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Facts
The assessee company, a manufacturer and exporter of terry towels, filed a return declaring a loss. The case was selected for scrutiny, and an assessment order was passed. Subsequently, the AO reopened the assessment based on the balance sheet indicating capital work-in-progress and interest paid on borrowed funds, believing income had escaped assessment.
Held
The Tribunal held that the reopening of the assessment was not justified as it was based on a change of opinion and no new information was available to the AO after the scrutiny assessment. The AO and CIT(A) had already considered the issue of disallowing interest on borrowed funds during the original assessment.
Key Issues
Whether the reopening of assessment under Section 147 was valid, considering it was based on a change of opinion without new information, and whether the disallowance of interest under Section 36(1)(iii) was correctly made.
Sections Cited
148, 36(1)(iii), 143(2), 143(3), 147, 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DIVISION BENCH, ‘B’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI MANOJ KUMAR AGGARWAL
The assessee is in appeal against the order of ld.
Commissioner of Income Tax (Appeals) [in short ‘the CIT (A)’] dated 11.07.2018 passed for assessment year 2007-08.
2. The assessee has taken five grounds of appeal, out of which Ground Nos. 1 and 5 are general in natures which do not call for recording of any specific finding. In the A.Y.2007-08 2 remaining three grounds of appeal, grievance of the assessee revolves around two fold, namely ;
a) The ld. CIT(A) has erred in upholding the re- opening of assessment by issuance of a notice under Section 148 of the Income Tax Act; b) The ld. CIT(A) has erred in upholding the addition of Rs.48,62,035/- which was added by the AO with the aid of Section 36(1)(iii) of the Income Tax Act.
The brief facts of the case are that assessee company is a manufacturer and exporter of terry towels. It has filed its return of income on 29.10.2007 declaring loss of Rs.86,40,279/-. The case of the assessee was selected for scrutiny assessment and a notice under Section 143(2) was issued and served upon the assessee. After hearing the assessee, the ld. AO has passed a scrutiny assessment order on 18.12.2009 under Section 143(3) of the Income Tax Act.
4. Dissatisfied with the assessment order, assessee filed an appeal before the CIT(A) who has decided the appeal on 11.07.2018.
The AO thereafter recorded the reasons and reopened the assessment. The copy of the reasons has been placed at page No. 8 of the Paper Book. The AO was of the view that A.Y.2007-08 3 assessee had opening capital work-in-progress of Rs.12,17,65,666/- and closing capital work-in-progress of Rs.6,43,261/-making average investment in work-in- progress during the year of Rs.6,12,44,063/-. The assessee had paid interest of Rs.1,47,52,591/- on borrowed funds. During the year, the disallowance of interest under Section 36(1)(iii) of the Act in relation to the average capital work-in-progress was worked out at Rs.73,44,534/- @ 12%.
The AO has believed that this income was escaped assessment, therefore, he reopened the assessment. The AO passed re-assessment order under Section 147 read with Section 143(3) on 19.12.2011. He made an addition of Rs.48,62,035/- under Section 36(1)(iii) of the Act. The calculation has been made by the AO in paragraph No. 6.3 of the order.
With the assistance of ld. Representative, we have gone through the record carefully. The first question for our adjudication is whether re-opening of the assessment is in accordance with law or not. The reasons assigned by the AO are available at page 8 of the Paper Book which read as under : A.Y.2007-08 4 Disallowance of Interest under Section 36(1)(iii) :- A perusal of the Balance-Sheet for the A.Y. 2007-08 shows that there is a Capital work in progress as on 01.04.2006 at Rs.12,17,65,666/- and as on 31.03.2007 at Rs.6,43,261/-. The assessee has paid interest of Rs. 1,47,52,591/- on borrowed funds of Rs.17,44,09,332/-.As per proviso to section 36(l)(iii) interest on borrowed funds used for procuring assets for extension of business are not to be allowed for the period till the assets is put to use for business purpose. Average investment in capital work in progress during the year is estimated at Rs. 6,12,04,463/- ( 12,17,65,666 + 6,43,261 ) The interest @ 12% computed at Rs. 73,44,534/- required to be disallowed under the provision of section 36(l)(iii). Therefore, I have reason to believe that there is under assessment to the tune of Rs. 73,44,534/-.
Perusal of the Schedule B to Balance-sheet shows that a liability on account of state investment subsidy is appearing therein at Rs. 30 lacs. The State subsidy needs to be treated as income of the assessee in relevant assessment year.
3. Perusal of the details of Traveling expenses Directors at Rs. 10,54,091/- shows that personal nature expenses included therein are not ruled out.
