P.Sundararajan, Avanashi V. DCIT, Tiruppur

ITA 1666/CHNY/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90527 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 9 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 26-08-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN IRS
• Assessee Lawyers: G BASKAR
• Keywords: Reopening of assessment; Business income; Depreciation; Business expenditure; Search and seizure; Period of limitation; Proportionate interest; Question of law; Tangible material; Wrong claim; Difference of opinion; Assessment record; Commercial expediency; Time period of passing order; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 143(3); 147; 148; 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . !' , # $% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER & SHRI V. DURGA RAO, JUDICIAL MEMBER ./ I.T.A. NO.1666/MDS/2013 ( / ASSESSMENT YEAR : 2006-2007) R. SUNDARARAJAN, NO.39-A, EXTENSION STREET, KAIKATTIPUDUR, AVINASHI 641 654 [PAN: AGQPS 1345A] ( &' /APPELLANT) VS THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE, TIRUPUR ( ()&' /RESPONDENT) / APPELLANT BY : SHRI. G. BASKAR, ADVOCATE / RESPONDENT BY : SHRI. N. MADHAVAN, IRS, JCIT. /DATE OF HEARING : 11.06.2015. ! /DATE OF PRONOUNCEMENT : 25.06.2015. * / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE OR DER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, COIMBATORE , DATED 25.06.2013, FOR THE ASSESSMENT YEAR 2006-2007. I.T.A.NO.1666/MDS/2013. :- 2 -: 2. THE FIRST GROUND RAISED BY THE ASSESSEE CHALLENGES THE REOPENING OF ASSESSMENT AS ORIGINAL ASSESSMENT WAS COMPLETED U/S.143(3) OF THE ACT DISALLOWING A PART OF OTHER EXPENSES, AND THE R E-ASSESSMENT WAS MADE ONLY ON CHANGE OF OPINION ON THE VERY SAME SET OF ALREADY CONSIDERED FACTS WITHOUT ANY FRESH TANGIBLE INFORMA TION AND THERE IS NO VALID REASON TO REOPEN THE ASSESSMENT. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN I NDIVIDUAL DIRECTOR IN S P APPAREL LTD DERIVES INCOME FROM SAL ARY, RENT FILED THE ORIGINAL RETURN OF INCOME FOR THE ASSESSMENT YEAR 2 006-07 ON 13.03.2007 ADMITTING TOTAL INCOME OF E1,02,16,651/- . THE CASE WAS SELECTED FOR SCRUTINY AND THE ORIGINAL ASSESSMENT W AS COMPLETED ON 22.04.2008 WITH AN ADDITION OF E2,46,065/- UNDER TH E HEAD OTHER EXPENSES. DURING THE FINANCIAL YEAR 2005-06 PERTAI NING TO A.Y. 2006-07 THE ASSESSEE HAD PAID INTEREST TOTALING TO E56,61,4 61/- AND INTEREST INCOME FROM FIRM WAS RECEIVED UPTO 30.11.12006, UP ON PART IX CONVERSION THE CAPITAL ACCOUNT OF THE ASSESSEE AFTE R ALLOTMENT OF SHARE HAD BECOME UNSECURED LOAN. FOR THIS UNSECURED LOAN ASSESSEE HAS NOT RECEIVED ANY INTEREST. SO, IT HAS BECOME INTEREST FREE LOAN TO THE COMPANY. BUT, ASSESSEE WAS FOUND TO HAVE DEBITED I NTEREST EXPENSES TO THE TUNE OF E26,52,520/- IN THE PROFIT AND LOSS ACCOUNT. AS THERE WAS REASONS TO BELIEVE THAT INCOME HAS ESCAPED ASSESSME NT WITHIN THE I.T.A.NO.1666/MDS/2013. :- 3 -: MEANING OF SEC.147, THE CASE WAS REOPENED AND NOTIC E 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 2 2.04.2008, THE ASSESSEE EXPLAINED THAT HE WAS DERIVING INCOME AS INTEREST O N CAPITAL FROM M/S. S.P. APPARELS AND INTEREST FROM BANK ONLY. FURTHER , VIDE LETTER DATED 22.04.2008 THE ASSESSEE EXPLAINED THAT HIS SUNDRY D EBTORS INCLUDE 24,52,61,029/- FROM M/S. S.P. APPARELS LTD WHICH IS A CLOSELY HELD COMPANY. IN THE BALANCE SHEET FURNISHED AS ON 31.03.2006, TH E ASSESSEE HAS NOT MENTIONED ANYTHING ABOUT HIS ASSETS OR LIABILITIES WITH THE FIRM IN WHICH HE IS A PARTNER. AS ALREADY MENTIONED SUNDRY DEBTO RS MAINLY CONSIST OF THE INVESTMENT WITH M/S. S.P. APPARELS LTD. ASSESSEES ADMITTED INCOME INCLUDES ONLY INTEREST F ROM BANK AND M/S. S.P. APPARELS APART FROM THE SHARE OF PROFIT FROM T HE 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 UTI LIZED 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 T HE TUNE OF 12 CRORES IN SHARES. BUT, HE HAD NOT ADMITTED ANY DIVIDEND I NCOME FROM SUCH SHARES. HENCE, THE CLAIM OF INTEREST PAID IS NOT R ELATED TO INVESTMENTS IN ANY BUSINESS ACTIVITY OR IN ANY INCOME GENERATING A SSETS OR ACTIVITY. THUS, IN THE RETURN FURNISHED AND AS PER THE ENCLOS URES, THE ASSESSEE HAS CLAIMED AN ITEM OF EXPENDITURE WHICH IS NOT ALLOWAB LE UNDER LAW AND THUS THE ASSESSEES INCOME HAS BEEN MADE THE SUBJEC T OF EXCESSIVE RELIEF UNDER THE ACT AS PROVIDED IN SUB-CLAUSE (C) OF EXPLANATION 2 TO SEC.147. HENCE, I HAVE REASON TO BELIEVE THAT INC OME 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 AN D 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 I.T.A.NO.1666/MDS/2013. :- 4 -: COMPLIANCE TO THE NOTICE U/S.148. THE ASSESSEE WAS ASKED TO REPLY WHY THE INTEREST EXPENSES PAID TO THE TUNE OF E26,52,52 0/- AFTER CONVERSION OF FIRM TO