TaxTMI 
TaxTMI 
TaxTMI 
2019 (1) TMI 992
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....has erred in deleting the above addition u/s 36 (1) (iii) of the Act by not appreciating the fact that the AO has mentioned detailed reasons of disallowances in assessment order. iii. The appellant craves to be allowed to add any fresh grounds of appeal and / or delete or amend any of the grounds of appeal." (1.1) ITA No. 3870/Del/2014 by Revenue is directed against the order of Learned Commissioner of Income Tax (Appeals)-XVII, Delhi (for short hereinafter referred to as the "Ld. CIT(A)") dated 09.04.2014 for Assessment Year 2010-11, on the following grounds of appeal: - ITA No.-3870/Del/2014 i. "On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 15,41,80,533/- u/s 36 (1) (iii) of the Act on account of disallowance of interest expenditure, by not appreciating the fact that the assessee company has used the borrowed funds for nonbusiness purposes. ii. On the facts and circumstances of the case and in law, the ld. CIT (A) has erred in deleting the above addition u/s 36 (1) (iii) of the Act by not appreciating the fact that the AO has mentioned detailed reasons of disallowances in assessment order. iii. The appellant ....
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.... relevant portion of the order of Ld. CIT(A) is reproduced as under: 5.1 The appellant has stated that the order u/s 148/143(3) is bad in law. However, there were sufficient reasons for the AO to believe that income had escaped assessment and proceedings were initiated after recording reasons. A reassessment is valid if there is prima facie reason to believe that income had escaped assessment. Information was received by the AO and reasons were recorded that there was escapement of income. The following case laws reaffirm this contention:- i) Ratnachudamani S. Utnal v ITO (2004) 269 ITR 212 (Karn) ii) ITO & Others v Shree Bajrang Commercial Co (Pvt.) Ltd (2004) 269 ITR 338 (Cal) 5.2 So far as the legality for assuming jurisdiction u/s 147 is concerned there should be a reason to believe that income chargeable to tax has escaped assessment. After the amendment of section 147 w. e. f. 01.04.1989, the scope of section 147 has been considerably widened. After the amendment, the only requirement under the section is that AO must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year. The AO is not required to conclusively prove esc....
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....s in that regard is' essential At that stage, the, final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At issue of notice, the only question is whether there was relevant material on which a reasonable person could have firmed a requisite belief whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction. 17. The scope and effect of section 147 as substituted with effect from 1-4-1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such 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 AO must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and seco....
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....as quoted the case of the Hon'ble Supreme Court in Madhav Prasad Jatia vs. CIT, AIR 1979 SC 1291: 118 ITR 200, 208. 6.4 The judgment of Bombay High Court in the case of CIT v Reliance Utility & Power Ltd. as well as Woolcombers of India Ltd. and of the apex court in the case of East India Pharmaceuticals Ltd. has held that if there are funds available with the appellant then the presumption would arise that investment would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment. The judgment of S A Builders Ltd. v CIT held that what is relevant is whether the amount was advanced as a measure of commercial expediency. The judgment of the Hon'ble Delhi High Court in the case of CIT v Dalmia Cement Ltd. has held that it should be established that there was nexus between the expenditure and purpose of the business. 6.5 As per section 36(l)(iii) the clause envisages the fulfillment of three conditions before interest can be allowed as a deduction: (1) There should a borrowing; (2) Capital must have been borrowed for business purposes; and (3) Interest should have been paid or payable in res....
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....reme Court has held that, in ordinary commercial practice, payment of interest is taken as a revenue expenditure. The money borrowed must be for the purposes of the appellant's business or profession that is carried on during the year of account. 6.9 In respect of interest paid, deduction permissible under this clause is in respect of interest as distinguished from other kinds of compensation. Interest is a permissible deduction under this clause only if it has been 'paid'. It need not have been actually paid in cash. It may have been paid by way of adjustment in accounts by any equivalent mode when the accounts are maintained on the mercantile basis. Interest on borrowed capital is allowable under this clause 6.10 The issue whether borrowed capital had been actually used for business is one relating to facts and does not give rise to a question of law. Even if it were a question of law, it may not give rise to a substantial question of law where the appellant agrees to pay interest on loan originally treated as interest free. The inference that borrowing is for non-business purposes on the particular facts of the case may be a question of fact. But it may give rise ....
