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TMI Blog2019 (1) TMI 992X X X X Extracts X X X X X X X X Extracts X X X X ..... l restrictions and liquidation damages/pre-payment charges, as aforesaid; it was neither prudent for the assessee to divert any part of borrowed funds for non-business purposes; nor was it prudent to make pre-payment of loan repayments even if the assessee had its own interest free funds. In these specific and peculiar facts and circumstances, there is no case for any disallowance of interest u/s 36(1)(iii) of I.T. Act. Disallowance of interest U/s 36(1)(iii) on merits. Accordingly, both the appeals filed by the Revenue are dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... nd on or before the time of hearing. (1.3) In this order, the following abbreviations have been used: a. Assessing Officer as AO b. Assessment Year as A.Y. c. Commissioner of Income Tax (Appeals) as CIT(A) d. Departmental Representative as DR e. Dated as dtd. f. Income Tax Act, 1961 as I.T. Act,1961 g. Income Tax Appellate Tribunal as ITAT h. Learned as Ld. i. Read with as r/w j. Under Section as U/s (1.4) For the sake of convenience, we hereby dispose off the aforementioned two appeals and Cross Objection vide ITA No. 3869/Del/2014 (A.Y. 2007-08), ITA No. 3870/Del/2014 (A.Y. 2010-11) and Cross Objection 128/Del/2014 (A.Y. 2007-08) through this consolidated order. The Assessee filed the return of income for A.Y. 2007- 08 showing Nil income. Original Assessment Order dated 10.12.2009 was passed U/s 143(3) of I. T. Act wherein Assessee's returned income was accepted and assessment was made on Nil income. Thereafter, the assessment was reopened U/s 147 r/w 148 of I.T. Act. Vide notice dated 30/03/2012 pursuant to which Assessment Order U/s 143(3)/147 of I.T. Act, was passed on 10/01/2013, in which an addition of ₹ 6,45,21,521/- was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be entitled to take all the points before the assessing authority. The appeals are dismissed. There will be no order as to costs." 5.3 The issue was again examined by the apex court in the case of Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 161 TAXMAN 316 (SC) wherein it was held as under: "16. Section 147 authorises and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income far any assessment year has escaped assessment. The word "reason in the phrase "reason to believe" would mean cause or justification, if the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot he read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Off leer is to administer the statute with .solicitude for the public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 143(1) had been issued." 5.4 The Hon'ble Courts in the judgments mentioned above have clearly held that formation of belief by the AO is within the realm of subjective satisfaction and it is not necessary for the AO to conclusively prove the escapement of income before initiating proceedings u/s 147. Therefore, it is held that the AO had reasons to believe that income had escapement assessment and he was within his competence to invoke the powers contained in section 147 to initiate reassessment of the income of the appellant. The ground of appeal is thus ruled against the appellant. 6. Ground No. 2 is in respect of disallowance under section 36 (l)(iii). 6.1 The AO held that the appellant company used substantial amount of funds which were borrowed as investments, which was not the business of the company. Therefore, the AO disallowed proportionate interest paid on account of funds utilized as investments stating that it was for non business purposes. 6.2 The appellant on the other hand stated that the loans borrowed and the utilization of funds was purely for business purposes. A part of the loans was utilized for investment in debt oriented funds. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction. The borrowing must be a genuine borrowing and not a bogus one. The borrowing may be on a permanent footing such as by way of debenture loan or a spasmodic one such as from year to year, or for short term such as by way of overdrafts from banks, or loans from time to time. 6.7 The amount should be borrowed for the purposes of the business. The moneys should be borrowed by the appellant for purposes of the appellant's business. Further, the expression 'for the purpose of the business' may take into account not only the day to day running of a business but several other matters. A borrowing diverted from business would cease to be a borrowing for purpose of business, so that the interest proportionate to such diverted funds is liable for disallowance. In order to be allowable as expenses, it should be in respect of business which was carried on by the appellant and the profits of which are computed and assessed, and should be incurred after the business is set up. Where the expenses were in connection with or related to a business which was yet to commence, the decision of the Tribunal in disallowing the deduction claimed by the appellant was correct. Interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds disallowance on account of interest U/s 36(1)(iii) of I.T. Act. Aggrieved, the Assessee filed an appeal before Ld. CIT(A), who, vide impugned order dated 09/04/2014, deleted the addition made by the AO, on account of the aforesaid disallowance of ₹ 15,41,80,533/- U/s 36 (1)(iii) of I. T. Act. The Revenue is in appeal against the aforesaid order dated 09/04/2014 of Ld. CIT(A) vide ITA No. 3870/Del/2014 for Assessment Year 2010-11. Relevant portion of the order of Ld. CIT(A) for A.Y. 2010-11 is as under:- "7. Ground No. 3 is in respect of disallowance under section 36 (1)(iii). 