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TMI Blog2008 (11) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... urn of income for the asst. yr. 1996-97 on 31st Oct., 1996. The return was processed under s. 143(1)(a) on 28th Oct., 1997. The assessment was reopened by issuing notice under s. 148 on 1st Dec., 1997. In compliance to notice under s. 148, the assessee filed return of income on 19th Jan., 1998 under protest. The assessee requested for reasons recorded for reopening the assessment vide letter dt. 21st May, 1998. The AO furnished the same vide his letter dt. 1st June, 1998 and the assessment was reopened on the following reasons: "(1) The loss of M/s Ganpati Synthetics Rs. 2,12,576 has been set off out of the income of M/s Ganpati Associates, whereas the partners of both the parties are separate. Therefore, the set off of this loss is not acceptable. (2) Interest free advances have been made to partners at Rs. 63,34,369 whereas in P&L a/c the interest has been claimed at Rs. 5,93,664 which is not admissible due to the interest free advances made to partners. On reassessment, the AO determined the income as follows: (Rs.) Declared loss (-) 52,919 Add: Interest claimed by the assessee 5,93,664 Speculation loss in cotton bales (-) 4,50,675 On account of lease rent 30,000 --- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation of the belief contemplated under s. 147 necessary for reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief and the rational connection postulates that there must be a direct nexus or live-link between the material coming to the notice of the ITO and the formation of his belief that there has been escapement of income of the assessee. The apex Court further observed that no doubt it is true that Court cannot go into the sufficiency or deficiency of the material or substitute its own opinion of that of the AO on the point whether action should be initiated for reopening of the assessment, but at the same it is not any and every material however vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to the escapement of the income of the assessee from assessment. 4.3 He further relied on the case of Bawa Abhai Singh vs. Dy. CIT (2001) 168 CTR (Del) 521 : (2002) 253 ITR 83 (Del), wherein it has been held that the crucial expression is "reason to believe". The expression predicts that the AO must hold a belief... by the existence for reasons for holding such a bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC), wherein the apex Court has held that the reopening of assessment under s. 147(a) was not justified as conditions precedent for reopening were not satisfied in the facts and circumstances of the case. 4.6 Further, reliance was made on the case of Vipan Khanna vs. CIT (2002) 175 CTR (P&H) 335 : (2002) 255 ITR 220 (P&H), wherein it has been held that when proceedings under s. 147 are initiated, the proceedings are open only qua items of understatement of underassessment and the finality of the proceeding as regards other issues remained undisturbed. 5. The learned Departmental Representative, on the other hand, submitted that no assessment has been made in this case. Only the return was processed under s. 143(1)(a) of the IT Act, 1961 and the AO has not formed any opinion. Since the assessment has not been made, it cannot be said that the AO is making roaming enquiries in the assessment proceedings. He submitted that the AO has prima facie material to believe that income has escaped from assessment. Hence, he supported the orders of lower authorities. 6. We have heard both the parties and perused the material plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y rate very excessive." 7.1 The brief facts of the case are that the assessee has claimed interest of Rs. 5,93,664 paid to the following parties: Party to whom paid Financial year 1995-96 1. U.P.F.C. 2,11,739.48 2. Bank of Baroda 1,68,531 3. M/s Daulat Ram Nathu Ram 50,568 4. M/s Rachna 17,068 5. Shri Manish Aeron 17,025 6. Prabha Aeron 27,240 7. Sandeep Aeron 23,835 8. Lokpriya Nursing Home Ltd. 77,685 9. Maanasi (u/a Nidhi Gupta) - ----------- Total 5,93,664.48 ----------- The assessee has paid interest free advances to its partners at Rs. 63,34,369. Since the assessee has given interest free advances to its partners, the AO was of the opinion that instead of giving interest free advances to the partners, the assessee could have cleared up its loans and avoided payment of interest. Hence, he disallowed the claim of interest claimed by the assessee. On appeal, the same was confirmed by the learned CIT(A). 7.2 The learned counsel for the assessee submitted that the assessee has received non-interest funds from M/s Ganpati Synthetics Ltd. at Rs. 66,50,202.55 and given advance to partners at Rs. 63,34,369 and the assessee has not raised any interest bearing loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowing of the capital was necessary for the business. If at the time of borrowing the assessee has sufficient funds of its own, the same is immaterial. This judgment is not applicable to the facts of the present case and is rejected. (ii) In the case of Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375 : (1979) 118 ITR 200 (SC), wherein the Hon'ble Supreme Court has also laid down the same conditions to claim deduction in respect of interest paid on capital borrowed. (iii) In the case of CIT vs. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) wherein it has been held that once the three conditions as laid down in respect of the interest claimed on borrowed capital are satisfied then the deduction in respect thereof must be given. 8. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below. 9. We have heard both the parties and perused the material placed on record. In the pre-sent case, the assessee has borrowed loans from banks as well as from various parties and paid interest at Rs. 5,93,664. At the same time, the assessee has received money from M/s Ganpati Synthetics Ltd., at Rs. 66,50,202.58. The assessee instead of using th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect picture of the accounts of the assessee as the cost is being incurred by the assessee, the partners would be enjoying benefit thereon. The interest free advance cannot be treated as for the purpose of business and after advancing interest free loans to the partners, the assessee incurred interest on borrowings to the extent of that interest incurred cannot be allowable as business expenditure. We cannot subscribe to the theory of the direct nexus of the funds between the borrowings of the funds and diversion thereof for non-business purposes. There is no escape from the finding that the interest being paid by the assessee to the extent the amounts are diverted to the partners on interest free basis are to be disallowed. Had it been so, there would have been no outstanding interest bearing loans and the assessee could have used funds for giving interest free advances to the partners. It was held in the case of CIT vs. H.R. Sugar Factory (P) Ltd. (1990) 87 CTR (All) 132 : (1991) 187 ITR 363 (All), held that the Court cannot shut its eyes to realities. What has actually happened is visible to the naked eye. The assessee, a private limited company closely held by three family group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case are that the assessee is running a manufacturing unit of yarn in the name of M/s Ganpati Synthetics, which is a unit of M/s Ganpati Associates. In the said unit, the assessee has shown profit. The assessee has shown loss of Rs. 4,50,675 on trading of cotton bales. The said loss was set off against business income of Rs. 7,27,494. It was claimed before the AO that the purchases and sales of cotton bales were made through agents at Pili Banga, Rajasthan, namely, M/s Suresh Kumar Surendra Kumar and M/s Prem Kumar Satish Kumar. The loss has been shown as follows: (a) M/s Prem Kumar Satish Kumar had purchased 165 bales of cotton from M/s Vardhman Industries, Pili Banga, (Raj.) on 22nd and 23rd March, 1996 for Rs. 14,31,945 and sold the same within a week on 27th March, 1996 and 30th March, 1996 to three dealers of Pili Banga for Rs. 11,40,903 and thus incurred a loss of Rs. 2,91,044. (b) M/s Satish Kumar Surendra Kumar purchased 110 bales of raw cotton during the year from 12th Jan., 1996 to 8th Feb., 1996 for Rs. 5,51,664 from various Pili Banga parties and after getting them ginned and pressed from a processor M/s Dalip Chand & Sons Industries, Pili Banga, the same were s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, he submitted that the AO was not aware with the system of practice followed in the Mandies of agricultural produce prevalent in India and on the contrary he was little bit confused. The AO neither tried to understand the system and practice followed by the Arhtias in such type of trade nor have tried to understand the substance of the transaction and on the contrary, it appears that he was bent upon to disallow the loss as claimed by the assessee either on this pretext or other. He further submitted that in order to understand the business transactions in between various parties one must be aware not only with the relevant laws but also the practice and custom prevalent in such type of trade. 11. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below. 12. We have heard both the parties and perused the material placed on record. The main contention of the assessee is that this issue was not at all the issue at the time of reopening of the assessment as enumerated in the order. The assessment was reopened to consider two issues other than this issue, as such, this issue cannot be considered. This argument of the assessee has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to levy tax on the entire income that has escaped assessment and once assessment is validly opened, no distinction can be made between the items falling under s. 147(a) or under s. 147(b)-in the present case, once the High Court came to the conclusion that notice was valid in respect of one item of cash credit, it was not open to examine the validity of the notice in regard to the remaining items-judgment of Hon'ble Allahabad High Court in Writ Petn. No. 152 of 1974, dt. 22nd April, 1974 overruled. Hence, the argument of this issue is rejected. Since we have followed the judgment of Hon'ble Supreme Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. and judgment of jurisdictional High Court, we have not considered the judgment of Kerala High Court in the case of Travancore Cements Ltd. vs. Asstt. CIT relied by the learned counsel for the assessee. 13. Now, coming to the merits of the case, the assessee has not been able to lead any evidence regarding taking delivery of the cotton bales from various suppliers either by agents or by itself. Also, there is no evidence of taking delivery after processing the cotton bales from the customers by the assessee's agent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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