2006 (2) TMI 236 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest paid on loans for the purchase of shares.
2. Validity of reassessment proceedings initiated under Section 148 of the Income Tax Act.
3. Jurisdiction of the Assessing Officer (AO) in issuing the reassessment notice.

Detailed Analysis:

1. Disallowance of Interest Paid on Loans for Purchase of Shares:
The Revenue contended that the CIT(A) erred in not appreciating that the facts of the case were distinguishable from CIT vs. Rajendra Prasad Moody, as the investment in shares was not solely for earning dividend income but also for acquiring control over Jaipur Syntex Ltd., where the assessees were directors. The AO disallowed the interest deduction on the grounds that the assessees failed to provide necessary documentation to prove the nexus between the loan and the purchase of shares. The AO also noted that the interest rate of 25% was exorbitant.

The CIT(A) had deleted these additions, relying on the Supreme Court judgment in Rajendra Prasad Moody, which allowed interest deduction even if no dividend income was received. The Department argued that the primary motive for purchasing shares was to acquire controlling interest, not to earn dividends, citing CIT vs. Amritaben R. Shah and Smt. Padmavati Jaikrishna vs. CIT.

The Tribunal upheld the CIT(A)'s decision, stating that there was no evidence suggesting that the primary motive was to acquire controlling interest. The Tribunal found that the investment was made to earn income from other sources, and thus, the interest paid was allowable under Section 57(iii) of the IT Act. The Tribunal also noted that the Department had not appealed against the CIT(A)'s similar decision for the assessment year 1997-98.

2. Validity of Reassessment Proceedings Initiated Under Section 148:
The assessees objected to the initiation of reassessment proceedings and the issuance of notice under Section 148 by the AO in Jaipur, arguing that the notice issued by the AO in Mumbai remained unserved and that the reassessment proceedings were restarted on the same grounds after being initially dropped.

The Tribunal upheld the CIT(A)'s validation of the reassessment proceedings, noting that the AO had prima facie reasons to believe there was an escapement of income. The Tribunal cited the Supreme Court's decision in Raymond Woollen Mills Ltd. vs. ITO, which supports the position that only prima facie material is required to form a belief for issuing a notice under Section 148.

3. Jurisdiction of the Assessing Officer in Issuing the Reassessment Notice:
The assessees argued that the AO in Jaipur lacked jurisdiction as the assessment records for other years were still in Mumbai, and the AO in Jaipur could not assess the income for only one year.

The Tribunal rejected this objection, affirming the CIT(A)'s decision that the AO in Jaipur had valid jurisdiction. The Tribunal noted that the assessees were permanently residing in Jaipur, and their main income arose within the jurisdiction of the ITO, Ward-6(1), Jaipur. The Tribunal cited the decision in Kanji Mal & Sons vs. CIT, which supports the view that technical objections to jurisdiction should not prevail if there is no real hardship to the assessee.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to allow the interest deduction under Section 57(iii) and validated the reassessment proceedings and the jurisdiction of the AO in Jaipur. The appeals and cross-objections were thus rejected.