2016 (2) TMI 567 - AT - Income Tax

Assessment u/s 153A - nexus between the interest expense and interest income - disallowance u/s 14A - Held that - As could be seen AO has duly examined the claim of the assessee with respect to the deduction of interest expenses on loan borrowed from the interest income earned from the loans advanced and has disallowed ₹ 38,19,800/- and ₹ 90,000 out of the interest expenditure claim of ₹ 96,24,943/- . Apart from the above, the assessee has also voluntarily offered disallowance of interest of ₹ 9,92,861/- u/s 14A of the Act. Thus, the assessee claimed deduction of balance amount of interest expenditure of ₹ 47,22,282/- towards loan borrowed against interest income of ₹ 99,01,472/- from loan advances , which claim was duly examined and allowed by the AO while framing the assessment orders dated 31.12.2009 u/s 153A read with Section 143(3) of the Act pursuant to first search on 19.07.2007 and no new incriminating material was found or unearthed during search u/s 132(1) of the Act, having being brought on record before the Tribunal and the assessment framed vide orders dated 31.12.2009 being concluded assessment as framed prior to date of second search on 29/03/2011, we are of considered view that the concluded assessments in the instant appeal cannot be disturbed on the same set of material facts as prevailing when the assessment was framed u/s 153A read with Section 143(3) of the Act on 31.12.2009 in pursuant to first search on 19.07.2007 and hence, we dismiss the appeal filed by the Revenue. - Decided against revenue

Issues Involved:
1. Nexus between interest expense and interest income.
2. Validity of disallowance of interest expenses claimed by the assessee.
3. Applicability of the principle of consistency in tax assessments.
4. Impact of incriminating material found during search operations on completed assessments.

Issue-wise Detailed Analysis:

1. Nexus Between Interest Expense and Interest Income:
The primary issue was whether the assessee could establish a nexus between the interest expense and interest income based on bank statements. The Assessing Officer (AO) disallowed the interest expense claim of Rs. 96,24,943/- on the grounds that the assessee failed to establish a direct nexus between the funds borrowed on interest and the funds advanced to earn interest. The AO argued that only if the borrowed funds were directly used for advancing loans could the interest expense be deducted against the interest income.

2. Validity of Disallowance of Interest Expenses:
The AO disallowed the interest expense claim citing the lack of direct correlation between the borrowed funds and the loans advanced. The assessee contended that similar claims had been allowed in previous assessments, and no new incriminating material was found during the second search to justify the disallowance. The assessee voluntarily disallowed Rs. 39,09,800/- from the total interest paid, considering the difference in average loans taken and given. The CIT(A) observed that the funds were managed through the same bank account, and the flow of funds was not disputed, thus allowing the interest expense claim.

3. Applicability of the Principle of Consistency in Tax Assessments:
The CIT(A) emphasized the principle of consistency, noting that the same issue had been examined and accepted in earlier assessments without any material change in facts. The CIT(A) referenced several case laws to support the principle that consistency should be maintained in tax assessments unless new material facts arise. The CIT(A) held that since the earlier assessment allowed the interest expense claim, and no new incriminating material was found in the second search, the disallowance was unjustified.

4. Impact of Incriminating Material Found During Search Operations on Completed Assessments:
The Tribunal noted that the assessments for the assessment year 2007-08 were concluded before the second search, and no incriminating material related to the interest expense claim was found during the second search. The Tribunal relied on the Special Bench decision in All Cargo Global Logistics Ltd. and the Bombay High Court ruling in Continental Warehousing Corporation, which held that completed assessments could only be disturbed based on incriminating material found during the search. The Tribunal upheld the CIT(A)'s decision, stating that the AO could not reassess the interest expense claim without new incriminating material.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decision to allow the interest expense claim. The Tribunal emphasized the principle of consistency and the requirement for incriminating material to justify reassessing completed assessments. The decision reinforced that assessments could not be disturbed without new evidence, maintaining the integrity of previously concluded assessments.

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