2010 (3) TMI 798 - AT - Income Tax

Whether the proceedings initiated by the AO under s. 147 of the Act for asst. yr. 2002-03, vide notice issued under s. 148, dt. 9th June, 2004, was valid? - Reference to third member - Held that - In the present case the notice under s. 148 was issued before the expiry of the time available for issuing notice under s. 143(2), whereas in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (2007 -TMI - 6563 - SUPREME Court) the notice under s. 148 was issued after the expiry of the time available for issuing notice under s. 143(2). - The decision in the case of Qatalys Software (2008 -TMI - 32194 - MADRAS HIGH COURT) is in consonance with all the Supreme Court judgments on the issue including the one in the case of Rajesh Jhaveri (2007 -TMI - 6563 - SUPREME Court). - notice issued by the AO under s. 148 for asst. yr. 2002-03 quashed. - Decided in favor of assessee.

Issues Involved:

1. Validity of reopening of assessment under Section 147 and issuance of notice under Section 148.
2. Disallowance of bad debts for inter-corporate loans.
3. Disallowance of unrealized interest.
4. Exclusion of 90% of insurance receipts, scrap sales, and interest income while computing deduction under Section 80HHC.
5. Treatment of interest receipts as income from other sources.
6. Disallowance of claim under Section 80-IA.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment:

The assessee filed its return for the assessment year 2002-03, which was processed under Section 143(1). The Assessing Officer (AO) later issued a notice under Section 148 before the expiry of the time available for issuing a notice under Section 143(2). The CIT(A) upheld the AO's action, citing the Supreme Court's decision in *Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd.*, which stated that an intimation under Section 143(1) is not an assessment and does not debar the AO from issuing a notice under Section 148 if the conditions for initiating proceedings under Section 147 are satisfied. The Tribunal, however, noted a divergence in judicial opinion, particularly from the jurisdictional High Court in *CIT vs. Qatalys Software Technologies Ltd.*, which held that reassessment proceedings could not be initiated when the time for issuing a notice under Section 143(2) had not expired. The Third Member concurred with the view that the AO could not initiate proceedings under Section 147 when the time for issuance of notice under Section 143(2) had not expired, thus quashing the notice issued under Section 148.

2. Disallowance of Bad Debts:

The AO disallowed the bad debt claims for advances made to Mercantile Credit Corporation Ltd. and Alsa Constructions, stating that these were capital investments and not trade debts. The CIT(A) upheld this view. The Tribunal noted that the advances were not in the ordinary course of the assessee's business and were not for business or commercial expediency. Thus, these advances were considered capital investments, and the claim for bad debts was disallowed under Section 36(2)(i).

3. Disallowance of Unrealized Interest:

The AO allowed only a part of the unrealized interest, while the CIT(A) confirmed the disallowance of the remaining amount. The Tribunal remitted the issue back to the AO to verify whether the entire amount of unrealized interest had been offered as income in the earlier years and to decide afresh accordingly.

4. Exclusion of 90% of Insurance Receipts, Scrap Sales, and Interest Income:

The Tribunal noted that these issues were prima facie covered by the Supreme Court's decision in *CIT vs. K. Ravindranathan Nair*. However, as there was no detailed discussion by the lower authorities, the Tribunal remitted these issues back to the AO for a detailed examination and decision on whether these receipts were directly related to the export activity of the assessee.

5. Treatment of Interest Receipts as Income from Other Sources:

The Tribunal upheld the lower authorities' decision, citing the jurisdictional High Court's ruling in *Dollar Apparels vs. ITO*, which held that interest income from deposits did not have a direct nexus with export earnings and should be treated as income from other sources.

6. Disallowance of Claim under Section 80-IA:

The AO did not discuss this issue, and the CIT(A) disallowed the claim by following the Tribunal's earlier order. The Tribunal remitted the issue back to the AO for reconsideration, taking into account the assessee's agreement with the Tamil Nadu Electricity Board and relevant Tribunal decisions.

Conclusion:

The appeal was partly allowed for statistical purposes, with several issues remitted back to the AO for fresh consideration. The Tribunal's detailed analysis and reliance on judicial precedents provided a comprehensive resolution of the complex issues involved in the case.

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