2012 (10) TMI 1054 - AT - Income Tax

Disallowance of interest u/s 14A - legal validity of addition made in the assessment under section 153A - Held that - time period for issue of notice had expired before date of search - Addition can be made only on the basis of incriminating material found in the course of search - here the disallowance of interest was not based on seized material and therefore no assessment under section 153(3) - Decided in favor of assessee Held that - AO did have jurisdiction and disallowance had to be considered on merit - Tribunal held that the borrowed funds could not be held to be utilized wholly and exclusively for the purpose of business as same were invested in the company with which the assessee had no business - disallowance of interest is confirmed - Decided against the assessee

Summary

Issues:
1. Jurisdiction under section 153A of the Income Tax Act, 1961.
2. Legal validity of disallowance of interest under section 153A.
3. Merit of disallowance of interest in different assessment years.

Jurisdiction under Section 153A:
The appeals were against the CIT(A)'s order for the assessment years 2004-05 to 2006-07, primarily disputing the disallowance of interest and challenging the jurisdiction under section 153A of the Income Tax Act. The Special Bench's decision clarified that in cases where assessments were not abated and had attained finality, the assessment/re-assessment should be based on incriminating material found during the search. For the assessment year 2004-05, as no incriminating material was found during the search, the disallowance of interest was deemed invalid. However, for the subsequent assessment years where assessments had not attained finality, the AO retained jurisdiction under section 153A.

Legal Validity of Disallowance of Interest:
Regarding the disallowance of interest, it was found that the borrowed funds were utilized in a company where the assessee was a director, but the company had no business dealings with the assessee except for being a director. The AO disallowed the claim stating that the borrowed funds did not generate any income for the assessee and were not allowable under section 14A. The Tribunal upheld the disallowance as the borrowed funds were not utilized exclusively for business purposes and had no direct or indirect nexus with the assessee's business. The disallowance of interest and car hire charges were confirmed for the assessment years 2005-06 and 2006-07 based on these findings.

Conclusion:
The appeal for the assessment year 2004-05 was allowed due to the lack of incriminating material, while the appeals for the assessment years 2005-06 and 2006-07 were dismissed based on the disallowance of interest and car hire charges. The Tribunal upheld the disallowance of interest for the latter years as the borrowed funds were not utilized for business purposes and did not have a connection with the assessee's business activities.