2016 (12) TMI 1347 - AT - Income Tax

Reopening of assessment - as per AO assessee had borrowed funds from HDFC towards financing the construction of building and residential quarters and capitalized the interest portion before the assets are put to use - Held that - So far as addition on account of payment of commission in respect of transactions entered under Oil for Food Programme of the United Nations are concerned the same is covered in favour of assessee as discussed in the year 2003-04. Following the same reasoning we delete the addition made on account of commission payment. The issue with regard to applicability of proviso inserted in Section 36(1)(iii) by the Finance Act 2003 is concerned the same is effective from assessment year 2004-05 as per verdict of Hon ble Supreme Cout in case of Core Health and Care Ltd. 2008 (2) TMI 8 - SUPREME COURT OF INDIA So far as disallowing the claim of interest on funds borrowed for financing construction of building and residential quarters is concerned we find that the proviso inserted in Section 36(1)(iii) by the Finance Act 2003 was effective from assessment year 2004-05. However the assessment year under consideration is 2002-03 therefore no disallowance can be made for such interest payment. As an abundant caution we direct the AO to verify if the interest payment has been added in the cost of construction no depreciation is to be allowed thereon. We direct accordingly. In the result appeal of the assessee for the assessment year 2003-04 is allowed whereas appeal of the assessee for the assessment year 2002-03 is allowed in part in terms indicated hereinabove.

Issues Involved:

1. Validity of reassessment notice and proceedings under sections 147 and 148 of the IT Act.
2. Disallowance of commission paid for export of goods under the Oil for Food Programme.
3. Jurisdiction of the Assessing Officer (AO) in making additions/disallowances while computing "book profit" for Minimum Alternate Tax (MAT).
4. Disallowance of interest paid on borrowed funds utilized for construction of buildings and residential quarters.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Notice and Proceedings:

The assessee contended that the AO erred in issuing notice under section 148 and assuming jurisdiction under section 147 of the Act merely due to a change of opinion. The learned Commissioner (Appeals) upheld the validity of the reassessment notice and proceedings. The Tribunal noted that the AO recorded reasons for reopening based on a CBDT memorandum indicating that the assessee was involved in paying kickbacks to the Iraqi Government under the Oil for Food Programme. However, the Tribunal found that the AO had mechanically recorded the reasons without verifying whether the expenses were charged to the profit and loss account, thus annulling the reassessment proceedings.

2. Disallowance of Commission Paid for Export of Goods:

The AO disallowed the commission payments made under the Oil for Food Programme, considering them illicit payments based on the Volcker Committee Report. The Tribunal, referencing the case of Metro Exporters Pvt. Ltd. and other similar cases, found that the commission payments were made through banking channels with RBI approval and pursuant to agreements approved by the Government of India and the UN. The Tribunal concluded that there was no evidence to prove that the payments were illegal or non-genuine, thus deleting the disallowance of commission payments.

3. Jurisdiction of AO in Making Additions/Disallowances for MAT:

The AO made additions/disallowances of certain items while computing "book profit" for MAT, which were unconnected with the specific issues for which reassessment was initiated. The Tribunal noted that the AO exceeded his jurisdiction by making such additions/disallowances, as these were not the subject matter of the reassessment proceedings. The Tribunal annulled these additions/disallowances.

4. Disallowance of Interest Paid on Borrowed Funds:

The AO disallowed the interest paid on borrowed funds utilized for the construction of buildings and residential quarters, contending that the interest should be capitalized. The Tribunal observed that the proviso to Section 36(1)(iii) inserted by the Finance Act 2003, which mandates capitalization of such interest, was effective from the assessment year 2004-05. Since the assessment year in question was 2002-03, the Tribunal held that no disallowance could be made for such interest payments. However, the Tribunal directed the AO to verify if the interest payment had been added to the cost of construction and, if so, to ensure no depreciation is allowed thereon.

Conclusion:

The Tribunal allowed the appeal for the assessment year 2003-04 and partly allowed the appeal for the assessment year 2002-03, annulling the reassessment proceedings and deleting the disallowances made on account of commission payments and interest on borrowed funds. The Tribunal also directed the AO to verify the capitalization of interest payments and ensure no depreciation is allowed if the interest is capitalized. The order was pronounced in the open court on 21/12/2016.

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