2011 (10) TMI 460 - HC - Income Tax

Dis-allowance of interest on interest free advances given to sister concerns for non-business purposes - Tribunal while deleting dis-allowance held that issue of dis-allowance of interest had already attained finality in the original assessment order and thus could not be reagitated in the reassessment proceedings - Held that - If Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment and failure to take steps u/s 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation u/s 143(1) had been issued - Decided against the assessee Further, once, the assessee has categorically taken a stand that there was no business consideration; the assessee cannot be permitted to take plea of commercial expediency only on account of a subsequent judgment of the Supreme Court in case of S.A.Builders Ltd vs. CIT (Appeals)(2006 - TMI - 3364 - SUPREME COURT - Income Tax). Further, Trbunal has relied upon the order passed in respect of the earlier AY which order has been set aside in appeal by this court, therefore, the basis of the order passed by the Tribunal stands knocked down in the present case - Decided against the assessee

Summary

Issues Involved:
1. Deletion of disallowance of interest on interest-free advances given to sister concerns for non-business purposes.
2. Finality of the original assessment order and its impact on reassessment proceedings.

Detailed Analysis:

Issue 1: Deletion of Disallowance of Interest on Interest-Free Advances
The primary issue across all appeals pertains to whether the Income Tax Appellate Tribunal (ITAT) was correct in deleting the disallowance of interest on interest-free advances given to sister concerns for non-business purposes. The Commissioner of Income Tax (Appeals) had initially set aside the Assessing Officer's (AO) order which disallowed the interest amount. However, the ITAT later deleted this disallowance in some cases.

In ITA No. 53 of 2003, the AO had disallowed Rs. 17,62,622/- as interest on interest-free loans advanced to sister concerns, arguing that these funds could have been used to reduce the assessee's credit balance in the bank. The ITAT set aside this disallowance based on two grounds: an earlier Tribunal order for the assessment year 1990-91 and the judgment in Vipin Khanna vs. Commissioner of Income Tax, which stated that reassessment could not include issues unconnected with the reasons for reopening the assessment.

The court, however, found that the ITAT's reliance on the earlier Tribunal order and the Vipin Khanna judgment was misplaced. The court noted that the judgment in Abhishek Industries Limited, which favored the revenue, should be applied. The plea of commercial expediency raised by the assessee was not accepted since it was not initially raised during the assessment stage. Consequently, the court ruled that the disallowance of interest on interest-free loans was justified, and the Tribunal's order deleting the disallowance was not tenable in law.

Issue 2: Finality of the Original Assessment Order and Reassessment Proceedings
The second issue concerns whether the original assessment order's finality precludes reassessment proceedings on the same issues. The assessee argued that there was no concealment during the original assessment, and the AO could not initiate reassessment merely on a change of opinion.

The court referred to amendments in Section 147 of the Income Tax Act, effective from April 1, 1989, and the insertion of Explanation 3 by the Finance Act No. 2 of 2009, which clarified that reassessment could include any issue that has escaped assessment, regardless of whether it was included in the reasons for reopening. The Supreme Court's judgments in Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd and Commissioner of Income Tax vs. Kelvinator of India Ltd were cited to support this interpretation.

The court concluded that the ITAT's finding that the original assessment order had attained finality and thus could not be reopened was not sustainable. The reassessment proceedings were valid, and the AO had the jurisdiction to reassess the income on any issue that had escaped assessment.

Conclusion:
The court allowed the revenue's appeals, ruling that:
1. The disallowance of interest on interest-free advances given to sister concerns for non-business purposes was justified.
2. The original assessment order's finality did not preclude reassessment proceedings on the same issues, given the amendments to Section 147 and the Supreme Court's interpretations.

The questions of law were answered in favor of the revenue and against the assessee, resulting in the appeals being allowed.