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TMI Blog2015 (7) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... he original assessment u/s.143(3) of the Act does not appear to have formed an opinion with regard to allowability of interest and he has accepted the claim of the assessee, as the assessee wanted to be accepted by the Assessing Officer. The assessee having failed to draw the attention of the Assessing Officer regarding interest payment, it cannot be said that there is no violation of provisions of the Act. Further, when no opinion has been expressed in the assessment order and no details or explanation in relation to the claim of interest has been called for by the Assessing Officer, it is not possible to accept the contention of the assessee that the Assessing Officer has applied his mind to the said aspect of interest payment. In the light of the aforesaid discussion, we are of the view that in the light of the reasons recorded by the Assessing Officer, there was sufficient material for Assessing Officer to form the requisite belief that income has escaped assessment for the assessment year under consideration.- Decided against assessee. Disallowance of interest - Held that:- If the amount is advanced from a mixed account or share capital or sale proceeds or profits etc., the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... version the capital account of the assessee after allotment of share had become unsecured loan. For this unsecured loan assessee has not received any interest. So, it has become interest free loan to the company. But, assessee was found to have debited interest expenses to the tune of E26,52,520/- in the profit and loss account. As there was reasons to believe that income has escaped assessment within the meaning of sec.147, the case was reopened and notice u/s.148 dated 22.04.2010 was issued. Accordingly, the Assessing Officer recorded the reason for re-opening of assessment as follows:- The assessee had shown sundry debtors of 34.70 crores. He admitted interest received from M/s. S.P. Apparels of 1,61,93,186/- vide his letter dated nil filed in this office on 22.04.2008, the assessee explained that he was deriving income as interest on capital from M/s. S.P. Apparels and interest from bank only. Further, vide letter dated 22.04.2008 the assessee explained that his sundry debtors include 24,52,61,029/- from M/s. S.P. Apparels Ltd which is a closely held company. In the balance sheet furnished as on 31.03.2006, the assessee has not mentioned anything about his assets or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,500/- ----------------- Assessed Income 1,31,15,216/- ------------------ 4. Aggrieved, the assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals) stating that there was no fresh material as to reopen the concluded assessment and according to ld. Authorised Representative for assessee it is only a change of opinion. However, the Commissioner of Income Tax (Appeals) rejected the plea of the assessee and observed that as per the proviso to section 147, reassessment proceedings can be initiated after expiry of four years only if there is a failure on the part of the assessee. But in this present case, the re-assessment was done within four years from the end of the relevant assessment year. Accordingly, he upheld the reopening of assessment. Against this, the assessee is in appeal before us. 5. The ld. Authorised Representative for assessee submitted that in the course of ori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest which is evident from the reason recorded by the Assessing Officer which was reproduced in earlier para of this order. The main contention of the assessee counsel is that this was only change of opinion and all materials available for assessment has already been available with the Assessing Officer in assessment record. We cannot appreciate this argument of the of the ld. Authorised Representative for assessee. The requirement for the Assessing Officer to initiate reassessment u/s.147 of the Act is explained by Supreme Court in its decision in the case of CIT vs. Kelvinator of India Limited 320 ITR 561, wherein it is held as under:- 3. After the enactment of the Direct Tax Laws (Amendment) Act, 1987 i.e., prior to April 1, 1989, section 147 of the Act reads as under: '147. Income escaping assessment.-If the Assessing Officer, for reasons to be recorded by him in writing, is of the opinion that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer. Hence, after April 1, 1989, the Assessing Officer has power to reopen, provided there is 'tangible material' to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words 'reason to believe' but also inserted the word 'opinion' in section 147 of the Act. However, on receipt of representations from the companies against omission of the words 'reason to believe', Parliament reintroduced the said expression and deleted the word 'opinion' on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549 dated October 31, 1989, which reads as follows ([1980] 182 ITR (St.) 1, 29) : '7.2. Amendment made by the Amending Act, 1989 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts books or other evidence from which material facts could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of this section. Had the assessee disclosed the interest payment bifurcation to the Assessing Officer at the time of original assessment, then it would have been said that assessee had done his duty and it is for the Assessing Officer to draw any interference on the fact placed before him. On the failure of the assessee to disclose the fact that assessee made investment in firms/companies and it was not derived any benefit though assessee incurred heavy interest expenditure. In our opinion, a failure on assessee s part to disclose full and true material facts necessary for the assessment is a reason to reopen the assessment though original assessment has been completed u/s.143(3) of the Act. In the present case, since reopening is within the period of four years from the end of the relevant assessment year, requirement of the proviso in sec 147 of the Act namely failure on the part of the assessee to disclose full and all materials facts for his assessment is not required to be fulfilled. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details or explanation in relation to the claim of interest has been called for by the Assessing Officer, it is not possible to accept the contention of the assessee that the Assessing Officer has applied his mind to the said aspect of interest payment. In the light of the aforesaid discussion, we are of the view that in the light of the reasons recorded by the Assessing Officer, there was sufficient material for Assessing Officer to form the requisite belief that income has escaped assessment for the assessment year under consideration. The assumption of jurisdiction under section 147 by issuance of notice under section 148 of the Act is valid and legal and as such no case is made out for intervention by this Tribunal. Therefore, the assessee fails in this ground. This ground is rejected. 