PRIVATE LIMITED COMPANY SHOULD NOT BE DI SALLOWED U/S.36(II) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDIN GS, THE ASSESSEE SUBMITTED HIS REPLY WHICH WAS PERUSED BY ASSESSING OFFICER AND WAS FOUND NOT ACCEPTABLE BECAUSE FOR THE INTEREST FREE LOAN WITH THE PRIVATE LIMITED COMPANY, THE ASSESSEE HAD PAID INTEREST WHI CH WAS NOT ALLOWABLE AS PER THE SEC 36(II) OF THE ACT E26,52,5 20/- AND ACCORDINGLY INTEREST EXPENSES TOWARDS INTEREST FREE LOAN IS DIS ALLOWED AND BROUGHT 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 A PPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) STATING THAT T HERE 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. HOWEVER, THE COMMISSIONER OF INCOME TAX (APPEALS) R EJECTED THE PLEA OF THE ASSESSEE AND OBSERVED THAT AS PER THE PROVIS O TO SECTION 147, REASSESSMENT PROCEEDINGS CAN BE INITIATED AFTER EXP IRY OF FOUR YEARS I.T.A.NO.1666/MDS/2013. :- 5 -: ONLY IF THERE IS A FAILURE ON THE PART OF THE ASSES SEE . BUT IN THIS PRESENT CASE, THE RE-ASSESSMENT WAS DONE WITHIN FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR. ACCORDINGLY, HE UPHELD T HE REOPENING OF ASSESSMENT. AGAINST THIS, THE ASSESSEE IS IN APPEA L BEFORE US. 5. THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSE E SUBMITTED THAT IN THE COURSE OF ORIGINAL ASSESSMENT, THE ASS ESSING OFFICER APPLIED HIS MIND REGARDING THE ISSUE OF ALLOWABILITY OF INT EREST AND AFTER CONSIDERING THE FACTS AND THE CIRCUMSTANCES, HE DIS ALLOWED A SUM OF E2,46,065/- CLAIMED AS OTHER EXPENSES OTHER THAN IN TEREST 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 LETTER FILE D BEFORE THE ASSESSING OFFICER ON 22.04.2008 WHICH IS PLACED ON RECORD AT PAGE NO.7 OF THE PAPER BOOK TO SUGGEST THAT THE ASSESSEE IS HAVING S UFFICIENT OWN FUNDS TO ADVANCE TO THE SUNDRY DEBTORS VIZ M/S. S.P. APPA RELS LIMITED WHEREIN THE ASSESSEE IS ONE OF THE MAJOR SHAREHOLDER. THE A SSESSEE HAS NOT ADVANCED ANY INTEREST BEARING FUNDS TO M/S. S.P. APPARELS LIMITED. BEING SO, THERE IS NO QUESTION TO DISALLOW THE INTE REST PAYMENT. THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE SUBMITTED TH AT AFTER CONSIDERING THE ASSESSEES LETTER, THE ASSESSING OFFICER OPTED NOT TO DISALLOW ANY I.T.A.NO.1666/MDS/2013. :- 6 -: PAYMENT OF INTEREST AT THE TIME OF ORIGINAL ASSESSM ENT. 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 A SSESSMENT SHOWED THAT IT WAS NOTHING BUT A REVIEW OF THE ORDERS PASS ED UNDER SECTION 143(3) RELATING TO THE ASSESSMENT YEARS 1996-97 AND 1997-98. CONSEQUENTLY, EVEN THOUGH THE ASSESSMENT WAS REOPEN ED WITHIN THE LIMITATION PERIOD OF FOUR YEARS, THERE BEING NO FRE SH MATERIAL TO DISTURB THE REASONING ARRIVED AT FOR THE ASSESSMENT YEAR, T HE REASSESSMENT PROCEEDINGS WERE NOT VALID. 6. ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESENTAT IVE SUBMITTED THAT THE COMMISSIONER OF INCOME TAX (APPE ALS) IN THIS CASE ASSESSMENT WAS REOPENED WITHIN 04 YEARS FROM THE EN D OF THE RELEVANT ASSESSMENT YEAR. THE REASSESSMENT NOTICE U/S.148 WA S ISSUED ON THE REASON THAT THERE WAS ESCAPEMENT OF INCOME ON ACCOU NT 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 MATE RIAL AVAILABLE ON RECORD. IN THIS CASE REASSESSMENT NOT ICE HAS BEEN ISSUED TO THE ASSESSEE ON 22.04.2010 FOR REOPENING OF ASSE SSMENT FOR I.T.A.NO.1666/MDS/2013. :- 7 -: ASSESSMENT YEAR 2006-2007 BY RECORDING REASON THAT THE ASSESSEE HAS CLAIMED EXCESSIVE EXPENDITURE TOWARDS INTEREST WHIC H IS EVIDENT FROM THE REASON RECORDED BY THE ASSESSING OFFICER WHICH WAS REPRODUCED IN EARLIER PARA OF THIS ORDER. THE MAIN CONTENTION OF THE ASSESSEE COUNSEL IS THAT THIS WAS ONLY CHANGE OF OPINION AND ALL MAT ERIALS AVAILABLE FOR ASSESSMENT HAS ALREADY BEEN AVAILABLE WITH THE ASSE SSING OFFICER IN ASSESSMENT RECORD. WE CANNOT APPRECIATE THIS ARGU MENT OF THE OF THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE. THE RE QUIREMENT FOR THE ASSESSING OFFICER TO INITIATE REASSESSMENT U/S.147 OF THE ACT IS EXPLAINED BY SUPREME COURT 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 (AME NDMENT) 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 ASSES SMENT FOR ANY ASSESSMENT YEAR, HE MAY, SUBJECT TO THE PROVISI ONS OF SECTIONS 148 TO 153, ASSESS OR REASSESS SUCH INCOME AND ALSO ANY OTHER INCOME CHARGEABLE TO TAX WHICH HAS ESCAPE D ASSESSMENT AND WHICH COMES TO HIS NOTICE SUBSEQUENT LY IN THE COURSE OF THE PROCEEDINGS UNDER THIS SECTION, OR RE COMPUTE THE LOSS OR THE DEPRECIATION ALLOWANCE OR ANY OTHER ALL OW ANCE, AS THE CASE MAY BE, FOR THE ASSESSMENT YEAR CONCERNED (HERE AFTER IN THIS SECTION AND IN SECTIONS 148 TO 153 RE FERRED TO AS THE RELEVANT ASSESSMENT YEAR) :' (EMPHASIS SUPPLIED ) 4. AFTER THE AMENDING ACT, 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 