2016 (7) TMI 1525 - AT - Income Tax

Tribunal upholds re-assessment under IT Act, disallows interest claim, appeal dismissed.

M/s. Empee Holdings Ltd. Versus The Deputy Commissioner of Income Tax, Chennai

The Tribunal upheld the validity of re-assessment proceedings under section 147 of the Income Tax Act, finding discrepancies in interest treatment and ... Reopening of assessment u/s 147 - assessee company has diverted interest bearing borrowed funds to group companies without charging any interest - AR argued that the assessee company having same management and due to interse mutual trust with group companies and the concept of business expediency borrowed funds were not utilized for the purpose of advancing interest free loans - HELD THAT: - Assessee company having common directors with other group companies and promoter shareholding. Further, on in depth analyzing M/s. Empee Distilleries Ltd holds 63.43 % of shares alongwith assessee company 2.2% of shares in M/s. Empee Sugars and Chemicals and M/s. Empee Distilleries Ltd holds 27.67% share of the assessee company. The transaction of chain Holding of shares by the assessee company and common individual share holders prove that there exist holding and subsidiary company operations having registered office at one place. The shares of M/s. Empee Sugars & Chemicals Ltd being 63.43% are directly held by M/s. Empee Distilleries Ltd and we could not understand why the loans was routed through the assessee company. The income of the assessee company is only on redemption of mutual funds and no business activities are carried in the previous year. The explanations that the interest free loan provided to M/s. Empee Distilleries Ltd are out of interest free funds cannot be accepted as the financial statements of the assessee company could not support arguments of AR. Assessee company on one hand obtain Interest bearing loans from the same management company and give interest free loans to other company in the same management and set off interest charged on loan funds against income on redemption of mutual funds and whereas interest income in the hands of M/s. Empee sugars and Chemicals Ltd does not subject to tax due to Business losses. So, considering the Apparent facts, financial statement, concept of same management and chain holding of shares and tax adjustments, we found that the ld. Commissioner of Income Tax (Appeals) has examined the evidence on record vis-à-vis explanations made by the assessee. We does not see any reason to interfere with the order of Commissioner of Income Tax (Appeals) on this ground Re-assessment proceedings - as found from the records, against income on redemption of mutual funds, the assessee company has claimed administrative expenditure and finance charges in the nature of interest on advances from M/s. Empee Sugars and Chemical Ltd and also increase in unsecured loans compared to earlier years. The factual matrix that the assessee has not charged any interest on advances to M/s. Empee Distilleries Ltd. But claimed interest in profit and loss account for advances from group company. AR explained that advances are made on commercial expediency and interest expenditure has to be allowed. All the three companies are under same management and with common shareholding. We are not convinced with the concept of change of opinion as the financial statements clearly shows that the interest was paid on advances but not charged in respect of advances provided to the group company. Further increase in unsecured loans and assessee’s company income is not from business activity but only out of redemption of mutual funds. Therefore, AO was right considering the reasons for re-assessment and issued notice u/s.148 within six years and based on the information as per assessment records and hence the re-assessment proceedings are valid - Decided against assessee. Issues Involved:1. Validity of re-assessment proceedings under section 147 of the Income Tax Act, 1961.2. Disallowance of interest claimed under section 36(1)(iii) of the Act.3. Disallowance of fee paid to Registrar of Companies.Analysis:1. Validity of Re-assessment Proceedings:The appeal challenged the validity of re-assessment proceedings under section 147 of the Income Tax Act. The Assessing Officer reopened the assessment based on the belief that the assessee company diverted interest-bearing borrowed funds to group companies without charging any interest. The Authorized Representative contended that the re-assessment was bad in law due to a change of opinion, arguing that the same information was available during the original assessment under section 143(1) of the Act. However, the Tribunal upheld the re-assessment proceedings, noting discrepancies in the treatment of interest on advances and unsecured loans, and the absence of interest charges on advances to group companies. The Tribunal found the re-assessment to be valid, as it was based on information available in the assessment records.2. Disallowance of Interest Claimed:The second issue involved the disallowance of interest aggregating to a significant amount claimed under section 36(1)(iii) of the Act. The Commissioner of Income Tax (Appeals) confirmed the disallowance, citing diversion of interest-bearing funds for non-business purposes and lack of genuine reasons for interest-free loans to group companies. The Tribunal concurred with the Commissioner's findings, emphasizing the absence of a business nexus between the interest paid by the assessee company and income from mutual funds. The Tribunal noted the interrelated shareholding patterns and common management among group companies, leading to the dismissal of the appeal on this ground.3. Disallowance of Fee to Registrar of Companies:The third issue, regarding the disallowance of a fee paid to the Registrar of Companies, was not pressed during the hearing, and hence, was not adjudicated upon by the Tribunal.In conclusion, the Tribunal dismissed the appeal of the assessee, upholding the decisions on the validity of re-assessment proceedings and the disallowance of interest claimed. The judgment was pronounced on July 19, 2016, in Chennai, by Shri Chandra Poojari and Shri G. Pavan Kumar, JJ.