SITAC RE PVT. LTD.,NEW DELHI V. DCIT CIRCLE-23(2), NEW DELHI

ITA 2237/DEL/2019

AI Insights

The case involves Sitac Re Pvt. Ltd, which appealed against the order of the Commissioner of Income Tax (Appeals)-8, New Delhi, concerning the assessment year 2015-16. The primary issues in the appeal were the legality of the enhanced scrutiny beyond the scope of limited scrutiny without proper approval, and the substantive additions made to the income of the assessee, including cessation of liability under section 41(1), disallowance of transmission charges, and notional interest income on CCDs. The Tribunal found that the additions made were beyond the scope of the limited scrutiny and violated CBDT instructions, leading to the allowance of the appeal.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 470171 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2015-2016
• Other Referred Cases: CIT vs Best Plastics Private Limited, Commissioner of Customs vs Indian Oil Corporation Limited, CIT vs Shoorji Vallabhdas & Co., Shivlaxmi Exports Ltd vs CIT, Shiv Nandan BuildCon Pvt. Ltd. vs. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAYA CHAUDHARY
• Assessee Lawyers: G.C. SRIVASTAVA
• Keywords: Commercial expediency; Notional interest
• Section: 143(3); 143(2); 2

Judgement Text

"Page | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “G”: NEW DELHI BEFORE SHRI SAKTIJIT DEY, HON’BLE VICE PRESIDENT AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA No. 2237/Del/2019 (Assessment Year: 2015-16) Sitac Re Pvt. Ltd, 27B, Prithviraj Road, New Delhi Vs. DCIT, Circle-23(2), New Delhi (Appellant) (Respondent) PAN:AACCN2500M Assessee by : Shri G. C. Srivastava, Adv Shri Anil Kumar Chopra, FCA Shri Parveen Kumar, FCA Shri kalrav Mehrotra, Adv Revenue by: Ms. Jaya Chaudhary, CIT DR Date of Hearing 23/10/2024 Date of pronouncement 31/12/2024 O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in ITA No. 2237/Del/2019 for AY 2015-16, arises out of the order of the Commissioner of Income Tax (Appeals)-8, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal No. 10499/17-18 dated 2802.2019 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 30.12.2017 by the Assessing Officer, DCIT, Circle-23(2), New Delhi (hereinafter referred to as ‘ld. AO’). 2. The assessee has raised the following concise grounds of appeal:- “Limited Scrutiny: 1. That the assessment as made by Ld. Assessing Officer (Ld. AO) is liable to be quashed as limited scrutiny assessment was enhanced as if it was complete scrutiny by making additions relating to (i) alleged cessation of ITA No. 2237/Del/2019 Sitac Re Pvt. Ltd Page | 2 liability u/s 41(1) and (ii) disallowance of transmission charges which were not covered by limited scrutiny reasons. Scope of limited scrutiny has been enhanced without prior approval from Pr CIT, without intimation to the appellant and contrary to binding CBDT instructions. Ld. CIT(A) has also erred in stating that the issue of unauthorized enhancement of limited scrutiny is an administrative action which is not appealable and accordingly, erred in not quashing the said assessment. 1.1 That in the alternative without prejudice to the above ground, the Ld. AO has erred in making addition for alleged cessation of liability u/s 41(1) of Rs 11,25,00,000 and disallowance of transmission charges of Rs 1,46,58,592/- which were outside the scope of limited scrutiny notice. The Ld. CIT(A) has erred in sustaining the said additions. Compulsorily Convertible Debentures (CCD): 2. That the Ld. CIT(A) has erred in sustaining the addition of Rs 1,91,70,000/- as notional, hypothetical interest income on 9% CCD. Strategic investment in CCD of sister concern engaged in similar business has been made out of own funds of appellant. As such too, there is no justification for assessing notional, hypothetical interest income of which there was bonafide waiver before the end of the year and thus it was foregone. There is no real income taxable under the Act. Alleged Cessation of Liability u/s 41(1): 3. That the Ld. AO has erred in making and the Ld. CIT(A) in sustaining the addition of Rs 11,25,00,000/- u/s 41(1) in respect of advance from customer which was under dispute before the Company Law Board / NCLT, on the assumption of alleged cessation of liability. No write back has been made of such advance by the appellant and there had been no allowance or deduction in any year in respect of the same. Rather subsequently. the amount & dispute has been settled to be paid as borne out by NCLT order. The addition u/s 41(1) is liable to be deleted in toto. 3.1 That the said erroneous addition is without any new event or development or receipt in this year and moreover results in double or multiple taxation in context of the view of his learned predecessor CIT(A) in AY 2013-14 that this is the income of AY 2008-09 i.e. in year of receipt. Transmission Charges: 4 That the Ld. AO and Ld. CIT(A) have erred on facts and