I.T.A.NO.1666/MDS/2013. :- 8 -: 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 PRO CEEDINGS UNDE R THIS SECTION, OR RECOMPUTE THE LOSS OR THE DEPRECIATION ALLOWANCE OR ANY OTHER ALLOWANCE, AS THE CASE MAY BE, FOR THE ASSESSMENT YEAR CONCERNED (HEREAFTER IN THIS SECTIO N AND IN SECTIONS 148 TO 153 REFERRED TO AS THE RELEVANT ASS ESSMENT YEAR) : ' (EMPHASIS SUPPLIED) 5. ON GOING THROUGH THE CHANGES, QUOTED ABOVE, MADE TO SECTION 147 OF THE ACT, WE FIND THAT, PRIOR TO THE DIRECT TAX LAWS (AMEND MENT) ACT, 1987, REOPENING COULD BE DON E UNDER THE ABOVE TWO CONDITIONS AND FULFILMENT OF THE SAID CONDITIONS ALONE CONFERRED JURIS DICTION ON THE ASSESSING OFFI CER TO MAKE A BACK ASSESSMENT, BUT IN SECTION 147 OF THE ACT (W ITH EFFECT FROM APRIL 1, 1989), THEY ARE GIVEN A GO-BY AND ONL Y ONE CONDITION HAS REMAINED VIZ. THAT WHERE THE ASSESSIN G OFFICER HAS REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSES SMENT, CONFERS JURISDICTION TO REOPEN THE ASSESSMENT. THER EFORE, POST- APRIL 1, 1989, POWER TO REOPEN IS MUCH WIDER. HOWEV ER, ONE NEEDS TO GIVE A SCHEMATIC INTERPRETATION TO THE WOR DS 'REASON TO BELIEVE' FAILING WHICH, WE ARE AFRAID, SECTION 147 WOULD GIVE ARBITRARYPOWERS TO THE ASSESSING OFFICER TO REOPEN ASSESSMENTS ON THE BASIS OF 'MERE CHANGE OF OPINION', WHICH CAN NOT BE PER SE REASON TO REOPEN. WE MUST ALSO KEEP IN MIND THE CONCEPTUAL DIFFERENCE BETWEEN POWER TO REVIEW AND POWER TO REA SSESS. THE ASSESSING OFFICER HAS NO POWER TO REVIEW ; HE HAS T HE POWER TO REASSESS. BUT REASSESSMENT HAS TO BE BASED ON FULFI LMENT OF CERTAIN PRECONDITION AND IF THE CONCEPT OF 'CHANGE OF OPINION' IS REMOVED, AS CONTENDED ON BEHALF OF THE DEPARTMENT, THEN, IN THE GARB OF REOPENING THE ASSESSMENT, REVIEW WOULD TAKE PLACE. ONE MUST TREAT THE CONCEPT OF 'CHANGE OF OPINION' A S AN IN-BUILT TEST TO CHECK ABUSE OF POWER BY THE ASSESSING OFFIC ER. HENCE, AFTER APRIL 1, 1989, THE ASSESSING OFFICER HAS POWE R TO REOPEN, PROVIDED THERE IS 'TANGIBLE MATERIAL' TO COME TO TH E CONCLUSION THAT THERE IS ESCAPEMENT OF INCOME FROM ASSESSMENT. REASONS MUST HAVE A LIVE LINK WITH THE FORMATION OF THE BEL IEF. OUR VIEW GETS SUPPORT FROM THE CHANGES MADE TO SECTION 147 O F THE ACT, AS QUOTED HEREINABOVE. UNDER THE DIRECT TAX LAWS (AMENDMENT) ACT, 1987, PARLIAMENT NOT ONLY DELETED THE WORDS 'REASON TO BELIEVE' BUT ALSO INSERTED THE WOR D 'OPINION' IN SECTION 147 OF THE ACT. HOWEVER, ON RECEIPT OF REPR ESENTATIONS FROM THE COMPANIES AGAINST OMISSION OF THE WORDS 'R EASON TO BELIEVE', PARLIAMENT REINTRODUCED THE SAID EXPRESSI ON AND DELETED THE WORD 'OPINION' ON THE GROUND THAT IT WO ULD VEST ARBITRARY POWERS IN THE ASSESSING OFFICER. WE QUOTE HEREINBELOW THE RELEVANT PORTION OF CIRCULAR NO. 54 9 DATED I.T.A.NO.1666/MDS/2013. :- 9 -: OCTOBER 31, 1989, WHICH READS AS FOLLOWS ([1980] 18 2 ITR (ST.) 1, 29) : '7.2. AMENDMENT MADE BY THE AMENDING ACT, 1989, TO REINTRODUCE THE EXPRESSION 'REASON TO BELIEVE' IN S ECTION 147.A NUMBER OF REPRESENTATIONS WERE RECEIVED AGAI NST THE OMISSION OF THE WORDS 'REASON TO BELIEVE' FROM SECT ION 147 AND THEIR SUBSTITUTION BY THE 'OPINION' OF THE ASSE SSING OFFICER. IT WAS POINTED OUT THAT THE MEAN ING OF TH E EXPRESSION, 'REASON TO BELIEVE' HAD BEEN EXPLAINED IN A NUMBER OF COURT RULINGS IN THE PAST AND WAS WELL SETTLED AND ITS OM ISSION FROM SECTION 147 WOULD GIVE ARBITRARY POWERS TO THE ASSE SS ING OFFICER TO REOPEN PAST ASSESSMENTS ON MERE CHANGE O F OPINION. TO ALLAY THESE FEARS, THE AMENDING ACT, 19 89, HAS AGAIN AMENDED SECTION 147 TO REINTRODUCE THE EXPRES SION 'HAS REASON TO BELIEVE' IN THE PLACE OF THE WORDS 'FOR R EASONS TO BE RECORDED BY HIM IN WRITING, IS OF THE OPINION'. OTH ER PROVISIONS OF THE NEW SECTION 147, HOWEVER, REMAIN THE SAME.' (EMPHASIS SUPPLIED)' . APPLYING THE SAID DECISION TO THE FACTS OF THIS CAS E, THE PROCEEDING INITIATED FOR RE-ASSESSMENT CANNOT BE QUASHED AT T HE 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 D ETAILS AVAILABLE ON RECORD TO INDICATE WHAT FUND WAS LENT TO M/S. S.P. APPARELS AS THE ASSESSEE ADVANCED A SUM OF E24,52,61,029/- TO M/S. S.P. APPARELS LIMITED LTD. FURTHER, THERE WAS INVESTMENT OF E12 C RORES IN SHARES. THE ASSESSEE HAS NOT ADMITTED ANY DIVIDEND INCOME FROM SUCH SHARES. THE CLAIM OF THE INTEREST PAID IS NOT REFLECTED AS INVE STMENT IN ANY BUSINESS ACTIVITIES OR IN ANY INCOME GENERATING ASSETS. THUS , THERE WAS EXCESSIVE RELIEF CLAIMED BY THE ASSESSEE IN THE FORM OF INTER EST PAYMENTS. IN THE I.T.A.NO.1666/MDS/2013. :- 10 -: CIRCUMSTANCES, IN SO FAR AS ASSESSMENT ORDER PASSED U/S.143(3) IS CONCERNED, IT DOES NOT REFLECT ANY APPLICATION OF M IND 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 AS SESSEE TO THE RELEVANT FACTS FILED BY HIM AT THE TIME OF ORIGINAL