2018 (9) TMI 781 - AT - Income Tax

Reopening of assessment - Interest expenditure on External Commercial Borrowings claimed as a deductible expenditure - share application money pending allotment which includes ECB and interest accrued thereupon has been issued and shares allotted in A.Y. 2008-09 - Held that - With the assistance of assessee, we have gone through the profit and loss account of the assessee company for the past year as submitted in paper book. The amount sought to be disallowed was debited in the financial year 2006-07 which is not at all relevant for the assessment year 2008-09 in which assessment is sought to be done. No interest whatsoever has been debited in the assessment year 2008-09. Hence, in our considered opinion, there is no question at all of disallowing the interest as capital expenditure which has not at all been debited in the impugned assessment year. Since, there is no debit of interest in the current assessment year, there is no question whatsoever of disallowing the same on the ground that there has been escapement of income. When the amount in question has not been debited in the profit and loss account as expenditure, nor the assessee has claimed any deduction and the assessee is following mercantile system of accounting, there is no question of disallowing the deduction which has not at all been claimed by the assessee. As regards the merits of the case, on similar analogy, since the impugned expenditure was not incurred during the current year, there is no question of disallowing the same in the current assessment year. As we have already given a finding that there was no question of making a disallowance of interest expenditure for whatever reason as the said expenditure was not at all debited during the year, the assessee succeeds on both the counts of lack of validity of reopening as well as merits of addition. In this regard, we are not inclined to accede to DR s request that a direction should be given for making the addition in earlier assessment year. We are of the opinion that in doing so, we shall be exceeding our jurisdiction. The ITAT is not mandated to exercise revisionary powers which are vested with CIT u/s. 263 to cure fatal errors and omission on the part of the Revenue authorities. - Decided in favour of assessee.

Issues Involved:
1. Allowability of interest expenditure on External Commercial Borrowings (ECB).
2. Validity of reopening assessment under section 147/148 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Allowability of Interest Expenditure on ECB:

The primary issue raised by the Revenue was whether the interest expenditure on ECB, claimed as a deductible expenditure in A.Y. 2007-08, should be allowed. The Revenue contended that the share application money pending allotment, which included ECB and interest accrued thereupon, was issued and shares allotted in A.Y. 2008-09. Therefore, the interest expenditure should be disallowed as it was capital in nature.

The assessee argued that no interest expenses were claimed during the financial year 2007-08, and the interest expenditure was claimed in the previous year, i.e., FY 2006-07. The assessee emphasized that the liability of interest payment on ECB became due and was crystallized in FY 2006-07 as per the terms of the ECB agreement. The assessee also cited the Delhi High Court decision in the case of Noble & Hewitt (I) (P.) Ltd., which held that disallowing a deduction not claimed would not arise.

The Assessing Officer (A.O.) disallowed the interest expenditure, stating that the conversion of the loan into shares had not taken place in A.Y. 2007-08, and thus, the interest should be disallowed in A.Y. 2008-09 when the shares were allotted.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, holding that the interest expenditure could not be treated as capital expenditure since it was related to the loan amount and was duly claimed in A.Y. 2007-08. The CIT(A) reasoned that the interest payable upon the loan amount was of revenue nature until the conversion into shares.

2. Validity of Reopening Assessment Under Section 147/148:

The assessee challenged the validity of the reopening of the assessment under section 147/148, arguing that the A.O. initiated reassessment proceedings based on mere change in opinion without any new material. The assessee contended that there was no failure on its part to furnish material facts, and hence, the notice under section 148 was bad in law.

The Tribunal noted that the reopening of the assessment is permissible if there is escapement of income from assessment in that particular year. The Tribunal found that the assessment was reopened to disallow interest which had not been incurred in the impugned assessment year. The Tribunal observed that the amount sought to be disallowed was debited in the financial year 2006-07, not relevant for A.Y. 2008-09, and no interest was debited in A.Y. 2008-09.

The Tribunal held that since no interest expenditure was debited in the profit and loss account for A.Y. 2008-09, there was no question of disallowing the same. The Tribunal relied on the Delhi High Court decision in Noble & Hewitt (I) (P.) Ltd., which held that disallowing a deduction not claimed would not arise. The Tribunal concluded that the reason recorded for reopening was unsustainable, and the validity of reopening was subject to rescission.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection. The Tribunal held that the interest expenditure was not incurred during A.Y. 2008-09, and thus, there was no question of disallowing it. The Tribunal also held that the reopening of the assessment was invalid as the interest expenditure was not debited in the relevant assessment year. The Tribunal emphasized that it did not have the jurisdiction to direct the addition in an earlier assessment year, which is within the revisionary powers of the CIT under section 263 of the Act.

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