2014 (11) TMI 1033 - AT - Income Tax

Reopening of assessment - Disallowance under section 43B being the amount of interest on loan converted into equity shares of the appellant pursuant to one time settlement with the lender bank - Held that - Section 43B per se does not provide the manner in which the payment of interest is to be made it only provides that the deduction is allowable on the sum payable mention in clauses (a) to (f) if such sum is actually paid by the assessee. The said section creates fiction that certain liabilities irrespective of the method of accounting followed by the assessee would be allowed as deduction only on actual payment. The clause (d) of the said section covers interest payment to the banks. The interest payment has to be made in cash or in actual terms of money has not been specified. The only rider given in Explanation 3C is that interest payable is allowable when the interest is actually paid and it should not be converted into loan or borrowings. There is no prohibition or embargo that the sum actually paid will not cover payments through allotment of shares. The shares are tradable commodity and has a value which can be sold in the market as per the value of the share on the date of sale. It is easily convertible into money as and when required. Once there is no such prohibition u/s 43B for discharging the payment of interest liability and claiming of deduction thereof by converting the payment through allotment of shares then how the assessing officer sans any legal provision or any judicial authority could have entertained reason to be believe that such a deduction is not allowable. On these facts we are of the opinion that the reasons as recorded by the AO do not clothe him with the jurisdiction u/s 147 to reopen the completed assessment. No legal provision or legal proposition has been brought to our notice in support the ground raised by the assessing officer in the reasons recorded for reopening the case. Thus on such reasons we hold that the reopening u/s 147 cannot be validly initiated as prima facie there is no reason to believe that any income chargeable to tax has escaped assessment. The very initiation of proceeding u/s 147 by issuance of notice u/s 148 is thus bad- in- law and accordingly the same is held and null and void. - Decided in favour of assessee.

Summary

Issues:
1. Validity of reopening the assessment under section 147.
2. Disallowance of interest amount under section 43B.
3. Disallowance of retrenchment compensation as capital expenditure.
4. Disallowance of expenditure under section 35DDA.

Issue 1: Validity of reopening the assessment under section 147:
The appellant challenged the reopening of the assessment under section 147, arguing that the original return of income was filed with complete and correct details. The appellant contended that the reasons for reopening lacked new information and amounted to a "change of opinion," citing legal precedents. The appellant further argued that the conversion of interest into equity shares for settlement did not violate section 43B, as the section does not specify cash-only payments. The Tribunal held that the reasons recorded did not provide a valid basis for reopening, as there was no legal provision prohibiting the deduction claimed. Consequently, the Tribunal found the reopening under section 147 to be invalid and quashed the reassessment proceedings.

Issue 2: Disallowance of interest amount under section 43B:
The Assessing Officer disallowed a sum under section 43B, contending that the conversion of interest into equity shares did not constitute actual payment. The appellant argued that the shares had value and could be sold for cash when needed, making them a valid mode of payment under section 43B. The Tribunal agreed with the appellant, emphasizing that section 43B does not restrict payments to cash only. Since there was no legal prohibition on using equity shares for payment, the Tribunal held that the deduction claimed by the appellant was allowable under section 43B.

Issue 3: Disallowance of retrenchment compensation as capital expenditure:
The Assessing Officer disallowed retrenchment compensation as capital expenditure, which the appellant contested. The appellant argued that the expenditure should be allowed as a deduction. However, due to the Tribunal's decision on the validity of reopening the assessment and the allowance of the deduction under section 43B, this issue became academic and was not adjudicated on its merits.

Issue 4: Disallowance of expenditure under section 35DDA:
The appellant sought to claim one-fifth of the expenditure under section 35DDA, but this claim was rejected by the Ld.CIT(A). However, given the Tribunal's decision on the primary issue of reopening the assessment and the allowance of the deduction under section 43B, the Tribunal did not delve into this issue on its merits. As a result, this issue was not further addressed in the judgment.

In conclusion, the Tribunal found the reopening of the assessment under section 147 to be invalid and allowed the appeal filed by the Assessee. The Tribunal's decision was based on the lack of legal basis for the reassessment and the permissible nature of using equity shares for payment under section 43B. Consequently, the other grounds raised by the Assessee were not addressed, as they had become academic in light of the primary issue's resolution.