2016 (2) TMI 1060 - AT - Income Tax

Assessment u/s 153A - disallowance of the claim of the interest expenditure incurred by the assessee on loans borrowed against the interest income - Held that - We uphold the orders of the CIT(A) and delete the additions made on account of disallowance of the claim of the interest expenditure incurred by the assessee on loans borrowed against the interest income on the short ground itself by holding that completed assessments can be interfered with by the AO while making assessment under section 153A of the Act only on basis of some incriminating material unearthed during the course of search which was not produced or not already disclosed or made known in course of original assessment and undisclosed income or property discovered in course of search while in the instant appeal the AO has in the assessments framed vide orders dated 31.12.2009 u/s. 153A read with Section 143(3) of the Act in pursuance to the first search on 19.07.2007 has duly examined and allowed the claim of the assessee for deduction of interest of Rs. 47, 22, 282/- being interest paid on loan borrowed against the interest income earned on loans advanced by the assessee and no new incriminating material has been found or unearthed during the course of second search on 29-03-2011 . See Commissioner of Income Tax (Central) -III Versus Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT - Decided in favour of assessee

Issues Involved:
1. Nexus between interest expense and interest income.
2. Validity of disallowance of interest expenses under Section 57(iii) of the Income Tax Act.
3. Applicability of the rule of consistency and the impact of prior assessments.
4. The role of incriminating material found during search operations in reassessment.

Issue-wise Detailed Analysis:

1. Nexus between Interest Expense and Interest Income:
The primary issue was whether there existed a nexus between the interest expenses claimed by the assessee and the interest income earned. The Assessing Officer (AO) disallowed the interest expenses on the grounds that the assessee failed to establish a direct correlation between the funds borrowed on which interest was paid and the funds advanced on which interest was earned. The AO contended that only if the borrowed funds were directly used for lending could the interest expense be claimed as a deduction.

2. Validity of Disallowance of Interest Expenses under Section 57(iii):
The AO disallowed the deduction of interest expenses under Section 57(iii) of the Income Tax Act, which allows for deductions of expenses incurred wholly and exclusively for earning income. The AO argued that the assessee did not satisfy the necessary condition of establishing a nexus between the borrowed funds and the interest income. The assessee countered this by referencing previous assessments where similar claims were allowed, and no new material facts had emerged to warrant a different conclusion.

3. Applicability of the Rule of Consistency and Impact of Prior Assessments:
The assessee argued that the principle of consistency should apply since the same issue had been examined and allowed in previous assessments, including those conducted under Section 153A following an earlier search. The CIT(A) agreed, noting that no new incriminating material was found in the subsequent search to justify a change in the assessment. The CIT(A) emphasized that equity demands the allowance of interest expenses if the income from interest is being taxed.

4. Role of Incriminating Material in Reassessment:
The Tribunal considered whether the absence of incriminating material found during the second search could affect the reassessment. The Tribunal referenced the Special Bench decision in All Cargo Global Logistics Ltd. and the Hon'ble Bombay High Court's decision in Continental Warehousing Corporation (Nhava Sheva) Limited, which held that completed assessments could only be interfered with based on incriminating material found during the search. Since no such material was found, the reassessment could not disallow the interest expenses already allowed in previous assessments.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to allow the interest expenses claimed by the assessee, emphasizing the need for consistency and the absence of new incriminating material. The Tribunal dismissed the Revenue's appeals, affirming that the disallowance of interest expenses was unjustified and unsustainable. The decision was based on the principle that reassessments under Section 153A should not disturb concluded assessments without new incriminating evidence.

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