2015 (7) TMI 447 - AT - Income Tax

Validity of reassessment proceedings - Disallowance u/s 36(1)(iii) of Income tax Act, 1961 - Charges of interest bearing funds advanced for non-business purposes - Reopening is not permissible on the basis of borrowed satisfaction rather there should be live link with the formation of belief and conclusion for escapement of income - Held that - Validity of reassessment proceedings - We find that there was no new tangible material with the Assessing Officer to form a belief that income chargeable to tax had escaped assessment, thus, in view of the decision from Hon ble Rajasthan High Court 2008 (5) TMI 276 - RAJASTHAN HIGH COURT reopening is not permissible on the basis of borrowed satisfaction rather there should be live link with the formation of belief and conclusion for escapement of income. The ratio laid down by Hon ble jurisdictional High Court in Aventis Pharma Ltd. vs ACIT 2010 (3) TMI 317 - BOMBAY HIGH COURT supports our view. Even after 01/04/1989, concept of change of opinion was not removed. The totality of facts clearly indicates that no new material came to the possession of the Assessing Officer leading to conclude that the income has escaped assessment, thus, issuance of notice for reopening and reassessment order passed u/s 143(3) r.w.s.147 of the Act was rightly held to be unsustainable in law. The existence of tangible material is necessary to ensure against an arbitrary exercise of power, thus, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income tax (Appeals). Disallowance u/s 36(1)(iii) of Income tax Act, 1961 - Considering the fact that the assessee had its own funds more than the loans given to its subsidiaries and also in the absence of any nexus establishing that the interest bearing borrowed funds were given us interest free to its subsidiaries, we hold that the disallowance of interest is not justified. Therefore, interest is allowable under section 36(1)(iii) of the Act. - Decided against the revenue.

Summary

Issues Involved:
1. Validity of reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961.
2. Deletion of disallowance under Section 36(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of Reassessment Proceedings Initiated Under Section 148:

The Revenue challenged the order of the First Appellate Authority, which held the reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961, as invalid. The primary contention was whether the reassessment was based on new tangible material or merely on borrowed satisfaction from another Assessing Officer (AO).

The original assessment was completed under Section 143(3) with the total income determined at Rs. 191,99,06,040/-. The reassessment was initiated based on information from ITO-25(1)(4), indicating that the assessee made substantial payments to M/s PRS Developers without proper documentation or business justification. The AO doubted the genuineness of the transactions, noting that no land was procured, no progress details were furnished, no interest was charged, and no recovery action was taken by the assessee.

The Tribunal observed that all primary facts were available during the original assessment, and no new material was introduced later. The reassessment was based on findings from another AO, constituting borrowed satisfaction. Citing the Supreme Court's decision in Kelvinator of India Ltd. and Green World Corporation, the Tribunal emphasized that reassessment based on borrowed satisfaction without new tangible material is invalid. The Tribunal affirmed the First Appellate Authority's decision, concluding that the reassessment proceedings under Section 148 were unsustainable in law.

2. Deletion of Disallowance Under Section 36(1)(iii):

The Revenue also contested the deletion of the disallowance of Rs. 34,01,095/- made under Section 36(1)(iii) of the Income Tax Act, 1961. The AO had disallowed the interest on borrowed funds, asserting that the funds were diverted for non-business purposes.

The Tribunal examined the facts and found that the assessee had advanced Rs. 43.50 crores to Shri Nilesh Thakur for land aggregation in Panvel, Alibaug, Pen, and Raigad areas, as per a letter of appointment dated 16/07/2007. The advances were reflected in the assessee's balance sheet under 'Advances for land.' The Tribunal noted that the assessee had sufficient own funds, far exceeding the advances made, and relied on the Supreme Court's decision in Munjal Sales Corporation and the Bombay High Court's decision in Reliance Utilities and Power Ltd., which held that if own funds are sufficient, it is presumed that advances are made from interest-free funds.

The Tribunal concluded that the advances were for business purposes, and the disallowance of interest was unwarranted. The Tribunal affirmed the First Appellate Authority's decision to delete the disallowance under Section 36(1)(iii).

Conclusion:

The Tribunal dismissed the Revenue's appeals, upholding the First Appellate Authority's decisions on both the validity of reassessment proceedings and the deletion of disallowance under Section 36(1)(iii). The reassessment was deemed invalid due to the absence of new tangible material, and the interest disallowance was deleted as the advances were made for business purposes from sufficient own funds.