8. Regarding disallowance of interest the ld. Authorised Representative for assessee submitted that the sundry creditors as on 31.03.2006 was at E34,70,32,605/-. Out of this, an amount of E24,52,61,029/- due from M/s. S.P. Apparels Limited which is a closely held company and according to the ld. Authorised Representative for assessee capital of the assessee as on 31.03.2006 was around E39,73, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case. No businessman can be completed to maximize his profits. 9. On the contrary, the ld. Departmental Representative submitted that the assessee advanced an amount of E24,52,61,029/- to M/s. S.P. Apparels Limited without any interest. Further, there was investment of E12 crores in shares and the loan and investment are made without bringing any business advantage to the assessee. Further, he submitted that the assessee at the same time, paid interest of E56,61,461/- and the Assessing Officer is justified in disallowing the interest of E26,52,500/- out of the interest expenditure incurred by the assessee of E56,61,461/-. He relied on the judgment of Punjab and Haryana High Court in the case of CIT vs. Abhishek Industries Ltd 286 ITR 1, wherein held that the share capital is meant to be used for productive use in the business. If the share capital, according to the assessee, was surplus and it could part with the same to its sister concern for non-business purpose without any interest, there was no need to raise the loans to that extent and the amount of such share capital should have been utilized for the project itself. In case the assessee has not advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that inspite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for nonbusiness purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. In our view, even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted. 11. The Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. However, a presumption may be raised in a given case as to why an assessee who for the purpose of running its business is required to borrow money from banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim no or little interest from its subsidiaries. 14. In the case of K. Somasundaram and Brothers v. Commissioner of Income-Tax 238 ITR 939, while dealing with a similar proposition, Madras High Court held as under (page 944): The amount so lent, according to the assessee, came out of the contract earnings. The amount borrowed, according to the assessee was invested in the execution of the contracts. It is clear, therefore, that the assessee had invested the borrowed funds in the execution of the contracts, had recouped the money so invested presumably with profits as well on executing the contract. The amount realised on the execution thus, included the amount which the assessee had borrowed and invested. When the assessee decided to lend a substantial pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the assessee has not derived any benefit out of the same. Admittedly, no interest was charged on these advances. The Tribunal appears to have placed reliance on the fact that the partners and their relatives have utilised the amounts for business purposes, such as construction of a shop building etc. So long as the assessee- firm is not the beneficiary of such investments, the nature of investment or the utilisation of such advances has no relevance. So far as the assessee is concerned, it is only an interest free advance. The claim of the assessee's counsel that cash balances were available with the firm for advances to the partners, their relatives and the sister concerns does not advance the assessee's case. If cash balances are available, the borrowing itself is not for the purpose of the business. An assessee with liquidity cannot claim that it can give interest free advances to the partners and others and then borrow funds from the bank on interest for business purposes. Such borrowings will not be for business purposes, but for supplementing the cash diverted by the assessee without any benefit to it. Therefore, so long as the assessee is not the beneficiary of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act and that the Tribunal's approach is not only superficial but too na ve . 14.6 In the case of Indian Metals and Ferro Alloys Ltd. v. CIT (1992) 193 ITR 344, the Orissa High Court held as under (page 349): ... it may be pointed out that, in a hypothetical case, an assessee can earn profits only after the date of investment and advance. It cannot be said that because, in the concerned assessment year, the profit was more than the investment and advance, those came only out of the profit. The actual financial liquidity position on the relevant date has to be established by the assessee. 14.7 Yet again in CIT v. H.R. Sugar Factory Pvt. Ltd. 190 ITR 643 (All.), B.P. Jeevan Reddy C.J. (as his Lordship then was) relying upon his earlier decision in H.R. Sugar Factory Pvt. Ltd.'s case that the assessee-company was not entitled to the allowance of interest. 14.8 In Veecumsees v. CIT, 220 ITR 185 (SC) ; The Hon'ble the Supreme Court held that deduction for payment of interest on the loans raised for building a cinema theatre, which was ultimately closed, was allowable deduction as the assessee was engaged in a composite business of jewellery an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn profits only after the date of investment and advance. It cannot be said that because, in the concerned assessment year, the profit was more than the investment and advance, those came only out of the profit. The actual financial liquidity position on the relevant date has to be established by the assessee . 14.13 In Regal Theatre v. Commissioner of Income Tax, 225 ITR 205, the Delhi High Court held that consideration of the issue regarding allowability of deduction under Section 36(1)(iii) of the Act is purely a question of law as it is an inference to be drawn from the facts. 15. In our opinion, if the amount is advanced from a mixed account or share capital or sale proceeds or profits etc., the same would be termed as diversion of borrowed capital and that the revenue need not require to establish nexus of the funds advanced to the sister concerns with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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