2015 (7) TMI 82 - AT - Income Tax

Reopening of assessment - Held that - Assessing Officer in the assessment order has not discussed the issue of interest from investment to M/s. S.P. Apparels Limited Ltd. The Assessing Officer while recording the reasons has formed an opinion that excess interest claim was allowed to the assessee and on that reason assessment was re-opened. Further a perusal of the material on record does not indicate that the assessee had drawn the attention of the Assessing Officer to the fact that the reasons mentioned for re-assessment at the time of completion of original assessment. According to the ld. Authorised Representative for assessee it is not necessary for the assessee to point out the above set of facts to the Assessing Officer and that the assessee is entitled to the claim of interest. Merely because the Assessing Officer mentioned in the original assessment order that E2,46,065/- is under the head other expenses to be disallowed, it does not mean the Assessing Officer is examining the interest allowability also. Thus, the Assessing Officer while framing the original assessment u/s.143(3) of the Act does not appear to have formed an opinion with regard to allowability of interest and he has accepted the claim of the assessee, as the assessee wanted to be accepted by the Assessing Officer. The assessee having failed to draw the attention of the Assessing Officer regarding interest payment, it cannot be said that there is no violation of provisions of the Act. Further, when no opinion has been expressed in the assessment order and no details or explanation in relation to the claim of interest has been called for by the Assessing Officer, it is not possible to accept the contention of the assessee that the Assessing Officer has applied his mind to the said aspect of interest payment. In the light of the aforesaid discussion, we are of the view that in the light of the reasons recorded by the Assessing Officer, there was sufficient material for Assessing Officer to form the requisite belief that income has escaped assessment for the assessment year under consideration.- Decided against assessee. Disallowance of interest - Held that - If the amount is advanced from a mixed account or share capital or sale proceeds or profits etc., the same would be termed as diversion of borrowed capital and that the revenue need not require to establish nexus of the funds advanced to the sister concerns with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest. - Decided against assessee.

Summary

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act.
2. Disallowance of interest expenses claimed by the assessee.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:

The assessee challenged the reopening of the assessment, arguing that the original assessment was completed under Section 143(3) and that the reassessment was based on a mere change of opinion without any fresh tangible information. The assessee contended that there was no valid reason to reopen the assessment.

The facts of the case revealed that the assessee, an individual director in a company, filed the original return of income for the assessment year 2006-07. The original assessment was completed with an addition under the head "other expenses." Subsequently, the case was reopened based on the belief that income had escaped assessment due to the assessee's claim of interest expenses, which were not allowable under the law. The Assessing Officer (AO) issued a notice under Section 148, stating that the assessee had claimed excessive expenditure towards interest, which was not related to any business activity or income-generating assets.

The Commissioner of Income Tax (Appeals) upheld the reopening of the assessment, noting that the reassessment was initiated within four years from the end of the relevant assessment year. The Tribunal agreed with this view, stating that the AO had sufficient material to form the belief that income had escaped assessment. The Tribunal referred to the Supreme Court's decision in CIT vs. Kelvinator of India Limited, which clarified that the AO has the power to reopen an assessment if there is "tangible material" indicating income escapement. The Tribunal concluded that the reassessment proceedings were valid and legal, rejecting the assessee's contention of a mere change of opinion.

2. Disallowance of Interest Expenses:

The assessee argued that the interest expenses claimed were allowable as they were incurred for business purposes. The assessee contended that sufficient interest-free funds were available to advance to the sundry debtors, and the interest-bearing funds were not used for this purpose. The assessee relied on the Supreme Court's judgment in S.A. Builders Ltd vs. CIT, which held that interest on borrowed funds used for advancing to a sister concern is allowable if it was done as a measure of commercial expediency.

The Departmental Representative argued that the assessee advanced a significant amount to a closely held company without any interest and made substantial investments in shares without deriving any business advantage. The AO disallowed a proportionate amount of interest expenses, reasoning that the borrowed funds were not used for income-generating activities.

The Tribunal upheld the disallowance, stating that the assessee failed to establish the nexus between the interest-free funds and the non-income-generating investments. The Tribunal emphasized that the onus was on the assessee to prove that the borrowed funds were used for business purposes. The Tribunal referred to several judicial precedents, including the Punjab and Haryana High Court's decision in CIT vs. Abhishek Industries Ltd, which held that interest on borrowed funds diverted for non-business purposes should be disallowed.

The Tribunal concluded that the assessee did not provide sufficient evidence to show that the interest-free funds were used for the non-income-generating investments. Therefore, the disallowance of interest expenses was justified.

Conclusion:

The Tribunal dismissed the assessee's appeal, upholding the reopening of the assessment and the disallowance of interest expenses. The Tribunal found that the reassessment proceedings were valid and that the assessee failed to establish the nexus between the interest-free funds and the non-income-generating investments. The decision emphasized the importance of providing sufficient evidence to support claims of interest expenses for business purposes.