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Judgment
Per Raj Kumar Chauhan, Judicial Member:
The appeal is directed against the order dated 29.12.2025 of Ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as the "CIT (A)/NFAC"] passed u/s 250 of the Income Tax Act, 1961 [hereinafter referred to as "the Act"] wherein the addition made u/s 36 of the Act by Assessment Order dated 20.09.2021 were confirmed and assessment order was upheld.
The brief facts as culled out from our proceedings of the authorities below are that the assessee has filed return of income for AY 2019-20 showing total income of Rs.83,08,434/-. The case was selected for complete scrutiny under the E-assessment Scheme, 2019 on the ground that:
High liabilities as compared to low income/receipts
Large investment in property (From 26QB) as compared to total income
Claim of refund coupled with disclosure of substantially lower receipts in return vis-à-vis, revision of return, claim of loss from House Property or claim of suspicious deduction
Notice u/s 143(2) of the Act was issued on 31.03.2022 followed by notice u/s 142(1) of the Act dated 30.07.2021 along with annexure containing a detailed questionnaire to which response was filed explaining how the assessee has claimed deduction of interest expenses amounting to Rs. 53.50 lakhs on loan taken from various bank for business purposes. From the balance sheet, the Id. AO noticed that the interest of Rs. 32,15,009/- was paid for loan taken from non-business purpose, and hence disallowable u/s 36 of the Act. The Id. AO further noticed that the assessee has shown as (-) negative capital balance in the balance sheet which shows that the assessee has diverted part of interest bearing fund for his personal use. Accordingly, the disallowances were made on the said accounts. The Id. Assessing Officer further observed that the assessee has not furnished any documentary evidence because the assessee has failed to furnish the copy of the new sanctioned plan from competent authority, copy of agreement with Bank, certificate/letter from bank, building use permission letter/certificate for commercial use of the property from the competent authority so as to prove that the property against which bank loan taken and interest paid is for the use of hotel business purpose.
Aggrieved by the impugned assessment order, the assessee filed an appeal before the Id. CIT(A) who has dismissed the same on the ground that the assessee has failed to contest his case despite issuing notice on 4 dates as the assessee has simply sought adjournment for 15-20 days and failed to avail the opportunity given to him. It was observed that the sufficient opportunity has been allowed but no submissions has been made by the appellant hence it was totally non prosecution from the appellant’s side and accordingly, the assessment order was upheld, making observations in para 3.1.1 to 3.3 extracted below as under:
'3.1.1 I have given thoughtful and earnest consideration to the findings and observations of the AO as well as appellant's key contentions emanating from the contents of the Form No.35. The AO, in the assessment order, observed that during the year under consideration, the assessee has taken housing loan for purchase of immovable property jointly with his brother and claimed interest paid on housing loan amounting to Rs. 32,15,009/- as business expenses. The AO has made the impugned addition of Rs.32,15,009/-, treating it as non-business purpose because the AO observed that in the sale deed or other documentary evidence submitted by the assessee, it is nowhere mentioned that the building is/has been used for business/commercial purposes. Further, the AO observed that the assessee failed to furnish the copy of new sanctioned plan from competent authority copy of agreement with Bank, Certificate/letter from Bank, building use permission letter/certificate for commercial use of the property from the Competent Authority etc to prove that the property against which bank loan taken and interest paid, is for the use of hotel business purpose.
3.1.2Further, the AO disallowed proportionate interest amounting to Rs.9,11,397.50/- u/s 36 of the Act, as the assessee diverted business funds for his personal use. The AO observed that during the year, the assessee has shown negative capital balance in the balance sheet which implied that the assessee had withdrawn the fund in excess of his capital balance as the assessee failed to explain where the (-) negative capital balance utilized.
3.2On the other hand, the appellant has challenged the addition on the ground that Assessing officer has erred in adding Rs. 32,15,009/- to total income w.r.t the purchase of the property in question with a pre-meditated mind and also made disallowance of proportionate interest of Rs. 9,11,398/- on account of diversion of borrowed funds outside business for personal use whereas there was an interest income of Rs. 15,15,261/- in the computation of income of the assessee submitted during the assessment proceedings. However, I find that other than making such assertions, the appellant has not been able to substantiate the grounds of appeal with any cogent material that could have been filed by him suo motu or in response to the notices issued by this office during the appellate proceedings. On an independent evaluation of the assessment order, I fail to notice any jurisdictional defect in invocation of the relevant provisions of the Act or any gross violation of the principles of natural justice.
3.3Having applied my mind to the facts and circumstances of the case and the applicable position of law, I am of the considered view that the appellant has failed to demonstrate any infirmity in the action of the Assessing Officer. In complete absence of any material supporting the appellant's line of argument, no case is made for interference with the assessment order on this count. Accordingly, the impugned addition of Rs. 32,15,009/- and Rs. 9,11,397/- is upheld and the instant ground of appeal is dismissed."
Aggrieved by the impugned order the assessee is in appeal and raised the following grounds of appeal:
'1. The CIT(A) has erred on the facts and circumstantial evidence in making addition of 41,26,406 disallowing 32,15,009 as interest on housing loan whereas the same is interest on loan against property which was used for business purposes.