Keeping in view above facts, I have reason to believe that there is under assessment. Therefore, notice u/s 148/- is being issued to the assessee for re- assessment its net taxable income/loss.
Dated : 4.2.2011. Sd/- (Princy Singla) Asstt. Commissioner of Income Tax, Circle 3(1), Chandigarh.
Section 147 of the Income Tax Act authorize the AO to reopen an assessment if an income has escaped assessment.
A perusal of Section 147, as was available on 04.02.2011, would indicate that it contemplates, “if the AO has reason to believe that any income chargeable to tax has escaped in any assessment year, he may subject to the provisions of Section 148 to 153 assess or reassess such income and also any A.Y.2007-08 5 other income chargeable to tax which has escaped assessment………….” Thus, AO should have an information in his possession which exhibits escapement of income. This information should have a live nexus with the formation of belief that income has escaped. In the light of the above position of the law as applicable at that time for re-opening of assessment, if we examine the reasons, then it would reveal that AO was not able to lay his hands on any new information. He has perused the Balance Sheet for the assessment year 2007-08. Whether this Balance Sheet was considered by him or not when scrutiny assessment under Section 143(3) was made on 18.12.2009, the ld. Counsel for the assessee has brought to our notice a questionnaire dated 15.01.2009 whose copy is available at page No. 225 of the Paper Book. At Sr.No. 7 of this questionnaire, the AO in the original assessment proceedings asked following information:
“7. Please furnish details additions to fixed assets alongwith a copy of accounts”
7.1 He also drew our notice to another Show Cause Notice issued under Section 142(1) in April, 2009 whose copy is available on another Paper Book page No. 222. In this Show Cause Notice at Sr.No. 7 ld. AO has directed as to :-
ITA No.1219/CHD/2018 A.Y.2007-08 6
“Please furnish detail of secured loans alongwith confirmation from the concerned Banks. In this regard also furnish certificates of the banks specifying the principal amount, loan amount and interest amount paid during the year.”
The AO has asked for details on 23 counts. The AO has disallowed an interest amount under Section 36(1) at Rs.77,191/-. He has examined the WIP, interest position etc.
While challenging the assessment order dated 18.12.2009, assessee has taken Ground No.2 before the First Appellate Authority. This ground reads as under :
‘That ld. AO has wrongly disallowed the amount of Rs.77,191/- on account of interest paid on capital borrowed.”
9.1 This ground has been considered by the CIT(A) and the finding of CIT(A) read as under :
6.1 In appeal, the Ld. AR has made his submission as under: -
"The assessee has capitalized total interest of term loan for fixed assets amounting to Rs. 18,65,819/- upto 21st August, 2006 when the assets were put to use. Without any consideration to this interest capitalized, the Ld. Assessing Officer has further disallowed interest of Rs. 77,191/- u/s 36(1 )(iii) which is unjust. The assessee has already capitalized the total interest on term loan taken for capital asset amounting to Rs. 18,65,819/- upto the date of capitalization of assets ie. 21st August, 2006. The statement of term loan account is enclosed. The interest on term loan should be capitalized upto 21 August 2006 as on this date the assets were put to use. The additions made after this date in these assets were for purchases of assets put to use within one to two weeks of their purchases." 6.2 I have perused the assessment order and examined the reply of the appellant. The appellant has not given the working of total loan on capital work in progress and interest thereon. The Assessing Officer has A.Y.2007-08 7 rightly worked out the interest on loan used for purchasing assets, which were not put to use under proviso to section 36(l)(iii) of the Act. The addition is therefore confirmed. Ground of appeal
No. 2 is dismissed.”
10. A perusal of all these details would indicate that not only the AO but ld. CIT(A) has also applied her minds on this issue, whether proportionate interest of average investment to the WIP deserves to be disallowed or not.
11. All these facts and circumstances have been undergone by both these authorities. The re-opening has been made merely on the basis of change of opinion which is not permissible as per law laid down by the Hon'ble Supreme Court in the case of CIT Vs Kelvinator India reported in 320 ITR 561. There is no information as percolated to the AO after completion of scrutiny assessment which can exhibit that income has escaped assessment. The Balance Sheet of the assessee, details of borrowed funds, their user has already been gone through by the AO as well as by the CIT(A) in scrutiny assessment. They have taken one of the possible opinion in law while not disallowing the alleged interest expenditure, therefore, re-opening is not justifiable.
12. In the above facts and circumstances, we allow first fold of grievance and quash the re-opening. Consequently, we do A.Y.2007-08 8 not deem it necessary to adjudicate the issue regarding addition of Rs.48,62,035/-.
In the result, appeal is allowed.
Order pronounced on 02.04.2025.