2023 (9) TMI 835 - AT - Income Tax

Reopening of assessment u/s 147 - Interest free advance given to sister concerns - reassessment proceedings initiated on the basis of audit objection - proof of commercial expediency proved or not? - AO noted that assessee is paying interest @ 12.75% whereas no interest has been charged from the sister concern - HELD THAT - We find in the case of Indian and Eastern Newspaper 1979 (8) TMI 1 - SUPREME COURT has held that the opinion of internal audit party of the Income Tax Department on a point of law cannot be regarded as information within the meaning of section 147(b) - We find in the case of GMR Holdings Pvt. Limited 2018 (9) TMI 353 - HIGH COURT OF KARNATAKA AT BANGLORE while deciding an identical issue has held that re-assessment proceedings u/s 147/148 of the Act cannot be undertaken on a mere change of opinion or audit objection raised by the internal auditors of the Department. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Lionbridge Technologies Pvt. Limited 2020 (6) TMI 314 - ITAT MUMBAI - The various other decisions relied upon by assessee also support his case to the proposition that re-assessment proceedings cannot be initiated on the basis of audit objections. We hold that the reassessment proceedings initiated on the basis of audit objection are not valid in law and accordingly, the re-assessment proceedings are quashed. Since we quash the re-assessment proceedings initiated by the AO on the basis of the audit objections, therefore, the grounds raised by the Revenue challenging the deletion on merit become academic in nature and therefore, are not being adjudicated. Decided against revenue.

Summary

Issues Involved:
1. Recall of Tribunal's order dismissing the Revenue's appeal due to low tax effect.
2. Validity of reassessment proceedings initiated based on audit objections.
3. Disallowance of interest on borrowed funds due to interest-free advances to sister concerns.

Summary:

1. Recall of Tribunal's Order:
The Revenue filed a Miscellaneous Application to recall the Tribunal's order in ITA No.265/Hyd/2013, which dismissed the Revenue's appeal due to low tax effect. The Revenue argued that the case falls under the exceptional category as per section 10(C) of CBDT Circular No.03/2018 dt.11.07.2018 because the reopening was based on audit objections. The Tribunal acknowledged the mistake and recalled its order, fixing the appeal for hearing immediately. The Miscellaneous Application filed by the Revenue was allowed.

2. Validity of Reassessment Proceedings:
The reassessment was initiated by the Assessing Officer based on audit objections, which claimed that the assessee had advanced interest-free loans to a sister concern while paying interest on borrowed funds. The Tribunal noted that reassessment proceedings based on audit objections are not valid. Citing Supreme Court and High Court decisions, the Tribunal held that the opinion of the internal audit party does not constitute "information" under section 147 of the Act. Consequently, the reassessment proceedings were quashed.

3. Disallowance of Interest on Borrowed Funds:
The Assessing Officer disallowed Rs.66,95,640/- as interest on borrowed funds because the assessee had advanced interest-free loans to its sister concern. The CIT(A) deleted the addition, citing judgments from the Supreme Court and Delhi High Court, which held that advances to sister concerns on commercial expediency are allowable. The Tribunal upheld the CIT(A)'s decision, noting that the advances were made on commercial grounds and there was no diversion of funds.

Conclusion:
The Tribunal allowed the Miscellaneous Application filed by the Revenue, quashed the reassessment proceedings initiated based on audit objections, and upheld the CIT(A)'s deletion of the disallowed interest. Consequently, the appeal filed by the Revenue was dismissed, and the appeal filed by the assessee was allowed.