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2015 (8) TMI 365 - ITAT DELHI

2015 (8) TMI 365 - ITAT DELHI - [2015] 43 ITR (Trib) 217 (ITAT [Del]) - Initiation of re-assessment proceedings - change of opinion - report of audit party - Held that:- Close look at the audit objection divulges that the audit party simply suggested that the interest of ₹ 2.54 crore was not actually paid, but, only transferred to a subsidiary company and the same should have been disallowed and this omission on the part of the AO resulted in over assessment of loss of ₹ 2.45 crore. .....

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interest not paid to the financial institutions, but, transferred to the assessee’s wholly owned subsidiary company, but, the audit party interpreted this provision in a different manner from the way in which it was interpreted by the AO and then suggested that the amount ought to have been charged to tax. The instant case is fully covered by the ratio of the judgment in the case of PVS Beedis Pvt. Ltd. ( 1997 (10) TMI 5 - SUPREME Court) read with the exception carved out by the Hon'ble Supreme .....

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terest u/s 43B - Transfer of interest liability - AR argued that when the assessee transferred all the assets and liabilities of its paper board unit to M/s RT Paper Board Ltd., and the liabilities also included interest payable to financial institutions at ₹ 2.45 crore, such transfer of interest liability should be considered as discharge of the interest obligation - Held that:- Two things are palpable from the prescription of Explanations 3C and 3D. First is that the interest payable to .....

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e to the banks/financial institutions. - Decided against assessee. - ITA No.3134/Del/2010 - Dated:- 6-8-2015 - SHRI R.S. SYAL AND SHRI C.M. GARG, JJ. For The Assessee : Shri Gaurav Jain, Advocate For The Department : Shri Vikram Sahay, Sr. DR ORDER PER R.S. SYAL, AM: This appeal by the assessee arises out of the order passed by the CIT(A) on 17.03.2010 in relation to the assessment year 2003-04. 2. The first ground is against the initiation of reassessment proceedings. Succinctly, the factual ma .....

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bjection on page 1 of the assessment order by noticing that there was unpaid interest of ₹ 5,01,38,035/- which was not allowed in earlier assessment years, out of which the assessee claimed deduction for a sum of ₹ 3,61,75,597/- u/s 43B by claiming it as discharged/paid. This amount of ₹ 3.61 crore included a sum of ₹ 2.45 crore which was transferred to a wholly owned subsidiary company. Since such interest of ₹ 2.45 crore was not actually paid, but, only transferre .....

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material on record. The first issue before us through ground no. 1 is challenge to the initiation of re-assessment proceedings. The ld. AR assailed the initiation of re-assessment proceedings on three counts viz., Change of opinion; Reasons not supplied by the AO; and Audit objection cannot lead to reassessment. We shall deal with these objections, one by one. Change of opinion 4.1. The ld. AR contended that that the annual accounts of the assessee thoroughly elaborated about the transfer of its .....

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bilities to M/s RT Paper Board Ltd., which is its wholly owned subsidiary company. Apart from other assets and liabilities of this unit transferred by the assessee, there was unpaid interest amounting to ₹ 5.01 crore payable to banks and financial institutions coming from the earlier years which was not paid and no deduction was also claimed in such earlier years. Out of this interest payable to financial institutions amounting to ₹ 5.01 crore, the assessee claimed deduction for a su .....

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the deductibility of interest of ₹ 1.16 crore, which was waived off by the banks/financial institutions and allowed by the AO in the original proceedings. The only controversy is about the remaining amount of ₹ 2.45 crore, which the AO allowed in the original assessment proceedings, for which the instant reassessment proceedings have been initiated. The case of the assessee is that transfer of such interest to M/s RT Paper Board Ltd. amounted to discharge of interest liability in its .....

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inion, which is not permissible u/s 147. Now the primary question is whether the AO formed any opinion in the original assessment proceedings on the deductibility of this interest amount. It is noticed that during the course of original assessment proceedings, there is some discussion in the assessment order about the Miscellaneous balances written back. On page 2 of the assessment order dated 24.3.2006 passed u/s 143(3) in the first round, there is reference to the amount of ₹ 1.16 crore, .....

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ises as to whether a mere disclosure of the factual aspects of transfer of undertaking in the annual accounts would satisfy the condition of formation of view by the AO on the subject, so as to eclipse his power from initiating the reassessment proceedings. In this regard, it is relevant to note Explanation 2 to section 147, the relevant part of which reads as under:- Explanation 2.-For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax ha .....

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essment has been made, but, income chargeable to tax has been under-assessed or excessive allowance has been allowed, it would be deemed to be a case where income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. This Explanation clearly mandates that despite the assessment having been originally completed, where, inter alia, some excessive deduction has been allowed resulting into income still remaining under-assessed, it will be deemed as a case of escapeme .....

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ion to section 147. However, the significant thing is that in order to bring a case within the four corners of change of opinion, it is foremost important that there should be some material to indicate that the AO applied his mind on the deductibility of any item of expense and then formed opinion about deduction. Unless some material is brought on record to demonstrate the formation of opinion, the assessee cannot argue in the reassessment proceedings that it is a case of initiation of reassess .....

