TaxTMI 
TaxTMI 
2008 (11) TMI 321
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....at the assessee filed its return of income for the asst. yr. 1996-97 on 31st Oct., 1996. The return was processed under s. 143(1)(a) on 28th Oct., 1997. The assessment was reopened by issuing notice under s. 148 on 1st Dec., 1997. In compliance to notice under s. 148, the assessee filed return of income on 19th Jan., 1998 under protest. The assessee requested for reasons recorded for reopening the assessment vide letter dt. 21st May, 1998. The AO furnished the same vide his letter dt. 1st June, 1998 and the assessment was reopened on the following reasons: "(1) The loss of M/s Ganpati Synthetics Rs. 2,12,576 has been set off out of the income of M/s Ganpati Associates, whereas the partners of both the parties are separate. Therefore, the set off of this loss is not acceptable. (2) Interest free advances have been made to partners at Rs. 63,34,369 whereas in P&L a/c the interest has been claimed at Rs. 5,93,664 which is not admissible due to the interest free advances made to partners. On reassessment, the AO determined the income as follows: &nb....
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....must be a direct nexus between the material coming to the notice of the AO and the formation of his belief. The belief must be that of an honest and reasonable person based upon reasonable grounds and that the ITO may act on direct or circumstantial evidence but not on mere suspicion, gossip, or rumour. In the present case, the AO has no material whatsoever to believe that the income has escaped from assessment. 4.1 He relied on the order of the Tribunal in the case of Asstt. CIT vs. O.P. Chawla (2008) 116 TTJ (Del)(TM) 755, wherein it has been held that no new evidence or material coming to the possession of AO after making assessment under s. 143(1)(a) that income escaped assessment on account of failure of assessee to furnish details relating to items shown in the balance sheet, he has no reason to believe that income escaped assessment and reassessment was void ab initio. 4.2 Further, he relied on the judgment of Hon'ble Supreme Court in the case of ITO vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 103 ITR 437 (SC), where the apex Court held that the reasons for the formation of the belief contemplated under s. 147 necessary for reopening of an assessment must have a ....
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....ngh vs. AAC 1973 CTR (SC) 484 : (1971) 82 ITR 147 (SC), wherein it has been held that ITO would be acting without jurisdiction, if the reason for his belief that income has escaped assessment does not exist or is not material or relevant. to the belief required by s. 34 of 1992 Act. Further, he relied on the judgment of Hon'ble Supreme Court in the case of Hindustan Lever Ltd. vs. R.B. Wadkar (2004) 190 CTR (Bom) 166 : (2004) 268 ITR 332 (Bom). The reason recorded by the AO nowhere stated that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, the reopening of assessment made under s. 143(3) after expiry of four years from the end of the relevant assessment was invalid. Since in this case, the reopening was made before the expiry of the four years from the end of the relevant assessment year and also the assessment was not completed under s. 143(3), as such this case is not applicable to the facts of the present case. 4.5 Further, he relied on the judgment of Hon'ble Supreme Court in the case of CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC), wherein the apex Court has....
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....t stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the AO." In view of the above judgment of Hon'ble Supreme Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd., we are not considering the other judgments cited by the learned counsel for the assessee. Accordingly, we hold that the reopening of assessment is valid and the same is confirmed. 7. As regards the merits of the case, ground Nos. 4 and 5 raised by the assessee are as follows: "4. That the authorities below ought not to have disallowed the interest of Rs. 5,93,664 claimed by the appellant as the interest bearing borrowed funds, raised in earlier years, have not been utilized in making interest free advances to partners. 5. That without prejudice to ground No. 4 above, the AO alleged that the bank credit limit has been utilized in making interest free advances to partners and then disallowed the whole interest of Rs. 5,93,664 against the interest paid to bank at Rs. 1,68,531, hence the disallowance of interest of Rs. 5,93,664 is arbitrary, unjust and at any rate very excessive." 7.1 The brief facts of the case are that the assesse....
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....ssessee submitted that the assessee has received non-interest funds from M/s Ganpati Synthetics Ltd. at Rs. 66,50,202.55 and given advance to partners at Rs. 63,34,369 and the assessee has not raised any interest bearing loans in the assessment year under consideration. The loan was used for the purpose for which it was availed and there is no diversion of the loans for any other non-business purpose. He submitted that the disallowance of interest is not warranted since this loan was not used for any non-business purpose and all the conditions laid down in s. 36(1)(iii) were complied with and there was no direct nexus between interest bearing funds and advances given to the partners. Hence, the disallowance is unwarranted. He submitted that for the asst. yr. 1996-97, payment of interest is lesser than payment of interest in the asst. yr. 1995-96. In the earlier assessment years, there was no disallowance on account of payment of interest. He drew our attention to the judgment of CIT vs. Radico Khaitan Ltd. (2005) 194 CTR (All) 451 : (2005) 274 ITR 354 (All), wherein it has been held that business expenditure-interest on borrowed capital-interest from advance to sister concern-Tribu....
