2023 (5) TMI 951 - AT - Income Tax

Reopening of assessment u/s 147 - Disallowance on account of interest on interest free advances given to the sister concern/relatives for non-business purpose - Addition u/s.36(1)(iii) - HELD THAT - As when the issue as regards the allowability of assessee s claim for deduction of interest expenditure u/s.36(1)(iii) had been deliberated upon by the A.O while framing the original assessment vide his order passed u/s.143(3) then in absence of any fresh material having been placed on record after culmination of the said assessment the assessee s case could not have been validly reopened u/s.147 of the Act. As in agreement with the view taken by the CIT(Appeals) that reopening of a concluded assessment that is merely prompted by a change of opinion of the successor A.O as against that taken by his predecessor can by no means be held to be justified. The aforesaid view is fortified by the judgment of Kelvinator of India 2010 (1) TMI 11 - SUPREME COURT held, that the case of an assessee cannot be reopened on the basis of a mere change of opinion . As observed by the CIT(Appeals) and, rightly so, as the amounts in question were advanced by the assessee firm in the normal course of its business, therefore, no part of the same could have been disallowed by triggering the provisions of Section 36(1)(iii) of the Act. Decided against revenue.

Issues Involved:
1. Deletion of disallowance of interest on interest-free advances given to sister concerns/relatives for non-business purposes.
2. Deletion of disallowance of proportionate interest on non-interest bearing advances.
3. Application of the "commercial expediency" principle as per the S.A. Builders Ltd. vs CIT case.
4. Validity of reopening proceedings under Section 147 of the Income-tax Act, 1961.
5. Reliance on the Anil Nagapal case for quashing proceedings under Section 147.
6. Ignoring the ratio of the decision in CIT vs P.V.S. Beedies Pvt. Ltd. regarding the reopening of assessment based on audit party errors.
7. Use of existing material for reopening assessment as per M/s Kalyanji Mavji & Co. vs CIT.
8. Acceptance of fresh evidence by CIT(A) without allowing AO to examine it.
9. Findings contrary to the evidence on record.
10. Erroneous order by CIT(A) in law and facts.

Summary:

1. Deletion of Disallowance of Interest on Interest-Free Advances:
The CIT(A) deleted the disallowance of Rs. 14,99,670/- made by the AO on account of interest on interest-free advances given to sister concerns/relatives for non-business purposes. The CIT(A) found that the advances were made for commercial expediency and future business needs.

2. Deletion of Disallowance of Proportionate Interest:
The CIT(A) deleted the disallowance of proportionate interest on non-interest bearing advances given to relatives and group concerns, holding that the advances were made in the normal course of business.

3. Commercial Expediency Principle:
The CIT(A) held that the assessee had advanced the interest-free funds due to commercial expediency, aligning with the principle laid down in the S.A. Builders Ltd. vs CIT case.

4. Reopening Proceedings under Section 147:
The CIT(A) quashed the reopening proceedings under Section 147, stating that the AO had reopened the case based on a mere change of opinion without any fresh material, which is not permissible.

5. Reliance on Anil Nagapal Case:
The CIT(A) relied on the Anil Nagapal case to quash the proceedings under Section 147, emphasizing that the AO had raised queries and sought information during the original assessment, and reopening on the same material was not justified.

6. Ignoring CIT vs P.V.S. Beedies Pvt. Ltd. Decision:
The CIT(A) ignored the ratio of the decision in CIT vs P.V.S. Beedies Pvt. Ltd., where reopening based on audit party errors was considered valid, stating that no fresh material was brought on record.

7. Use of Existing Material for Reopening Assessment:
The CIT(A) held that reopening based on existing material without any fresh information is not justified, contrary to the decision in M/s Kalyanji Mavji & Co. vs CIT.

8. Acceptance of Fresh Evidence:
The CIT(A) accepted fresh evidence without allowing the AO to examine it, which was contested by the revenue as a violation of Rule 46A of the I.T. Rules.

9. Findings Contrary to Evidence:
The CIT(A) gave findings contrary to the evidence on record, accepting the assessee's submissions without proper verification, which the revenue argued rendered the decision perverse.

10. Erroneous Order by CIT(A):
The revenue contended that the order of the CIT(A) was erroneous both in law and on facts.

Conclusion:
The appeal filed by the revenue was dismissed, and the order of the CIT(A) was upheld, quashing the reopening proceedings and deleting the disallowance of interest expenditure. The judgment emphasized that reopening based on a mere change of opinion is not permissible without fresh material.

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