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TMI Blog2015 (8) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpreted this provision in a different manner from the way in which it was interpreted by the AO and then suggested that the amount ought to have been charged to tax. The instant case is fully covered by the ratio of the judgment in the case of PVS Beedis Pvt. Ltd. ( 1997 (10) TMI 5 - SUPREME Court) read with the exception carved out by the Hon'ble Supreme Court in Indian & Eastern Newspapers Society (1979 (8) TMI 1 - SUPREME Court ) drawing a line of distinction between communication of law and interpretation of law. The argument of the ld. AR on this issue, being devoid of any merit, is hereby jettisoned. It is, therefore, held that the audit objection in the instant case constituted an `information’ about the escapement of income to the AO, thereby justifying the initiation of reassessment. - Decided against assessee. Deduction of interest u/s 43B - Transfer of interest liability - AR argued that when the assessee transferred all the assets and liabilities of its paper board unit to M/s RT Paper Board Ltd., and the liabilities also included interest payable to financial institutions at ₹ 2.45 crore, such transfer of interest liability should be considered as discharge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee objected to the initiation of reassessment proceedings before the ld. CIT(A) on certain counts but without any success. Eventually, the assessment order was upheld on merits as well. The assessee is now in appeal before us. 3. We have heard the rival submissions and perused the relevant material on record. The first issue before us through ground no. 1 is challenge to the initiation of re-assessment proceedings. The ld. AR assailed the initiation of re-assessment proceedings on three counts viz., Change of opinion; Reasons not supplied by the AO; and Audit objection cannot lead to reassessment. We shall deal with these objections, one by one. Change of opinion 4.1. The ld. AR contended that that the annual accounts of the assessee thoroughly elaborated about the transfer of its paper board unit to M/s RT Paper Board Ltd., and, as such, the presumption should be that the AO did consider and apply his mind on the deductibility of interest of ₹ 2.45 crore. Initiation of re-assessment proceedings on this basis, in the opinion of the AR, amounted to change of opinion. 4.2. In order to appreciate the rival contentions, it is firstly relevant to understand the controv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment order about the Miscellaneous balances written back. On page 2 of the assessment order dated 24.3.2006 passed u/s 143(3) in the first round, there is reference to the amount of ₹ 1.16 crore, being the amount of interest waived off by the institutions. There is no discussion whatsoever on the amount of interest of ₹ 2.45 crore claimed as deduction by way of its transfer to M/s RT Paper Board Ltd. What to talk of discussing this issue, there is not even a whisper about the entire issue of transfer of unpaid interest of ₹ 2.45 crore to M/s RT Paper Board Ltd., and the deductibility of this amount in terms of section 43B of the Act. Under such circumstances, the question arises as to whether a mere disclosure of the factual aspects of transfer of undertaking in the annual accounts would satisfy the condition of formation of view by the AO on the subject, so as to eclipse his power from initiating the reassessment proceedings. In this regard, it is relevant to note Explanation 2 to section 147, the relevant part of which reads as under:- Explanation 2. -For the purposes of this section, the following shall also be deemed to be cases where income charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., (2015) 373 ITR 661 (SC). The Full Bench of the Hon ble Delhi High Court in CIT vs. Usha International Ltd., (2012) 348 ITR 485 (Del) has also held that there is no scope for arguing about the change of opinion when no opinion has been formed. It has been laid down by Their Lordships that : `The expression change of opinion postulates formation of opinion and then a change thereof. In the context of Section 147 of the Act it implies that the Assessing Officer should have formed an opinion at the first instance, i.e., in the proceedings under Section 143(3) and now by initiation of the reassessment proceeding, the Assessing Officer proposes or wants to take a different view. ..... The word opinion as per the Blacks Law Dictionary means a statement by a Judge or a court of a decision reached by him incorporating cause tried or argued before them, expounding the law as applied to the case and, detailing the reasons upon which the judgment is based. In the context of assessment proceedings, it means formation of belief by an Assessing Officer resulting from what he thinks on a particular question. It is a result of understanding, experience and reflection to use the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court in the case of GKN Driveshaft (India) Ltd. (supra) has held that the AO is obliged to supply reasons to the assessee before taking up the reassessment proceedings. The logic behind this exercise is to give an opportunity to the assessee to raise objections before the AO against the initiation of reassessment proceedings. When such objections are raised, it become obligatory on the part of the AO to firstly deal with and pass an order on the objections raised by the assessee against the initiation of re-assessment proceedings. Only thereafter, he can proceed to take the reassessment on merits. If no reasons are demanded by the assessee during the course of re-assessment proceedings, then, there is no obligation nor there can be such obligation on the part of the AO to supply the reasons. Adverting to the facts of the instant case, we find that there is no reference whatsoever in the assessment order about the assessee seeking a copy of reasons for reassessment. In fact, a gist of the audit objection, which formed the bedrock for the initiation of reassessment, has been reproduced in the assessment order itself. Further, no such issue was taken up by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot permissible under the law. He relied on certain judgments including that of the Hon ble Supreme Court in Indian and Eastern Newspaper Society vs. CIT (1979)119 ITR 996 (SC) to claim that initiation of reassessment proceedings on the basis of internal audit report, was not sustainable. On the contrary, the ld. DR relied on the judgment of the Hon'ble Supreme Court in the case of CIT vs. PVS Beedis Pvt. Ltd. (1999) 237 ITR 13 (SC) in which the initiation of re-assessment proceedings on the basis of audit objection has been held to be valid. 