ASSESSME NT, WHICH LEAD TO THE CONCLUSION THAT THE ASSESSING OFFICER HAS APPLIED H IS MIND TO THE SAME. IN THIS REGARD, HE HAS RELIED ON THE JUDGMENT OF JU RISDICTIONAL HIGH COURT IN THE CASE OF ASHLEY SERVICES LTD (CITED SUPRA) . IN OUR OPINION PRODUCTION BEFORE THE ASSESSING OFFICER OF ACCOUNTS BOOKS OR OTHER EVIDENCE FROM WHICH MATERIAL FACTS COULD WITH DUE D ILIGENCE HAVE BEEN DISCOVERED BY THE ASSESSING OFFICER WILL NOT NECESS ARILY AMOUNT TO DISCLOSURE WITHIN THE MEANING OF THIS SECTION. HAD THE ASSESSEE DISCLOSED THE INTEREST PAYMENT BIFURCATION TO THE A SSESSING OFFICER AT THE TIME OF ORIGINAL ASSESSMENT, THEN IT WOULD HAVE BEEN SAID THAT ASSESSEE HAD DONE HIS DUTY AND IT IS FOR THE ASSESS ING OFFICER TO DRAW ANY INTERFERENCE ON THE FACT PLACED BEFORE HIM. ON THE FAILURE OF THE ASSESSEE TO DISCLOSE THE FACT THAT ASSESSEE MADE IN VESTMENT IN FIRMS/COMPANIES AND IT WAS NOT DERIVED ANY BENEFIT THOUGH ASSESSEE INCURRED HEAVY INTEREST EXPENDITURE. IN OUR OPINION , A FAILURE ON ASSESSEES PART TO DISCLOSE FULL AND TRUE MATERIAL FACTS NECESSARY FOR THE I.T.A.NO.1666/MDS/2013. :- 11 -: ASSESSMENT IS A REASON TO REOPEN THE ASSESSMENT THO UGH ORIGINAL ASSESSMENT HAS BEEN COMPLETED U/S.143(3) OF THE ACT . IN THE PRESENT CASE, SINCE REOPENING IS WITHIN THE PERIOD OF FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR, REQUIREMENT OF THE PR OVISO IN SEC 147 OF THE ACT NAMELY FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULL AND ALL MATERIALS FACTS FOR HIS ASSESSMENT IS NOT REQUIRED TO BE FULFILLED. HOWEVER, IT IS APPARENT THAT THE OMISSION OF THE AS SESSEE TO BRING IT TO THE ASSESSING OFFICERS NOTICE THOSE PARTICULARS OF INVESTMENT MADE BY THE ASSESSEE, WILL AMOUNT TO OMISSION TO DISCLOSE F ULLY AND TRULY ALL MATERIALS FACTS NECESSARY FOR HIS ASSESSMENT. IN TH E CASE OF INDO-ADEN SALT MFG. AND TRADING CO. P. LTD. VS CIT 159 ITR 62 4(SC) HELD THAT MERE PRODUCTION OF EVIDENCE BEFORE THE ASSESSING OF FICER IS NOT ENOUGH. THERE MAY BE A FAILURE TO MAKE A TRUE AND FULL DISC LOSURE, IF SOME MATERIAL FOR THE ASSESSMENT LAY EMBEDDED IN THE EVI DENCE WHICH THE REVENUE COULD HAVE UNCOVERED BUT DID NOT, THEN, IT IS THE DUTY OF THE ASSESSEE TO BRING IT TO THE NOTICE OF THE ASSESSING OFFICER. THE ASSESSEE KNOWS ALL THE MATERIAL AND RELEVANT FACTS - THE ASS ESSING AUTHORITY MIGHT NOT. TESTING THE FACTS OF THE PRESENT CASE I N THE LIGHT OF THE AFORESAID PRINCIPLES, AS NOTED HEREINABOVE, THE ASS ESSING OFFICER IN THE ASSESSMENT ORDER HAS NOT DISCUSSED THE ISSUE OF INT EREST FROM INVESTMENT TO M/S. S.P. APPARELS LIMITED LTD. THE A SSESSING OFFICER I.T.A.NO.1666/MDS/2013. :- 12 -: WHILE RECORDING THE REASONS HAS FORMED AN OPINION THAT EXCESS INTEREST CLAIM WAS ALLOWED TO THE ASSESSEE AND ON THAT REASO N ASSESSMENT WAS RE-OPENED. FURTHER A PERUSAL OF THE MATERIAL ON REC ORD DOES NOT INDICATE THAT THE ASSESSEE HAD DRAWN THE ATTENTION OF THE AS SESSING OFFICER TO THE FACT THAT THE REASONS MENTIONED FOR RE-ASSESSME NT AT THE TIME OF COMPLETION OF ORIGINAL ASSESSMENT. ACCORDING TO THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE IT IS NOT NECESSARY FO R THE ASSESSEE TO POINT OUT THE ABOVE SET OF FACTS TO THE ASSESSING O FFICER AND THAT THE ASSESSEE IS ENTITLED TO THE CLAIM OF INTEREST. MER ELY BECAUSE THE ASSESSING OFFICER MENTIONED IN THE ORIGINAL ASSESS MENT ORDER THAT E2,46,065/- IS UNDER THE HEAD OTHER EXPENSES TO BE DISALLOWED, IT DOES NOT MEAN THE ASSESSING OFFICER IS EXAMINING THE INT EREST ALLOWABILITY ALSO. THUS, THE ASSESSING OFFICER WHILE FRAMING THE ORIGINAL ASSESSMENT U/S.143(3) OF THE ACT DOES NOT APPEAR TO HAVE FORME D AN OPINION WITH REGARD TO ALLOWABILITY OF INTEREST AND HE HAS ACCEP TED THE CLAIM OF THE ASSESSEE, AS THE ASSESSEE WANTED TO BE ACCEPTED B Y THE ASSESSING OFFICER. THE ASSESSEE HAVING FAILED TO DRAW THE AT TENTION OF THE ASSESSING OFFICER REGARDING INTEREST PAYMENT, IT CA NNOT BE SAID THAT THERE IS NO VIOLATION OF PROVISIONS OF THE ACT. FU RTHER, WHEN NO OPINION HAS BEEN EXPRESSED IN THE ASSESSMENT ORDER AND NO D ETAILS OR EXPLANATION IN RELATION TO THE CLAIM OF INTEREST HA S BEEN CALLED FOR BY THE I.T.A.NO.1666/MDS/2013. :- 13 -: 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 OF INTEREST PAYMENT. IN THE LIGHT OF THE AF ORESAID DISCUSSION, WE ARE OF THE VIEW THAT IN THE LIGHT OF THE REASONS RE CORDED BY THE ASSESSING OFFICER, THERE WAS SUFFICIENT MATERIAL FO R ASSESSING OFFICER TO FORM THE REQUISITE BELIEF THAT INCOME HAS ESCAPED A SSESSMENT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. THE ASSUMPTION OF JURISDICTION UNDER SECTION 147 BY ISSUANCE OF NOTICE UNDER SECTI ON 148 OF THE ACT IS VALID AND LEGAL AND AS SUCH NO CASE IS MADE OUT FOR INTERVENTION BY THIS TRIBUNAL. THEREFORE, THE ASSESSEE FAILS IN THIS G ROUND. THIS GROUND IS REJECTED. 