Case Law Details
Brief of the Case:
In the cited case, ITAT inter-alia held in the light of the main provisions of section 43B read with Explanations 3C and 3D that the interest payable to banks and other financial institutions can be allowed as deduction only ‘if such interest has been actually paid’ and second is that where such interest ‘has been converted into loan or borrowing/advance, it shall not be deemed to have been actually paid. Hence, it is crystal clear that deduction of interest u/s 43B cannot be allowed in the present case because such interest has not been actually paid by the assessee to the banks/financial institutions.
Facts of the Case:
The Assessee filed its return declaring loss of Rs.12,48,92,067/-. The assessment was completed u/s 143(3) of the IT Act on 24.03.2006 determining loss at Rs.11,32,76,728/-. On the basis of audit objection regarding excess allowance of deduction of Rs.2,45,01,117/- towards interest paid u/s 43B of the IT Act, the case was reopened by means of notice u/s 148 of the IT Act. The AO reproduced the gist of audit objection on the assessment order by noticing that there was unpaid interest of Rs.5,01,38,035/- which was not allowed in earlier assessment years, out of which the assessee claimed deduction for a sum of Rs.3,61,75,597/- u/s 43B by claiming it as discharged/paid. This amount of Rs.3.61 crore included a sum of Rs.2.45 crore which was transferred to a wholly owned subsidiary company. Since such interest of Rs.2.45 crore was not actually paid, but, only transferred to a subsidiary company, the AO reopened the assessment by noticing that the same was not allowable. After entertaining objections from the assessee, the AO denied deduction of Rs.2.45 crore.
The assessee objected to the initiation of reassessment proceedings before the CIT(A) on certain counts but without any success.
On aggrieved, the assessee appealed before ITAT against the initiation of reassessment proceedings and on the merits of sustenance of addition.
Contention of the Revenue:
Revenue contended that the amount transferred to M/s. RT Paper Board Ltd is not deductible as the transfer of interest to another company cannot constitute payment of interest so as to be eligible for deduction.
Further, in case of reassessment, Revenue 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 initiation of re-assessment proceedings on the basis of audit objection has been held to be valid.
Contention of the Assessee:
Assessee 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.
Assessee contended that the annual accounts of the assessee thoroughly elaborated about the transfer of its paper board unit to M/s.RT Paper Board Ltd., and, as such, the presumption should be that the AO did consider and apply his mind on the deductibility of interest of Rs.2.45 crore. Initiation of re-assessment proceedings on this basis amounted to change of opinion. The assessee has canvassed a view that since the AO examined the issue during the course of original assessment proceedings, the initiation of reassessment proceedings on the same count amounts to change of opinion, which is not permissible u/s 147.
Assessee further contended that the AO did not supply reasons for initiation of re-assessment proceedings and, as such, the reassessment order be declared a nullity.
Assessee further contended that the AO initiated reassessment proceedings simply on the basis of audit objection, which is not permissible under the law. He relied on a judgment 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 re-assessment proceedings on the basis of internal audit report, was not sustainable.
Assessee also 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 Rs.2.45 crore, such transfer of interest liability should be considered as discharge of the interest obligation. He relied on a decision to contend that effective discharge of liability be construed as payment u/s 43B of the Act. He mainly relied on the judgment of the Hon’ble Supreme Court in the case of W.T. Suren & Company Ltd. vs. CIT (1998) 230 ITR 643 (SC) and other decisions to buttress his contention that the transfer of interest 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.
Held by CIT (A):
The CIT (Appeals) rejected the contention of the Revenue and upheld the assessment order.
Held by ITAT:
ITAT observed that the AO formed opinion on the issue in question during the course of original assessment proceedings and, hence, his hands are tied for initiating re-assessment proceedings. Since the AO did not form any opinion on the deductibility of such interest in the original assessment proceedings, the contention of the Assessee about the change of opinion falls flat on the ground.
ITAT found that there was 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, which formed the bedrock for the initiation of reassessment, has been reproduced in the assessment order itself. Further, no such issue was taken up by the assessee before the CIT(A) that despite the assessee’s request for supply of reasons leading to initiation of reassessment proceedings, the AO did not supply such reasons and framed the assessment u/s 147. No such ground was taken by the assessee in the Memorandum of Appeal filed before the CIT(A).
ITAT observed that the assessee attempted to distort the actual reasons with the ulterior motive of playing foul with the CIT(A). This completely belies the contention of the Assessee that he was not supplied with the reasons. ITAT held that the assessee was promptly supplied the reasons leading to the initiation of reassessment proceedings. This contention was, therefore, rejected.
In respect of the reassessment, ITAT observed that the audit party simply suggested that the interest of Rs.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 Rs.2.45 crore. This shows that the AO was simply informed about the fact which had escaped his attention during the course of assessment proceedings to the effect that a sum of Rs.2.45 crore was not allowable u/s 43B of the Act which is nothing, but, a communication of law to the AO. ITAT 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 Rs.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 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 argument of the Assessee on this issue, being devoid of any merit, is hereby jettisoned. It is, therefore, held that the audit objection in the instant case constituted ‘information’ about the escapement of income to the AO, thereby justifying the initiation of reassessment.
ITAT further observed in light of the prescription of section 43B read with Explanations 3C and 3D is that the interest payable to banks and other financial institutions can be allowed as deduction only ‘if such interest has been actually paid’ and where such interest ‘has been converted into loan or borrowing/advance, it shall not be deemed to have been actually paid.’ Hence, it is crystal clear that deduction of interest u/s 43B cannot be allowed in the present case because such interest has not been actually paid by the assessee to the banks/financial institutions. This ground was not allowed.
In the result, the appeal was dismissed.