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....e assessee has borrowed loans from banks as well as from various parties and paid interest at Rs. 5,93,664. At the same time, the assessee has received money from M/s Ganpati Synthetics Ltd., at Rs. 66,50,202.58. The assessee instead of using this fund to clear the outstanding dues, has given Rs. 63,34,369 to its partners and thereby the assessee burdened the firm with the payment of interest at Rs. 5,93,664. In the circumstances, there is heavy burden cast on the assessee to the effect that in spite of pending loans on which the assessee has incurred interest liability, still there was justification to advance loans to its partners without any interest for non-business purposes. It is an admitted fact that the loans of the parties are outstanding and also interest has been paid on that amount. In such circumstances, when the assessee received business funds from M/s Ganpati Synthetics Ltd., the assessee instead of using those funds for business purpose, has diverted the same as advance to partners. The assessee has not been able to lead any evidence as to why the receipt of funds could not be used for repaying the outstanding loans. Had it been used for the purpose of repaying out....
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....P) Ltd. (1990) 87 CTR (All) 132 : (1991) 187 ITR 363 (All), held that the Court cannot shut its eyes to realities. What has actually happened is visible to the naked eye. The assessee, a private limited company closely held by three family groups, is made to lend huge amounts at a very low rate of interest and the entire difference of interest is being charged to the assessee. The assessee is not a finance company. It was engaged in the manufacturing of sugar. No business purpose of the assessee company is served by such lendings to its directors/shareholders. It cannot be said that it is expedient in the interest of business or is laid out for the purpose of the business of the assessee. It is not even a case that they were the employees of the company. The company may be borrowing large amounts for the purpose of its business every year, but that does not explain the huge advances to the directors/shareholders. Had this money not been advanced to the directors, it would have been available to the assessee for its business purposes and to that extent it might not have been necessary to borrow from the bank. We are, therefore, of the opinion that the AO was right in disallowing the....
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....purchased 110 bales of raw cotton during the year from 12th Jan., 1996 to 8th Feb., 1996 for Rs. 5,51,664 from various Pili Banga parties and after getting them ginned and pressed from a processor M/s Dalip Chand & Sons Industries, Pili Banga, the same were sold to M/s Prem Kumar Satish Kumar on 28th March, 1990 for Rs. 4,22,222. 10.2 This was disallowed by the AO. On appeal, the learned CIT(A) confirmed the order of the AO. Aggrieved with the order of the CIT(A), the assessee is now in appeal before us. 10.3 The learned counsel for the assessee submitted that this issue is not at all related to the reason for reopening the assessment. This is a fresh issue considered by the AO in the reassessment proceedings. He relied on the judgment of Hon'ble Kerala High Court in the case of Travancore Cements Ltd. vs. Asstt. CIT (2008) 219 CTR (Ker) 359, wherein it has been held that if two items of income are unconnected and totally alien the assessing authority has to follow sub-s. (2) of s. 148 with regard to the other item of escaped income which comes to the knowledge during the course of the proceedings; notices under ss. 142(1) and 143(2) could not be issued in respect of issues w....
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....ee is that this issue was not at all the issue at the time of reopening of the assessment as enumerated in the order. The assessment was reopened to consider two issues other than this issue, as such, this issue cannot be considered. This argument of the assessee has no merit. Since it is a settled law that if the ITO has jurisdiction to reopen the assessment, then the entire assessment is at large and the ITO can look into the items other than those on the basis of which the proceedings were reopened. The relevant and material question is whether the ITO had information in his possession within the meaning of s. 147(b) of the Act. Sec. 147(b) of the Act says that if the ITO has, in consequence to information in his possession, the reason to believe that income has escaped assessment, he may assess or reassess such income. The ITO must have reason to believe on the basis of information in his possession. The information may be factual or legal, it cannot be equated with suspicion or conjecture. For this proposition, we place reliance on the judgments of jurisdictional High Court in the case of E. Hill & Co. (P) Ltd. vs. CIT (1979) 9 CTR (All) 52 : (1980) 122 ITR 630 (All) and also ....
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.... the assessee has not been able to lead any evidence regarding taking delivery of the cotton bales from various suppliers either by agents or by itself. Also, there is no evidence of taking delivery after processing the cotton bales from the customers by the assessee's agents or by assessee itself. In the absence of primary evidence, taking delivery either by the assessee or by its agent from any party, the claim of the assessee cannot be allowed. Hence, the learned CIT(A) was justified in rejecting the claim of the assessee by holding as follows: "3.3 I have considered the facts of the case as well as the arguments of the learned Authorised Representative. From the facts noticed, it appears to be more of a case of purchase of paper loss rather than any speculative loss or trading loss. The appellant's main line of business is manufacturing of yarn and in the past, it had never traded to any cotton. It was for the first time this year that at the fag end of the year, trading in cotton bales was shown. The cotton trading was stated to have been done from a far off place in Pili Banga (Raj). The purchase and sale of cotton were in their own names and there is nothing to suggest th....