in law in not allowing deduction of transmission charges payable to Gujarat Energy Transmission Corp. Ltd. (GETCO) of Rs 1,46,58,592/-. Moreover, dispute of year of allowability be it this year or next succeeding year does not justify the disallowance as in the alternative it would be allowable next year ITA No. 2237/Del/2019 Sitac Re Pvt. Ltd Page | 3 4.1 That in any case, the Ld. AO and Ld. CIT (A) have erred in not holding that the said disallowed amount be added to work-in-progress as earlier to be carried forward, if not allowed as period cost of the year. General Grounds: 5. That the disallowances and additions referred above have been made and sustained on erroneous views and non-appreciation of facts, laws, submissions, material and binding case law in appellant's favour on record much of which have been neither discussed nor rebutted. Moreover, such addition/dısallowances are made & sustained based on suspicion, conjectures and surmises without any substantive basis or cogent material. As such too, the same are liable to be deleted. 6 That the assessment as made and the order of the Ld. CIT(A) are against law and facts of the case involved. 7. That the grounds of appeal as herein are without prejudice to each other. 8. That the appellant respectfully craves leave to add, amend, alter and / or forego ground(s) at or before the time of hearing. 3. We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of installation and sale of windmill projects and provision of consultancy services in relation to windmill projects and investment in other companies doing such business. The return of income for the Assessment Year 2015-16 was filed by the assessee company declaring total loss of Rs 7,26,558/- on 30-11- 2015. The case was selected for limited scrutiny by issuance of notice under section 143(2) of the Act dated 2-8-2016 for examination of the following specific issues:- 1. Contract receipt / fees mismatch 2. Sales turnover mismatch 3. Receipt of foreign remittance 4. Low income and high loans / advances / investments 5. Low income and high investments 6. Loss from currency fluctuations ITA No. 2237/Del/2019 Sitac Re Pvt. Ltd Page | 4 4. But, during the course of assessment proceedings, the Learned AO apart from the aforesaid issues which were subject matter of limited scrutiny also proceeded to examine certain other issues thereby going beyond the scope of limited scrutiny. No requisite approval from the learned PCIT was obtained for converting the case of the assessee from limited scrutiny to complete scrutiny. Ultimately in the assessment framed under section 143(3) of the Act, additions were made on account of cessation of liability under section 41(1) of the Act, disallowance of transmission charges for delay in transmission of power as per agreed schedule and addition towards notional interest on compulsorily convertible debentures. The assessee filed its objections before the learned AO that the other issues which are sought to be examined by the learned AO are beyond the scope of limited scrutiny vide letter dated 20-12-2017. The learned AO vide para 3 of his order observed that the new issues examined by him are covered by the following issues identified for limited scrutiny:- a. Low income and high loans / advances / investments b. Low income and high investments c. Loss from currency fluctuations 5. Ultimately the scrutiny assessment was completed under section 143(3) of the Act on 30-12-2017 after making the following additions / disallowances:- a) Addition on account of cessation of liability of disputed business advance received from foreign customer – Rs 11,25,00,000/- b) Disallowance of transmission charges of Rs 1,46,58,592/- for delay in transmission of power as per agreed schedule c) Addition towards notional interest on compulsorily convertible debentures of Rs 1,91,70,000/- ITA No. 2237/Del/2019 Sitac Re Pvt. Ltd Page | 5 6. We find that the addition made under section 41(1) of the Act reflected in a) above and disallowance of transmission charges would certainly not fall under any of the categories of - a. Low income and high loans / advances / investments b. Low income and high investments c. Loss from currency fluctuations pointed out by the Learned AO. Hence we have no hesitation to hold that these two additions certainly cannot be made in the impugned assessment which had been taken up only for limited scrutiny. It is not in dispute that no permission or approval from the learned PCIT had been obtained for converting limited scrutiny to complete scrutiny in the instant case. The CBDT Instruction No. 20/2015 dated 29-12-2015 and CBDT Instruction No. 5/2016 dated 14-7-2016 read with DGIT (Vigilance) letter dated 30-11-2017 is very clear, wherein it is mentioned that before venturing into other issues outside the scope of limited scrutiny, the Learned AO should have taken prior approval of Learned PCIT. Admittedly, in the present case, the Learned