7.1 The AO held that the appellant company used substantial amount of funds which were borrowed, as investments, which was not the business of the company. Therefore, the AO disallowed proportionate interest paid on account of funds utilized as investments stating that it was for non business purposes. 7.2 The appellant on the other hand stated that the loans borrowed and the utilization of funds was purely for business purposes. A part of the loans was utilized for investment in debt oriented funds. These funds were the appellant's own funds. The balance funds were used for investment in bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be on a permanent footing such as by way of debenture loan or a spasmodic one such as from year to year, or for short term such as by way of overdrafts from banks, or loans from time to time. 7.7 The amount should be borrowed for the purposes of the business. The moneys should be borrowed by the appellant for purposes of the appellant's business. Further, the expression 'for the purpose of the business' may take into account not only the day to day running of a business but several other matters. A borrowing diverted from business would cease to be a borrowing for purpose of business, so that the interest proportionate to such diverted funds is liable for disallowance. In order to be allowable as expenses, it should be in respect of business which was carried on by the appellant and the profits of which are computed and assessed, and should be incurred after the business is set up. Where the expenses were in connection with or related to a business which was yet to commence, the decision of the Tribunal in disallowing the deduction claimed by the appellant was correct. Interest on money borrowed for investment in a joint venture company could be treated as one borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice issued under section 148 of the Act and requesting for reasons to believe dated 16 April, 2012. 3. Copy of reasons recorded by Ld. Deputy Commissioner of Income-tax, Circle 14(1) dated 27th March, 2012. 4. Copy of letter of objection dated 12th September, 2012 filed against reopening of assessment U/s 147 of the Act. 5. Copy of submission filed before the Ld. Assessing Officer dated 20th October, 2009. 6. Copy of submission dated 20th November 2013 filed before the Hon'ble CIT(A)-XVII 7. Copy of audited financial statement pertaining to AY 2007-08 8. Copy of order of disposal of objections for re-opening of assessment for AY 2007-08. 9. Copy of appeal against order u/s 143(3)/147 to CIT(A). 10. Copy of assessment order passed under section 143(3) of the Act dated 27th December, 2012 passed by the Ld. DCIT, Circle -14(1) for AY 2010- 11. 11. Copy of submission dated 26th December, 2013 filed before the Hon'ble CIT(A)-XVII 12. Summary of facts and arguments filed before CIT(A) dated 04th April, 2014. 13. Copy of audited financial statement pertaining to AY 2010-11. 14. Loan agreement dated 13th January 2004 with Asian Development Bank. 15. Loan agreement dated 9th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceeded the assessee's own interest free funds. The Ld. Counsel for assessee further contended, with the help of the following judicial precedents, that in the facts and circumstances of the assessee, in any case, there is presumption that investments were made out of interest free funds generated or available with the company including the share capital and reserves. • Reliance Utility and power Limited [2009] 313 ITR 340/178 Taxman 135 (Bom.) • Woolcoombers of India Limited [1982] 134 ITR 219 (Cal.) • East India Pharmaceuticals [1997] 224 ITR 627 (SC) • DD Industrial Ltd. [2015] 57 taxmann.com 310 (Delhi) • Tin Box Co. 135 taxman 145 (Delhi) (2.1) The Ld. Counsel for assessee also drew our attention to Cash Flow Statement of the respective Financial Years which is as under, in support of the contention that the assessee had adequate interest free funds of its own for making investments in mutual funds: Year ended Revenue (A) Share Capital (B) Drawn loan amounts as at end of year (C) Loan utilized= Asset Capitalization + CWIP+ Capital advance (D) Investment in mutual funds as at year end (E) Whether (D)- [(B)+(c)] 2006 NIL 420 980 (loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, it is also not in dispute that due to contractual restrictions and liquidation damages/pre-payment charges, as aforesaid; it was neither prudent for the assessee to divert any part of borrowed funds for non-business purposes; nor was it prudent to make pre-payment of loan repayments even if the assessee had its own interest free funds. In these specific and peculiar facts and circumstances, there is no case for any disallowance of interest U/s 36(1)(iii) of I.T. Act. Moreover, Ld. DR failed to bring any material facts to our notice to distinguish the facts of the assessee with the facts of the judicial precedents on which the Ld. CIT(A) relied upon and on which the Ld. Counsel for assessee relied upon during appellate proceedings in ITAT. The Ld. DR thus failed to make any case for any interference by us with the order of Ld. CIT(A) on this issue. (4.2) In view of the aforesaid specific and peculiar facts and circumstances of the case, and in view of the foregoing discussion, we decline to interfere with the decision of Ld. CIT(A) on the issue of disallowance of interest U/s 36(1)(iii) of I.T. Act, on merits. Accordingly, both the appeals filed by the Revenue are dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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