8. REGARDING DISALLOWANCE OF INTEREST THE LD. AUTHOR ISED REPRESENTATIVE FOR ASSESSEE SUBMITTED THAT THE SUND RY 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 R EPRESENTATIVE FOR ASSESSEE CAPITAL OF THE ASSESSEE AS ON 31.03.2006 W AS AROUND E39,73,08,548/-. IN ADDITION TO THIS, THE ASSESSE E BORROWED INTEREST FREE LOANS FROM HIS FAMILY MEMBERS. AS SUCH, THE AMOUNT ADVANCED TO M/S. S.P. APPARELS LIMITED IS OUT OF INTEREST FREE OWN FUNDS AND INTEREST I.T.A.NO.1666/MDS/2013. :- 14 -: BEARING FUNDS WAS NOT AT ALL USED FOR THE PURPOSE O F LOAN TO M/S. S.P. APPARELS LIMITED. FURTHER HE RELIED ON THE JUDGMEN T OF THE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD VS. CIT (A) AND ANOTHER 288 ITR 1(SC) WHEREIN HELD THAT IN ORDER TO DECIDE WHETHER INTEREST ON FUNDS BORROW ED BY THE ASSESSEE TO GIVE AN INTEREST FREE LOAN TO A SIS TER 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 TH E LOAN WAS GIVEN BY THE ASSESSEE AS MEASURE OF COMMERCIAL EXPEDIENCY. THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE MA Y NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT W AS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. DECISIONS RELATING TO SEC.37 WILL ALSO BE APPLICABL E TO SECTION 36(1)(III) BECAUSE IN SECTION 37 ALSO THE E XPRESSION USED IS FOR THE PURPOSE OF THE BUSINESS. FO R THE PURPOSE OF BUSINESS INCLUDES EXPENDITURE VOLUNTAR ILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMAT ERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. TO CONSIDER WHETHER ONE SHOULD ALLOW DEDUCTION UNDE R SECTION 36(1)(III) OF INTEREST PAID BY THE ASSESSEE ON AMOUNTS BORROWED BY IT FOR ADVANCING TO A SISTER CONCERN, THE AUTHORIZES AND THE COURTS SHOULD EXAM INE THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MON EY AND WHAT THE SISTER CONCERN DID WITH THE MONEY. THA T THE BORROWED AMOUNT IS NOT UTILIZED BY THE ASSESS IN IT S OWN BUSINESS BUT HAD BEEN ADVANCED AS INTEREST FREE LOA NS TO ITS SISTER CONCERN IS NOT RELEVANT. WHAT IS RELEVA NT IS WHETHER THE AMOUNT WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIE W WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS . ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF) THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN T HE 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 I.T.A.NO.1666/MDS/2013. :- 15 -: CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPLETED TO MAXIMIZE HIS PROFITS . 9. ON THE CONTRARY, THE LD. DEPARTMENTAL REPRESEN TATIVE SUBMITTED THAT THE ASSESSEE ADVANCED AN AMOUNT OF E 24,52,61,029/- TO M/S. S.P. APPARELS LIMITED WITHOUT ANY INTEREST. F URTHER, 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 JUSTIF IED IN DISALLOWING THE INTEREST OF E26,52,500/- OUT OF THE INTEREST EXPEND ITURE INCURRED BY THE ASSESSEE OF E56,61,461/-. HE RELIED ON THE JUDGMENT OF PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD 286 ITR 1, WHEREIN HELD THAT THE SHARE CAPITAL IS MEANT TO BE USED FOR PRODUCTIVE USE IN THE BUSINESS. IF THE SHARE CAPIT AL, ACCORDING TO THE ASSESSEE, WAS SURPLUS AND IT COULD PART WITH THE SA ME TO ITS SISTER CONCERN FOR NON-BUSINESS PURPOSE WITHOUT ANY INTERE ST, THERE WAS NO NEED TO RAISE THE LOANS TO THAT EXTENT AND THE AMOU NT OF SUCH SHARE CAPITAL SHOULD HAVE BEEN UTILIZED FOR THE PROJECT I TSELF. IN CASE THE ASSESSEE HAS NOT ADVANCED LOANS TO ITS SISTER CONCE RN 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 I.T.A.NO.1666/MDS/2013. :- 16 -: WAS CONCERNED, THE INTEREST BEING PAID BY THE ASSES SEE ON THE WORKING CAPITAL COULD HAVE CERTAINLY BEEN SAVED TO THAT EXT ENT. 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 ADVANCED TO THE SISTER CONCERNS TO ADVANCE SOM E BUSINESS OBJECT. ACCORDINGLY, THE ASSESSEE WAS NOT ENTITLED TO CLAIM DEDUCTION OF THE INTEREST ON THE BORROWINGS TO THE EXTENT THOSE WERE DIVERTED TO SISTER CONCERNS OR OTHER PERSONS WITHOUT INTEREST. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN THE PRESENT CASE, ADMITTEDLY THE ASSESSE E HAS ADVANCED A SUM OF E24,52,61,029/- TO M/S. S.P. APPARELS LIMITE D AND ALSO MADE INVESTMENT OF E12 CRORES IN SHARES FROM WHICH THE A SSESSEE HAS NOT DERIVED ANY INTEREST/DIVIDEND FROM THESE LOANS OR FROM SHARES. AT THE SAME TIME, THE ASSESSEE CLAIMED AN EXPENDITURE TOWA RDS 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 FU NDS AVAILABLE WITH THE ASSESSEE TO MAKE ADVANCE TO M/S. S.P. APPARELS LIMI TED AND ALSO TO MAKE INVESTMENT IN SHARES. FURTHER, THE FACTS SHOW S THAT THE ASSESSEE HAS INCURRED INTEREST EXPENDITURE OF E56,61,461/-. IN OUR OPINION, IF THE I.T.A.NO.1666/MDS/2013. :- 17 -: INTEREST FREE FUNDS ARE AVAILABLE WITH THE ASSESSEE , IT IS THE DUTY OF THE ASSESSEE TO ESTABLISH THE NEXUS OF THE INTEREST FRE E FUNDS TO THE NON- INCOME GENERATING INVESTMENT AND ALSO TO SHOW THAT ONLY INTEREST FREE FUNDS WERE INVESTED IN NON-INCOME BEARING INVESTMEN TS AND THE ASSESSEE CANNOT EXPECT THAT THE REVENUE HAS TO PRO VE THAT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WAS DIVERTED IN INVESTMENT WHICH YIELDED NO RETURNS. SECTION 36(1) (III) OF THE ACT PROVIDES FOR DEDUCTIONS OF INTEREST ON THE LOANS RAISED FOR BUSINESS PURPOS ES. 