AO had not taken any such approval of the concerned authorities. Therefore, the assessment order passed is in violation of CBDT instructions referred to above. Now a question arises as to what will be the fate of such an order passed in violation of extant CBDT instructions. We find that the Hon’ble Jurisdictional High Court in the case of CIT vs Best Plastics Private Limited reported in 169 Taxman 4 (Del) and the Hon’ble Supreme Court in the case of Commissioner of Customs vs Indian Oil Corporation Limited reported in 267 ITR 272 (SC) had categorically held that circulars and instructions issued by CBDT are binding on the officers of the Income Tax Department. Since the addition made on account of cessation of liability under section 41(1) of the Act and disallowance of transmission charges were admittedly beyond the scope of limited scrutiny, those additions are liable to be deleted as the same has been made in violation the decisions of Hon’ble Jurisdictional High Court and Court. Hence, we hold the addition made under section 41(1) of the Act and disallowance of transmission legal issue without going into the mer Ground Nos. 1, 3, 3.1., 4 and 4.1. raised by the assessee are allowed on the technical issue. 7. Now, what is left to be adjudicated is notional interest income addition made in the sum of compulsorily convertible debentures (CCDs). funds made an investment of Rs 21.30 crores in 9% CCDs of concern namely M/s DJ Wind Solutions Private Limited which in turn invested the same in CCDs of dow were invested in M/s Jasdan Energy Private Limited (Jasdan) a group concern which is also engaged in the business of development of wind farms. The debenture holder had discretion to waive off the interest. Flow of investment in group companies CCDs are as under: as the same has been made in violation of aforesaid CBDT instructions and decisions of Hon’ble Jurisdictional High Court and Hon’ble Supreme Hence, we hold the addition made under section 41(1) of the Act and disallowance of transmission charges are hereby deleted on this preliminary legal issue without going into the merits of such addition. Accordingly, the Ground Nos. 1, 3, 3.1., 4 and 4.1. raised by the assessee are allowed on the Now, what is left to be adjudicated is notional interest income addition Rs 1,91,70,000/- on account of investment in 9% compulsorily convertible debentures (CCDs). The assessee out of its own funds made an investment of Rs 21.30 crores in 9% CCDs of concern namely M/s DJ Wind Solutions Private Limited which in turn invested same in CCDs of down line group companies. Ultimately, the said funds were invested in M/s Jasdan Energy Private Limited (Jasdan) a concern which is also engaged in the business of development of The debenture holder had discretion to waive off the Flow of investment in group companies CCDs are as under: ITA No. 2237/Del/2019 Sitac Re Pvt. Ltd Page | 6 of aforesaid CBDT instructions and Hon’ble Supreme Hence, we hold the addition made under section 41(1) of the Act and charges are hereby deleted on this preliminary of such addition. Accordingly, the Ground Nos. 1, 3, 3.1., 4 and 4.1. raised by the assessee are allowed on the Now, what is left to be adjudicated is notional interest income addition investment in 9% The assessee out of its own funds made an investment of Rs 21.30 crores in 9% CCDs of a group concern namely M/s DJ Wind Solutions Private Limited which in turn invested Ultimately, the said funds were invested in M/s Jasdan Energy Private Limited (Jasdan) a concern which is also engaged in the business of development of The debenture holder had discretion to waive off the Flow of investment in group companies CCDs are as under:- ITA No. 2237/Del/2019 Sitac Re Pvt. Ltd Page | 7 8. Jasdan for its wind farm projects, in addition to project funds raised through subject CCDs also raised further funds through loans from State Bank of India and Bank of India. As a protection of the debt, the banks in the loan agreement provided that any subordinate loan from group companies will be without any interest and discharge of such subordinate loans will not be made until the discharge of loan from SBI and Bank of India. Because of inability of Jasdan to pay interest on CCDs, the assessee as well as all down line group concerns agreed to waive off their right of interest on CCDs on 31-3-2015 before the closure of the year. The Learned AO however proceeded to add interest income on notional basis in the sum of Rs 1,91,70,000/- (21,30,00,000 *9%) in the assessment on the ground that assessee is following mercantile system of accounting and irrespective of the fact of waiver by the assessee, interest has accrued during the year. This action of the Learned AO was upheld by the Learned CITA. 9. At the outset, we hold that this issue would certainly fall within the scope of one of the parameters selected and reflected in the limited scrutiny. Hence there could be no objection for