2022 (3) TMI 618 - AT - Income Tax

Reopening of assessment u/s 147 - information received from audit party - Eligibility of deduction u/s 80IB - taxing the interest earned on the loans and advances made to the sister concerns under the head Income from other sources - HELD THAT - It is an admitted position that the reassessment proceedings were initiated by the Assessing Officer only after audit objection was raised. The Audit party who pointed out that the interest income earned on the loans advances made to the sister concerns should be assessed under the head Income from other sources without setting off any interest expenditure. This information in the form of audit objection had enabled the Assessing Officer to form an opinion that the income got escaped assessment to tax.The Hon ble Supreme Court in the case of P.V.S. Beedies (P.) Ltd. ( 1997 (10) TMI 5 - SUPREME COURT had laid down that an audit objection constitutes information. Therefore, the contentions that there was no fresh tangible material brought on record by the Assessing Officer cannot be accepted. Second contention of the appellant that there was no failure on the part of the assessee to disclose truly and fully all material facts necessary for the purposes of making the assessment as laid down in the first proviso to section 147 of the Act cannot be accepted, as it is evident from the original return of income filed that the assessee made claim that interest expenditure incurred on the loans borrowed from HUDCO for the purpose of housing project against the interest earned on the loans advances made to the sister concerns, knowing fully well that the there was no nexus between the borrowed funds and loans advances to the sister concerns. It is settled position of law that for the purpose of allowing the expenditure against the interest income earned, the loans should be borrowed for the purpose of earning the interest income as laid down by the Hon ble Supreme Court in the case of Seth R. Dalmia 1977 (9) TMI 1 - SUPREME COURT Thus in the present case there was tangible material in the form of audit objection. Thus, we do not find any merit in the contentions raised by the assessee challenging the validity of the reassessment proceedings. Therefore, we uphold the validity of the reassessment proceedings. Accordingly, the ground no.1 stands dismissed. Interest income earned on the loans and advances made to the sister concerns under the head Income from other sources - HELD THAT - It is an admitted position that the interest expenditure was incurred on loans borrowed from HUDCO for the purpose of housing project. The contention of the appellant that the loans and advances were made to the sister concerns for the business purpose and out of business expediency cannot be accepted for the reason that the appellant had not led any evidence proving the business expediency, as it is question of fact which requires to be proved by leading necessary evidence. Even assuming for a moment, the loans and advances were made to the sister concerns for business purpose, there is necessity for charging interest and secondly, the loans were borrowed from HUDCO only for the purpose of business of housing project not for the purpose of advancing loans to the sister concerns. Therefore, there was no nexus between the borrowed funds and amounts advanced to the sister concerns. In these circumstances, in the absence of nexus between the borrowed funds and amounts advanced to the sister concerns, the question of allowing interest against the interest earned from the loans and advances to the sister concerns does not arise in terms of law laid down by the Hon ble Supreme Court in the case of Seth R. Dalmia (supra). Thus, we do not find any merit in the contention raised by the appellant - Decided against assessee.

Summary

Issues:
Validity of reassessment proceedings; Taxation of interest income earned on loans and advances to sister concerns under 'Income from other sources'.

Validity of Reassessment Proceedings:
The appeal challenged the validity of reassessment proceedings for the assessment year 2008-09. The Assessing Officer issued a notice under section 148 proposing to re-assess the income based on certain discrepancies. The appellant contended that there was no fresh tangible material enabling the Assessing Officer to form an opinion that income had escaped assessment. However, the reassessment was initiated following an audit objection, which was considered as fresh information. The Hon'ble Supreme Court precedent was cited to support the validity of reassessment based on audit objections. The appellant's argument that there was no failure to disclose all material facts necessary for assessment was rejected as the original return of income had misleading claims regarding interest expenditure. The audit party exposed the falsity of the information provided. The tribunal upheld the validity of the reassessment proceedings based on the audit objection constituting new information.

Taxation of Interest Income:
Regarding the taxation of interest income earned on loans and advances made to sister concerns under 'Income from other sources,' the appellant argued that the borrowed funds were used for business purposes and not for the housing project, thus the interest expenditure should be set-off against interest income. However, the tribunal found no evidence proving business expediency or a nexus between the borrowed funds and advances to sister concerns. The loans were borrowed for the housing project, not for advancing loans to sister concerns, as per the Hon'ble Supreme Court precedent. Therefore, the tribunal dismissed the appellant's contentions and upheld the lower authorities' decision to tax the interest income earned on loans and advances to sister concerns under 'Income from other sources.'

Conclusion:
The tribunal dismissed the appeal, upholding the validity of the reassessment proceedings and confirming the taxation of interest income earned on loans and advances to sister concerns under 'Income from other sources' for the assessment year 2008-09.

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