2012 (2) TMI 476 - AT - Income Tax

Summary

Issues Involved:
1. Reopening of assessment u/s 147.
2. Disallowance of interest-free loan u/s 36(1)(iii).
3. Disallowance of interest on share application money u/s 36(1)(iii).
4. Disallowance of interest u/s 14A.

Summary:

Issue 1: Reopening of Assessment u/s 147
The assessee contended that the reopening of assessment was primarily to disallow under section 14A and that section 36(1)(iii) was used to avoid the provisions of section 14A, which are not applicable for reopening assessments prior to 1.4.2001. The CIT (A) upheld the reopening, noting that the Assessing Officer had a prima facie belief based on findings from AY 2001-02 that funds were diverted for non-business purposes, leading to excess interest claims. The Tribunal agreed, stating that since no scrutiny assessment was done under section 143(3) earlier, reopening under section 147 is valid. The ground was dismissed.

Issue 2: Disallowance of Interest-Free Loan u/s 36(1)(iii)
The Assessing Officer disallowed Rs. 72,000/- being interest-free loan given to Shri Rishi Kumar Chakrapani, stating it was not for business purposes. The CIT (A) upheld this disallowance, and the Tribunal confirmed it, noting that there was no evidence to counter the findings of non-business consideration. The ground was rejected.

Issue 3: Disallowance of Interest on Share Application Money u/s 36(1)(iii)
The Assessing Officer disallowed Rs. 43,70,388/- as interest on share application money, stating it was not a business activity. The CIT (A) and the Tribunal upheld this disallowance, noting that the advances were not for business purposes and were recovered without any allotment of shares or receipt of interest. The ground was rejected.

Issue 4: Disallowance of Interest u/s 14A
For AY 2001-02, the CIT (A) enhanced the disallowance under section 14A to Rs. 153.01 lakhs, against Rs. 16,25,921/- made by the Assessing Officer. The Tribunal restored the issue to the Assessing Officer for fresh examination, noting that the nexus between borrowed funds and their utilization for business or non-business purposes needs to be established. The Tribunal also directed the Assessing Officer to consider whether the disallowed amounts could be set off against capital gains income.

For AY 2003-04 and AY 2004-05, the Tribunal directed the Assessing Officer to re-examine the disallowance of interest, considering whether the investments were for business purposes and whether the borrowed funds were utilized for business activities. The disallowance of interest on advances to Shri Rishi Kumar Chakrapani and MPCC was confirmed as they were for non-business purposes.

Conclusion:
The appeal in ITA No. 933/Mum/2006 was dismissed, while other appeals were partly allowed for statistical purposes. The Tribunal directed the Assessing Officer to re-examine the issues concerning disallowance of interest under sections 14A and 36(1)(iii) based on the nexus between borrowed funds and their utilization.