the assessee in this regard. But on merits, it was argued by the Learned AR before us that since before the close of the year, the assessee waived off its right to charge interest on CCDs, no such notional interest can be taxed in the hands of the assessee as neither it has accrued nor it has been received during the year. The Learned DR before us vehemently argued that the decision of waiver was taken by the assessee only on 31-3-2015 and hence interest had accrued to the assessee for the whole year. This was buttressed by the Learned AR by stating that the effective date of waiver was 1-4-2014 and hence no interest could accrue to the assessee. ITA No. 2237/Del/2019 Sitac Re Pvt. Ltd Page | 8 10. It is not in dispute that the entire investment of Rs 21.30 crores in CCDs of group concerns were made out of own funds and not out of borrowed funds. The waiver of interest stipulated is always at the discretion of the debenture holders. On request from the borrower i.e. DJ Wind Solutions Pvt Ltd, the assessee waived off their right of interest on CCDs on 31-03-2015 for bona fide commercial expediency. The borrower of the CCDs, i.e DJ Wind Solutions Pvt. Ltd. did not have the income or financial capacity to pay the interest and there was no hope of recovery as is evident from its audited financial statements as on 31-03-2015, wherein it had nil income and loss of Rs 38,300/-. Further, the borrower, M/s DJ Wind Solutions Pvt. Ltd did not provide any interest on the CCDs invested by it in DJ Jasdan Wind Energy and had not claimed any interest expenditure on debentures payable to assessee herein. Similarly, the downstream investment are in two further companies namely DJ Jasdan Wind Energy Pvt. Ltd. and Jasdan Energy Pvt. Ltd that were Special Purpose Vehicles (SPVs) as per business plans, but the two did not have any income and rather in last company, namely Jasdan Energy Pvt Ltd, no interest was to be paid on subordinate loans as per the undertaking given by them to the bank which is mentioned supra. Hence, admittedly the right to receive interest on CCDs was waived off by the assessee before the end of the year and accordingly the interest so waived cannot be said to be accrued to the assessee warranting taxation of the same. In any event, there is no provision in the Act to bring to tax notional interest income. It is trite law that only real income could be taxed and reliance in this regard has been rightly placed by the learned AR before us on the decision of Hon’ble Supreme Court in the case of CIT vs Shoorji Vallabhdas & Co. reported in 46 ITR 144 (SC) wherein it was held as under:- “Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though ITA No. 2237/Del/2019 Sitac Re Pvt. Ltd Page | 9 in book-keeping, an entry is made about a \"hypothetical income\", which does not materialise. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income.” 11. Similarly the reliance on the decision of Hon’ble Calcutta High Court in the case of Shivlaxmi Exports Ltd vs CIT reported in 81 taxmann.com 262 is also well placed. In that case, the lender waived off interest on request of borrowers based on commercial consideration during the relevant year and did not provide any interest income. Hon’ble Calcutta High Court following the decision of Hon’ble Supreme Court in the case of Shoorji Vallabhdas supra and other decisions held that interest income could not said to have been accrued for the appellant for the assessment year in the backdrop of the resolutions taken for waiver of interest. 12. We find that the waiver of interest by the assessee was a bona fide commercial decision to support the group concerns as mutually agreed, neither the assessee has provided interest income nor has the borrower DJ Windfarm / Jasdan, etc., provided any interest expenditure. Entire investment in CCDs was out of own non-interest bearing funds of the assessee. With regard to taxation of notional interest income, the Hon’ble Jurisdictional High Court in the case of Shiv Nandan BuildCon Pvt. Ltd. vs. CIT reported in 60 Taxmann.com 347 had observed as under:- \"Where assessee-company gave interest-free advance to another company, in absence of any specific provision under Income-tax Act, notional interest income computed by Assessing Officer on said advance was to be deleted.” 13. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we have no hesitation to delete the addition made in the sum of Rs 1,91,70,000/- towards interest income on notional basis. Accordingly, the Ground No.2 raised by the assessee is allowed. ITA No. 2237/Del/2019 Sitac Re Pvt. Ltd Page | 10 14. The Ground Nos. 5 to 8 raised by the assessee are general in nature and does not require any specific adjudication. 15. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 31/12/2024. Sd/- Sd/- (SAKTIJIT DEY) (M. BALAGANESH) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 31/12/2024 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi "