2004 (7) TMI 327 - AT - Income Tax

ITAT Adjusts Interest Calculation; Deletes Disallowance of Advances Due to Lack of Fund Diversion Evidence.

The ITAT partially allowed the appeals for both assessment years. It upheld the levy of interest under sections 234B and 234C, directing the AO to ... Interest Chargeable - interest on advances to sister concerns - HELD THAT:- It is clear that as regards the period upto which the interest u/s 234B was to be charged as per the amended provisions, if the regular assessment has been made then the interest is to be charged upto that date. As regards the definition of the words 'assessed tax' it almost remained the same which was prior to the amendment. Prior to the amendment, as per Explanation I to section 234B, 'assessed tax' meant the tax on the total income determined under sub-section (1) of section 143 or on regular assessment. As per the amended Explanation I to section 234B, the assessed tax means the tax on the total income determined under sub-section (1) of section 143 or regular assessment. Thus, while amending the section 234B as well as Explanation I, the Legislature in its own wisdom provided that where a regular assessment is made, the interest was leviable upto that date. But it did not bring any similar amendment of words 'assessed tax'. It did not provide for levy of interest on the tax determined under sub-section (1) of section 143 or where a regular assessment is made the tax on the income determined on regular assessment. In view of these facts, we find force in the argument of the learned Counsel that the interest u/s 234B cannot be levied on the basis of tax determined on regular assessment. But at the same time, we do not agreed with the arguments of the learned Counsel that the interest should be calculated on the basis of tax on the returned income. Actually, in the unmended Explanation and even in the amended Explanation, there is no mention of the tax on the returned income. It has only provided that the assessed tax means the tax on the income determined under sub-section (1) of section 143 or regular assessment. Thus the option was given to the assessee to calculate tax on the assessed income which was advantageous to it. We, therefore, direct the Assessing Officer to recalculate interest under sections 234A & 234B of the Act on the tax on the income determined under sub-section (1) of section 143 of the Act. Disallowance of interest - It is settled law that the deduction of interest can be allowed only if the interest bearing funds have been utilized in the business carried on by the assessee. To the extent the borrowed funds have not been utilized in the business, the proportionate interest has to be disallowed. But it is also settled law that the onus was on the Revenue to prove that the interest bearing funds have been diverted to the sister concerns without charging the interest. The Lucknow Bench of the Tribunal in the case of Meenakshi Synthetics (P.) Ltd.[2002 (6) TMI 175 - ITAT LUCKNOW] has held that non-charging of interest on loans given by an assessee cannot by itself be a sufficient ground for disallowing interest paid by the assessee on loans taken by it in absence of any nexus between the borrowed capital and interest-free advances. The Hyderabad Bench of the Tribunal in the case of Ashok Brothers [2002 (4) TMI 231 - ITAT HYDERABAD-A] had held that no part of interest paid by the assessee on its overdraft account could be disallowed on the ground that the assessee has made interest-free advances to its sister concern by issuing cheques from its cash credit account when it has sufficient interest-free funds available to match the interest-free advances. Thus, we hold that the ld. CIT(A) was not justified in sustaining the disallowance of interest made by the Assessing Officer. The disallowance sustained by the ld. CIT(A) is, therefore, deleted. In the result, the appeals for both the years are partly allowed. Issues Involved:1. Disallowance of salary payments u/s 40(b).2. Levy of interest u/s 234B and 234C.3. Disallowance of interest on advances to sister concerns.Summary:1. Disallowance of Salary Payments u/s 40(b):The assessee initially challenged the disallowance of salary paid to certain individuals invoking the provisions of section 40(b) of the Act. However, these grounds were not pressed by the assessee, and hence, were dismissed.2. Levy of Interest u/s 234B and 234C:The assessee raised two additional grounds challenging the levy of interest u/s 234B and 234C. The first ground argued that there was no direction to charge interest under specific sections in the assessment order. The second ground contended that interest should be calculated on the returned income, not the assessed income. The Tribunal admitted these additional grounds as they pertained to the jurisdiction of levying interest.The Tribunal reviewed various judicial pronouncements, including decisions from the Hon'ble Patna High Court, Hon'ble Supreme Court, and other High Courts. It was concluded that if there was no direction to charge interest in the assessment order, the levy of interest would be illegal. However, if there was a direction to charge interest without specifying the section, the Department could levy interest under the applicable sections. In the present case, the assessment orders for both years contained directions to charge interest, thus justifying the Department's levy of interest.Regarding the calculation of interest u/s 234B, the Tribunal noted that amendments to the section clarified that interest should be charged up to the date of regular assessment. The Tribunal directed the Assessing Officer to recalculate interest based on the tax determined under sub-section (1) of section 143, not on the returned income.3. Disallowance of Interest on Advances to Sister Concerns:The assessee challenged the disallowance of interest on the grounds that the interest-bearing funds were allegedly diverted to sister concerns without charging interest. The Tribunal emphasized that the onus was on the Revenue to prove such diversion. Citing various judicial precedents, it was held that non-charging of interest on loans given by the assessee cannot be a sufficient ground for disallowing interest paid on loans taken by the assessee unless a nexus is established. The Tribunal concluded that the CIT(A) was not justified in sustaining the disallowance of interest and thus deleted the disallowance.Conclusion:The appeals for both assessment years were partly allowed, with specific directions for recalculating interest and deleting the disallowance of interest on advances to sister concerns.