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2015 (7) TMI 82 - ITAT CHENNAI

2015 (7) TMI 82 - ITAT CHENNAI - TMI - Reopening of assessment - Held that:- Assessing Officer in the assessment order has not discussed the issue of interest from investment to M/s. S.P. Apparels Limited Ltd. The Assessing Officer while recording the reasons has formed an opinion that excess interest claim was allowed to the assessee and on that reason assessment was re-opened. Further a perusal of the material on record does not indicate that the assessee had drawn the attention of the Assessi .....

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the Assessing Officer is examining the interest allowability also. Thus, the Assessing Officer while framing the original assessment u/s.143(3) of the Act does not appear to have formed an opinion with regard to allowability of interest and he has accepted the claim of the assessee, as the assessee wanted to be accepted by the Assessing Officer. The assessee having failed to draw the attention of the Assessing Officer regarding interest payment, it cannot be said that there is no violation of p .....

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material for Assessing Officer to form the requisite belief that income has escaped assessment for the assessment year under consideration.- Decided against assessee.

Disallowance of interest - Held that:- If the amount is advanced from a mixed account or share capital or sale proceeds or profits etc., the same would be termed as diversion of borrowed capital and that the revenue need not require to establish nexus of the funds advanced to the sister concerns with the borrowed funds. .....

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ess but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest. - Decided against assessee. - I.T.A. No.1666/Mds/2013 - Dated:- 25-6-2015 - Shri Chandra Poojari & Shri V. Durga Rao, JJ. For the Petitioner : Shri. G. Baskar, Advocate For the Respondent : Shri. N. Madhavan, IRS, JCIT. ORDER .....

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any fresh tangible information and there is no valid reason to reopen the assessment. 3. The facts of the case are that the assessee is an individual director in S P Apparel Ltd derives income from salary, rent filed the original return of income for the assessment year 2006-07 on 13.03.2007 admitting total income of E1,02,16,651/-. The case was selected for scrutiny and the original assessment was completed on 22.04.2008 with an addition of E2,46,065/- under the head other expenses. During the .....

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loss account. As there was reasons to believe that income has escaped assessment within the meaning of sec.147, the case was reopened and notice u/s.148 dated 22.04.2010 was issued. Accordingly, the Assessing Officer recorded the reason for re-opening of assessment as follows:- The assessee had shown sundry debtors of 34.70 crores. He admitted interest received from M/s. S.P. Apparels of 1,61,93,186/- vide his letter dated nil filed in this office on 22.04.2008, the assessee explained that he w .....

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/s. S.P. Apparels Ltd. Assessee s admitted income includes only interest from bank and M/s. S.P. Apparels apart from the share of profit from the said firm. He has claimed interest paid of 56,61,461/-. There is no detail available on record to indicate that the loans borrowed were utilized to make investment with M/s. S.P. Apparels (firm). On the contrary, all the assets shown are not related to the purpose of any business activity. It is true that the assessee has made investments to the tune o .....

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o Sec.147. Hence, I have reason to believe that income chargeable to tax has escaped assessment. According to the Assessing Officer there was reason to believe that income has escaped assessment u/s.147 of the Act and the case was reopened by issuing notice u/s.148 dated 22.04.2010. The assessee in his letter requested to treat the return originally filed as the return in compliance to the notice u/s.148. The assessee was asked to reply why the interest expenses paid to the tune of E26,52,520/- .....

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ht to tax and the total income is computed as under:- Income as per order u/s.143(3), dated 22.04.2008 1,04,62,716/- Add: Disallowance of interest expenses Towards interest free loan 26,52,500/- Assessed Income 1,31,15,216/- 4. Aggrieved, the assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals) stating that there was no fresh material as to reopen the concluded assessment and according to ld. Authorised Representative for assessee it is only a change of opinion. .....

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sed Representative for assessee submitted that in the course of original assessment, the Assessing Officer applied his mind regarding the issue of allowability of interest and after considering the facts and the circumstances, he disallowed a sum of E2,46,065/- claimed as other expenses other than interest payment. So the reason recorded for reopening the assessment is nothing but review of original assessment order which was completed u/s.143(3) of the Act. He also drew our attention to the let .....

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at after considering the assessee s letter, the Assessing Officer opted not to disallow any payment of interest at the time of original assessment. He further relied on the judgment of jurisdictional High Court in the case of CIT vs. Ashley Services Ltd 369 ITR 209 (Mad) wherein it was held that a reading of the reasons given for reopening of the assessment showed that it was nothing but a review of the orders passed under section 143(3) relating to the assessment years 1996-97 and 1997-98. Cons .....

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that there was escapement of income on account of wrong claim of expenditure which is not allowable under law and excessive relief has been granted to the assessee. 7. We have heard both the parties and perused the material available on record. In this case reassessment notice has been issued to the assessee on 22.04.2010 for reopening of assessment for assessment year 2006-2007 by recording reason that the assessee has claimed excessive expenditure towards interest which is evident from the rea .....

