Tirupati Udyog Ltd vs ACIT, Circle-16(1), New Delhi

PER SHRI M BALAGANESH, ACCOUNTANT MEMBER:

The appeal in ITA Nos.6938 to 6980/Del/2025 for AYs 2005-06, 2007-08 and 2010-11, arises out of the order of the Id. Commissioner of Income Tax (Appeals)-3, New Delhi [hereinafter referred to as 'Id. CIT(A)', in short] dated 06.08.2025, 30.07.2025 against the order of assessment passed u/s 143(3)/ 147 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.03.2013 by the Assessing Officer, ACIT, Circle-16(1), (hereinafter referred to as ‘ld. AO’).

The assessee has raised a preliminary ground challenging the validity of assumption of jurisdiction under section 147 of the Act and consequential framing of reassessment thereon. This is a legal issue and hence taken up first for adjudication.

We have heard the rival submissions and perused the materials available on record. The assessment for the assessment year 2005-06 was sought to be reopened by the Learned AO vide issuance of notice under section 148 of the Act dated 30-3-2011. This notice is enclosed in page 41 of the paper book. We find that the Learned AO had sent the proposal in the prescribed proforma for seeking approval in terms of section 151 of the Act on 31-3-2011 for reopening the assessment. This is enclosed in page 44 of the paper book. The Learned Additional Commissioner of Income Tax had forwarded the proposal letter of the Learned AO to Learned Commissioner of Income Tax Delhi-VI, New Delhi, vide letter dated 31-3-2011. This is enclosed in page 43 of the paper book. The Learned AO sends a letter addressed to Learned CIT Delhi-VI, New Delhi through proper channel, vide letter dated 31-3-2011 sending the reasons recorded for reopening the assessment along with the proposal. This is enclosed in page 42 of the paper book. All these documents clearly prove that even the proposal for reopening the assessment and approval in terms of section 151 of the Act was obtained from the Competent Authority only on 31-3-2011, whereas, the notice under section 148 of the Act stood issued to the assessee on 30-3-2011 itself which clearly establishes that at the time of issuance of notice under section 148 of the Act, necessary approval under section 151 of the Act from the Competent Authority was not even obtained by the Learned AO. This clearly proves that approval under section 151 of the Act was obtained by the Learned AO from the Competent Authority after the issuance of notice under section 148 of the Act dated 30-3-2011, which becomes fatal to the very assumption of jurisdiction for reopening the assessment. Since this fact is clearly established vide pages 41-44 of the paper book, we have no hesitation to hold that the very assumption of jurisdiction for reopening the assessment is completely flawed in this case and had to be declared illegal. Consequentially, the reassessment framed in the hands of the assessee for assessment year 2005-06 is hereby quashed as void abinitio.

Since the reassessment is quashed for the above mentioned reason, the adjudication of other factual and legal grounds raised by the assessee become academic in nature and they are left open.

In the result, the appeal of the assessee in ITA No. 6938 /Del/2025 for assessment year 2005-06 is partly allowed.

The assessee has raised a preliminary ground challenging the validity of assumption of jurisdiction under section 147 of the Act and consequential framing of reassessment thereon. This is a legal issue and hence taken up first for adjudication.

We have heard the rival submissions and perused the materials available on record. The assessee company filed its return of income for the assessment year 2007-08 declaring total income of Rs. 3,22,63,297. The assessment was completed under section 143(3) of the Act originally. Later the case of the assessee was sought to be reopened under section 148 of the Act due to the reason that a search operation was conducted on Shri R Charu Chandra group in which lot of documents related to assessee company was found and seized. Accordingly a notice under section 148 of the Act dated 30-3-2011 was issued and duly served upon the assessee company. The assessee company is engaged mainly in the business of manufacturing and sale of sponge iron, MS ingots and re-rolled products and other trading activities. The Learned AO noted in the reasons recorded that there is a difference of Rs. 21,78,503 in net profit as figures are compared between the return of income and copy of provisional balance sheet found during the search operation. The assessee was specifically asked to explain the above said difference in net profit. The assessee filed the submission dated 28-01-2013. Submission of the assessee was duly considered and not found satisfactory by the Learned AO which lead to the addition of Rs. 21,78,503 on account of difference in net profit in the reassessment completed under section 143(3) read with section 148 of the Act dated 28-03-2013. This issue was subject matter of reasons recorded for reopening the assessment by the Learned AO.