6.2. We have heard the rival submissions on the point in the light of the judgments relied on by both the sides. In view of the above referred judgments of the Hon'ble Summit Court on the point, we need to examine as to whether the assessee's case falls within the ratio laid down in PVS Beedis Pvt. Ltd. (supra) or in Indian and Eastern Newspapers Society (supra) and further CIT vs. Lucas T.V.S. Ltd. (1998) 249 ITR 306 (SC) 6.3. In the case of Indian and Eastern Newspapers Society (supra), the assessee received some amount on account of occupation of its conference hall and rooms which was assessed by the AO as & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, the initiation of reassessment, based on the substituted interpretation of a provision by the internal audit party, cannot be sustained. It has been categorically held by the Hon'ble Supreme Court in Indian Eastern Newspaper Society (supra) that the internal audit party of the IT Department 'performs essentially administrative or executive functions and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of IT authorities. The IT Act does not contemplate such power in any internal audit organisation of the IT Department .... The statute supports the conclusion that an audit party can't pronounce on the law, and that such pronouncement does not amount to information within the meaning of s. 147(b) of the IT Act, 1961'. Having made the above observations in para 6 of its judgment, the Hon'ble Summit Court then made an exception in the same para to the effect that : ` But although an audit party does not possess the power to so pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communicator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian and Eastern Newspapers Society (supra), the otherwise taxability of receipt from occupation of conference hall and rooms was not disputed. Whereas the AO held such amount to be taxable as 'Business income', the audit party held it to be taxable as 'Income from house property.' It was this adoption of a different interpretation by the internal audit party to the existing factual position, which was not approved by the Hon'ble Supreme Court as a good ground to initiate a valid re-assessment. Similarly, in the case of Lucas TVS Ltd. (supra) , the AO allowed deduction u/s 35(2) for the amounts spent in this year as well as the earlier years and the internal audit party opined that only the amount spent during the year was allowable as deduction u/s 35(2). It is obvious that in both these cases, the AO's opinion on the interpretation of the relevant provision was overruled by the internal audit party. In contrast, in the case of PVS Beedis Pvt. Ltd. (supra), the assessee claimed deduction u/s 80G and the internal audit party pointed out that such deduction was not permissible because the registration of the trust to which contribution was made, had alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the AO resulted in over assessment of loss of ₹ 2.45 crore. This shows that the AO was simply informed about the fact which had escaped his attention during the course of assessment proceedings to the effect that a sum of ₹ 2.45 crore was not allowable u/s 43B of the Act which is nothing, but, a communication of law to the AO. We are not confronted with a situation in which the AO, after due consideration of the matter in the original assessment proceedings interpreted section 43B as allowing deduction for a sum of ₹ 2.45 crore in respect of interest not paid to the financial institutions, but, transferred to the assessee s wholly owned subsidiary company, but, the audit party interpreted this provision in a different manner from the way in which it was interpreted by the AO and then suggested that the amount ought to have been charged to tax. The instant case is fully covered by the ratio of the judgment in the case of PVS Beedis Pvt. Ltd. (supra) read with the exception carved out by the Hon'ble Supreme Court in Indian Eastern Newspapers Society (supra) drawing a line of distinction between communication of law and interpretation of law. The argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f clauses (d) (e) of section 43B divulges that a deduction for any sum payable by the assessee as interest on any loan or borrowing from any public financial institutions or scheduled banks etc., is allowable as deduction in computing the income referred to in section 28 only of that previous year in which such sum is actually paid by him. This mandate of allowing deduction in the year in which such interest is actually paid by the assessee irrespective of the year in which liability to pay such interest was incurred. We are accentuating on the expression actually paid from the prescription of section 43B, which leaves nothing to doubt that the deduction on account of interest to scheduled banks and financial institutions, etc., can be allowed only in the year in which it is actually paid. The term actually paid is to be seen in contradistinction to the term constructive payment , which has been coined by the ld. AR in the context of this provision. We fail to appreciate any logic in substituting actual payment with the so-called constructive delivery, when the legislature has provided in unambiguous terms that interest must be actually paid. By no stretch of imagination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banks/financial institutions. In our considered opinion, this judgment is of no assistance to the assessee. 11. It is further noticed that the legislature has put the position beyond any shadow of doubt by inserting Explanations 3C and 3D by the Finance Act, 2006 with retrospective effect covering the assessment year under consideration, which read as under : - Explanation 3C. -For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause ( d ) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid. Explanation 3D. -For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause ( e ) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance shall not be deemed to have been actually paid. 12. Two things are palpable from the prescription of Explanations 3C and 3D. First is that the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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