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.... 118 ITR 200, 208. 7.4 The judgment of Bombay High Court in the case of CIT v Reliance Utility A Power Ltd. as well as Woolcombers of India Ltd. and of the apex court in the case of East India Pharmaceuticals Ltd. has held that if there are funds available with the appellant then the presumption would arise that investment would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment. The judgment of S A Builders Ltd. v CIT held that what is relevant is whether the amount was advanced as a measure of commercial expediency. The judgment of the Hon'ble Delhi High Court in the case of CIT v Dalmia Cement Ltd. has held that it should be established that there was nexus between the expenditure and purpose of the business. 7.5 As per section 36(1)(iii) the clause envisages the fulfillment of three conditions before interest can be allowed as a deduction: (1) There should a borrowing; (2) Capital must have been borrowed for business purposes; and (3) Interest should have been paid or payable in respect thereof. 7.6 Borrowal implies a consensual act: The word 'borrow' has not been defined ....
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....expenditure. The money borrowed must be for the purposes of the appellant's business or profession that is carried on during the year of account. 7.9 In respect of interest paid, deduction permissible under this clause is in respect of interest as distinguished from other kinds of compensation. Interest is a permissible deduction under this clause only if it has been 'paid'. It need not have been actually paid in cash. It may have been paid by way of adjustment in accounts by any equivalent mode when the accounts are maintained on the mercantile basis. Interest on borrowed capital is allowable under this clause. 7.10 The issue whether borrowed capital had been actually used for business is one relating to facts and does not give rise to a question of law. Even if it were a question of law, it may not give rise to a substantial question of law where the appellant agrees to pay interest on loan originally treated as interest free. The inference that borrowing is for non-business purposes on the particular facts of the case may be a question of fact. But it may give rise to a question of law where the inference does not follow the facts of the case. 7.11 It is quite appare....
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....e following contentions: (A) Borrowed funds were utilized exclusively for purposes of business and no borrowed funds were used for making investments in the mutual funds. (B) The assessee had sufficient funds of its own to make the investments. (C.1) In respect of loan agreement with (ADB) Asian Development Bank, a final repayment of the loan is due on 15.01.2019 and, if, there was any prepayment of loan amount, assessee would be liable for liquidation damages. As per the loan agreement, the utilization of loan was restricted to project only. A periodic audit report, on the progress of the project and loan utilization needs were submitted to the lenders. (C.2) In respect of loan taken from IFC (International Financial Corporation), a final repayment of the loan is due on 15.01.2019 and the utilization of loan is restricted to project only and in case of any pre-payment by the assessee, the assessee was liable to heavy pre- payment charges. (C.3) In respect of loans taken from State Bank of India (senior lender), the last installment is due on 31/12/2018 and there are restrictions on use of borrowed funds taken on loans by the assessee. Further, at the time of hearing before ....
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....29.50 (Schedule 5) Yes 2010 300.98 468 NIL* 1554.45 (Schedule 4) 67.52 (Schedule 5) Yes Total 93,568.64 3,77,165.41 4,15,716.22 38,061.41 (3) In response, the Ld. DR did not dispute the facts contended by the Ld. Counsel for assessee, at the time of hearing, before us. The Ld. DR also did not distinguish the facts of the assessee with the facts of the judicial precedents on which the Ld. Counsel for assessee relied or on which the Ld. CIT(A) deleted the addition made by the AO on account of disallowance of interest U/s 36(1)(iii) of I.T. Act. However, he relied on the Assessment Orders for A.Y. 2007-08 and A.Y. 2010-11, passed by the AO. (4) We have heard both sides patiently and we have perused the materials on record, including the paper book, synopsis etc. filed in the course of appellate proceedings in ITAT, carefully. We have also considered the judicial precedents referred to in the record and also the precedents brought to our attention, at the time of hearing before us. (4.1) The common issue involved in both the appeals filed by Revenue is regarding disallowance of interest U/s 36(1)(iii) of I.T. Act. As mentioned earlier, the Ld. DR did not....