2013 (11) TMI 1599 - AT - Income Tax

Tribunal Decision: Validity of Reopening Upheld, Interest Disallowance Allowed, Disallowance Confirmed under Section 14A

Asstt Commissioner of Income-Tax, Versus Sh. Laxmi Bidi Trading Co. & vice versa

The Tribunal upheld the validity of the reopening under Section 148 for A.Y. 2001-02. The Tribunal allowed the assessee's appeals regarding the ... Addition u/s 36(1)(iii) - Held that:- If rate of interest paid to specified persons in compared with rate on unsecured loan are more or less are same. Besides this, various formalities are required to avail the finance from the bank. It is also settled law that how the business should be carried on is the prerogative of the assessee and the Assessing Officer cannot dictate the terms as to how the business should be carried on. While considering the claim u/s. 36(1)(iii) what is to be required to judge is whether the amount is borrowed for the purpose of business or not. Since the amount has been borrowed in earlier years as well as during the year at a stipulated rate of interest and which has been still utilized for the purpose of business, the interest rate could not have been re-negotiated for earlier year. Therefore, rate of interest, paid by the assessee is quite reasonable having regard to the fair market value of such services. Therefore, the CIT(A) was incorrect in restricting the interest payable to the extent of 15% or 14% which is supported by various decisions mentioned in the order in preceding paras. Since the interest rate paid by the assessee is reasonable, the order of the CIT(A) is reversed and addition is deleted. Thus, assessee’s appeals are allowed and Revenue’s appeals are dismissed on this ground. Addition u/s 14A - Held that:- The assessee has mixed fund in books of account i.e. borrowed as well as self generated. Therefore, the assessee had to prove fund invested in the shares are from the exempted or self generated fund. Now Rule 8D is applicable. Accordingly, the assessee has calculated itself disallowance as per Rue which is very nominal. Thus, we confirm the order of the CIT(A). Issues Involved:1. Validity of reopening under Section 148.2. Disallowance of interest under Section 40A(2)(b).3. Disallowance under Section 14A.Detailed Analysis:1. Validity of Reopening under Section 148:The first issue pertains to the validity of the reopening of the assessment under Section 148 for A.Y. 2001-02. The original assessment was completed under Section 143(3) on 26.03.2004. The Assessing Officer (A.O.) later issued a notice under Section 148 on 31.03.2006, based on the belief that income had escaped assessment due to non-business utilization of borrowed funds and an excessive claim of income tax. The CIT(A) upheld the reopening, citing that the A.O. had reasonable grounds to believe that income had escaped assessment. The Tribunal confirmed this decision, noting that once an assessment is reopened, the A.O. is free to examine all points in reassessment proceedings, even if the reopening was based on a single issue. The Tribunal dismissed the assessee's appeal on this ground.2. Disallowance of Interest under Section 40A(2)(b):The second issue involves the disallowance of interest payments to relatives of partners, deemed excessive under Section 40A(2)(b). The A.O. disallowed portions of the interest paid at 18%, comparing it to lower market rates. The CIT(A) partly allowed the appeals, reducing the disallowance to 3% for A.Y. 2001-02 and 2003-04, and 4% for A.Y. 2004-05 and 2005-06. The Tribunal, however, reversed the CIT(A)'s decision, holding that the interest rate of 18% was reasonable and justified, considering the business requirements and the prevailing market conditions. The Tribunal emphasized that the business decisions, including the rate of interest on borrowings, are the prerogative of the assessee and should not be interfered with by the A.O. Thus, the Tribunal allowed the assessee's appeals and dismissed the revenue's appeals on this ground.3. Disallowance under Section 14A:The third issue pertains to the disallowance under Section 14A for A.Y. 2007-08. The A.O. made a disallowance of Rs. 2,17,377/- under Section 14A read with Rule 8D, related to the exempt dividend income. The CIT(A) confirmed the disallowance, stating that the assessee failed to prove that the investments in shares were not made out of borrowed funds. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had mixed funds and did not establish a clear nexus between the exempt income and non-borrowed funds. Consequently, the Tribunal confirmed the disallowance made by the A.O.Conclusion:- The Tribunal upheld the validity of the reopening under Section 148 for A.Y. 2001-02.- The Tribunal allowed the assessee's appeals regarding the disallowance of interest under Section 40A(2)(b), deeming the interest rate of 18% reasonable.- The Tribunal confirmed the disallowance under Section 14A for A.Y. 2007-08, supporting the A.O.'s application of Rule 8D.Result:- Assessee's appeals for A.Y. 2001-02 partly allowed, and for A.Y. 2003-04, 2004-05, 2005-06, and 2006-07 allowed.- Assessee's C.O. for A.Y. 2007-08 partly allowed.- Revenue's appeals for A.Y. 2001-02, 2003-04, 2004-05, 2005-06, 2006-07, and 2007-08 dismissed.