2017 (4) TMI 528 - HC - Income Tax

Reopening of assessment - denial of deduction u/s 36(1)(iii) - Held that - Where the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment, he may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings. The argument that the Assessing Officer was not competent to pass an order of reassessment in respect of any other income which may have escaped assessment other than on which reasoned to believe have been recorded is not tenable and is turned down. - Decided against assessee. Assessee appellant has taken loan for business purposes from various sources including U.P.F.C. and Bank of Baroda and had paid interest thereon amounting to ₹ 5,93,644/-. It claimed deduction of the said amount under Section 36(1)(iii) of the Act but the authorities denied the said deduction on the ground that the assessee has given interest free advances to its partners which means that it had surplus money which could have been utilised to clear off the loan so as to reduce the interest liability. In order to get the benefit under Section 36(1)(iii) of the Act it is settled in law that only three factors are relevant namely that the assessee had borrowed money for business purpose; it has utilised it for the business; and that it had paid interest on it. In the case at hand there is no dispute that the borrowing was for business purposes, it was utilised in the business and the assessee had paid interest on it therefore, the interest so paid was deductable under Section 36(1)(iii) of the Act. Accordingly, denial of deduction on any other ground is not tenable in law. Therefore, interest amount as paid by the assessee is liable to be deducted under Section 36(1)(iii) of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Reassessment based on additional income not included in the original reason for initiation of proceedings.
2. Disallowance of interest deduction under Section 36(1)(iii) of the Income Tax Act.

Analysis:

*Reassessment based on additional income:*
The appellant challenged the reassessment by the Income Tax Officer, arguing that the reasons for initiating the proceedings did not include the claim regarding the purchase and sale of cotton. The appellant contended that the assessing authority lacked the competence to reassess based on this additional income. However, Section 147 of the Income Tax Act grants the Assessing Officer the authority to reassess any income chargeable to tax that has escaped assessment, even if it was not part of the original reasons for reassessment. The provision allows the assessing authority to consider any other income chargeable to tax that comes to notice during the reassessment proceedings, irrespective of the initial reasons recorded. The Division Bench decision cited by the appellant did not support their argument, as it did not address the specific language of Section 147. Additionally, the Supreme Court precedent emphasized that once the assessment is reopened, the entire proceedings start afresh, allowing the assessing officer to consider additional grounds that may have come to light during the proceedings. Therefore, the argument that reassessment cannot be done on additional income beyond the initial reasons recorded was dismissed.

*Disallowance of interest deduction:*
The appellant had taken a loan for business purposes and paid interest on it, seeking a deduction under Section 36(1)(iii) of the Act. However, the authorities denied the deduction, claiming that the appellant had given interest-free advances to partners, indicating surplus funds that could have been used to clear the loan. To qualify for the deduction under Section 36(1)(iii), the borrower must have borrowed for business purposes, utilized the funds in the business, and paid interest on the loan. In this case, all these conditions were met, as the borrowing was for business, utilized in the business, and interest was paid on it. Therefore, the denial of the deduction on other grounds was deemed legally untenable. Consequently, the interest amount paid by the appellant was held to be deductible under Section 36(1)(iii) of the Act. The judgment favored the appellant on this issue, ruling in their favor against the revenue.

In conclusion, the first issue was decided against the appellant, while the second issue was resolved in favor of the appellant, resulting in a partial allowance of the appeal.