2015 (11) TMI 293 - AT - Income Tax

Appeal outcomes: Section 263 upheld for 2006-07, TDS credit allowed for 2007-08 per High Court ruling

The appeal for the assessment year 2006-07 was dismissed, upholding the CIT's revision order under Section 263 and the disallowance of interest ... Revision u/s 263 - Disallowance of interest u/s 36(1)(iii) - Held that:- AO asked details of the loan and advance being balance-sheet items (asset) and no question was raised on allowability or disallowability of the interest. Even the AO did not go into the point of interest-free advance in the question asked from the assessee. Thus merely asking the details of loan and advance without questioning the claim of the interest would not by any stretch of imagination raise a presumption that the issue of allowability of claim of interest was in the view of the AO. Further, the assessment order does not remotely indicate any thing that there was any thought process by the AO on the interest claim. Rather the AO's query was restricted to the balance sheet item and does not touch the profit and loss account of the assessee. Therefore, we are in complete agreement with the CIT that there is a lack of inquiry on the part of the AO which renders the assessment order erroneous so far as it is prejudicial to the interests of the revenue. Rejection of TDS credit - AO rejected the claim of the credit of the said amount of TDS u/s 194C towards mobilisation advance on the ground as such credit cannot be allowed when the corresponding receipt has not been offered to tax - Held that:- As decided in assessee's own case for the assessment year 2002-03 as held if the amount is a mobilisation advance and not an income at all, the question of paying income tax would net arise. When the gross receipts is offered and in that assessment year he has suffered loss, the question of paying any tax on the said amount also does not arise. A conjoint reading of Sections 194C, 199 & 237 of the Act makes it clear that if there was no liability to pay tax, the TDS paid is liable to be refunded and that is absolutely what the Tribunal has stated. - Decided in favour of assessee. Disallowance of interest on account of interest-free advance made to Shri Manohar Shetty - Held that:- Interest-free loan was given from borrowed fund. In view of our finding on this issue for the assessment year 2006-07, we uphold the impugned order of the CIT(A) qua this issue as the argument that the interest free loan had been given for the purpose of facilitating the procedure of getting the work contract from NHAI does not appeal to reason and therefore fails to fulfill the test of preponderance of probability and also commercial expediency. In short, it cannot be held that the loan was for the purpose of business. It is by chance and opening balance was there which was made a cog in the wheel of the reverse engineering. Besides it is admittedly not from own funds. Besides, MS cannot be held as a sister concern of the appellant. Therefore A.O. is justified to treat the interest receivable from MS as the income of the appellant - Decided against assessee. Issues Involved:1. Legality of the revision order passed under Section 263 of the Income Tax Act.2. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act.3. Rejection of TDS credit under Section 199 of the Income Tax Act.4. Charging of interest under Sections 244A and 234D of the Income Tax Act.Detailed Analysis:1. Legality of the Revision Order Passed Under Section 263:The appeal by the assessee challenges the revision order dated 17/3/2011 of the CIT passed under Section 263 for the assessment year 2006-07. The CIT found that the AO allowed interest expenditure of Rs. 3,00,50,905/- on borrowed funds while an amount of Rs. 11.5 crores was advanced as an interest-free loan to Shri Manohar Shetty, a partner in SCC, which was a member of the assessee joint venture. The CIT observed that the AO failed to disallow the interest payable on borrowed funds utilized for making interest-free advances, which should have been disallowed under Section 36(1)(iii). The CIT issued a show-cause notice and, after considering the assessee's objections, concluded that the AO did not conduct a proper inquiry, rendering the order erroneous and prejudicial to the interests of the revenue. The CIT set aside the AO's order with directions for a fresh assessment.2. Disallowance of Interest Expenditure Under Section 36(1)(iii):The assessee contended that the interest-free advance to Shri Manohar Shetty was given for commercial expediency, as it facilitated obtaining a bank guarantee from SCC for a contract with NHAI. The assessee argued that the AO had conducted an inquiry and applied his mind, thus the CIT's invocation of Section 263 was unjustified. However, the Tribunal found that the AO merely asked for details of loans and advances as balance-sheet items without questioning the allowability of the interest claim. The Tribunal agreed with the CIT that there was a lack of inquiry by the AO, making the assessment order erroneous and prejudicial to revenue interests. On merits, the Tribunal held that the interest-free advance lacked commercial expediency as it was an obligation of the joint venture partners to arrange the bank guarantee, and the advance did not involve any economic substance or business interest of the assessee.3. Rejection of TDS Credit Under Section 199:For the assessment year 2007-08, the assessee challenged the rejection of TDS credit of Rs. 22,44,000/- deducted by NHAI on a mobilization advance of Rs. 10 crores. The AO disallowed the TDS credit on the ground that the corresponding income was not offered to tax, as required by Section 199(2). The CIT(A) upheld this decision. However, the Tribunal noted that the issue was covered by a decision of the Hon'ble jurisdictional High Court in the assessee's own case for the assessment year 2002-03, which held that TDS on mobilization advance, not being income, should be refunded. Following this judgment, the Tribunal directed the AO to allow the TDS credit.4. Charging of Interest Under Sections 244A and 234D:The Tribunal noted that the charging of interest under Sections 244A and 234D is consequential and automatic, thus no specific adjudication was required on this ground.Conclusion:The appeal for the assessment year 2006-07 was dismissed, upholding the CIT's revision order under Section 263 and the disallowance of interest expenditure. For the assessment year 2007-08, the Tribunal partly allowed the appeal, directing the AO to allow the TDS credit as per the jurisdictional High Court's decision, while upholding the disallowance of interest expenditure. The appeal was pronounced in the open court on 9.10.2015.