2012 (8) TMI 985 - AT - Income Tax

Assessment u/s 153A - Held that - The addition in such a case can only be made on the basis of incriminating material found in the course of search and in the instant case from the perusal of the assessment order as well as the order of CIT(A) it is seen that the disallowance on interest which has been made is not based on any seized material or documents found during the course of search and seizure. Therefore such a disallowance be deleted. Disallowance of interest - Held that - No reason to deviate from the findings given by the CIT(A) as admittedly the borrowed funds cannot be held to be utilised wholly and exclusively for the business purpose. The investment in the company wherein the assessee is a Director will result only in dividend income which undoubtedly would be hit by Section 14A. Nothing has been brought on record that by lending the money to the company by the assessee from his own borrowed funds has any direct or indirect nexus for the business purpose of the assessee. Therefore in our opinion there is no merit in the contention raised by the assessee and accordingly we uphold the order of the CIT(A) and dismiss both the appeals filed by the assessee for the assessment years 2005-06 & 2006-2007 respectively.

Summary

Issues involved:
Assessment under Section 153A for the years 2004-2005, 2005-06, and 2006-07; Disallowance of interest on borrowed funds not utilized for business purposes.

Analysis:

1. Assessment under Section 153A:
The appeals were against a consolidated order for the assessment years 2004-2005, 2005-06, and 2006-07 under Section 143(3) read with Section 153A. The issues were common, and the assessment proceedings were disposed of together.

2. Dispute on Assessment Year 2004-2005:
For the assessment year 2004-2005, the assessment had attained finality before the search date, and no abatement occurred under Section 153A. The disallowance of interest was challenged as lacking incriminating material, leading to its deletion.

3. Dispute on Assessment Years 2005-06 & 2006-07:
In contrast, assessments for these years were pending during the search, resulting in abatement under Section 153A. The disallowance of interest had to be decided on merits due to the ongoing assessment proceedings.

4. Disallowance of Interest on Borrowed Funds:
The core issue was whether interest on borrowed funds, not utilized for business purposes but invested in a company where the assessee was a director, was allowable. The contention was that the investment sustained the earning capacity of the assessee.

5. Decision and Rationale:
The Assessing Officer and CIT(A) disallowed the interest, citing it was not wholly and exclusively for the assessee's business. The CIT(A) referenced relevant case law to support the disallowance. The Tribunal upheld the disallowance, finding no business nexus in the investment, which would only yield dividend income subject to Section 14A.

6. Final Outcome:
The appeal for the assessment year 2004-2005 was allowed, while the appeals for 2005-06 and 2006-07 were dismissed. The judgment was pronounced on 22nd August 2012 by the ITAT Mumbai.

This detailed analysis covers the issues raised in the legal judgment, providing a comprehensive overview of the assessment under Section 153A and the disallowance of interest on borrowed funds for the respective assessment years.