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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 ..... of Rs. 5,01,38,035/- which was not allowed in earlier assessment years, out of which the assessee claimed deduction for a sum of Rs. 3,61,75,597/- u/s 43B by claiming it as discharged/paid. This amount of Rs. 3.61 crore included a sum of Rs. 2.45 crore which was transferred to a wholly owned subsidiary company. Since such interest of Rs. 2.45 crore was not actually paid, but, only transferred to a subsidiary company, the AO reopened the assessment by noticing that the same was not allowable. After entertaining objections from the assessee, the AO denied deduction of Rs. 2.45 crore. The assessee 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 reassessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g back to the question of change of opinion, the assessee has canvassed a view that since the AO examined this issue during the course of original assessment proceedings, the initiation of reassessment proceedings on the same count amounts to change of opinion, which is not permissible u/s 147. Now the primary question is whether the AO formed any opinion in the original assessment proceedings on the deductibility of this interest amount. It is noticed that during the course of original assessment proceedings, there is some discussion in the assessment 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 Rs. 1.16 crore, being the amount of interest waived off by the institutions. There is no discussion whatsoever on the amount of interest of Rs. 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 Rs. 2.45 crore to M/s RT Paper Board Ltd., and the deductibility of this amount in terms of section 43B of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monstrate the formation of opinion, the assessee cannot argue in the reassessment proceedings that it is a case of initiation of reassessment on change of opinion. The Hon'ble Supreme Court in ACIT vs. Rajesh Jhaveri Stock Brokers (2007) 291 ITR 500 (SC) has held that unless the formation of opinion is shown, there can be no question of arguing about the change of opinion. Similar view has been reiterated by the Hon'ble Supreme Court in the case of DCIT vs. Zuari Asset Development and Investment Company 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. . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id not supply reasons for initiation of re-assessment proceedings and, as such, the reassessment order be declared a nullity. To buttress this contention, the ld. AR relied on the judgment of the Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. Vs. ITO and Ors. (2003) 259 ITR 90 (SC). The ld. DR strongly opposed this contention. 5.2. After considering the rival submissions and perusing the relevant material on record, we find that it is, no doubt, true that the 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpletely belies the contention of the ld. AR that the assessee was not supplied with the reasons. Leaving this issue at this stage only, it suffices to say that the assessee was promptly supplied the reasons leading to the initiation of reassessment proceedings. This contention is, therefore, rejected. Audit objection cannot lead to reassessment 6.1. The ld. AR submitted that the AO initiated reassessment proceedings simply on the basis of audit objection, which is not 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r wrong. An interpretation to a provision given by the internal audit party cannot be construed as a declaration of law binding on the AO. When an internal audit party objects to the interpretation given by the AO to a provision and proposes substitution of such interpretation with the one it feels right, it crosses its jurisdiction and enters into the realm of judicial supervision, which it is not authorized to do. In such circumstances, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner contrary to what the AO had done, it does not lay down a valid foundation for the initiation of re-assessment proceedings. If however, the audit party does not offer its own interpretation to the provisions and simply communicates the existence of law to the AO or any other factual inaccuracy, then the initiation of reassessment proceedings on such basis cannot be faulted with. It can be seen that in the case of Indian 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in over assessment of loss of Rs. 2,45,01,117/- involving potential tax effect of Rs. 90,01,60/-. " 6.7. A close look at the above audit objection divulges that the audit party simply suggested that the interest of Rs. 2.54 crore was not actually paid, but, only transferred to a subsidiary company and the same should have been disallowed and this omission on the part of the AO resulted in over assessment of loss of Rs. 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 Rs. 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 Rs. 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 am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him : ................". 9. A bare perusal of 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 contradisti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain employees deductible u/s 37(1) of the Act. Section 37(1), unlike section 43B, does not contain any stipulation of actual payment as a condition precedent for allowing deduction. We are concerned with a case in which section 43B is under consideration and the deduction can be allowed only when the amount is `actually paid' to the 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 sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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