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485 (Del) has also held that there is no scope for arguing about the change of opinion when no opinion has been formed. It has been laid down by Their Lordships that : The expression "change of opinion" postulates formation of opinion and then a change thereof. In the context of Section 147 of the Act it implies that the Assessing Officer should have formed an opinion at the first instance, i.e., in the proceedings under Section 143(3) and now by initiation of the reassessment proceed .....

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question. It is a result of understanding, experience and reflection to use the words in Law Lexicon by P. Ramanatha Aiyar. Question of change of opinion arises when an Assessing Officer forms an opinion and decides not to make an addition or holds that the assessee is correct and accepts his position or stand. Though the Hon ble Apex Court judgments have been rendered in the context of intimation u/s 143(1)(a), vis-à-vis formation of opinion, the same logic applies when the assessment i .....

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r the other connected records of assessment, the assessee cannot contend that the opinion was formed by the AO on a point which is sought to be reopened u/s 148 of the Act. 4.5. Adverting to the facts of the instant case, we find that there is no discussion worth the name in the original assessment order about the deductibility of interest of ₹ 2.45 crore out of unpaid interest which was transferred to a wholly owned subsidiary company u/s 43B of the Act. In our considered opinion, it is f .....

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ons for initiation of re-assessment proceedings and, as such, the reassessment order be declared a nullity. To buttress this contention, the ld. AR relied on the judgment of the Hon ble Supreme Court in the case of GKN Driveshafts (India) Ltd. Vs. ITO and Ors. (2003) 259 ITR 90 (SC). The ld. DR strongly opposed this contention. 5.2. After considering the rival submissions and perusing the relevant material on record, we find that it is, no doubt, true that the Hon ble Supreme Court in the case o .....

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sment proceedings. Only thereafter, he can proceed to take the reassessment on merits. If no reasons are demanded by the assessee during the course of re-assessment proceedings, then, there is no obligation nor there can be such obligation on the part of the AO to supply the reasons. Adverting to the facts of the instant case, we find that there is no reference whatsoever in the assessment order about the assessee seeking a copy of reasons for reassessment. In fact, a gist of the audit objection .....

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at the extant factual position is somewhat contrary to what has been sought to be argued before us. Page 13 of the impugned order indicates that the assessee in its written submissions dated 30.10.09 has referred to the reasons recorded by the AO for reopening of the assessment which were submitted before the ld. CIT(A) and reproduced on the same page. Thereafter, there is a mention about the copy of reasons claimed by the assessee to have been recorded by the AO for initiating the reassessment .....

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asons furnished by the ld. AR as part of the paper book before him did not form part of the assessment record. The actual reasons recorded by the AO on 31.8.2007 found in the assessment folder were found to be in variance with the scanned copy of the reasons furnished by the assessee. The ld. CIT(A) then reproduced a scanned copy of the actual reasons recorded by the AO on page 15 of his order. The above sequence of events amply demonstrates that the assessee attempted to distort the actual reas .....

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the basis of audit objection, which is not permissible under the law. He relied on certain judgments including that of the Hon ble Supreme Court in Indian and Eastern Newspaper Society vs. CIT (1979)119 ITR 996 (SC) to claim that initiation of reassessment proceedings on the basis of internal audit report, was not sustainable. On the contrary, the ld. DR relied on the judgment of the Hon'ble Supreme Court in the case of CIT vs. PVS Beedis Pvt. Ltd. (1999) 237 ITR 13 (SC) in which the initiat .....

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d. (1998) 249 ITR 306 (SC) 6.3. In the case of Indian and Eastern Newspapers Society (supra), the assessee received some amount on account of occupation of its conference hall and rooms which was assessed by the AO as 'Business income.' The audit party of the Department formed an opinion that the amount should have been taxed under the head 'Income from house property.' It was in this backdrop of the facts that the Hon'ble Supreme Court held that the opinion of the internal a .....

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stricted the claim of deduction to ₹ 2,95,135/-. It is on the basis of such facts that the Hon'ble Supreme Court held that the opinion of the audit party on a question of law, could not constitute an information justifying the initiation of re-assessment proceedings. In the case of PVS Beedis Pvt. Ltd. (supra), the original assessment was completed allowing deduction u/s 80G. The audit party observed that the payment made to the trust, for which deduction was allowed, was not a recogni .....

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gesting to the Assessing Officer about how a provision should be interpreted and whether the interpretation so given by the AO to a particular provision of the Act is right or wrong. An interpretation to a provision given by the internal audit party cannot be construed as a declaration of law binding on the AO. When an internal audit party objects to the interpretation given by the AO to a provision and proposes substitution of such interpretation with the one it feels right, it crosses its juri .....

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ributed the powers of judicial supervision over the quasi-judicial acts of IT authorities. The IT Act does not contemplate such power in any internal audit organisation of the IT Department .... The statute supports the conclusion that an audit party can't pronounce on the law, and that such pronouncement does not amount to "information" within the meaning of s. 147(b) of the IT Act, 1961'. Having made the above observations in para 6 of its judgment, the Hon'ble Summit Cou .....