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 BUSI NESS PURPOSES. IF IN THE PROCESS OF EXAMINATION OF GENUINENESS OF SUCH A DEDUCTION, IT TRANSPIRES THAT THE ASSESSEE HAD ADVANCED CERTAIN F UNDS TO SISTER CONCERNS OR ANY OTHER PERSON WITHOUT ANY INTEREST, THERE WOULD BE VERY HEAVY ONUS ON THE ASSESSEE TO BE DISCHARGED BEFORE THE ASSESSING OFFICER TO THE EFFECT THAT INSPITE OF PENDING TERM LOANS AND WORKING CAPITAL LOANS ON WHICH THE ASSESSEE IS INCURRING LI ABILITY TO PAY INTEREST, STILL THERE WAS JUSTIFICATION TO ADVANCE LOANS TO S ISTER CONCERNS FOR NON- BUSINESS PURPOSES WITHOUT ANY INTEREST AND ACCORDIN GLY, THE ASSESSEE SHOULD BE ALLOWED DEDUCTION OF INTEREST BEING PAID ON THE LOANS RAISED BY IT TO THAT EXTENT. IN OUR VIEW, EVEN THE PLEA OF NEXUS OF LOANS RAISED I.T.A.NO.1666/MDS/2013. :- 18 -: BY THE ASSESSEE WITH THE FUNDS ADVANCED TO THE SIST ER CONCERNS ON INTEREST FREE BASIS, MAY BE IT IS PLEADED TO BE OUT OF SALE PROCEEDS OR SHARE CAPITAL OR DIFFERENT ACCOUNT CANNOT BE ACCEPT ED. 11. THE ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A CO MMON KITTY. THE MONIES RECEIVED AS SHARE CAPITAL, AS TERM LOAN, AS WORKING CAPITAL LOAN, AS SALE PROCEEDS ETC. DO NOT HAVE ANY DIFFERE NT COLOUR. WHATEVER ARE THE RECEIPTS IN THE BUSINESS, THAT HAVE THE COL OUR OF BUSINESS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATION. SOURC ES HAS NO CONCERN WHATSOEVER. THE ONLY THING SUFFICIENT TO DISALLOW T HE INTEREST PAID ON THE BORROWING TO THE EXTENT THE AMOUNT IS LENT TO SISTE R CONCERN WITHOUT CARRYING ANY INTEREST FOR NON-BUSINESS PURPOSES WOU LD BE THAT THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEARING D EBTS TO BE REPAID. IN CASE THE ASSESSEE HAD SOME SURPLUS AMOUNT WHICH, AC CORDING TO IT, COULD NOT BE REPAID PREMATURELY TO ANY FINANCIAL IN STITUTION, STILL THE SAME IS EITHER REQUIRED TO BE CIRCULATED AND UTILIS ED 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 PIC TURE OF THE ACCOUNTS OF THE ASSESSEE AS AT THE COST BEING INCURRED BY TH E ASSESSEE, THE SISTER CONCERN WOULD BE ENJOYING THE BENEFITS THEREOF. IT CANNOT POSSIBLY BE I.T.A.NO.1666/MDS/2013. :- 19 -: HELD THAT THE FUNDS TO THE EXTENT DIVERTED TO SISTE R CONCERNS OR OTHER PERSONS FREE OF INTEREST WERE REQUIRED BY THE ASSES SEE FOR THE PURPOSE OF ITS BUSINESS AND LOANS TO THAT EXTENT WERE REQUI RED TO BE RAISED. WE DO NOT SUBSCRIBE TO THE THEORY OF DIRECT NEXUS OF T HE FUNDS BETWEEN BORROWINGS OF THE FUNDS AND DIVERSION THEREOF FOR N ONBUSINESS PURPOSES. RATHER, THERE SHOULD BE NEXUS OF USE OF B ORROWED FUNDS FOR THE PURPOSE OF BUSINESS TO CLAIM DEDUCTION UNDER SE CTION 36(1)(III) OF THE ACT. THAT BEING THE POSITION, THERE IS NO ESCAP E FROM THE FINDING THAT INTEREST BEING PAID BY THE ASSESSEE TO THE EXT ENT THE AMOUNTS ARE DIVERTED TO SISTER CONCERN ON INTEREST FREE BASIS A RE TO BE DISALLOWED. 12. IF THE PLEA OF THE ASSESSEE IS ACCEPTED THAT THE IN TEREST FREE ADVANCES MADE TO THE SISTER CONCERNS FOR NON-BUSINE SS PURPOSES WAS OUT OF ITS OWN FUNDS IN THE FORM OF CAPITAL INTRODU CED 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 CAPI TAL INTRODUCED BY IT AS A MARGIN FOR LOANS BEING RAISED AND AFTER THE LOANS ARE RAISED, WHEN SUBSTANTIAL AMOUNT IS DIVERTED TO SISTER CONCERNS F OR NON-BUSINESS PURPOSES WITHOUT INTEREST, A PLEA IS SOUGHT TO BE R AISED THAT THE AMOUNT ADVANCED WAS OUT OF ITS CAPITAL, WHICH IN FACT STOO D EXHAUSTED IN SETTING UP OF THE UNIT. SUCH A PLEA MAY BE ACCEPTABLE AT A STAGE WHEN NO LOANS I.T.A.NO.1666/MDS/2013. :- 20 -: HAD BEEN RAISED BY THE ASSESSEE AT THE TIME OF DISB URSEMENT OF FUNDS. THIS WOULD DEPEND ON FACTS OF EACH CASE. 13. SECTION 106 OF THE INDIAN EVIDENCE ACT OR THE PRINC IPLES ANALOGOUS THERETO PLACES THE BURDEN IN RESPECT THER EOF UPON THE ASSESSEE, AS THE FACTS ARE WITHIN ITS SPECIAL KNOWL EDGE. 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 B E GIVING LOAN TO ITS SUBSIDIARY COMPANIES AND THAT TOO WHEN IT PAYS A HE AVY INTEREST TO ITS LENDERS, IT WOULD CLAIM NO OR LITTLE INTEREST FROM ITS SUBSIDIARIES. 