Case Law Details
Sea Castle An Ayurvedic And Leisure Hotel Vs ITO (Kerala High Court)
The Kerala High Court admitted and ruled upon a question of law challenging the sustainability of appellate orders that dismissed a statutory appeal without acknowledging a lack of natural justice in the original assessment order. The case involved Sea Castle An Ayurvedic and Leisure Hotel, which had its income tax returns for the assessment years 2010-11 to 2012-13 revised by the Assessing Officer (AO). The revision disallowed deductions claimed for interest and bank charges paid to the Kerala Financial Corporation under Section 43B of the Income Tax Act, which permits deduction only upon actual payment, and also disallowed excess remuneration, leading to demand notices in March 2018. The assessee’s subsequent statutory appeal to the Commissioner was dismissed in-limine in February 2023, as the assessee failed to utilize multiple opportunities to submit written responses. Following this, the assessee filed an appeal with the Income Tax Appellate Tribunal, which was dismissed in March 2025 solely on the grounds of a significant delay of 588 days, without addressing the merits or the concern that the initial AO order was passed ex facie without providing an opportunity of hearing.
The Kerala High Court determined that the AO’s order, passed under Sections 143(3), 147, and 154 of the Income Tax Act, failed to indicate that the assessee was afforded an opportunity to defend its claims for deduction of interest and bank charges. The court stressed that this lack of compliance with the principles of natural justice should have been considered by the Commissioner, even without the assessee’s representation. While acknowledging the assessee’s 588-day delay in approaching the Tribunal was unjustified and reflected a lackadaisical approach, the court noted that the law prefers to adjudicate matters on their merits, and procedural non-compliance can be compensated monetarily. Consequently, the High Court set aside the orders of both the Tribunal and the Commissioner, answering the question of law in favor of the assessee. The appeal before the Commissioner was restored to its original number, subject to the assessee paying a cost of to the Mediation and Conciliation Centre of the Court, making the payment a prerequisite for the restoration. The parties were directed to appear before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC).
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
Income Tax Appeal is admitted on the following question of law:
“Whether the order of the Commissioner as well as the Tribunal dismissing the statutory appeals without noticing the fact that the order of the Assessing officer while exercising the powers under Section 143(3) r/w 147 of the Income Tax Act without giving opportunity of hearing to the assessee are sustainable in the eyes of law or not on merits”.
2. The appellant is running a Hotel under the name and style ‘Sea Castle An Ayurvedic and Leisure Hotel’ at Vishinjam, Thiruvananthapuram and had been regularly filing the income tax return. For the assessment years 2010-11, 2011-12, and 2012-13, the assessee filed returns claiming certain amounts as deductions towards interest and bank charges paid to Kerala Financial Corporation. The Assessing Officer, on examining the matter, noticed that under Section 43B of the Income Tax Act, interest on a borrowed loan is allowed to be deducted, only if it has actually been paid. Since it was found that the assessee had not paid the interest even at the time of assessment for the respective periods, the Assessing Officer revised the assessment order, holding that the claimed amounts are not allowable and that the excess remuneration was to be disallowed, accordingly, the demand notices were issued on 27.3.2018.
3. Aggrieved of the same, appellant preferred a statutory appeals under Section 250 of the Income Tax Act, 1961 before the Commissioner. The Commissioner vide impugned order dated 27.2.2023 dismissed the appeal by giving following reasoning:
In this case, the appellant was given opportunities to represent the case on 15.02.2021. 25.08.2022. 19.09.2022 and 23.02.2023. In response, till date, no written submission has been made by the appellant. No explanation whatsoever has been offered by the appellant to justify its claims Thus, it appears that the appellant is not interested in proceedings with the appeal filed. Therefore, the appeal of the appellant is dismissed in-limine.
4. On perusal of the aforementioned order, it is evident that there was no representation on behalf of the appellant in defending the grounds of appeal by assailing the order of the Assessing officer.
5. Having left with no other opportunity, an appeal was preferred before the Income Tax Appellate Tribunal and all the three appeals were assigned different numbers. However, in the process of filing the appeal, there was a delay of 588 days. Paragraphs 3 and 4 of the affidavit seeking the condonation of delay in filing the appeal reads thus:
I have been served with the order passed by the CIT (Appeals), National Faceless Appeal Centre on 27-022023. The appeal against the above order ought to have been served on or before 27-04-2023.
Unfortunately, I had not noticed the appellate order as I was out of station from May to June 2023, My office staff also did not inform me about the above order after I returned in July 2023. It is only during the month of December 2023, when I enquired about the status of the appeal that the Accountant informed me about the rejection of the appeal by the appellate authority.
6. It was noticed that the order of the Commissioner was dated 27.2.2023 but acquired the knowledge of the order only in December 2023 as the assessee was out of station from May to June 2023.
7. The learned Income Tax Tribunal vide order dated 25.3.2025 dismissed the appeal on the ground of delay without adjudication on merits much less the fact that the order of the Assessing Officer exfacie did not reveal the compliance of the principles of natural justice.
8. Anil D Nair, learned Senior Counsel assisted by Smt. Binisha Baby submitted that the averments in the application seeking condonation of delay are not commensurating with the requirement of law but the fact remains the order of the Assessing officer ex facie is not sustainable as it was passed at the back of the appellant-assessee and is willing to compensate in terms of cost, in case an effective opportunity is granted to contest the order before the Assessing Officer or Tribunal in accordance with law.
9. Counsel for the respondent submitted that the affidavit filed in support of the petition for condonation of delay does not satisfy the requirement of law and, therefore, the delay of 588 days in filing the appeal was rightly held to be unjustified. There is no illegality and perversity for the reason that the act of the assessee is totally reprehensible as no explanation has come forward in not defending the statutory appeal preferred before the Commissioner against the order of the Assessing Officer and urged this court for dismissal of the appeal.
10. We have heard the learned counsel for the parties and appraised the paper book.
11. There is no denial of the fact that the impugned order of the Assessing Officer, passed in exercise of powers under Sections 143(3), 147 read with 154 of the Income Tax Act by revising the returns for the aforesaid assessment years, does not indicate that the assessee was at any stage afforded an opportunity to defend the claim of deduction of interest on the loan availed from the Kerala Financial Corporation for the relevant periods. In other words, whether there would not have been any applicability of Section 43B of the Income Tax Act or not.
12. All these factors in our considered view ought to have weighed in the mind of the Commissioner even if there was no representation on behalf of the appellant. No doubt, the act of the appellant in preferring an appeal before the Income Tax Tribunal with a delay of 588 days is unjustified and reprehensible, being supported only by vague pleadings and a lackadaisical approach. However, the law with regard to condonation of delay is no longer res integra as the intention behind is to adjudicate the matter on merits but should not be thrown away on the ground of limitation as the such act can always be compensated in terms of money. Accordingly, we set aside the order of the Income Tax Appellate Tribunal dated 25.3.2025 as well as the Income Tax Commissioner dated 27.2.2023 by deciding the question of law in favour of the appellant and the appeal preferred before the Commissioner is ordered to be restored to the original number and directed to appear before the Commissioner subject to payment of Rs.3,00,000/- (Rupees three lakhs only) to the Mediation and Conciliation Centre of this Court. It is made clear that the payment of cost shall be a condition precedent. The parties through their counsels are directed to appear before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC).
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