2019 (8) TMI 831 - AT - Income Tax

Assessment framed u/s 153A r.w.s 143(3) - assessee contended that there was no search in his premises - HELD THAT - As per the noting in the assessment order, we find that a search and seizure operation u/s 132 was conducted on 23.07.2015. The assessee has challenged the assumption of jurisdiction on the ground that its premises were never searched and, therefore, assessment framed u/s 153A is bad in law. The challenge of jurisdiction was dismissed by the AO as well as by the CIT(A). We find that on identical set of facts, the assessee was assessed for A.Y 2012-13 and in that year, the assessee has not challenged the jurisdiction of the AO u/s 153A for want of search at its premises. Once the assessee has accepted the search and seizure operation and consequent assessment orders in earlier years, the assessee cannot challenge the same for the year under consideration. This ground is, accordingly, dismissed. Disallowance of interest u/s 36(1)(iii) - advance to subsidiary companies for the business exigencies - HELD THAT - Non-current investments, which were a appearing in A.Y 2014-15 at ₹ 9.53 crores came down to ₹ 6.62 crores in A.Y 2015-16 and ₹ 3.91 crores in A.Y 2016-17. This, in addition to interest free funds available with the assessee in the form of share capital and reserves and surplus is sufficient for making interest free funds in subsidiary companies. In our considered opinion, looking after the business exigencies of the subsidiary companies is also a primary responsibility of the holding company. In the case of Hero Cycles 2015 (11) TMI 1314 - SUPREME COURT has held that advance given to a subsidiary company on business expediency establishes the nexus between expenditure and the purpose of business and, therefore, interest paid on borrowed money cannot be disallowed. The Hon'ble Supreme Court in the case of Reliance Industries 2019 (1) TMI 757 - SUPREME COURT has held that where interest free funds were available to the assessee which were sufficient to meet the investments in subsidiary companies, interest u/s 36(1)(iii) cannot be disallowed. There is no finding by the AO that the subsidiary companies have not utilised the borrowed money for their respective businesses. In fact, in earlier A.Ys, i.e. A.Y 2013-14, assessment was framed u/s 153A r.w.s 143(3) and no such disallowance was made by the AO. Considering the facts in totality and also the past history of the assessee, we set aside the findings of the CIT(A) and direct the AO to delete the disallowance of interest u/s 36(1)(iii). This ground raised by the assessee in both the appeals is allowed.

Summary

Issues:
Validity of assessment under section 153A r.w.s 143(3) of the Income-tax Act, 1961
Disallowance of interest under section 36(1)(iii) of the Act

Validity of assessment under section 153A r.w.s 143(3) of the Income-tax Act, 1961:
The appeals were against two separate orders of the Commissioner of Income Tax [Appeals] for assessment years 2015-16 and 2016-17. The jurisdictional challenge was based on the premise that the premises were not searched during the search and seizure operation under section 132 of the Act. However, since the assessee had accepted similar assessments in earlier years without challenging jurisdiction, the challenge for the current year was dismissed. The Tribunal held that once the search and seizure operation was accepted in previous years, challenging it in subsequent years is not permissible.

Disallowance of interest under section 36(1)(iii) of the Act:
Regarding the disallowance of interest under section 36(1)(iii) of the Act, the Assessing Officer questioned the increase in finance charges without a corresponding increase in business activity. The assessee explained the utilization of funds, stating that loans were used for business advances and provided documentary evidence. The Assessing Officer, however, disallowed a portion of the claimed interest, citing lack of fund flow statement to justify the utilization of interest-bearing loans for business purposes. The CIT(A) upheld the disallowance.

The Tribunal considered the fund flow statement and the utilization of funds by the subsidiary companies. Referring to judicial precedents, including the cases of Hero Cycles Ltd. and Reliance Industries, the Tribunal held that if funds were utilized for subsidiary companies' businesses, interest paid on borrowed money cannot be disallowed. It was noted that the subsidiary companies had utilized the borrowed money for their businesses in the past without disallowance. Consequently, the Tribunal directed the Assessing Officer to delete the disallowance of interest under section 36(1)(iii) of the Act for both assessment years.

In conclusion, the Tribunal allowed both appeals filed by the assessee, considering the facts of the assessment year 2015-16. The orders were pronounced on 14.06.2019.