The Learned AO in the reasons recorded observed that as per the impounded provisional balance sheet and profit and loss account, the turnover declared by the assessee was Rs 148,38,72,269, whereas the sales reflected in the return of income for assessment year 2007-08 was Rs 124,97,08,104. Accordingly, the difference figure of Rs 23,41,64,165 was sought to be treated as income escaping assessment in the hands of the assessee for which reasons were recorded by the Learned AO for assessment year 2007-08. The assessee gave the explanation before the Learned AO in the reassessment proceedings that the difference arose due to inclusion of GST portion in the turnover reflected in the provisional profit loss account found during the course of search and survey and as such, there was no difference in turnover at all and that the figure reported in the return of income was correct. This explanation of the assessee was accepted by the Learned AO in the reassessment proceedings and no addition was made with regard to difference in turnover by the Learned AO in the reassessment order completed under section 143(3) read with section 148 of the Act dated 28-03-2013. It could be seen that there were two issues noted by the Learned AO in the reasons recorded :-

It is noticed that the Learned AO had accepted the explanation offered by the assessee with regard to the difference in turnover and resorted not to make any addition in the reassessment proceedings . However, with regard to difference in net profit of Rs 21,78,503, addition was indeed made in the reassessment order. Apart from this, the Learned AO also proceeded to make several other additions on account of disallowance of extraordinary expenses, issuance of post dated cheques , interest income and receipt of unsecured loans and share application money.

The assessee preferred an appeal before the Learned CITA. In first appeal, the Learned CITA deleted the addition made on account of net profit of Rs 21,78,503. Hence the entire two issues that were subject matter of reasons recorded , ultimately did not survive in the assessment and first appellate proceedings. It is trite law that the first appellate proceedings are continuation of assessment proceedings. Hence if the issues that were subject matter of reasons recorded did not survive in the assessment or in first appellate stage, it amounts to framing of reassessment on issues that were not subject matter of reasons recorded. The Learned AO cannot resort to any other fresh issues without resorting to make additions on issues that were subject matter of reasons recorded. Reliance in this regard was placed by the Learned AR on the recent Third Member Decision of Delhi Tribunal in the case of Mahesh Kumar vs ITO in ITA No. 2650/Del/2024 dated 06-08-2025. For the sake of convenience, the entire third member order is reproduced below:-

In Jet Airways (I) Ltd. (supra), following was the substantial question of law posed before the Bombay High Court :-

The Bombay High Court in the context of Explanation 3 to Section 147 of the Act added by the Finance (No. 2) Act, 2009 held as under :-

Thus, the distinction sought to be made out by the learned Accountant Member, in my considered opinion, cannot be accepted.

The learned Accountant Member in para 3.4 of his order has found that the case of B.P. Poddar Foundation for Education (supra) decided by the Kolkata Bench involves identical facts. Incidentally, the decision in the said case has been confirmed by the Calcutta High Court. This aspect has been considered by the learned Accountant Member in para 5 onwards of his order. Before the Calcutta High Court, the Revenue had raised the following substantial question of law :-

The Calcutta High Court, inter alia, relying upon the decision of Bombay High Court in the case of Jet Airways (I) Ltd. (supra) and that of Delhi High Court in Ranbaxy Laboratories Ltd. (supra) had found that the Tribunal was justified in finding that the reopening was bad in law. However, here again, the learned Accountant Member in para 5.8 of the order has found that the reliance placed by the Kolkata Tribunal on the ITA NO.2650/DEL/2024 (A.Y.2012-13) decision of Bombay High Court in Jet Airways (I) Ltd. (supra) and the Delhi High Court in Ranbaxy Laboratories Ltd. (supra) "is not acceptable" because no such proposition was laid down in these decisions. The following observations in para 5.8 of his order are relevant :-

In my considered view, once the learned Accountant Member had found that the facts in the case of B.P. Poddar Foundation for Education (supra) were identical, it was not open to express any contrary view. That being an order of the co-ordinate Bench was binding.

The learned Accountant Member has also reproduced in para 3.2 of the order the observations of learned CIT(A) while deleting the addition in respect to bogus LTCG. The learned Accountant Member found that the findings are "a little abrupt". Although the reasons given by the learned CIT(A) could have been more specific and clear, the said ITA NO.2650/DEL/2024 (A.Y.2012-13) aspect cannot be gone into for the reason that ultimately the learned CIT(A) has partly allowed the appeal and deleted the addition and that order has not been challenged by the Revenue and has thus attained finality.

In the result, Ground no. 3 as raised by the assessee deserves to be allowed and the impugned addition cannot be sustained. The question as referred to is answered accordingly, holding that the reopening u/s 147 r.w.s 148 of the Act, in this case, is not valid. The appeal, therefore, deserves to be allowed as proposed by the learned Vice President (Judicial Member).”

It is not in dispute that both the issues of difference in turnover and difference in net profit that were subject matter of reasons recorded were not sustained upto the level of first appellate authority’s order. For one issue , no addition was made by the learned AO in the re-assessment proceedings itself and other issue was deleted by the learned CITA. Hence the ratio laid down in the aforesaid third member decision would squarely apply to the facts of the instant case and hence the Learned AO could not have resorted to make additions on any other issues that were not the subject matter of reasons recorded. Respectfully following the aforesaid decision of third member, which has the effect of a special bench and is binding on this tribunal, we quash the reopening and allow the legal ground raised by the assessee thereon.

