2012 (8) TMI 392 - AT - Income Tax

Validity of reassessment proceedings framed u/s 143(3) r.w.s. 147 - assessment reopened to dis-allow interest expenses holding that said interest paid on the borrowed funds, utilized for the purpose of obtaining capital assets must be capitalized - CIT(A) deleted dis-allowance on ground that requirement is that of utilization of fund for the purpose of business - Held that - Entire reassessment is bad in law being based on mere change of opinion as there was no failure on part of assessee in disclosing all material particulars. The AO has not come in position of any new material so as to form an opinion that any income has escaped assessment attributable to failure on part of the assessee in disclosing material facts. As regards merits, it is found that borrowed amount is for the purpose of business within the meaning of sec. 36(i)(iii). There is no dispute that borrowed funds were used in business. Hence, we see no reason to interfere - Decided in favor of assessee.

Summary

Issues:
1. Validity of reopening assessment beyond four years.
2. Merits of disallowance of interest expenses.

Issue 1: Validity of reopening assessment beyond four years

The case involved a reassessment by the Assessing Officer (AO) beyond the four-year limit under section 147 of the Income Tax Act. The AO reopened the assessment based on the grounds that certain interest expenses were not capitalized as required by law. However, the Appellate Tribunal found that there was no failure on the part of the assessee to disclose all material facts necessary for the assessment. The Tribunal noted that the AO did not bring any new material to justify the reopening and merely reviewed existing records. The Tribunal emphasized that no assessment can be reopened based solely on a change of opinion, and for reopening beyond four years, there must be clear evidence of income escaping assessment due to the assessee's failure to disclose material facts. Citing relevant case law, the Tribunal held that the reassessment was not in accordance with the law and, therefore, quashed the reassessment.

Issue 2: Merits of disallowance of interest expenses

Regarding the disallowance of interest expenses, the AO had disallowed a portion of the interest amount claimed by the assessee as revenue expenditure, alleging that it was incurred for acquiring capital assets. However, the Appellate Tribunal disagreed with the AO's reasoning. The Tribunal found that the borrowed funds were used for the purpose of the business, as required by section 36(1)(iii) of the Act. The Tribunal held that once funds are borrowed and utilized for business purposes, the claim of interest deduction should be allowed, regardless of whether the funds were used for acquiring capital assets or revenue. The Tribunal relied on the Supreme Court decision in the case of Dy. CIT vs. Core Health Care Ltd. to support its decision. Consequently, the Tribunal allowed the assessee's appeal on the merits and deleted the disallowance of interest expenses.

In conclusion, the Appellate Tribunal ruled in favor of the assessee on both issues. The reassessment was deemed invalid due to the lack of failure on the part of the assessee to disclose material facts, and the disallowance of interest expenses was overturned based on the proper utilization of borrowed funds for business purposes as per the relevant provisions of the Income Tax Act and supported by relevant case law.