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TMI Blog2016 (5) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... s erred in confirming disallowance of interest of Rs. 5,56,268 on Kotak Term Loans when the said borrowed funds are not used in advancing loans and advances to various parties, as per assessee's submission to AO dated 27/1/2014 Para 1 to 3 and Cash Flow statement As per Ann A to Submission dated 18/3/2014. 3. The Ld CIT-(Appeals)-1,Surat has erred in confirming disallowance of interest of Rs. 5,56,268 without distinguishing between the part of borrowed funds on which interest paid was claimed and part of the borrowed funds on which interest paid , was not claimed as explained by the assessee vide his submission to CIT(A) dated 5/5/2015. 4. The Ld CIT-(Appeals)-1, Surat has erred in confirming the addition without considering and appreciating the facts stated by the assessee vide his submissions dated 27/1/2014 Para 1 to 3 and submission dated18/3/2014 Ann A Cash Flow Statement. 5. Without Prejudice to what is stated in the above grounds appellant submits that even if the funds are assumed to be used for advancing the loans, the same are given out of commercial expediency and therefore to be considered as advanced for business purpose. 6. The Assessee craves leave to add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to business transactions and also interest payable on major portion of secured loan has been charged to the capital account of the persons and not debited to the profit and loss account and therefore, assessee was having sufficient interest free funds which deemed to have been applied towards loans and advances given on which no interest has been charged by assessee. However, ld. Assessing Officer was not convinced with the reply of assessee and went ahead to disallow interest expenditure to the extent of Rs. 5,56,268/- and added the same to the NIL income assessed u/s 143(3) of the Act and finally framed assessment order u/s 143(3) r.w.s. 147 of the Act at Rs. 5,56,268/-. 4. Aggrieved, assessee went in appeal before ld. CIT(A) who rejected the ground of assessee raised against the order u/s 143(3) r.w.s. 147 of the Act by observing that as the case was reopened within four years from the relevant assessment year, therefore, the provisions of section 147 of the Act therefore, the provisions of section 147 of the Act are applicable and dismissed the ground for disallowance of Rs. 5,56,268/- and confirmed the addition made by Assessing Officer by observing as under :- "D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness purpose of the assessee concern. Thus, the business expediency test also failed in this case. 6.3 In a peculiar situation where assessee is having liquidity but diverting those funds as interest-free advances to partners/sister concern and then borrow funds from Bank on interest for business - in that case it was held in the case of ACIT Vs. Punjab Stainless Steel Ind. 128 ITD 12 (Del) that in such a situation interest on borrowed capita! has to be disallowed. Almost similar situation prevailed in this case also. 6.4 In view of the above discussion, I am of the considered view that disallowance of interest of Rs. 5,56,268/- was fully justified in this case. The ground of the assessee is dismissed." 5. Assessee is now in appeal before the Tribunal. 6. First we take ground no.1 raised against the action of ld. CIT(A) who erred in holding the jurisdiction of Assessing Officer for reopening of the assessment. Ld. AR submitted that reasons recorded for reopening of assessment fail as the balance sheet and other financial documents which were already forming part of the assessment records had been examined by the Assessing Authority during the proceedings u/s 143(3) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een discovered by the Assessing Officer will not necessarily96 amount to disclosure within the meaning of the foregoing proviso. Explanation 2.-For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; [(ba) where the assessee has failed to furnish a report in respect of any international transaction which he was so required under section 92E;] (c) where an assessment has been made, but- (i) income chargeable to tax has been underassessed ; or (ii) such income has been assessed at too low a rate ; or (iii) such income has been made the subject of exces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the proceedings u/s 143(3) of the Act. 10. In these circumstances, we are of the view that ld. Assessing Officer has rightly initiated proceedings u/s 147 of the Act before the end of four years from the relevant assessment year. Accordingly, this ground of assessee is rejected. 11. Ground nos.2 to 5 are raised against the order of ld. CIT(A) confirming disallowance of interest of Rs. 5,56,268/- out of the interest paid on Kotak Benk Term loans which have been held to be used for advancing loans and advances to various parties without charging any interest. During the course of assessment proceedings it was observed by Assessing Officer that assessee has taken secured loan of Rs. 85,62,788/- from various banks and also obtained unsecured loan of Rs. 9,84,303/- from various persons. In the profit and loss account assessee has claimed interest expenses of Rs. 7,27,496/- towards secured loans and Rs. 37,333/- towards unsecured loan. However, assessee has not charged interest on loans and advances of Rs. 41,02,373/- and accordingly Assessing Officer applied normal market rate of 15% and calculated the amount of deemed interest income at Rs. 5,56,268/- as escaped income from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est bearing funds and non-interest bearing funds. The only basis taken by Assessing Officer for making addition of Rs. 5,56,268/- was that assessee has claimed interest on secured loans of Rs. 85,62,788/- and interest on unsecured loan of Rs. 9,84,303/- and on the other side assessee has given loans and advances of Rs. 41,02,373/- without charging interest. However, going from the facts of the case produced before us, we find that secured loan of Rs. 85,62,788/- has been taken from following six parties :- i) ICICI Bank Ltd. Rs.7,54,078.13 ii) Barklays Bank Rs.12,81,652.00 iii) HDFC Bank Rs.3,96,108.59 iv) Indiable Credit Service Bank Rs.12,53,766.00 v) Kotak Bank term loan Rs.21,97,486.00 vi) Kotak Bank term loan Rs.26,79,698.00 Total Rs.85,62,788/- Out of the above six secured loans interest debited to profit and loss account on loans is only in relation to term loans taken from Kotak Bank, which is shown at Rs. 7,27,496/- in the profit and loss account whereas interest payable on the remaining four secured loans of Rs. 36,85,604/- has not been claimed as an expenditure in the profit and loss account, but has been debited to the partners' capi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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