2022 (1) TMI 283 - AT - Income Tax

Reopening of assessment u/s 147 - Disallowance of Interest on Borrowed Fund - As submitted that the assessee had taken loan on which interest has been claimed as business expenditure, but the borrowed funds were advanced to others on interest free, which shows that the assessee had not utilized the borrowed funds for the purpose of its business - HELD THAT - During the impugned AY, the assessee has also given loans and advances to other companies which is outstanding as on 31/03/2008 including advances given to M/s SCSL. During the impugned AY, the assessee has received interest - It clearly shows that interest bearing funds had been given to the others/group companies/M/s SCSL on interest free. Therefore, the AO has rightly disallowed interest paid on borrowed funds to the above noted companies u/s 36(1)(iii). Section 36(1)(iii) is clear that if the interest paid by the assessee is to be allowed only in respect of capital borrowed for the purpose of business or profession only, whereas, in the case on hand, the assessee has utilized the above interest bearing loans for other purposes by giving loans on interest free. The facts in the cases relied on by the assessee are that notional interest which was not charged by the assessee, but, the issue in the case under consideration is different that the AO has disallowed interest paid on borrowed funds but not on the notional interest income, which was to be received by the assessee. Assessee company is one of the group companies of M/s SCSL and the assessee had advanced to the tune of ₹ 80.78 crores to M/s SCSL. We find that M/s SCSL was involved in a big financial scandal by way of inflating the figures in the balance sheet due to which M/s SCSL involved in various court cases, which are pending. Genuineness of the amounts advanced to such group company by the assessee is doubtful. Therefore, the arguments advanced by the ld. AR of the assessee are not tenable or acceptable and, therefore, we set aside the order of the CIT(A) and restore that of the AO. Accordingly, the addition made by the AO is restricted to ₹ 11,03,57,441/- towards interest only as against the addition of ₹ 11,11,15,463/- made by the AO u/s 36(1)(iii) of the Act and other addition made by the AO towards bank charges and Demat charges are not covered u/s 36(1)(iii). Thus, the ground raised by the revenue are partly allowed.

Summary

Issues Involved:
1. Validity of reopening the assessment under section 147/148 of the Income Tax Act.
2. Disallowance of interest expenditure under section 36(1)(iii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147/148:
The assessee, a company involved in agricultural activities, had its assessment reopened by the Assessing Officer (AO) under section 147/148 of the Income Tax Act after recording reasons and issuing a notice on 31/05/2012. The reasons for reopening included the assessee availing secured and unsecured loans totaling ?150.19 Crore and advancing ?80.78 Crore to SCSL, charging interest at 18%, and treating it as business income. However, the AO noted that interest was not charged on the balance advances of ?104.90 Crore.

The CIT(A) observed that the addition made by the AO was not on the issue for which the reasons were recorded for reopening. The CIT(A) relied on the judicial decision of the Mumbai High Court in the case of CIT vs Jet Airways (P) Ltd (331 ITR 236), which supports the principle that addition on account of any other matter cannot be made without making an addition on the issue of reopening. The CIT(A) also referenced the decision of the ITAT Hyderabad in the case of Swarnadhara IJM, which held that a reassessment order is not valid if income other than the income which was the basis for reopening was considered for assessment.

2. Disallowance of Interest Expenditure under Section 36(1)(iii):
The AO disallowed ?11,11,15,463/- as interest expenditure under section 36(1)(iii) on the grounds that the borrowed funds were not utilized for business purposes. The AO noted that the assessee had taken term loans from SICOM Ltd and GE Capital Services India Ltd and received an interest-free unsecured loan from Vamadeva Greenlands Pvt Ltd. The term loans were disbursed as unsecured loans to others, and the assessee did not conduct any business activity during the year, nor did it offer any income from business and profession.

The CIT(A) deleted the addition by observing that the amount of ?80.78 Crore receivable from SCSL was an opening balance and no fresh loans were given to SCSL during the year. The CIT(A) also referenced the decision of the ITAT in the case of M/s. Aahar Greenfields Farms Pvt Ltd, which held that notional interest cannot be brought to tax in the absence of a contract and uncertainty. The CIT(A) concluded that the interest expenditure was not disallowable under section 36(1)(iii) as the borrowed funds were not utilized for non-business purposes.

However, the ITAT disagreed with the CIT(A) and noted that the assessee had taken interest-bearing loans and given them to others on an interest-free basis, which is not permissible under section 36(1)(iii). The ITAT emphasized that the AO had disallowed the interest paid on borrowed funds, not on notional interest income. The ITAT also highlighted the dubious nature of the advances to SCSL due to its involvement in a financial scandal.

The ITAT set aside the order of the CIT(A) and restored the AO's disallowance of interest expenditure, restricting the addition to ?11,03,57,441/- towards interest only, excluding bank charges and Demat charges which are not covered under section 36(1)(iii).

Conclusion:
The ITAT partly allowed the revenue's appeal, upholding the disallowance of interest expenditure under section 36(1)(iii) while restricting the addition to ?11,03,57,441/-. The reopening of the assessment was deemed valid based on the reasons recorded by the AO. The judgment emphasizes the importance of the proper utilization of borrowed funds for business purposes under section 36(1)(iii).