TMI Blog2008 (11) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... on 31st Oct., 1996. The return was processed under s. 143(1)(a) on 28th Oct., 1997. The assessment was reopened by issuing notice under s. 148 on 1st Dec., 1997. In compliance to notice under s. 148, the assessee filed return of income on 19th Jan., 1998 under protest. The assessee requested for reasons recorded for reopening the assessment vide letter dt. 21st May, 1998. The AO furnished the same vide his letter dt. 1st June, 1998 and the assessment was reopened on the following reasons: "(1) The loss of M/s Ganpati Synthetics Rs. 2,12,576 has been set off out of the income of M/s Ganpati Associates, whereas the partners of both the parties are separate. Therefore, the set off of this loss is not acceptable. (2) Interest free advances have been made to partners at Rs. 63,34,369 whereas in P L a/c the interest has been claimed at Rs. 5,93,664 which is not admissible due to the interest free advances made to partners. On reassessment, the AO determined the income as follows: (Rs.) Declared loss (-) 52,919 Add: Interest claimed by the assessee 5,93,664 Speculation loss in cotton bales (-) 4,50,675 On acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in the case of ITO vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 103 ITR 437 (SC), where the apex Court held that the reasons for the formation of the belief contemplated under s. 147 necessary for reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief and the rational connection postulates that there must be a direct nexus or live-link between the material coming to the notice of the ITO and the formation of his belief that there has been escapement of income of the assessee. The apex Court further observed that no doubt it is true that Court cannot go into the sufficiency or deficiency of the material or substitute its own opinion of that of the AO on the point whether action should be initiated for reopening of the assessment, but at the same it is not any and every material however vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to the escapement of the income of the assessee from assessment. 4.3 He further relied on the case of Bawa Abhai Singh vs. Dy. CIT (2001) 168 CTR (Del) 521 : (2002) 253 ITR 83 (Del), wherein it has been held that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not applicable to the facts of the present case. 4.5 Further, he relied on the judgment of Hon'ble Supreme Court in the case of CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC), wherein the apex Court has held that the reopening of assessment under s. 147(a) was not justified as conditions precedent for reopening were not satisfied in the facts and circumstances of the case. 4.6 Further, reliance was made on the case of Vipan Khanna vs. CIT (2002) 175 CTR (P H) 335 : (2002) 255 ITR 220 (P H), wherein it has been held that when proceedings under s. 147 are initiated, the proceedings are open only qua items of understatement of underassessment and the finality of the proceeding as regards other issues remained undisturbed. 5. The learned Departmental Representative, on the other hand, submitted that no assessment has been made in this case. Only the return was processed under s. 143(1)(a) of the IT Act, 1961 and the AO has not formed any opinion. Since the assessment has not been made, it cannot be said that the AO is making roaming enquiries in the assessment proceedings. He submitted that the AO has prima facie material to believe tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole interest of Rs. 5,93,664 against the interest paid to bank at Rs. 1,68,531, hence the disallowance of interest of Rs. 5,93,664 is arbitrary, unjust and at any rate very excessive." 7.1 The brief facts of the case are that the assessee has claimed interest of Rs. 5,93,664 paid to the following parties: Party to whom paid Financial year 1995-96 1. U.P.F.C. 2,11,739.48 2. Bank of Baroda 1,68,531 3. M/s Daulat Ram Nathu Ram 50,568 4. M/s Rachna 17,068 5. Shri Manish Aeron 17,025 6. Prabha Aeron 27,240 7. Sandeep Aeron 23,835 8. Lokpriya Nursing Home Ltd. 77,685 9. Maanasi (u/a Nidhi Gupta) - ----------- Total 5,93,664.48 ----------- The assessee has paid interest free advances to its partners at Rs. 63,34,369. Since the assessee has given interest free advances to its partners, the AO was of the opinion that instead of giving interest free advances to the partners, the assessee could have cleared up its l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed capital, the following three conditions are required to be satisfied: (i) The money must have been borrowed by the assessee. (ii) The money must have been borrowed for the purpose of business. (iii) The interest must have been paid by the assessee on the said borrowed capital. The Madhya Pradesh High Court has further held that it is not the requirement of law that the assessee must further show that the borrowing of the capital was necessary for the business. If at the time of borrowing the assessee has sufficient funds of its own, the same is immaterial. This judgment is not applicable to the facts of the present case and is rejected. (ii) In the case of Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375 : (1979) 118 ITR 200 (SC), wherein the Hon'ble Supreme Court has also laid down the same conditions to claim deduction in respect of interest paid on capital borrowed. (iii) In the case of CIT vs. