2002 (7) TMI 235 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition on account of interest payment to ANZ Grindlays Bank.
2. Validity of reassessment proceedings initiated by the AO.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Interest Payment to ANZ Grindlays Bank

Facts and Background:
The assessee-company, as per the order of the Board for Industrial and Financial Reconstruction (BIFR) dated 15th May, 1990, took a loan of Rs. 1,14,00,000 from ANZ Grindlays Bank to finance M/s Mewar Sugar Mills Ltd., a sick industry. The loan was repaid within the same accounting year using an interest-free loan from Relico (India) Ltd. The assessee claimed an interest payment of Rs. 5,92,840, which was disallowed by the AO on the grounds that the loan did not appear in the balance sheet.

CIT(A) Findings:
The CIT(A) deleted the disallowance, noting that the finance provided to M/s Mewar Sugar Mills Ltd. was indeed from the loan availed from ANZ Grindlays Bank and repaid by Relico (India) Ltd. The CIT(A) found no justification for the disallowance.

Tribunal's Decision:
The Tribunal reversed the CIT(A)'s decision, stating that the investment in M/s Mewar Sugar Mills Ltd. was for acquiring controlling interest and management as per BIFR's order, and thus, the interest paid on the borrowings was for capital investment, not for business purposes. Therefore, the interest was not deductible as a revenue expenditure.

Issue 2: Validity of Reassessment Proceedings Initiated by the AO

Facts and Background:
The AO initiated reassessment proceedings on the grounds that the assessee-company advanced an interest-free loan to M/s Mewar Sugar Mills Ltd., and the notional interest of Rs. 19,44,000 per annum had escaped assessment.

CIT(A) Findings:
The CIT(A) cancelled the reassessment, stating that the AO did not appreciate the facts correctly and that there was no provision in law to tax notional interest income where a taxpayer has advanced interest-free loans. The reasons recorded by the AO did not indicate that income chargeable to tax had escaped assessment.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee had disclosed complete facts during the original assessment, and the AO had already examined the issue of loan and interest payment. The Tribunal found that the reassessment was based on a mere change of opinion without any new material or information. The Tribunal cited various judicial precedents to support that reopening of assessment on a change of opinion is not permissible.

Conclusion:
The Tribunal allowed the Revenue's appeal regarding the deletion of the interest payment addition (ITA No. 1399/Jp/1993) but dismissed the appeal concerning the validity of the reassessment proceedings (ITA No. 1299/Jp/1997).