2012 (7) TMI 103 - AT - Income Tax

Validity of revisionary order passed u/s 263 - order revised on ground that interest bearing funds has been utilized for non-business purposes - assessee, a partnership firm, had shown payment of interest to partners of Rs.72,65,894/- on their current accounts, and had made investment in non business asset viz residential building to the tune of Rs.5,84,60,738/-- Held that - In the present case, though the AO had made certain enquiries, but such glaring feature of the balance sheet was not confronted to the assessee. Such an assessment which has been made without taking into account the position of the outstanding balances as shown in the balance-sheet and the related consequence on the profit disclosed as per the P&L account can give rise to an automatic suspicion that an erroneous order has been passed causing prejudice to the Revenue. Revisionary powers u/s.263 has rightly been invoked - Decided against assessee. Dis-allowance of proportionate interest expenditure on the ground of interest bearing funds have been utilized for non-business purpose - Held that - The only explanation of the assessee was that the building used for the purposes of the business as well as for the purpose of providing stay for partners. But simultaneously, this fact has also been brought on record that the said building was not treated as a business asset because the assessee has not claimed depreciation on the same. Thus a nexus has been established the non-business assets have factually been funded from the current accounts of the partners. Further, assessee has not discharged its primary onus to prove that entire interest-bearing funds including partners capital account were entirely used for the purposes of the business. Dis-allowance made upheld - Decided against assessee.

Issues Involved:
1. Objection regarding short payment of Tribunal fees.
2. Delay in filing the appeal.
3. Jurisdiction invoked under Section 263 by the Commissioner of Income Tax (CIT).
4. Disallowance of interest expenditure on the grounds of non-business use of borrowed funds.

Issue-wise Detailed Analysis:

1. Objection Regarding Short Payment of Tribunal Fees:
The Tribunal addressed the Registry's objection that the appellant paid only Rs. 1,000/- instead of Rs. 10,000/- for filing an appeal against the order passed under Section 263 by the CIT. The Tribunal referred to the decision in JET Electronics vs. ACIT 116 TTJ 225 (Ahd.), which held that appeals filed against orders under Section 263 are governed by clause (d) of Section 253(6) of the IT Act. Consequently, the objection was dismissed, and the appeal was admitted for adjudication.

2. Delay in Filing the Appeal:
The Tribunal acknowledged the delay in filing the appeal but emphasized the importance of substantial justice over technical considerations. Citing precedents like Collector, Land Acquisition vs. Mst. Katiji & Ors. and State of Haryana vs. Chandra Mani, the Tribunal condoned the delay, emphasizing a pragmatic approach and the cause of substantial justice.

3. Jurisdiction Invoked Under Section 263 by the Commissioner of Income Tax (CIT):
The assessee challenged the jurisdiction invoked under Section 263 by the CIT, arguing that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The CIT had observed discrepancies in the interest deduction claimed by the assessee, specifically pointing out that interest was paid to partners on funds utilized for non-business purposes. The CIT directed the AO to reassess the interest earned on bank deposits and the interest paid to partners. The Tribunal upheld the CIT's invocation of Section 263, noting that the AO failed to confront the assessee with glaring discrepancies in the balance sheet. The Tribunal emphasized that the CIT's power of revision is justified when the AO fails to make necessary inquiries, leading to an erroneous order prejudicial to the Revenue.

4. Disallowance of Interest Expenditure on the Grounds of Non-Business Use of Borrowed Funds:
The AO disallowed Rs. 21,89,507/- of interest expenditure, observing that the interest-bearing funds were utilized for non-business purposes, such as investments in residential properties. The CIT(A) upheld this disallowance, noting that the assessee did not claim depreciation on the residential properties, indicating non-business use. The Tribunal, after considering the submissions and precedents cited by the assessee, upheld the disallowance. The Tribunal found that the assessee failed to prove that the interest-bearing funds were entirely used for business purposes and confirmed the AO's finding of a nexus between the partners' current accounts and non-business investments.

Conclusion:
The Tribunal dismissed both appeals of the assessee, upholding the CIT's invocation of Section 263 and the disallowance of interest expenditure for non-business use of borrowed funds. The Tribunal emphasized the importance of substantial justice, the necessity of proper inquiries by the AO, and the justification for the CIT's revisional powers under Section 263.

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