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TMI Blog2023 (9) TMI 848X X X X Extracts X X X X X X X X Extracts X X X X ..... of PSC mono block sleepers for broad gauge for ADB funded project of Aligarh to Ghaziabad, 3rd Line which is in the Northern zone. It was also mandated that petitioner should set up a new manufacturing facility at an agreed location. Petitioner therefore incorporated a new company ICON Sleeper Track Pvt. Ltd. (ICON) on 28th August 2007 as a subsidiary of petitioner. Petitioner assigned the contract for the work received from RVNL to ICON for which an assignment deed was executed on 19th July 2008. ICON has set up a manufacturing facility for manufacture of PSC sleepers at Sholaka on Northern Railway. For this purpose, petitioner had granted loans and advances and also invested in the share capital of ICON which, as on 31st March 2008, stood at Rs. 7,67,91,417/- and Rs. 20,00,000/-, respectively and Rs. 8,05,30,529/- and Rs. 1,00,00,000/- as on 31st March 2009, respectively. It is this deployment of fund to associate concerns which, according to the Revenue, was for a non-business purpose. 2. For the first time in the previous year relevant to Assessment Year 2003-04, Respondent No. 1 alleged that the amount deployed by petitioner towards making investment in extending loans and ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. is a group company of M/s. Gita Refractories Pvt. Ltd. During the course of Survey u/s. 133A of the IT Act it was seen that M/s. Vaman Prestressing Pvt. Ltd. had advance a loan of Rs. 8.05 crores as on 31.03.2009 to associate and sister concerns without charging any interest. Similarly an amount of Rs. 1 Crore as on 31.03.2009 was advanced to sister concerns without charging interest as share application money. It is also seen that the assessee company had borrowed an amount of Rs. 6.18 crores as on 31.03.2009 and interest of Rs. 1.21 crores is charged off for A.Y. 2009-10. Considering the above, it is seen that the borrowed capital is advanced to sister concerns and associate concerns without charging any interest. Therefore, interest claimed on borrowed capital is not allowable u/s. 36(1)(iii) of the IT Act. Hence, I have reason to believe that income has escaped assessment within the meaning of section 147 of the I.T. Act. Issue notice u/s. 148 of the I.T. Act. (Abhyuday A Anand, I.R.S) Asstt. Commissioner of Income Tax 2(3) Mumbai 5. Petitioner filed its objections vide its communication dated 13th July 2013 and 16th October 2013 explaining that the advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned in the petition. Subsequently, a notice under Section 142(1) of the Act was also issued to petitioner. 8. The petition came to be admitted by an order dated 25th June 2014 and Ad-interim relief was granted. Respondent No. 1 was directed not to take further steps pursuant to the notice issued under Section 148 and Section 142(1) of the Act. During the pendency of the petition proceedings under Section 153(A) of the Act against petitioner was commenced and assessment order dated 27th March 2015 under Section 153(A) read with Section 143(3) of the Act has been passed. By the said assessment order the returns of petitioner for Assessment Year 2009-10 has been accepted as filed. Pursuant to the leave granted by this court, the petition was amended on 23rd February 2022. No reply has been filed at all either to the petition as originally filed or to the amended portion. 9. Mr. Pardiwalla submitted as under : (a) The A.O. must have formed belief that assessee's income chargeable to tax has escaped assessment, such belief formed by the A.O. must be based on relevant material and unless the jurisdictional requirements are fulfilled the assumption of jurisdiction to reassess petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Assessment Year 2003-04. The CIT[A] and the ITAT have accepted that those were commercial expediency for 2007-08 and 2008-09 as assessment orders under Section 143(3) have been passed accepting returns as filed and therefore the commercial expediency could not be disputed. (e) In Prashant S. Joshi vs. Income Tax Officer and Another [2010] 324 ITR 154 (Bom), the court held that the basic postulate which underlines Section 147 of the Act is the formation of belief by the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year. The Assessing Officer must have reasons to believe that such is the case before he proceeds to issue a notice under Section 147 of the Act. The reasons which are recorded by the Assessing Officer for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned. The touchstone to be applied is whether there was reason to believe that income had escaped assessment. The sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non for a valid exercise of power. In the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case." 12. In Prashant S. Joshi (supra) the Division Bench of this court held that the Assessing Officer must have reasons to believe that income has escaped assessment and at that stage an established fact that income has escaped assessment is not required. The only question, at the stage of issuing notice is whether there was relevant material on which a reasonable person could have formed a requisite belief and whether the materials would conclusively prove the escapement is not the concern at that stage because formation of belief by the Assessing Officer is within the realm of subjective satisfaction. The court held that some time the touchstone to be applied is whether there was reason to believe that income had escaped assessment. The Division Bench also held that the act of taking notice cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um. The Hon'ble Apex Court held that extending such a loan would fall under the expression used for the purpose of business. If the amount has been advanced as a measure of commercial expediency, the interest on funds borrowed by the assessee should be allowed as deduction under Section 36(1)(iii) of the Act. Paragraph Nos. 19 to 36 of S.A. Builders Ltd. (supra) read as under : 19. We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 20. In this connection we may refer to Section 36(1)(iii) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') which states that "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the income tax under Section 28 of the Act. 21. In Madhav Prasad Jantia vs. Commissioner of Income Tax U.P. AIR 1979 SC 1291, this Court held that the expression "f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 27. No doubt, as held in Madhav Prasad Jantia vs. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under Section 36(1)(iii) of the Act. In Madhav Prasad's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jantia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under Section 36(1)(iii) of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 30. It has been repeatedly held by this Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 36. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the applicable law. It cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. Though the sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non for a valid exercise of power. Paragraph No. 20 of Prashant S. Joshi (supra) reads as under : 20. For all these reasons, it is evident that there was absolutely no basis for the first respondent to form a belief that any income chargeable to tax has escaped assessment within the meaning of the substantive provisions ofsection 147. Explanation 2 to section 147 creates a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation "where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return." For the purpose of clause (b) to explanation 2, the Assessing Officer must notice that the assessee has understated his income or has claimed excessive loss, deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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