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2017 (11) TMI 632 - ITAT CHENNAIDisallowance of (proportionate) interest (premium) on debentures - the issue of the debentures to the directors of the assessee-company, who, as it transpires, are the erstwhile partners of the successee-firm - Held that:- It is only the partner’s capital, which is by definition the positive difference between the firm’s assets and liabilities, which could be regarded as the firm’s capital, on which deduction of interest, subject to the relevant conditions, is allowable under the Act (s. 36(1)(iii) r/w. s. 40(b)(iv)). The firm’s assets are recorded at cost, defined u/s. 43(1), subject to the exceptions laid u/s. 43A and proviso to s. 36(1)(iii). The same, as shall be noted, are largely in agreement with the accounting standards, being AS-10. It is in view of this settled position of law that we also endorse the AO’s construing the assessee’s claim, referring to McDowell & Co. Ltd. (1985 (4) TMI 64 - SUPREME Court), as largely an exercise in tax evasion. The revaluation in the present case has no purpose except to claim tax deduction on interest on a higher level of borrowings. An analogy, to our mind, would be a firm (or any entity) claiming depreciation on the enhanced value of an asset, otherwise eligible for depreciation under the Act, using the tax neutral event of succession, as u/s. 47(xiii), for the purpose. The ld. CIT(A) clearly has misdirected himself in the instant case. We, in view of the foregoing, accordingly, uphold the AO’s action qua the disallowance of the interest (premium) on the debentures, i.e., as relatable to the revaluation of land by the successee firm, Kali Material Handling Systems. Reopening of the assessments - Held that:- In the facts of the case, the returns for the relevant years, i.e., AYs. 2008-09 and 2009-10, were only processed u/s. 143(1), which procedure bars the examination of the assessee’s return or the claims preferred thereby, with as much as even the prima facie adjustments, i.e., on the basis of a return and the accompanying material, also barred w.e.f. 01.06.1999. The disallowance under reference, as afore-stated, is even otherwise not a subject matter of a prima facie adjustment, entails as it does, a complete understanding and knowledge of the primary facts leading to the issue of the debentures to the directors of the assessee-company, who, as it transpires, are the erstwhile partners of the successee-firm. And, accordingly, there is no question on either formation of reason to believe or an opinion by the AO in the matter, and which, as apparent from its’ reading, guided the decision in TANMAC India (supra). Rather, as afore-stated, any issue of notice u/s. 148 without the knowledge of the relevant facts would be violative of s.147, being not supported by any reason/s to believe. The charge of change of opinion, which is the basis of the assessee’s legal plea, is misplaced in view of the admitted position that the relevant facts along with the materials came to light only during the course of the assessment proceedings for AY 2010-11. And, further, a failure to take steps u/s. 143(3) would not render the AO powerless to initiate reassessment proceedings when the return had been earlier subject to processing u/s. 143(1). The ambit of the two procedures is completely different.The assessee’s legal plea is without merit and, accordingly, not maintainable. We decide accordingly, rejecting the assessee’s legal issue, and answering thus the third question arising in the present case by validating the initiation of reassessment proceedings - Appeal Decided against assessee.
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