14. IN THE CASE OF K. SOMASUNDARAM AND BROTHERS V. COMMISSIONER OF INCOME-TAX 238 ITR 939 , WHILE DEALING WITH A SIMILAR PROPOSITION, MADRAS HIGH COURT HELD AS UNDER (PAGE 944): THE AMOUNT SO LENT, ACCORDING TO THE ASSESSEE, CAME OUT OF THE CONTRACT EARNINGS. THE AMOUNT BORROWED, ACCORDING TO THE ASSESSEE WAS INVESTED IN THE EXECU TION OF THE CONTRACTS. IT IS CLEAR, THEREFORE, THAT THE ASS ESSEE HAD INVESTED THE BORROWED FUNDS IN THE EXECUTION OF THE CONTRACTS, HAD RECOUPED THE MONEY SO INVESTED PRESUMABLY 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 TH E RELATIVES OF THE PARTNERS, IT WAS CLEARLY NOT A BUS INESS PURPOSE. THE ASSESSEE CLEARLY DIVERTED THE FUNDS WH ICH HAD BEEN BORROWED, HAD BEEN INVESTED IN THE CONTRAC T I.T.A.NO.1666/MDS/2013. :- 21 -: WORK, AFTER THE INVESTMENT WAS RECOVERED AND WAS AVAILABLE EITHER FOR THE PURPOSES OF THE BUSINESS O R BY WAY OF REPAYMENT OF THE LOAN. THE ASSESSEE DID NEIT HER, BUT CHOSE TO DIVERT THE MONEY FOR NON-BUSINESS PURP OSES. AFTER SUCH DIVERSION, THE INTEREST PAID ON THE CAPI TAL BORROWING TO THE EXTENT OF THE AMOUNTS DIVERTED CAN NO LONGER BE AN ITEM OF EXPENDITURE WHICH CAN BE CLAIM ED FOR DEDUCTION AS AN ITEM OF BUSINESS EXPENDITURE. IF TH E AMOUNTS DIVERTED WAS SUBSEQUENTLY BROUGHT BACK INTO THE BUSINESS AND UTILISED IN THE BUSINESS, THE ASSESSEE COULD THEREAFTER CLAIM THE INTEREST PAID 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 PRESUMPTION THAT A PART OF THE CAPITAL WOULD HAVE BEEN DIVERTED FOR NON-BUSINESS PURPOSES NOT FROM THE BORROWED CAPITAL BUT FROM THE CAPITAL CONTRIBUTED BY THE ASSESSEE. IN THE ABSENCE OF SUCH AN ELEMENT IN THE FACTS ARISING IN THE PRESENT CASE, WE ARE UNABLE TO SUBSCRIBE TO THE VIEW OF THE TRIBUNAL THAT THE ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 36(1)(III) WITH REGARD TO THE INTEREST PAID ON BORROWED CAPITAL, WHICH WAS UTILISED BY THE ASSESSEE'S FATHER FOR NON-BUSINESS PURPOSES. 14.2 IN 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 WA S DISALLOWED UNDER SECTION 36(1)(VIII) OF THE ACT. I.T.A.NO.1666/MDS/2013. :- 22 -: 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 TO TH E PARTNERS, THEIR RELATIVES AND THE SISTER CONCERNS A RE NOT FOR BUSINESS PURPOSES AND THE ASSESSEE HAS NOT DERI VED ANY BENEFIT OUT OF THE SAME. ADMITTEDLY, NO INTERES T WAS CHARGED ON THESE ADVANCES. THE TRIBUNAL APPEARS TO HAVE PLACED RELIANCE ON THE FACT THAT THE PARTNE RS AND THEIR RELATIVES HAVE UTILISED THE AMOUNTS FOR BUSINESS PURPOSES, SUCH AS CONSTRUCTION OF A SHOP BUILDING ETC. SO LONG AS THE ASSESSEE- FIRM IS NOT THE BENEFICIARY OF SUCH INVESTMENTS, THE NATURE OF INVESTMENT OR THE UTILISATION 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 A SSESSEE WITH LIQUIDITY CANNOT CLAIM THAT IT CAN GIVE INTERE ST FREE ADVANCES TO THE PARTNERS AND OTHERS AND THEN BORROW FUNDS FROM THE BANK ON INTEREST FOR BUSINESS PURPOS ES. SUCH BORROWINGS WILL NOT BE FOR BUSINESS PURPOSES, BUT FOR SUPPLEMENTING THE CASH DIVERTED BY THE ASSESSEE WITHOUT ANY BENEFIT TO IT. THEREFORE, SO LONG AS TH E ASSESSEE IS NOT THE BENEFICIARY OF THE INVESTMENTS MADE BY THE PARTNERS, THEIR RELATIVES AND THE SISTER CON CERNS, AND SO LONG AS THE ADVANCES ARE INTEREST FREE, THE ASSESSING OFFICER IS PERFECTLY JUSTIFIED IN DISALLO WING THE INTEREST IN PROPORTION TO 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 I.T.A.NO.1666/MDS/2013. :- 23 -: 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 F OUND OUT FROM THE ADVANCES TAKEN BY THE ASSESSEE. THE ON US TO PROVE THAT IT IS ENTITLED TO (DEDUCTION) IN THIS REGARD WAS ON THE ASSESSEE. IT WAS TO BE PROVED THAT A BON A FIDE LOAN HAD BEEN GRANTED IN FAVOUR OF A SISTER CONCERN. IT WAS, THEREFORE, ITS DUTY TO PLACE REQUI SITE MATERIALS ON RECORD. 14.5 THIS ASPECT OF THE MATTER HAS ALSO BEEN CONSID ERED IN THE CASE OF CIT V. H.R. SUGAR FACTORY PVT. LTD., 187 ITR 363 , WHEREIN THE ALLAHABAD HIGH COURT HELD (PAGE 370): THE COURT CANNOT SHUT ITS EYES TO REALITIES. WHAT HAS ACTUALLY HAPPENED IS VISIBLE TO THE NAKED EYE. THE ASSESSEE, A PRIVATE LIMITED 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 I S 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 DIRECTORS/ SHAREHOLDERS. IT CANNOT BE SAID THAT IT IS EXPEDIENT IN THE INTEREST OF BUSINESS OR IS LAID OUT FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE.... MAY BE THAT THE COMPANY BORROWS LARGE AMOUNTS FOR THE PURPOSE OF ITS BUSINESS EVERY YEAR, BUT THAT DOES NOT EXPLAIN THE HUGE ADVANCES TO THE DIRECTORS/SHAREHOLDERS. HAD THIS MONEY BEEN NOT ADVANCED TO THE DIRECTORS, IT WOULD HAVE BEEN AVAILABLE TO THE ASSESSEE FOR ITS BUSINESS PURPOSES AND TO THAT EXTENT IT MAY NOT HAVE BEEN NECESSARY TO BORROW FROM THE BANKS. WE ARE, THEREFORE, OF THE OPINION THAT THE INCOME-TAX OFFICER WASRIGHT 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 NAVE. I.T.A.NO.1666/MDS/2013. :- 24 -: 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 INVESTMENT AND ADVANCE. IT CANNOT BE SAID THAT BECAUSE, IN THE CONCERNED ASSESSMENT YEAR, THE PROFIT WAS MORE THAN THE INVESTMENT AND ADVANCE, THOSE CAME ONLY OUT OF THE PROFIT. THE ACTUAL FINANCIAL LIQUIDITY POSITION ON THE RELEVANT DATE HAS TO BE ESTABLISHED BY THE ASSESSEE. 