2016 (5) TMI 465 - AT - Income Tax

Reopening of assessment - diversion of interest bearing to non-interest bearing funds - Held that - As regards the reasons for which reassessment proceedings have been initiated, assessee could not placed on record any communication referring to discussion about the diversion of interest bearing to non-interest bearing funds which means that there was no discussion at all on this point and, therefore, there cannot be any change of opinion because there was no opinion framed on this aspect during assessing proceedings u/s 143(3) of the Act and the period of four years given in the Act specifically pertains to those aspects which may have escaped assessment during the proceedings u/s 143(3) of the Act and four years being sufficient period within which department can go ahead with re-assessment proceedings for any such escaped income arising out of the assessment records held in the possession of the department which have been gathered during the proceedings u/s 143(3) of the Act. Thus Assessing Officer has rightly initiated proceedings u/s 147 of the Act before the end of four years from the relevant assessment year. - Decided against assessee Disallowance of interest - diversion of interest bearing funds to non-interest bearing loans and advances - Held that - On perusal of list of loans and advances as given as on the close of the financial year 2007-08 we observe that most of the loans and advances are in the nature of trade and commerce which the assessee might have given during the course of normal business. However, one cannot ignore the possibility that list of loans and advances may also include sister concern of the assessee from whom interest might not have been charged. However, in the given circumstances wherein we have examined that assessee was having sufficient interest free funds in the form of partners capital at the year end of ₹ 36,65,742/- as well as interest free secured loans of ₹ 36,85,604/-, disallowance of interest at ₹ 5,56,268/- on the loans and advances given of ₹ 41,02,373/- is uncalled for as the assessee had sufficient interest free funds available to apply to the loans and advances given. We are of the view that no addition for disallowance of interest expenses is to be sustained. We delete the same. - Decided in favour of assessee

Summary

Issues Involved:
1. Jurisdiction of the AO under Section 147 for reopening of the assessment.
2. Disallowance of interest on Kotak Term Loans.
3. Distinction between parts of borrowed funds on which interest was claimed and not claimed.
4. Consideration of facts stated by the assessee.
5. Commercial expediency of the loans advanced.

Analysis:

1. Jurisdiction of the AO under Section 147 for reopening of the assessment:
The assessee argued that the Assessing Officer (AO) lacked jurisdiction to reopen the assessment under Section 147 of the Income Tax Act, 1961, as the reasons were based on a change of opinion and were vague. The AO had issued a notice under Section 148 on 28.03.2013, within the four-year limit from the end of the relevant assessment year (2008-09). The Tribunal found that the AO had not discussed the issue of diversion of interest-bearing funds to non-interest-bearing loans during the original assessment under Section 143(3). Therefore, there was no change of opinion, and the AO was justified in reopening the assessment within the prescribed time limit.

2. Disallowance of interest on Kotak Term Loans:
The AO disallowed interest expenses of ?5,56,268, arguing that the assessee had diverted interest-bearing funds towards non-interest-bearing loans and advances. The assessee contended that the interest debited in the profit and loss account pertained only to the Kotak Bank term loan, while interest on other secured loans from four banks amounting to ?36,85,604 was not claimed as an expenditure but debited to the partners' capital account. The Tribunal observed that the assessee had sufficient interest-free funds available, which could be deemed to have been applied to the interest-free loans and advances. Therefore, the disallowance of interest expenses was not justified.

3. Distinction between parts of borrowed funds on which interest was claimed and not claimed:
The Tribunal noted that the interest debited to the profit and loss account was only in relation to the Kotak Bank term loan, while interest on other secured loans was debited to the partners' capital account. This indicated that the assessee had interest-free funds available, which could be used for the interest-free loans and advances. Hence, the disallowance of interest expenses was not warranted.

4. Consideration of facts stated by the assessee:
The assessee provided detailed submissions and cash flow statements to support their claim that the interest-bearing funds were not used for non-interest-bearing loans and advances. The Tribunal found that the assessee had sufficient interest-free funds and that the loans and advances were related to business transactions. Therefore, the addition for disallowance of interest expenses was unjustified.

5. Commercial expediency of the loans advanced:
The assessee argued that the loans and advances were given out of commercial expediency and should be considered as advanced for business purposes. The Tribunal observed that the assessee had sufficient interest-free funds and that the loans and advances were related to business transactions. Therefore, the disallowance of interest expenses was not justified, and the addition was deleted.

Conclusion:
The Tribunal concluded that the AO had the jurisdiction to reopen the assessment under Section 147 within the prescribed time limit. However, the disallowance of interest expenses was not justified, as the assessee had sufficient interest-free funds available. Therefore, the addition for disallowance of interest expenses was deleted, and the appeal was partly allowed.