2.Interest of 9,11,397 which is incorrectly calculated on negative capital balance having been diverted for the personal purpose whereas the same is used for the business of construction activities as explained."
We have heard the Id. AR as well as the Id. DR. It was argued on behalf of the assessee/appellant that the Id. CIT(A) has not given the effective opportunity of hearing and the impugned order has been passed without following principles of natural justice because the assessee has sought adjournment on reasonable grounds and without giving effective opportunity of hearing the impugned order has been passed. The Id. DR while relying on the order of the Id. lower authorities has left it to the discretion of the Tribunal to restore the matter to the file of the Id. CIT(A) for giving further opportunity if so deemed expedient in the interest of justice.
The Id. AR however tried to impress upon the Tribunal that there is a jurisdictional legal issue involved in this case because the return of income was filed on 25.10.2019 for AY 2019-20 and as per provisions of the Act, notice u/s 143(2) of the Act has to be issued within six months from the end of the financial year in which return of income is filed, i.e. notice u/s 143(2) of the Act is to be issued by 30.09.2020 but the same was issued on 30.03.2021 and as such the assessment order passed was bad in law and the whole assessment proceedings are liable to be quashed. In support of this argument, written submissions have been filed after conclusion of hearing wherein the same argument has been taken and the Id. AR has relied upon the case of Hon’ble jurisdictional Delhi Bench in ITA No. 1600/Del/2017 order dated 22.09.2022 and in ITA No. 1449/Del/2023 order dated 01.04.2026. In both these cases the legal grounds raised before the Tribunal as additional grounds pertaining to the notice u/s 143(2) were decided in favour of the assessee.
A question arises whether the Tribunal can consider the correctness of notice u/s 143(2) having been issued beyond the period of limitation without raising any grounds either before the Id. CIT(A) or before the Tribunal in that regard. On examination of the Form 35 and the grounds taken therein as well as taken before the Tribunal nothing is stated about the notices u/s 143(2) having been issued beyond the period of limitation.
Rule 11 of Income Tax (Appellate Tribunal) Rule 1963 provided as under:
'11. The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule:
Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.
Rejection or amendment of memorandum of appeal."
Admittedly, no legal ground has been raised before the Tribunal with regard to the notice u/s 143(2) of the Act being barred by limitation. Similarly, no such ground has been raised before the Id. CIT(A) as is evident from Form 35 where grounds of appeal are mentioned as extracted below:
'1. That the Ld. AO failed to appreciate and consider the facts and circumstances with the purchase of the property in question and with a pre- meditated mind moved to disallow the interest of Rs. 32,15,009/- on the same.
2.That the Ld. AO failed to appreciate and consider the material placed on record while disallowing proportionate interest of Rs. 9,11,398/- on account of diversion of borrowed funds outside business for personal use whereas there was an interest income of Rs. 15,15,261/- in the computation of income of the assessee submitted during the assessment proceedings."
The Id. assessee/appellant in this case has not availed the opportunity of filing additional ground before the Tribunal or before the Id. CIT(A) and the question raised by written submissions before us can be considered by the Id. CIT(A) u/s 250(5) of the Act extracted below as under:
"S. 250 (5) The Joint Commissioner (Appeals) or the Commissioner (Appeals) may, at the hearing of an appeal, allow the appellant to go into any ground of appeal not specified in the grounds of appeal, if the Joint Commissioner (Appeals) or the Commissioner (Appeals) is satisfied that the omission of that ground from the form of appeal was not willful or unreasonable."
Hence for the above reasons, the issue of notice u/s 143(2) being issued beyond period of limitation, cannot be decided by the Tribunal because no ground/additional ground in that regard was raised by appellant before us.
Now the question arises whether the impugned order has been passed by following principles of natural justice or an effective opportunity of hearing has been given to the assessee or not. Section 250(2)(a) of the Act provides as under:
"Section 250 (2) The following shall have the right to be heard at the hearing of the appeal: -
a. The appellant, either in person or by an authorized representative;"
Thus it is evident from the provisions of section 250(2)(a) of the Act that the opportunity to be given by the Id. first appellate authority is not a mere formality but it is mandatory requirement of law. On perusal of the impugned order, we have noticed that though the notice of hearing was issued on 4 dates and on each date, the assessee has sought adjournment. It is argued by the assessee before us that the adjournment was sought on justified grounds.
In these given facts and circumstances, we are of the considered opinion that the end of justice required that the assessee be given effective opportunity of hearing by the Id. CIT(A) for presenting its case and producing the necessary materials/documents as per law in support of its case for claiming deduction of interest amount which has been disallowed by the Assessing Officer and the disallowance has been confirmed by the Id. first appellate authority. For these reasons, the matter is restored to the file of the Id. CIT(A) for deciding afresh and the assessee may file evidence in support of its claim by submitting the necessary documents as mentioned in the assessment order and for that reason the disallowance was made by the Assessing Officer. The assessee shall submit the necessary evidence/material/submissions before the Id. CIT(A) within a period of 60 days from this order who shall consider it as per law and decide the matter afresh.
The appeal of the assessee is accordingly allowed for statistical purposes.