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) wherein it has been held that once the three conditions as laid down in respect of the interest claimed on borrowed capital are satisfied then the deduction in respect thereof must be given. 8. The learned Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest for non-business would be that the assessee has some loans rather interest bearing debts to be repaid. Even the advance not required to be paid prematurely, still business funds either again were circulated or utilized for the purpose of business or to be invested in the manner in which it generates income and not that it is diverted as interest free advance to its partners. This would result in not presenting true and correct picture of the accounts of the assessee as the cost is being incurred by the assessee, the partners would be enjoying benefit thereon. The interest free advance cannot be treated as for the purpose of business and after advancing interest free loans to the partners, the assessee incurred interest on borrowings to the extent of that interest incurred cannot be allowable as business expenditure. We cannot subscribe to the theory of the direct nexus of the funds between the borrowings of the funds and diversion thereof for non-business purposes. There is no escape from the finding that the interest being paid by the assessee to the extent the amounts are diverted to the partners on interest free basis are to be disallowed. Had it been so, there would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of cotton transactions on the ground of speculative in nature is arbitrary, unjust and are based on surmises and conjectures. 7. That the provisions of s. 43(5) of the Act are not applicable to the facts of the case as the cotton transactions were carried out by the appellant through 'Pucca Arhatia' on delivery basis and accordingly the disallowance of Rs. 4,75,675 is arbitrary, unjust and bad in law." 10.1 The brief facts of the case are that the assessee is running a manufacturing unit of yarn in the name of M/s Ganpati Synthetics, which is a unit of M/s Ganpati Associates. In the said unit, the assessee has shown profit. The assessee has shown loss of Rs. 4,50,675 on trading of cotton bales. The said loss was set off against business income of Rs. 7,27,494. It was claimed before the AO that the purchases and sales of cotton bales were made through agents at Pili Banga, Rajasthan, namely, M/s Suresh Kumar Surendra Kumar and M/s Prem Kumar Satish Kumar. The loss has been shown as follows: (a) M/s Prem Kumar Satish Kumar had purchased 165 bales of cotton from M/s Vardhman Industries, Pili Banga, (Raj.) on 22nd and 23rd March, 1996 for Rs. 14,31,945 and sold the same wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal according to the directions given by the principal. Hence, it could not be presumed by the AO that merely because the names of the appellant were not mentioned in the bills received and issued by the two Arhtias of Pili Banga from 3rd parties, the transactions relating thereto do not belong to the appellant. In this case both the Arhtias have charged their commission from the appellant for the services rendered by them. 10.5. Further, he submitted that the AO was not aware with the system of practice followed in the Mandies of agricultural produce prevalent in India and on the contrary he was little bit confused. The AO neither tried to understand the system and practice followed by the Arhtias in such type of trade nor have tried to understand the substance of the transaction and on the contrary, it appears that he was bent upon to disallow the loss as claimed by the assessee either on this pretext or other. He further submitted that in order to understand the business transactions in between various parties one must be aware not only with the relevant laws but also the practice and custom prevalent in such type of trade. 11. The learned Departmental Representative, on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t proceedings have been initiated but also any other income chargeable to tax which has escaped assessment and which has come to his notice subsequently in the course of proceedings under this section. Further, in the case of ITO vs. Mewalal Dwarka Prasad (1989) 76 CTR (SC) 40 : (1989) 176 ITR 529 (SC), it has been held that reassessment validity notice under s. 148-once proceedings are started-ITO has not only jurisdiction but it is his duty to levy tax on the entire income that has escaped assessment and once assessment is validly opened, no distinction can be made between the items falling under s. 147(a) or under s. 147(b)-in the present case, once the High Court came to the conclusion that notice was valid in respect of one item of cash credit, it was not open to examine the validity of the notice in regard to the remaining items-judgment of Hon'ble Allahabad High Court in Writ Petn. No. 152 of 1974, dt. 22nd April, 1974 overruled. Hence, the argument of this issue is rejected. Since we have followed the judgment of Hon'ble Supreme Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. and judgment of jurisdictional High Court, we have not considered the jud ..... X X X X Extracts X X X X X X X X Extracts X X X X
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