2014 (2) TMI 1166 - AT - Income Tax

Validity of reopening of assessment - Disallowance u/s 14A - Held that - Assessing officer reopened the assessment in the name of verifying the house property payment/ receipts. Payment of house property tax are otherwise allowable as statutory deduction, more so when the income qua the same property is taxed. In these circumstances the reasons meant for further verification and for roving inquiries are not sustainable in law - no infirmity in the order of CIT(A), which is upheld as in both the years the issue is almost identical. Section 14A read with rule 8D has been held to be applicable only prospectively from A.Y. 2008-09. No nexus has been found between interest bearing borrowings and exempt income. Besides, the loans in question which were earlier raised have been only repaid in this year. In view of these facts and circumstances we uphold the order of CIT(A). - Decided against Revenue.

Summary

Issues:
1. Validity of reopening assessment u/s 148 for A.Y. 2004-05.
2. Addition made under section 14A for A.Y. 2004-05.
3. Disallowance of interest attributable to exempt dividend income u/s 14A for A.Y. 2005-06.

Analysis:

Issue 1: Validity of reopening assessment u/s 148 for A.Y. 2004-05:
- The assessing officer reopened the assessment to verify house property payment/receipts. The reasons for reopening were deemed insufficient as they were for further verification and roving inquiries, not sustainable in law.
- The CIT(A) held that the reasons for reopening were merely a change of opinion and lacked tangible material. It was emphasized that the house property tax payment was statutory and allowable, especially when the income from the property was already taxed.
- Citing precedents, it was concluded that the assessment could not be reopened for mere verification purposes, and the assessing officer's actions were not in accordance with the law.

Issue 2: Addition made under section 14A for A.Y. 2004-05:
- The CIT(A) found no nexus between interest-bearing borrowings and exempt income. It was noted that the loans in question had been repaid during the year and were not utilized for earning exempt income.
- Section 14A, along with rule 8D, was held to be applicable only prospectively from A.Y. 2008-09. The CIT(A) deleted the addition as the interest-bearing loans were not linked to exempt income, and the funds were not diverted for such purposes.

Issue 3: Disallowance of interest attributable to exempt dividend income u/s 14A for A.Y. 2005-06:
- The assessing officer disallowed interest amount attributable to investments yielding exempt dividend income under section 14A. The CIT(A) relied on various judgments to support the assessee's contention that if the business is indivisible, expenditure cannot be apportioned.
- Precedents were cited to argue that direct expenses incurred for earning exempt income should only be covered by section 14A. The assessing officer failed to establish a clear nexus between interest-bearing funds and investments in group companies.

Conclusion:
- The appeals filed by the revenue were dismissed as the Tribunal upheld the CIT(A)'s orders for both assessment years. The judgments highlighted the importance of tangible reasons for reopening assessments and the requirement of a direct nexus between interest-bearing funds and exempt income for disallowances under section 14A.