2018 (1) TMI 281 - AT - Income Tax

Reopening of assessment - Addition on a/c of non-capitalization of Interest - Held that - The assessment order says that the AO has not been able to substantiate any nexus between the funds utilized in the construction of flat and the interest debited to the profit and loss account for treating it as capital in nature. It is not the case of the Assessing Officer that the amount utilized in the construction represented interest bearing borrowed funds of the assessee. Per contra, there is no material on record to disbelieve the contention of the assessee that he had sufficient surplus funds which was utilized in the construction. Unless a nexus between the interest debited and the funds utilized is proved, the stand taken by the department regarding capitalization of interest, in our opinion, cannot be accepted. Therefore, the addition made by the authorities below in this head by way of impugned reassessment proceedings, deserves to be deleted. In respect of exhibition expenses paid to M/s. Mullar & Phipps India Ltd., there is no rebuttal of the contention of the assessee made before us that this point was raised by the Assessing Officer in the original assessment proceedings. The assessee had filed its reply, which stood accepted by the Assessing Officer with due application of mind. In these circumstances, the addition made by the authorities below on this account by reopening the assessment u/s. 147/148, in our considered opinion, is not tenable and stands deleted as also held in several decisions - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening assessment u/s 147/148
2. Addition on account of non-capitalization of interest
3. Addition on account of non-capitalization of expenses incurred on mixer machine
4. Disallowance u/s 40(a)(ia) regarding exhibition expenses

Analysis:

Issue 1: Validity of reopening assessment u/s 147/148
The case involved a reassessment proceeding for the assessment year 2006-07 based on the Assessing Officer's belief that income had escaped assessment. The AO reopened the assessment based on alleged non-disclosure of material facts by the assessee. The CIT(A) upheld the validity of the reopening. However, the Tribunal found that the AO failed to establish a nexus between the interest debited and borrowed funds used for construction, leading to the conclusion that the reopening was unjustified. The Tribunal emphasized that full disclosure was made during the original assessment, and the reassessment was deemed invalid.

Issue 2: Addition on account of non-capitalization of interest
The AO made an addition due to the non-capitalization of interest amounting to ?3,96,000 debited to the profit and loss account. The CIT(A) partially upheld this addition. However, the Tribunal disagreed with the AO's decision, stating that there was no evidence to prove that the construction used borrowed funds. As such, the Tribunal ruled in favor of the assessee and deleted the addition.

Issue 3: Addition on account of non-capitalization of expenses incurred on mixer machine
The AO added ?54,808 for non-capitalization of expenses related to the purchase of a mixer machine. The CIT(A) deleted this addition, and the Tribunal concurred, stating that the AO failed to establish that the expenses were capital in nature. Therefore, the addition was deemed unjustified and was removed.

Issue 4: Disallowance u/s 40(a)(ia) regarding exhibition expenses
The AO disallowed ?3,54,737 for exhibition expenses under section 40(a)(ia) due to non-deduction of TDS. The CIT(A) upheld this disallowance. However, the Tribunal sided with the assessee, noting that the contention was raised during the original assessment and accepted by the AO. As a result, the disallowance was considered untenable, and the addition was deleted.

In conclusion, the Tribunal allowed the assessee's appeal, rejecting the additions made during the reassessment. The Tribunal emphasized the importance of establishing a clear nexus between the alleged discrepancies and the funds utilized, and upheld the principle of full and true disclosure of material facts during assessments.