copy of the final order of the Indian Council of Arbitration before the Assessing Officer.

11. In the result, the appeal filed by the Revenue is allowed for statistical purposes.

Order pronounced on 21^st June, 2023 at Chennai.