2014 (12) TMI 1242 - AT - Income Tax

Reopening of assessment - addition based on information received regarding the collation and dissemination of information from Foreign Tax Authorities(U.S. tax authorities) towards transaction carried out with Bridgewater, New Jersey, USA - Held that - Since the AO s reopening was based on tangible material received by AO from US tax authorities, it cannot be said that there was mere change of opinion. The CIT(A) upheld the reopening of assessment. We also found that after receipt of information from US tax authorities, the AO compared the information which he had in the record and informed some receipts from US authorities, which were not matching with regard to the names and account of transaction. Thus, it cannot also be said that there was true and correct disclosure by the assessee in the return of income. Accordingly, we do not find any infirmity in the reopening of the assessment u/s.147. We found that aggregate transaction value of design services provided to the group company were USD 221,223, account copies of break up of the Revenue received from various countries in India and also from other countries were furnished before the AO. While making addition, the AO could not prove that this transaction is not part of the transactions which is shown by the assessee as Revenue which was built to Aker Kvaerner Pharmaceuticals which was on the same address i.e. Bridgewater, New Jersey, USA. We also found that the aggregate transaction value of USD 221,223 with its group company Aker Kvaerner Pharmaceuticals for the year reflected in contract revenue and offered to tax was much higher than the amount of USD 43,592 indicated in the notice. Thus, the aggregate contract revenue reflected by the assessee in its books and already offered to tax is more than the transaction value provided. Accordingly, the addition of USD 43,592 made by the AO is tantamount to double taxation of the very same income. The detailed finding recorded by the CIT(A) at para 4.3 has not been controverted. Accordingly, we do not find any reason to interfere in the order of CIT(A) for deleting the addition of USD 43,592. Disallowance u/s 14A - Held that - We found that the CIT(A) while dealing with the issue has observed that assessee invested an amount of ₹ 23,19,77,841/- for earning the exempt income and invested ₹ 22,33,76,732/- in growth funds of mutual funds. Grow funds of the mutual funds are taxable under the Act. The assessee receives the income in the short term or long term capital gains based on the time the assessee keeps its investments. Hence, investment under growth scheme cannot be considered as investment in income which does not form part of the total income, as this income is taxable, the expenditure incurred for it cannot be disallowed as this will not come under purview of sec.14A. Therefore, the CIT(A) directed the AO to exclude the investment from the growth fund while applying the Rule 8D and restricted the disallowance to ₹ 1,47,887/-. From the observation of the CIT(A), we found that the investments in mutual fund with growth scheme have not generated any tax-free dividend income, therefore, the CIT(A) has rightly excluded the same from the total value of investments. Accordingly, we do not find any reason to interfere in the order of the CIT(A) Accrual of income - Addition on reversal of Income and the expenses of earlier years - CIT(A) deleted the addition - Held that - We do not find any infirmity in the order of CIT(A) insofar as he has brought to tax income of the prior year and at the very same time directed the AO to allow expenditure of prior period. The detailed finding recorded by CIT(A) has not been controverted. Accordingly, we do not find any reason to interfere in the order of CIT(A)

Summary

Issues Involved:
1. Deletion of addition based on information from Foreign Tax Authorities.
2. Reopening of assessment after four years.
3. Disallowance under Section 14A.
4. Deletion of disallowance of prior period income and expenses.

Detailed Analysis:

1. Deletion of Addition Based on Information from Foreign Tax Authorities:
The Revenue appealed against the deletion of an addition of Rs. 19,83,872 based on information from U.S. tax authorities regarding a transaction with Bridgewater, New Jersey, USA. The assessee argued that Bridgewater is a location, not a party, and provided engineering design services to a group company, Aker Kvaerner Pharmaceuticals, with an aggregate transaction value of USD 221,223. The CIT(A) deleted the addition, noting that the AO did not provide any material to contradict the assessee's submissions or prove that the transaction was not part of the revenue shown by the assessee. The Tribunal upheld the CIT(A)'s decision, stating that the addition of USD 43,592 would result in double taxation as the aggregate contract revenue reflected by the assessee was already higher than the amount indicated in the notice.

2. Reopening of Assessment After Four Years:
The assessee challenged the reopening of the assessment under Section 147 after four years. The Tribunal noted that the original assessment was completed under Section 143(3) on 30-11-2006, and the notice for reopening was issued on 29-3-2011 based on tangible material received from U.S. tax authorities. The Tribunal upheld the CIT(A)'s decision to confirm the reopening, stating that it was not a mere change of opinion and there was no true and correct disclosure by the assessee in the return of income.

3. Disallowance Under Section 14A:
For the assessment year 2008-09, the Revenue contested the restriction of disallowance under Section 14A to Rs. 1,47,887 and the deletion of disallowance of Rs. 1,87,65,694. The Tribunal noted that the assessee invested in growth funds of mutual funds, which are taxable, and therefore, the expenditure incurred for it cannot be disallowed under Section 14A. The CIT(A) directed the AO to exclude the investment in growth funds while applying Rule 8D, and the Tribunal upheld this decision, stating that investments in mutual funds with growth schemes did not generate any tax-free dividend income.

4. Deletion of Disallowance of Prior Period Income and Expenses:
The Revenue also contested the deletion of disallowance of Rs. 1,87,65,694, which included the reversal of income of Rs. 82,90,255 and expenses of Rs. 1,05,35,440 from earlier years. The Tribunal noted that the assessee had shown a net positive margin of Rs. 30,08,401 for contracts completed prior to F.Y. 2007-08. The CIT(A) allowed the claim, stating that only real income can be taxed, and hypothetical or notional income which the assessee has not received cannot be taxed. The CIT(A) also allowed the prior period expenses, noting that once prior period income is taxed, disallowance of prior period expenses is not justified. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere.

Conclusion:
The Tribunal dismissed both the appeals of the Revenue and the cross-objection filed by the assessee, upholding the CIT(A)'s decisions on all grounds. The order was pronounced in the open court on 19/12/2014.