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th authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose'. When we read the judgment in Indian & Eastern Newspaper Society (supra) in entirety, what unfolds is that albeit the audit party is not entitled to judicially interpret a provision, but at the same time, it can communicate the law to the AO, which he omitted to consider. This position has been aptly explained in CIT vs. First Leasing Co. of India Lt .....

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existence of the law, the opinion of the audit party would be regarded as information and the Supreme Court has made a distinction between the communication of law and interpretation of law.' That is how, the Hon'ble Madras High Court held that the audit report should be regarded as a communication of law and there is no interpretation of law involved in the matter. The tribunal order, holding that the audit party had interpreted the relevant provisions relating to the granting of extra .....

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he provisions and simply communicates the existence of law to the AO or any other factual inaccuracy, then the initiation of reassessment proceedings on such basis cannot be faulted with. It can be seen that in the case of Indian and Eastern Newspapers Society (supra), the otherwise taxability of receipt from occupation of conference hall and rooms was not disputed. Whereas the AO held such amount to be taxable as 'Business income', the audit party held it to be taxable as 'Income fr .....

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u/s 35(2). It is obvious that in both these cases, the AO's opinion on the interpretation of the relevant provision was overruled by the internal audit party. In contrast, in the case of PVS Beedis Pvt. Ltd. (supra), the assessee claimed deduction u/s 80G and the internal audit party pointed out that such deduction was not permissible because the registration of the trust to which contribution was made, had already expired. It is manifest that in the case of PVS Beedis Pvt. Ltd. (supra), the .....

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f the AO to the existence of law, the opinion of the audit party can be regarded as 'information' leading to a valid initiation of reassessment. In a nutshell, whereas the initiation of re-assessment proceedings on the basis of an interpretation to the provisions of law by the audit party is forbidden, the communication of law or the factual inconsistencies by the internal audit party, do not operate as a hindrance in the initiation of re-assessment proceedings. 6.6. Now, let us examine .....

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terest paid or set off during previous year out of unpaid interest of ₹ 5,01,38,035 which was not allowed in the assessment year of any preceding previous year. The interest of ₹ 2,45,01,117/- was transferred to a wholly owned subsidiary company. As the interest of ₹ 2,45,01,117 was not actually paid but only transferred to a subsidiary company, it should have been disallowed. The omission resulted in over assessment of loss of ₹ 2,45,01,117/- involving potential tax effe .....

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gs to the effect that a sum of ₹ 2.45 crore was not allowable u/s 43B of the Act which is nothing, but, a communication of law to the AO. We are not confronted with a situation in which the AO, after due consideration of the matter in the original assessment proceedings interpreted section 43B as allowing deduction for a sum of ₹ 2.45 crore in respect of interest not paid to the financial institutions, but, transferred to the assessee s wholly owned subsidiary company, but, the audit .....

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t of the ld. AR on this issue, being devoid of any merit, is hereby jettisoned. It is, therefore, held that the audit objection in the instant case constituted an information about the escapement of income to the AO, thereby justifying the initiation of reassessment. 7. Ground no. 2 is on the merits of sustenance of addition. The ld. AR argued that when the assessee transferred all the assets and liabilities of its paper board unit to M/s RT Paper Board Ltd., and the liabilities also included in .....

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t to M/s RT Paper Board Ltd., is nothing, but, an effective discharge of the interest obligation and, hence, the amount is allowable u/s 43B of the Act. Au contraire, the ld. DR strongly relied on the impugned order on this score. 8. In order to appreciate the controversy in the right perspective, it would be fruitful to consider the mandate of the relevant part of section 43B, which is as under :- 43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise .....

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ning such loan or advances, or …… shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him : ……………. . 9. A bare perusal of clauses (d) & (e) of section 43B divulges that a deduction for any sum payabl .....

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rom the prescription of section 43B, which leaves nothing to doubt that the deduction on account of interest to scheduled banks and financial institutions, etc., can be allowed only in the year in which it is actually paid. The term actually paid is to be seen in contradistinction to the term constructive payment , which has been coined by the ld. AR in the context of this provision. We fail to appreciate any logic in substituting actual payment with the so-called constructive delivery, when the .....

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ties is interest payable. Now, it is the obligation of the transferee company to discharge the interest liability to this extent by making payment to banks/financial institutions. Simply transferring interest liability by the assessee to its subsidiary company can, under no circumstances, be considered as a substitute of actual payment of interest. If we interpret the provisions of section 43B in the manner as suggested by the ld. AR, then, every transfer of liability by the assessee to another .....

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. Transfer of liability by the assessee to its wholly owned subsidiary company, to whom this paper board unit was transferred, simply means transfer of liability from one assessee to another and not the discharge of this liability to the banks/financial institutions. It is so for the reason that the amount of such interest is still receivable by such banks and financial institutions etc. and there is no erosion of asset of Interest receivable from their books of account. 10. The judgment of the .....

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