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t in its decision in the case of CIT vs. Kelvinator of India Limited 320 ITR 561, wherein it is held as under:- 3. After the enactment of the Direct Tax Laws (Amendment) Act, 1987 i.e., prior to April 1, 1989, section 147 of the Act reads as under: '147. Income escaping assessment.-If the Assessing Officer, for reasons to be recorded by him in writing, is of the opinion that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sect .....

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1989, section 147 reads as under : '147. Income escaping assessment.-If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciati .....

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g Officer to make a back assessment, but in section 147 of the Act (with effect from April 1, 1989), they are given a go-by and only one condition has remained viz. that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post- April 1, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words 'reason to believe' failing which, we are afraid, section 1 .....

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of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer. Hence, after April 1, 1989, the Assessing Officer has power to reopen, provided there is 'tangible material' to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support .....

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ry powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549 dated October 31, 1989, which reads as follows ([1980] 182 ITR (St.) 1, 29) : '7.2. Amendment made by the Amending Act, 1989, to reintroduce the expression "reason to believe" in section 147.-A number of representations were received against the omission of the words "reason to believe" from section 147 and their substitution by the "opinion" of the Assessing Office .....

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corded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same.' (emphasis supplied)". Applying the said decision to the facts of this case, the proceeding initiated for re-assessment cannot be quashed at the threshold. In the present case the reason reflect the ground that the income as escaped in view of the fact that assessee claimed interest payment of E56,61,461/- which is not allowable. There is no details available on record to .....

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so far as assessment order passed u/s.143(3) is concerned, it does not reflect any application of mind by the Assessing Officer to the claim of interest payment. However, according to the ld. Authorised Representative for assessee in the light of enquiry made by the Assessing Officer and the reply filed by the assessee to the relevant facts filed by him at the time of original assessment, which lead to the conclusion that the Assessing Officer has applied his mind to the same. In this regard, he .....

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t would have been said that assessee had done his duty and it is for the Assessing Officer to draw any interference on the fact placed before him. On the failure of the assessee to disclose the fact that assessee made investment in firms/companies and it was not derived any benefit though assessee incurred heavy interest expenditure. In our opinion, a failure on assessee s part to disclose full and true material facts necessary for the assessment is a reason to reopen the assessment though origi .....

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by the assessee, will amount to omission to disclose fully and truly all materials facts necessary for his assessment. In the case of Indo-Aden Salt Mfg. and Trading Co. P. Ltd. vs CIT 159 ITR 624(SC) held that mere production of evidence before the Assessing Officer is not enough. There may be a failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the Revenue could have uncovered but did not, then, it is the duty of the assessee to .....

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sessee and on that reason assessment was re-opened. Further a perusal of the material on record does not indicate that the assessee had drawn the attention of the Assessing Officer to the fact that the reasons mentioned for re-assessment at the time of completion of original assessment. According to the ld. Authorised Representative for assessee it is not necessary for the assessee to point out the above set of facts to the Assessing Officer and that the assessee is entitled to the claim of inte .....

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Assessing Officer. The assessee having failed to draw the attention of the Assessing Officer regarding interest payment, it cannot be said that there is no violation of provisions of the Act. Further, when no opinion has been expressed in the assessment order and no details or explanation in relation to the claim of interest has been called for by the Assessing Officer, it is not possible to accept the contention of the assessee that the Assessing Officer has applied his mind to the said aspect .....

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refore, the assessee fails in this ground. This ground is rejected. 8. Regarding disallowance of interest the ld. Authorised Representative for assessee submitted that the sundry creditors as on 31.03.2006 was at E34,70,32,605/-. Out of this, an amount of E24,52,61,029/- due from M/s. S.P. Apparels Limited which is a closely held company and according to the ld. Authorised Representative for assessee capital of the assessee as on 31.03.2006 was around E39,73,08,548/-. In addition to this, the as .....

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to a sister concern(eg., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as measure of commercial expediency. The expression commercial expediency is one of wide import and includes such expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions r .....

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s should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assess in its own business but had been advanced as interest free loans to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Once it is established that there was nexus betw .....

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advanced an amount of E24,52,61,029/- to M/s. S.P. Apparels Limited without any interest. Further, there was investment of E12 crores in shares and the loan and investment are made without bringing any business advantage to the assessee. Further, he submitted that the assessee at the same time, paid interest of E56,61,461/- and the Assessing Officer is justified in disallowing the interest of E26,52,500/- out of the interest expenditure incurred by the assessee of E56,61,461/-. He relied on the .....

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e the assessee has not advanced loans to its sister concern on interest fee basis, even if the alleged surplus amount could not be repaid to the financial institution before the scheduled date as far as the term loan was concerned, the interest being paid by the assessee on the working capital could have certainly been saved to that extent. The borrowing of the funds by the company to that extent was not for the purpose of business and there was nothing on record to suggest that amounts were adv .....

