TaxTMI 
TaxTMI 
2011 (9) TMI 538
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....oan of Rs.62,49,056/- with ICICI Bank and an amount of Rs.62,42,396/- was shown on the assets side as long given to M/s Lakshmi Ganapathi Paper Mills Ltd. The interest paid on ICICI loan and the interest amount received from M/s Lakshmi Ganapathi Paper Mills Ltd. have been set off by you. As per provisions of section 24(iv) of the IT Act, interest paid on housing loan has to be set off from income from 'house property' only. Hence, the interest paid on housing loan by you cannot be allowed to be set off against the interest income earned'. In view of the above, I am of the opinion that the assessee has wrongly set off interest paid on ICICI loan towards interest amount received from M/s Lakshmi Ganapathi Paper Mills Ltd. and as per section 24(iv) of the Act the same should have been set off from income from house property only and hence, there are reasons to believe that there is escapement of income within the meaning of section 147 of the IT Act." 4. In response to the above notice issued u/s 148 of the Act, the assessee has requested the assessing officer to treat the return of income filed by him on 30.7.2005 as return of income filed in response to the notice issue....
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....lished between interest receipts and interest payments. The High Court held that there is no direct nexus. The case is also distinguishable. In the case of the assessee there is direct nexus between borrowal and utilisation of loan. 5.1 In the case of the assessee who is an individual, (unlike in the cited cases which relate to companies), the purpose of borrowal and the purpose of lending have direct nexus. Therefore the above case law is not at all applicable. 6. On the other hand the learned departmental representative submitted that there was a wrong claim made by the assessee w.r.t. interest paid to ICICI Bank u/s 57(iii) of the Act. To correct this mistake, the assessment was reopened. He submitted that the assessee wrongly claimed the interest paid to the ICICI Bank though the loan was availed for the purpose of acquisition/construction of house property, it was diverted by the assessee for other purposes as such the interest cannot be allowed either u/s 24 of IT Act or under 57(iii) of the Act. At the time of issue of notice u/s 148, if the assessing officer has reason to believe that income had escaped assessment, he can reopen the concluded assessment. He need not h....
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....ould not be allowed to set off the interest income derived by it on loans granted for the welfare of the employees engaged by it against the interest paid by it to NABARD. 8. We have heard both the parties and perused the materials available on record. The scope and effect of section 147 as substituted with effect from April 1, 1989, as also section 148 to 152 are substantially different from the provisions as they stood prior to sub substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied, firstly the Assessing officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the as....
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....ed under the head 'income from house property'. 11. The ld. AR submitted that "the assessee is a Managing Director of the above company holding majority shares along with his family members in the company M/s Lakshmi Ganapathi Paper Mills Ltd. The nature of assessee company business is wholesale dealers/traders for various paper products. The assessee's company requires lot of working capital and to meet the working capital requirements of the company, the assessee has taken loan from ICICI Bank, by mortgaging his house property. The entire loan proceeds received by the assessee were transferred to the company. 12. He submitted that the assessee has claimed the deduction of interest paid by him at Rs.7, 10,787/- to the ICICI Bank on the housing loan taken by him out of interest received from the company. The loan has given by the ICICI Bank was for the purpose of construction of house, the assessee would have been eligible for deduction of interest if a house property was constructed and the same would have been deductible from out of 'income from house property'. Since the assessee has not constructed house property out of the housing loan taken for construction of house pro....
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....loan taken by him the assessee is not eligible deduction u/s 24 of the Act. On the other hand assessee claimed deduction u/s 57(iii) of the Act. In our opinion, the assessee is also not entitled for deduction u/s 57(iii) of the Act. Interest on borrowing was not allowable as deduction from interest income derived from loan given to company as interest paid had no nexus with interest earned in as much as expenditure by way of interest could not be said to have been expended wholly and exclusively for earning income by way of interest from loan. For the purpose of allowability of deduction u/s 57(iii) what had to be correlated or connected was not the fund with the income received from such loan but earlier borrowing and subsequent earning of interest from the loan. In this case, the assessee failed to establish that it was his purpose or one of his purposes of utilise the amount received on loan for earning interest. For example, if the assessee after borrowing the amount for the purpose of business had kept part of it in short term deposit in the bank and it was to be held that the interest paid on amount of borrowed was not deductible from interest earned from short term deposit a....
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....ook from the bank did not reduce his income by way of interest on the fixed deposit placed by him in the bank. 18. In view of the above discussion, we do not find any infirmity in the order of the CIT(A) and the same is confirmed. 19. The second ground is with regard to addition of a sum of Rs.6,31,573/- towards foreign gift as the income of the assessee. 20. The Learned Authorized Representative submitted that the Assessing Officer erred in applying the provisions of section 147 to assess the amount of Rs.6,31,473 as being any other income chargeable to tax which has escaped assessment, without arriving at a specific finding that this amount represented income and that it escaped assessment. 21. As the finding is necessary about the escapement before the income can be brought within the scope of section 147 of the IT Act, the Assessing Officer lacks jurisdiction to assess Rs.6,31,473/-. The Assessing Officer is not justified in invoking the provisions of section 57(1)(v) of the Act in the facts and circumstances of the case. The Assessing Officer has also erred in inferring that the amount of Rs.6,31,573/- is hit by the provisions of section 56(1) (V) of the Act, witho....
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.... disclosure within the meaning of the foregoing proviso. 24. We have heard both the parties and perused the materials available on record and gone through the case law cited by the AR. In this case the assessment was reopened to consider the payment of interest to ICICI. Thereafter while completing the assessment the assessing officer came to know about the foreign gift received by the assessee from Smt. V. Nalini and Sri Tarakeswar who are said to be cobrother and sister in law of the assessee. However, no confirmation letters from the above parties and other evidences have been filed. Since no evidence has been filed from the above parties, he treated the impugned gifts as income u/s 56(1)(v) of the Act. The contention of the assessee on this issue is that the assessing officer has not dealt the issue while recording the reasons for reopening the assessment u/s 147. Under section 147 of the act, the Assessing Officer has to assess or reassess the income which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of t....