2017 (12) TMI 1120 - AT - Income Tax

Disallowance of Finance Cost incurred during the year under the consideration u/s 36(1)(iii) - acceptance of the claim in earlier years in proceedings u/s 143(1) - Held that - Merely because the revenue has accepted the said claim of interest as business expenses in the earlier years in the summary proceedings u/s. 143(1) does not create res-judicata as revenue has never gone into the details of the said claim as the return of income was accepted in summary manner u/s 143(1) without scrutiny being conducted u/s. 143(3) r.w.s. 143(2). Thus, mere acceptance of the claim in earlier years in proceedings u/s 143(1) does not debar Revenue from examining the claim on merits in subsequent years and does not create a bar of res-judicata . We are fully aware that consistency is to be maintained but the claim of interest expenses was never examined by the revenue in any of the earlier years as scrutiny proceedings were not initiated in any of the earlier years since said loans were raised by the assessee. Thus only bald statements are made by the assessee for claiming that the interest has been paid for the business purposes while no such evidences are brought on record by the assessee to prove its contention that the said loans were used for business purposes by the assessee and mandate of Section 36(1)(iii) was complied with. The payments and the return thereof of the said advances are from the sister concerns and in the absence thereof of the evidences on record to substantiate that these were business expenses, we are afraid claim of the assessee to allow interest expenses on bank overdraft as business expenses cannot be accepted and hence the appeal of the assessee is dismissed. - Decided against assessee.

Summary

Issues Involved:

1. Disallowance of Finance Cost under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Imposition/Re-computation of Interest under Section 234B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Finance Cost under Section 36(1)(iii):

The assessee, engaged in the business of an advertising agency, appealed against the disallowance of finance cost amounting to ?1,37,08,749/- by the AO, which was upheld by the CIT(A). The finance cost was incurred as interest on a bank overdraft used for an advance payment towards the purchase of land. The AO disallowed the expense, stating there was no business activity during the assessment year.

The assessee argued that the finance cost should be allowed as a business expense under Section 36(1)(iii) since the overdraft was used for a business purpose, i.e., making an advance payment for purchasing business assets. The assessee cited several case laws, including Madhav Prasad Jatia v. CIT, S A Builders Limited v. CIT, and Punjab Stainless Steel Industries v. CIT, to support their claim.

The CIT(A) upheld the AO's decision, noting that the assessee failed to demonstrate any business activity during the relevant period. The assessee did not have an office, employees, or any business revenue except for dividend income, indicating a lack of business operations. The CIT(A) also pointed out that the assessee's main object was advertising, not land dealings, and the transaction seemed to be a diversion of interest-bearing funds to sister concerns for extra-commercial considerations.

Upon appeal to the tribunal, the assessee presented the Memorandum of Association (MOA) to justify that real estate business was part of its incidental or ancillary objects. The assessee also claimed that records were destroyed in a fire, making it impossible to produce the MOU and its cancellation. However, the tribunal noted that no such plea was raised before the lower authorities and that the assessee failed to provide cogent evidence to substantiate the business purpose of the overdraft.

The tribunal observed that the assessee had no revenue from advertising or real estate business during the relevant period and only earned dividend income. The tribunal also noted that the transactions involved sister concerns, raising doubts about their genuineness. The tribunal concluded that the assessee failed to discharge the onus of proving that the borrowed funds were utilized for business purposes and upheld the disallowance of the finance cost.

2. Imposition/Re-computation of Interest under Section 234B:

The assessee also appealed against the imposition/re-computation of interest under Section 234B. However, the tribunal's detailed analysis focused primarily on the disallowance of finance cost under Section 36(1)(iii). The tribunal upheld the AO's and CIT(A)'s decisions, implicitly rejecting the appeal regarding Section 234B without further detailed discussion.

Conclusion:

The tribunal dismissed the appeal, upholding the disallowance of finance cost under Section 36(1)(iii) and implicitly affirming the imposition/re-computation of interest under Section 234B. The assessee failed to provide sufficient evidence to prove that the finance cost was incurred for business purposes, and the transactions with sister concerns lacked credibility.