2009 (12) TMI 704 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the assessment reopening under section 147.
2. Disallowance of interest expenditure related to exempt dividend income.
3. Addition of unsecured loans and sundry creditors.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Reopening under Section 147:

The Revenue appealed against the Commissioner of Income-tax (Appeals) decision, which annulled the assessment as void ab initio. The Commissioner of Income-tax (Appeals) held that the only reason recorded by the Assessing Officer for reopening the assessment was the claim of interest income out of exempt income, and not the unsecured loans and other credits. According to the Commissioner, the Assessing Officer should have recorded reasons for reopening the assessment on account of unsecured loans and credits as well. The Commissioner of Income-tax (Appeals) concluded that the Assessing Officer cannot resort to section 147 only for making disallowance under section 14A, and once the reasons fail to empower the Assessing Officer to take action under section 14A, the whole basis of the assessment goes away. Therefore, the Commissioner of Income-tax (Appeals) annulled the assessment as a whole.

2. Disallowance of Interest Expenditure Related to Exempt Dividend Income:

The Assessing Officer observed that the assessee had raised unsecured loans and used them for investment purposes, generating exempt dividend income. The interest paid on these loans was debited to the profit and loss account. The Assessing Officer disallowed the interest expenditure of Rs. 33,80,312 against the dividend income claimed to be exempt under section 10(33) of the Income-tax Act, 1961. The assessee contended that section 14A, even though introduced with effect from April 1, 1962, cannot be invoked for reassessment to disallow the proportionate expenditure on exempt income. However, the Assessing Officer justified the disallowance by stating that income is always taxable after deducting the related expenditure.

3. Addition of Unsecured Loans and Sundry Creditors:

The Assessing Officer found that the assessee had taken unsecured loans in the form of inter-corporate deposits (ICD) and added the same to the income due to the assessee's failure to produce the parties who had advanced the ICDs. Similarly, an addition was made for sundry creditors as the assessee did not furnish their addresses or produce them before the Assessing Officer. The Commissioner of Income-tax (Appeals) held that the Assessing Officer did not record reasons related to these unsecured loans and creditors for reopening the assessment, thus invalidating these additions.

Judgment Summary:

The Tribunal considered the rival contentions and found that the Assessing Officer did not invoke the provisions of section 14A for reopening the assessment or while framing the reassessment. The justification given by the Commissioner of Income-tax (Appeals) for annulling the assessment was deemed untenable. The Tribunal noted that the Commissioner of Income-tax (Appeals) did not decide on the merits regarding the validity of reopening and the justification of the claim of interest expenditure against the exempt income. Therefore, the Tribunal restored the entire appeal to the file of the Commissioner of Income-tax (Appeals) for a fresh decision in terms of their observations. The order of the Commissioner of Income-tax (Appeals) annulling the assessment was set aside. The appeal of the Revenue was allowed for statistical purposes.

Conclusion:

The Tribunal directed the Commissioner of Income-tax (Appeals) to reconsider the issues afresh, particularly the validity of reopening the assessment and the disallowance of interest expenditure related to exempt income. The Tribunal emphasized that the Assessing Officer's actions should not have been annulled solely based on the non-invocation of section 14A.