14.7 YET AGAIN IN CIT V. H.R. SUGAR FACTORY PVT. LTD. 190 ITR 643 (ALL.) , B.P. JEEVAN REDDY C.J. (AS HIS LORDSHIP THEN WAS) RELYING UPON HIS EARLIER DECISION IN H.R. SUGAR FACTORY PVT. LTD .'S CASE THAT THE ASSESSEE-COMPANY 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 IN TEREST ON THE LOANS RAISED FOR BUILDING A CINEMA THEATRE, WHICH WAS ULT IMATELY 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. I.T.A.NO.1666/MDS/2013. :- 25 -: 14.9 IN THE CASE COMMISSIONER OF INCOME-TAX V. SARAYA SU GAR MILLS (P) LTD. , 201 ITR 181 , THE ALLAHABAD HIGH COURT HELD THAT WHERE PART OF THE OVERDRAFT DIVERTED TO DIRECTORS AND CON CERNS IN WHICH THEY WERE SUBSTANTIALLY INTERESTED, INTEREST IN SUCH AMO UNT TO THAT EXTENT WAS HELD DISALLOWABLE. SIMILAR VIEWS WERE EXPRESSED BY BOMBAY HIGH COURT IN PHALTAN SUGAR WORKS LTD. V. COMMISSIONER O F WEALTH TAX, AND PHALTAN SUGAR WORKS LTD. V. COMMISSIONER OF INCOME- TAX 215 ITR 582 (BOM). 14.10 IN THE CASE OF ELMER HAVELL ELECTRICS AND ORS. V. COMMISSIONER OF INCOME-TAX AND ANR. 277 ITR 549 , THE DELHI HIGH COURT, WHILE REJECTING THE APPEAL OF THE ASSESSEE O N THE ISSUE OF DISALLOWANCE OF INTEREST ON INTEREST FREE ADVANCES MADE TO SISTER CONCERN, OBSERVED THAT THE ASSESSEE ITSELF HAD TAKE N 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 , THE MADRAS HIGH COURT DISALLOWED THE INTEREST ON I.T.A.NO.1666/MDS/2013. :- 26 -: THE BORROWED CAPITAL TO THE EXTENT THE SAME WAS ADV ANCED TO THE DIRECTORS WITHOUT INTEREST . 14.12 IN INDIAN METALS & FERRO ALLOYS LTD. V. COMMISSIONER O F INCOME TAX (1992) 193 ITR 344 , ORISSA HIGH COURT HELD AS UNDER (PAGE 348): THE DETERMINATIVE QUESTION IN A CASE OF THIS NATU RE IS THE SOURCE FROM WHICH THE ASSESSEE MAKES INVESTMENT S OR ADVANCES. WHERE AN ASSESSEE SEEKS TO DEDUCT CERT AIN ITEMS FROM HIS BUSINESS PROFITS, THE ONUS OF PROVIN G THE 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 SEC TION 36 FOR THE PURPOSE OF COMPUTATION OF INCOME REFERRE D TO IN SECTION 28, HE HAS TO PLACE MATERIALS IN SUPP ORT OF HIS CLAIM OF ENTITLEMENT TO THE DEDUCTION. THEREFOR E, 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 TO THE FACTUAL ASPECTS, CAME TO HOLD THAT THE MONEY UTILISED WAS FROM THE BORROWED FUNDS. THI S ESSENTIALLY IS AN INFERENCE FROM FACTUAL ASPECTS. ILLUSTRATIVELY, IT MAY BE POINTED OUT THAT, IN A HYPOTHETICAL CASE, AN ASSESSEE CAN EARN PROFITS ONL Y AFTER THE DATE OF INVESTMENT AND ADVANCE. IT CANNOT BE SAID THAT BECAUSE, IN THE CONCERNED ASSESSMENT YEAR , THE PROFIT WAS MORE THAN THE INVESTMENTAND ADVANCE, THOSE CAME ONLY OUT OF THE PROFIT. THE ACTUAL FINAN CIAL LIQUIDITY POSITION ON THE RELEVANT DATE HAS TO BE ESTABLISHED BY THE ASSESSEE. I.T.A.NO.1666/MDS/2013. :- 27 -: 14.13 IN REGAL THEATRE V. COMMISSIONER OF INCOME TAX, 225 ITR 205 , THE DELHI HIGH COURT HELD THAT CONSIDERATION OF THE ISSUE REGARDING ALLOWABILITY OF DEDUCTION UNDER SECTION 3 6(1)(III) OF THE ACT IS PURELY A QUESTION OF LAW AS IT IS AN INFERENCE TO B E DRAWN FROM THE FACTS. 15. IN OUR OPINION, IF THE AMOUNT IS ADVANCED FROM A MIXED ACCOUNT OR SHARE CAPITAL OR SALE PROCEEDS OR PROFIT S ETC., THE SAME WOULD BE TERMED AS DIVERSION OF BORROWED CAPITAL AND THAT THE REVENUE NEED NOT REQUIRE TO ESTABLISH NEXUS OF THE FUNDS ADVANCE D TO THE SISTER CONCERNS WITH THE BORROWED FUNDS. ONCE IT IS BORNE OUT FROM THE RECORD THAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON WHI CH LIABILITY TO PAY TAX IS BEING INCURRED AND ON THE OTHER HAND, CERTAI N AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTHERS WITHOUT CARRY ING ANY INTEREST AND WITHOUT ANY BUSINESS PURPOSE, THE INTEREST TO THE E XTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO B E DISALLOWED UNDER SECTION 36(1)(III) OF THE ACT. SUCH BORROWINGS TO T HAT EXTENT CANNOT POSSIBLY BE HELD FOR THE PURPOSE OF BUSINESS BUT FO R SUPPLEMENTING THE CASH DIVERTED WITHOUT DERIVING ANY BENEFIT OUT OF I T. ACCORDINGLY, THE ASSESSEE WILL NOT BE ENTITLED TO CLAIM DEDUCTION OF THE INTEREST ON THE I.T.A.NO.1666/MDS/2013. :- 28 -: BORROWINGS TO THE EXTENT THOSE ARE DIVERTED TO SIST ER CONCERNS OR OTHER PERSONS WITHOUT INTEREST. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.1666/MDS/2013 IS DISMISSED. ORDER PRONOUNCED ON THURSDAY, THE 25TH OF JUNE , 2015, AT CHENNAI. SD/- SD/- ( . !' ) V. DURGA RAO # / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ' #$ /CHENNAI. %& /DATED:25.06.2015. KV &' () *) /COPY TO: 1. + APPELLANT 2. / RESPONDENT 3. , ( )/CIT(A) 4. , /CIT 5. )-. / /DR 6. .0 1 /GF.