2016 (7) TMI 313 - AT - Income Tax

Revision u/s 263 - Interest free loans and advances have been given to one of the Directors and to the related companies in which the Directors are interested - interest dis allowance - Held that - The loans availed are basically for specific purposes like purchase of assets, i.e., cars and it was explained that HDFC Inventory Floor Funding amounting to ₹ 382.33 lakhs was sanctioned during the year for the purpose of purchase of goods and the corresponding interest for the loan availed is only ₹ 10,81,911/- which is marked in Schedule-15. Whereas, the proportionate interest disallowance has been worked out by the Ld. CIT(A) at ₹ 72,83,333/-. It was explained that there is no diversion of funds to related parties other than normal business transaction and the amount shown as advance to Koyenco Autors (P) Ltd. is in the nature of rent advance and classified under Loans & Advances . The building belongs to them and the assessee is pay in grent of ₹ 60 lakhs for that building. The building is used as show room and service centre. As regards advance in the name of the Director, it was in connection with business requirements of the Company and the loan advances were not paid out of borrowed funds. The Assessing Officer was satisfied that there was no diversion of funds during the assessment proceedings. Since the loans/advances have been given for the specific purpose, therefore, the view taken by the Ld. CIT(A) is not a correct view and there cannot be any occasion to come to the conclusion that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Ld. CIT(A) himself in para 5 of his order reproduced hereinabove has mentioned that the assessee was paying heavy interest to the financial institutions for acquiring capital assetsand for working capital requirements. No finding has been given as to how theorder of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue - Decided in favour of assessee

Summary

Issues:
1. Invocation of provisions of section 263 of the Income Tax Act by the Commissioner.
2. Absence of twin conditions for invoking section 263.
3. Alleged diversion of interest-bearing funds to sister concerns.
4. Classification of advance to sister concern as rent advance.
5. Failure to consider objections raised by the appellant before concluding diversion of funds.
6. Disallowance of proportionate interest paid on secured and unsecured loans.

Analysis:

Issue 1 - Invocation of section 263:
The assessee challenged the Commissioner's order invoking section 263, arguing that objections were overlooked. The Commissioner found interest-free loans given to directors and related companies, leading to proportionate interest disallowance on loans. The Ld. CIT(A) set aside the assessment order as prejudicial to revenue, directing a fresh assessment.

Issue 2 - Absence of twin conditions:
The appellant contended that the twin conditions for invoking section 263 were not met in their case. The Commissioner's failure to address objections before concluding on the diversion of funds was highlighted as a flaw in the order, leading to the appeal for quashing the section 263 order.

Issue 3 - Alleged diversion of funds:
The appellant argued against the Commissioner's finding of diversion of interest-bearing funds to sister concerns, asserting that the funds were for specific purposes like asset purchases. The nature of loans and advances to related parties was explained as part of normal business transactions, with no unauthorized diversion of funds.

Issue 4 - Classification of advance:
The appellant emphasized that the advance to the sister concern was a rent advance for using the building as a showroom and service center. The appellant's contention was that the Commissioner overlooked this crucial aspect while concluding on the diversion of funds.

Issue 5 - Failure to consider objections:
The appellant raised concerns about the Commissioner not addressing objections before alleging diversion of funds. The appellant argued that the order under section 263 was flawed as it did not consider all aspects and objections raised by the appellant.

Issue 6 - Disallowance of interest on loans:
The assessment involved disallowance of proportionate interest on secured and unsecured loans due to interest-free loans given to directors and related companies. The appellant contested this disallowance, presenting detailed schedules and explanations regarding the loans and advances, asserting that the disallowance was unjustified.

In conclusion, the ITAT Cochin allowed the appeal, setting aside the Commissioner's order under section 263, emphasizing the need for proper consideration of objections and factual justifications before invoking such provisions. The judgment highlighted the importance of a thorough assessment process and adherence to legal requirements in tax matters.