Since the entire reopening is quashed, the adjudication of other factual and legal grounds become academic in nature and they are left open.

In the result, the appeal of the assessee in ITA No. 6939/Del/2025 for assessment year 2007-08 is partly allowed.

The Ground No. 1 raised by the assessee was stated to be not pressed by the learned AR at the time of hearing for which necessary endorsement has been made by the learned AR in our file. Accordingly, the Ground No. 1 raised by the assessee is dismissed as not pressed.

The Ground No. 2 raised by the assessee is challenging the disallowance of interest paid on belated payment of indirect tax of Rs 82,218 by applying the provisions of section 40(a)(ii) of the Act.

We have heard the rival submissions and perused the materials available on record. During the course of assessment proceedings, it was noticed by the learned AO that assessee had paid the following interest :-

The aforesaid interest of Rs 82,218 was disallowed by the learned AO on the ground that the same partakes the character of taxes and since payment of taxes are not allowed as deduction, the interest paid on delayed payment of such tax was sought to be disallowed. This action of the learned AO was upheld by the learned CITA.

At the outset, there is a big difference between direct tax and indirect tax. All the aforesaid payments were made only on account of interest on delayed payment of indirect taxes. While the payment of direct tax such as income tax, gift tax, wealth tax shall not be allowed as deduction in terms of section 40(a)(ii) of the Act, the payment of indirect tax such as excise duty, service tax, customs duty, VAT, octroi, etc. would be allowed as deduction and would not be covered by section 40(a)(ii) of the Act. Hence, interest paid on delayed payment of indirect taxes would only be compensatory in nature and would be allowed as deduction. This issue is no longer res integra in view of the decision of the Hon’ble Supreme Court in the case of Lachman Das Mathura Das vs CIT reported in 254 ITR 799 (SC) wherein it was held that interest on arrears or outstanding balance of sales tax paid by the assessee would be compensatory in nature and would be allowable as deduction in computing profits of the business. Respectively following the said decision, the Ground No. 2 raised by the assessee is hereby allowed.

The Ground No. 3 raised by the assessee is challenging the disallowance of interest of Rs. 6,13,638 under section 36(1)(iii) of the Act.

We have heard the rival submissions and perused the materials available on record. The Learned AO noticed that assessee had given loans of Rs. 32 lakhs to Rajkumar Goyal Gurgaon on which interest was not charged. When confronted, the assessee submitted that the said payment was paid in connection with plan for acquiring land around Gurgaon for setting up a new factory and since the plan did not materialize, the amount is to be recovered from the party. Similarly, the amount of Rs. 6 lakhs was paid to Praveen Construction for purchase of a flat for company guest house purposes at Hyderabad which amount is also outstanding. Similarly the assessee had made payment of advance of Rs . 1,11,73,061 to Madhavi Srivastava for purchase of property which was also not recovered. The Learned AO noted that assessee has borrowed funds to the tune of Rs. 34.17 crores and paid interest of Rs. 3,33,82,396 on one hand, but on the other hand had advanced interest-free funds to certain parties. Accordingly, he resorted to treat the aforesaid three advances made by the assessee as diversion of borrowed funds for non-business purposes and made proportionate disallowance of interest at the rate of 12% amounting to Rs. 17,96,767 in the assessment. The Learned CITA gave partial relief to the assessee in this regard by directing the Learned AO to disallow interest only from the day on which the funds were advanced and not for the whole year. Accordingly, the disallowance of interest stood restricted to Rs. 6,13,638 which is challenged by the assessee before us. No appeal has been preferred by the revenue against this direction of the learned CITA before us.

The only issue to be decided in this regard is as to whether the assessee was justified in giving interest-free advances to certain parties on one hand, but on the other hand would be justified in paying interest on borrowed funds. We find from perusal of the balance sheet of the assessee as on 31-03-2010, the assessee is having sufficient own funds of Rs. 29.11 crores . The balance sheet is enclosed in page 5 of the paper book. The own funds available with the assessee company are several times more than the interest-free advances given by the assessee. Since sufficient interest-free funds are available with the assessee company, it has to be presumed that the borrowed funds were not utilized for making interest free advances to aforesaid parties. Hence, no disallowance of interest could be made by invoking the provisions of section 36(1)(iii) of the Act or any other provision of the Act in this regard. Reliance in this regard was placed on the decision of Hon’ble Supreme Court in the case of South Indian Bank vs CIT reported in 438 ITR 1 (SC). Respectfully following the said decision, the disallowance of interest of Rs 6,13,638 made herein is deleted. Accordingly, the Ground No. 3 raised by the assessee is allowed.

In the result, the appeal of the assessee in ITA No. 6940/Del/2025 for the assessment year 2010-11 is partly allowed.

To sum up, all the appeals of the assessee are partly allowed.