Tribunal rejects assessee's arguments, upholds reassessment & addition under Income-tax Act

The tribunal upheld the initiation of reassessment proceedings, rejecting the assessee's arguments on change of opinion, reasons supplied by the AO, and audit objection. It also sustained the addition made by the AO, ruling that the transfer of interest liability to a subsidiary did not constitute actual payment under Section 43B of the Income-tax Act. The tribunal dismissed the appeal, affirming the reassessment and addition.

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Issues Involved:
1. Initiation of reassessment proceedings.
2. Merits of sustenance of addition.

Issue-wise Detailed Analysis:

1. Initiation of Reassessment Proceedings:
The first issue pertains to the initiation of reassessment proceedings. The assessee challenged this on three counts: Change of opinion, reasons not supplied by the AO, and audit objection cannot lead to reassessment.

Change of Opinion:
The assessee argued that the AO's initiation of reassessment proceedings amounted to a change of opinion since the AO had already considered the deductibility of interest during the original assessment. However, the tribunal noted that there was no discussion in the original assessment order regarding the deductibility of the Rs. 2.45 crore interest transferred to a subsidiary. The tribunal emphasized that for a reassessment to be considered a change of opinion, there must be evidence that the AO had formed an opinion on the issue during the original assessment. Since no such opinion was formed, the tribunal rejected the assessee's contention.

Reasons Not Supplied by the AO:
The assessee contended that the AO did not supply the reasons for initiating reassessment proceedings, citing the Supreme Court's ruling in GKN Driveshafts (India) Ltd. The tribunal found that the assessee had been supplied with the reasons, as evidenced by the written submissions and the scanned copy of the reasons presented before the CIT(A). The tribunal concluded that the assessee's claim of not being supplied with the reasons was unfounded.

Audit Objection Cannot Lead to Reassessment:
The assessee argued that the reassessment was based solely on an audit objection, which is not permissible. The tribunal distinguished between cases where the audit party interprets the law and cases where it communicates the existence of law or factual inaccuracies. It cited the Supreme Court's ruling in CIT vs. PVS Beedis Pvt. Ltd., which upheld reassessment based on factual errors pointed out by the audit party. The tribunal found that the audit party in this case had communicated a factual inaccuracy regarding the unpaid interest, which justified the initiation of reassessment proceedings.

2. Merits of Sustenance of Addition:
The second issue pertains to the merits of the addition sustained by the AO. The assessee argued that the transfer of interest liability to its wholly-owned subsidiary should be considered as an effective discharge of the interest obligation, thereby making it deductible under Section 43B of the Income-tax Act.

The tribunal examined the relevant provisions of Section 43B, which allow deductions for interest payable to financial institutions or banks only in the year in which such interest is "actually paid." The tribunal emphasized that "actual payment" cannot be equated with "constructive payment" or mere transfer of liability. It noted that the transfer of interest liability to a subsidiary does not constitute actual payment to the banks or financial institutions, as the liability remains unpaid.

The tribunal also referred to Explanations 3C and 3D to Section 43B, which clarify that interest converted into a loan or borrowing is not deemed to have been actually paid. Based on these provisions, the tribunal concluded that the interest of Rs. 2.45 crore transferred to the subsidiary was not deductible under Section 43B, as it was not actually paid.

Conclusion:
The tribunal dismissed the appeal, upholding the initiation of reassessment proceedings and the addition sustained by the AO. The order was pronounced in the open court on 06.08.2015.

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