2022 (10) TMI 1112 - AT - Income Tax

Assessment u/s 153A - incriminating material found during the course of search or not? - Deduction of interest expenditure u/s 57 - HELD THAT - On reading of the assessment order, we do not find any material which was unearthed during the course of search on 13/7/2016 related to the adjustment made by the learned assessing officer with respect to the adjustment in the closing inventory of the assessee. Now it has been fairly concluded by the Honourable Supreme Court in Sinhgad technical education society 2017 (8) TMI 1298 - SUPREME COURT that without reference to incriminating material seized during search, the concluded assessment cannot be enhanced. Therefore ground number 1 and 3, 4 of the appeal of learned assessing officer are dismissed. Net interest expenditure as cost of inventory is merely an academic in view of our decision in holding that there is no incriminating material with respect to the above adjustment, therefore there is no requirement of going into the merits of the addition. Therefore, ground number 2 is dismissed. Addition u/s 69A - addition made on account of seized material found during search - HELD THAT - Therefore, as the amount has already been taxed in the settlement petition of the assessee group, making addition once again in the hence of this assessee will amount to double taxation of the same income. Therefore, ground number 5 7 of the appeal are dismissed. Addition of differential interest income - trust income offered in the return of income is less as per the form 26AS the same was shown - HELD THAT - We find that with respect to the above addition was found during the course of assessment proceedings and the same was made only on the issue of 3 verification of form number 26AS. Therefore, for the same reasoning given by us that concluded assessment can only be tinkered with incriminating material found during the course of search. Same is absent with respect to this addition. Accordingly, ground number 3 of the appeal is dismissed. Claim of the interest expenditure and adjustment in value of the closing stock inventory - HELD THAT - In the present case the return of income was filed on 26/11/2013 and search took place on 13/7/2016 and therefore the impugned assessment year is concluded assessment, which could have been upwardly adjusted only on account of incriminating material found during the course of search. We find that no such incriminating material has been referred to in the assessment order and no such incriminating material has been produced before us during the course of hearing. In view of this following our reasoning given in the appeal of the learned assessing officer for assessment year 2011 12 and 2012 13 as above, we dismiss ground number 1-4 of the appeal of the learned assessing officer for assessment year 2013 14. Addition of interest on loan - AO aggrieved that appellate authority failed to appreciate the fact that the assessee failed to substantiate with documentary evidence the business expediency of the loan given from which interest expenses was earned and therefore the same is allowable u/s 57 of the income tax act but not u/s 36 (1) (iii) - HELD THAT - As stated that the fixed deposit receipts made by the assessee is in the normal course of its business and had absolute commercial expediency while doing so and thus the nature of the income of the assessee company must be treated as business income. Further this issue was replied before the learned CIT A which is also placed - Therein also did not discuss any of the facts as stated before us with respect to the agreement entered into by the assessee. CIT A has also did not give any justifiable reason to hold that the income and by the assessee on interest from fixed deposit receipt should be considered as business income but merely believed the written submission of the assessee. The arguments of AR with respect to the stalled project was not considered by any of the lower authorities as emanating from the assessment order or appellate order. We set-aside appeal of AO back to the file of the learned assessing officer for the purpose of determination whether the interest income earned by the assessee on fixed deposit receipt is a business income on income from other sources. The assessee is also directed to justify the same that interest on fixed deposit receipt should be considered as business income and consequently the deduction of interest expenditure is also required to be examined by the learned assessing officer. Accordingly ground number 1 4 of the appeal of the AO is restored back to the file of the learned assessing officer.

Summary

Issues Involved:
1. Adjustment of interest expenditure in the closing inventory.
2. Addition of unexplained money under Section 69A.
3. Classification of interest income from fixed deposits as business income or income from other sources.
4. Deductibility of interest expenditure under Section 36(1)(iii) or Section 57 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Adjustment of Interest Expenditure in the Closing Inventory:
The primary issue was whether the interest expenditure could be adjusted in the closing inventory. The assessee had shown interest income under Section 56 and claimed interest expenditure as business expenditure. The Assessing Officer (AO) reduced the closing stock by the net interest expenditure, arguing it was not allowable as an expense. The Commissioner of Income Tax (Appeals) [CIT(A)] held that without incriminating material found during the search, the AO could not disturb the concluded assessment. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's rulings in Continental Warehousing Corporation and Sinhgad Technical Education Society. The Tribunal dismissed the AO's appeals for assessment years 2011-12 to 2014-15 on this ground.

2. Addition of Unexplained Money Under Section 69A:
The AO added amounts under Section 69A based on seized materials during the search, citing unexplained money. The CIT(A) deleted these additions, noting that the amounts were already included in the settlement petition filed by the assessee group before the Settlement Commission. The Tribunal agreed, stating that taxing the same income again would result in double taxation. The AO's appeals for assessment years 2011-12 to 2014-15 were dismissed on this ground as well.

3. Classification of Interest Income from Fixed Deposits:
For assessment year 2017-18, the issue was whether interest income from fixed deposits should be classified as business income or income from other sources. The AO classified it as income from other sources, while the CIT(A) treated it as business income. The Tribunal found that the CIT(A) did not provide sufficient reasoning for this classification and remanded the matter back to the AO for a fresh determination. The Tribunal directed the AO to examine whether the interest income should be considered business income and to verify the business expediency of the loan.

4. Deductibility of Interest Expenditure:
In assessment year 2017-18, the AO disallowed interest expenditure under Section 36(1)(iii) but allowed it under Section 57, to the extent of interest income taxed under Section 56. The CIT(A) allowed the deduction under Section 36(1)(iii), treating the interest income as business income. The Tribunal remanded this issue back to the AO for re-examination, directing the AO to determine the appropriate classification of interest income and the corresponding deductibility of interest expenditure.

Conclusion:
The Tribunal dismissed the AO's appeals for assessment years 2011-12 to 2014-15, upholding the CIT(A)'s decisions on both the adjustment of interest expenditure in the closing inventory and the addition of unexplained money under Section 69A. For assessment year 2017-18, the Tribunal remanded the issues of classification of interest income and deductibility of interest expenditure back to the AO for fresh determination. The appeals for assessment year 2017-18 were allowed for statistical purposes.