2015 (8) TMI 365 - AT - Income Tax

Initiation of re-assessment proceedings - change of opinion - report of audit party - Held that - Close look at the audit objection divulges that the audit party simply suggested that the interest of ₹ 2.54 crore was not actually paid, but, only transferred to a subsidiary company and the same should have been disallowed and this omission on the part of the AO resulted in over assessment of loss of ₹ 2.45 crore. This shows that the AO was simply informed about the fact which had escaped his attention during the course of assessment proceedings to the effect that a sum of ₹ 2.45 crore was not allowable u/s 43B of the Act which is nothing, but, a communication of law to the AO. We are not confronted with a situation in which the AO, after due consideration of the matter in the original assessment proceedings interpreted section 43B as allowing deduction for a sum of ₹ 2.45 crore in respect of interest not paid to the financial institutions, but, transferred to the assessee s wholly owned subsidiary company, but, the audit party interpreted this provision in a different manner from the way in which it was interpreted by the AO and then suggested that the amount ought to have been charged to tax. The instant case is fully covered by the ratio of the judgment in the case of PVS Beedis Pvt. Ltd. ( 1997 (10) TMI 5 - SUPREME Court) read with the exception carved out by the Hon ble Supreme Court in Indian & Eastern Newspapers Society (1979 (8) TMI 1 - SUPREME Court ) drawing a line of distinction between communication of law and interpretation of law. The argument of the ld. AR on this issue, being devoid of any merit, is hereby jettisoned. It is, therefore, held that the audit objection in the instant case constituted an information about the escapement of income to the AO, thereby justifying the initiation of reassessment. - Decided against assessee. Deduction of interest u/s 43B - Transfer of interest liability - AR argued that when the assessee transferred all the assets and liabilities of its paper board unit to M/s RT Paper Board Ltd., and the liabilities also included interest payable to financial institutions at ₹ 2.45 crore, such transfer of interest liability should be considered as discharge of the interest obligation - Held that - Two things are palpable from the prescription of Explanations 3C and 3D. First is that the interest payable to banks and other financial institutions can be allowed as deduction only if such interest has been actually paid and second is that where such interest has been converted into loan or borrowing/advance, (it) shall not be deemed to have been actually paid. In the light of the main provisions of section 43B read with Explanations 3C and 3D, it is crystal clear that deduction of interest u/s 43B cannot be allowed in the present case because such interest has not been actually paid by the assessee to the banks/financial institutions. - Decided against assessee.

Summary

Issues Involved:
1. Initiation of reassessment proceedings.
2. Merits of sustenance of addition.

Issue-wise Detailed Analysis:

1. Initiation of Reassessment Proceedings:
The first issue pertains to the initiation of reassessment proceedings. The assessee challenged this on three counts: Change of opinion, reasons not supplied by the AO, and audit objection cannot lead to reassessment.

Change of Opinion:
The assessee argued that the AO's initiation of reassessment proceedings amounted to a change of opinion since the AO had already considered the deductibility of interest during the original assessment. However, the tribunal noted that there was no discussion in the original assessment order regarding the deductibility of the Rs. 2.45 crore interest transferred to a subsidiary. The tribunal emphasized that for a reassessment to be considered a change of opinion, there must be evidence that the AO had formed an opinion on the issue during the original assessment. Since no such opinion was formed, the tribunal rejected the assessee's contention.

Reasons Not Supplied by the AO:
The assessee contended that the AO did not supply the reasons for initiating reassessment proceedings, citing the Supreme Court's ruling in GKN Driveshafts (India) Ltd. The tribunal found that the assessee had been supplied with the reasons, as evidenced by the written submissions and the scanned copy of the reasons presented before the CIT(A). The tribunal concluded that the assessee's claim of not being supplied with the reasons was unfounded.

Audit Objection Cannot Lead to Reassessment:
The assessee argued that the reassessment was based solely on an audit objection, which is not permissible. The tribunal distinguished between cases where the audit party interprets the law and cases where it communicates the existence of law or factual inaccuracies. It cited the Supreme Court's ruling in CIT vs. PVS Beedis Pvt. Ltd., which upheld reassessment based on factual errors pointed out by the audit party. The tribunal found that the audit party in this case had communicated a factual inaccuracy regarding the unpaid interest, which justified the initiation of reassessment proceedings.

2. Merits of Sustenance of Addition:
The second issue pertains to the merits of the addition sustained by the AO. The assessee argued that the transfer of interest liability to its wholly-owned subsidiary should be considered as an effective discharge of the interest obligation, thereby making it deductible under Section 43B of the Income-tax Act.

The tribunal examined the relevant provisions of Section 43B, which allow deductions for interest payable to financial institutions or banks only in the year in which such interest is "actually paid." The tribunal emphasized that "actual payment" cannot be equated with "constructive payment" or mere transfer of liability. It noted that the transfer of interest liability to a subsidiary does not constitute actual payment to the banks or financial institutions, as the liability remains unpaid.

The tribunal also referred to Explanations 3C and 3D to Section 43B, which clarify that interest converted into a loan or borrowing is not deemed to have been actually paid. Based on these provisions, the tribunal concluded that the interest of Rs. 2.45 crore transferred to the subsidiary was not deductible under Section 43B, as it was not actually paid.

Conclusion:
The tribunal dismissed the appeal, upholding the initiation of reassessment proceedings and the addition sustained by the AO. The order was pronounced in the open court on 06.08.2015.