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ee has not derived any interest/dividend from these loans or from shares. At the same time, the assessee claimed an expenditure towards interest of E56,61,461/-. Due to this reasoning, the Assessing Officer disallowed proportionate interest of E26,52,520/-. The claim of the assessee before us is that there was enough interest free funds available with the assessee to make advance to M/s. S.P. Apparels Limited and also to make investment in shares. Further, the facts shows that the assessee has i .....

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ns. Section 36(1) (iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other .....

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r view, even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted. 11. The Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, that have the col .....

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l the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns o .....

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rest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed. 12. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for .....

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e principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. However, a presumption may be raised in a given case as to why an assessee who for the purpose of running its business is required to borrow money from banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim no or little interest from its subsidiaries. 14. In .....

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y with profits as well on executing the contract. The amount realised on the execution thus, included the amount which the assessee had borrowed and invested. When the assessee decided to lend a substantial part of those funds interest-free to the relatives of the partners, it was clearly not a business purpose. The assessee clearly diverted the funds which had been borrowed, had been invested in the contract work, after the investment was recovered and was available either for the purposes of t .....

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as a deduction. But so long as the diversion continues the assessee would be disentitled. 14.1 In the case of Commissioner of Income-Tax v. M.S. Venkateswaran 222 ITR 163, the Madras High Court accepting the plea of the Revenue held as under (Page 168): The facts on record would clearly go to show that the father of the assessee had definitely diverted a portion of the borrowed capital for his own purposes and not for business purposes. In such a case, it cannot be said that there can be a pres .....

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n the case of Commissioner of Income-tax v. P. Ganu Rao and Sons, 185 ITR 324 (Mad), interest on borrowed capital to the extent the same was utilised for non- business purposes was disallowed under Section 36(1)(viii) of the Act. 14.3 In the case of Commissioner of Income-Tax v. V.I. Baby and Co., 254 ITR 248, the Kerala High Court, while reversing the order of the Tribunal, held as under (Page 250): We are inclined to accept the argument raised by counsel for the Revenue, because the advances t .....

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ilisation of such advances has no relevance. So far as the assessee is concerned, it is only an interest free advance. The claim of the assessee's counsel that cash balances were available with the firm for advances to the partners, their relatives and the sister concerns does not advance the assessee's case. If cash balances are available, the borrowing itself is not for the purpose of the business. An assessee with liquidity cannot claim that it can give interest free advances to the p .....

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the advances made. 14.4 We may notice that in the case of CIT v. Motor General Finance Ltd. 254 ITR 449, Delhi High Court held as under (page 460): From the conspectus of the decisions as noticed hereinbefore, there cannot be any doubt whatsoever that the nexus between the amount paid by way of advance to a sister concern and the fund available at the relevant time in the assessee's hands must be found out from the advances taken by the assessee. The onus to prove that it is entitled to (de .....

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imited company closely held by three family groups, is made to lend huge amounts (up to 23 lakhs of rupees as per the compromise arrived at between the assessee and the directors/ shareholders in the civil suits referred to above) at a very low rate of interest and the entire difference of interest is being charged to the assessee. The assessee is not a finance company. It is engaged in the manufacture of sugar. No business purpose of the assessee-company is served by such lendings to its direct .....

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from the banks. We are, therefore, of the opinion that the Income-tax Officer was right in disallowing the difference of interest under Section 36(1)(iii) of the Income-tax Act and that the Tribunal's approach is not only superficial but too naïve . 14.6 In the case of Indian Metals and Ferro Alloys Ltd. v. CIT (1992) 193 ITR 344, the Orissa High Court held as under (page 349): ... it may be pointed out that, in a hypothetical case, an assessee can earn profits only after the date of in .....

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ny was not entitled to the allowance of interest. 14.8 In Veecumsees v. CIT, 220 ITR 185 (SC) ; The Hon'ble the Supreme Court held that deduction for payment of interest on the loans raised for building a cinema theatre, which was ultimately closed, was allowable deduction as the assessee was engaged in a composite business of jewellery and cinema. The facts of the case are distinguishable with the facts of the case in hand. 14.9 In the case Commissioner of Income-Tax v. Saraya Sugar Mills ( .....

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d Anr. 277 ITR 549, the Delhi High Court, while rejecting the appeal of the assessee on the issue of disallowance of interest on interest free advances made to sister concern, observed that the assessee itself had taken loan with interest and had advanced funds by diversion or otherwise to its sister concern free of interest. Taking this and other findings by the Tribunal into consideration, the appeal was dismissed. 14.11 In Commissioner of Income Tax v. Sujanni Textiles (P) Ltd. , 225 ITR 560, .....

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he same falls on him. The burden of proving a claim to an allowance or deduction is on an assessee. If the assessee makes a claim to deduction in terms of Section 36 for the purpose of computation of income referred to in Section 28, he has to place materials in support of his claim of entitlement to the deduction. Therefore, the assessee was required to show that the amounts invested in or advanced to the subsidiary company came out of the assessee's own funds. The Tribunal, with reference .....

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