2017 (11) TMI 632 - AT - Income Tax

Disallowance of (proportionate) interest (premium) on debentures - the issue of the debentures to the directors of the assessee-company, who, as it transpires, are the erstwhile partners of the successee-firm - Held that - It is only the partner s capital, which is by definition the positive difference between the firm s assets and liabilities, which could be regarded as the firm s capital, on which deduction of interest, subject to the relevant conditions, is allowable under the Act (s. 36(1)(iii) r/w. s. 40(b)(iv)). The firm s assets are recorded at cost, defined u/s. 43(1), subject to the exceptions laid u/s. 43A and proviso to s. 36(1)(iii). The same, as shall be noted, are largely in agreement with the accounting standards, being AS-10. It is in view of this settled position of law that we also endorse the AO s construing the assessee s claim, referring to McDowell & Co. Ltd. (1985 (4) TMI 64 - SUPREME Court), as largely an exercise in tax evasion. The revaluation in the present case has no purpose except to claim tax deduction on interest on a higher level of borrowings. An analogy, to our mind, would be a firm (or any entity) claiming depreciation on the enhanced value of an asset, otherwise eligible for depreciation under the Act, using the tax neutral event of succession, as u/s. 47(xiii), for the purpose. The ld. CIT(A) clearly has misdirected himself in the instant case. We, in view of the foregoing, accordingly, uphold the AO s action qua the disallowance of the interest (premium) on the debentures, i.e., as relatable to the revaluation of land by the successee firm, Kali Material Handling Systems. Reopening of the assessments - Held that - In the facts of the case, the returns for the relevant years, i.e., AYs. 2008-09 and 2009-10, were only processed u/s. 143(1), which procedure bars the examination of the assessee s return or the claims preferred thereby, with as much as even the prima facie adjustments, i.e., on the basis of a return and the accompanying material, also barred w.e.f. 01.06.1999. The disallowance under reference, as afore-stated, is even otherwise not a subject matter of a prima facie adjustment, entails as it does, a complete understanding and knowledge of the primary facts leading to the issue of the debentures to the directors of the assessee-company, who, as it transpires, are the erstwhile partners of the successee-firm. And, accordingly, there is no question on either formation of reason to believe or an opinion by the AO in the matter, and which, as apparent from its reading, guided the decision in TANMAC India (supra). Rather, as afore-stated, any issue of notice u/s. 148 without the knowledge of the relevant facts would be violative of s.147, being not supported by any reason/s to believe. The charge of change of opinion, which is the basis of the assessee s legal plea, is misplaced in view of the admitted position that the relevant facts along with the materials came to light only during the course of the assessment proceedings for AY 2010-11. And, further, a failure to take steps u/s. 143(3) would not render the AO powerless to initiate reassessment proceedings when the return had been earlier subject to processing u/s. 143(1). The ambit of the two procedures is completely different.The assessee s legal plea is without merit and, accordingly, not maintainable. We decide accordingly, rejecting the assessee s legal issue, and answering thus the third question arising in the present case by validating the initiation of reassessment proceedings - Appeal Decided against assessee.

Summary

Issues Involved:
1. Delay in filing Cross Objections by the Assessee.
2. Validity of the reopening of assessments for AYs 2008-09 and 2009-10.
3. Deduction of interest on debentures issued to directors and its relation to revaluation of the firm's land.

Detailed Analysis:

1. Delay in Filing Cross Objections by the Assessee:
The Assessee's Cross Objections (COs) were delayed by 149 days. The Assessee's Authorized Representative (AR) argued that the delay was due to the realization in January 2016 that the reopening of the assessment could also be challenged. The Tribunal noted that the appeal papers were communicated to the Assessee on 16.06.2015, making the delay 200 days. The Tribunal found no reasonable cause for condoning the delay and dismissed the COs as not maintainable. However, the Tribunal allowed the Assessee to support the orders appealed against by the Revenue on any other ground, including the legal issue regarding the notice under Section 148.

2. Validity of the Reopening of Assessments for AYs 2008-09 and 2009-10:
The Assessee argued that the reopening of assessments was invalid as the particulars regarding the claim for premium on debentures were on record. The Tribunal reviewed the reasons recorded by the Assessing Officer (AO), which revealed that the facts came to light only during the assessment proceedings for AY 2010-11. The Tribunal found that the returns for AYs 2008-09 and 2009-10 were only processed under Section 143(1), which does not involve examination of the Assessee's claims. The Tribunal held that there was no change of opinion, and the reopening of assessments was valid. The Tribunal rejected the Assessee's legal plea and validated the initiation of reassessment proceedings.

3. Deduction of Interest on Debentures Issued to Directors:
The main issue was whether the Assessee-company could claim deduction of interest on debentures issued to its directors, which was related to the revaluation of the firm's land. The Tribunal noted that the Assessee-company was formed by converting a partnership firm and had revalued its land, crediting the partners' capital accounts. The partners withdrew funds, which were later reintroduced into the company, and debentures were issued. The AO disallowed the Assessee's claim for interest on debentures to the extent of ?202.8 lacs, considering it a colorable device without fresh infusion of funds.

The Tribunal examined the legal and accounting principles, noting that revaluation credits cannot be withdrawn and should be credited to a revaluation reserve. The Tribunal found that the Assessee's transactions were not genuine and were aimed at claiming tax deductions on interest. The Tribunal upheld the AO's disallowance of interest on debentures related to the revaluation of land, emphasizing that the borrowing did not serve any business purpose.

Conclusion:
The Tribunal dismissed the Assessee's Cross Objections due to the delay in filing and upheld the reopening of assessments for AYs 2008-09 and 2009-10. The Tribunal also upheld the AO's disallowance of interest on debentures related to the revaluation of land, finding the transactions to be a tax evasion device. The Revenue's appeals were allowed, and the Assessee's COs were dismissed as not maintainable.