2012 (7) TMI 60 - AT - Income Tax

Disallowance u/s.14A - CIT(A)deleting the disallowance made by AO - Held that - As assessee had raised the loan up to 1997-98 and majority of investments have been made before 1997-98 claiming deduction u/s.80M - as there is no dispute to the fact that assessee is having the non-interest bearing funds the nexus between borrowed funds and investments can be said to be established only where it is shown that interest free funds are not available with the assessee - as there is no nexus of such kind proved by the AO, thus as per the past history where the Department itself has been taking the view that no expenses including the interest has been attributed to dividend for computing deduction u/s.80M the disallowance made by the AO is to be deleted - in favour of assessee. Rejection of revised return filed - Held that - If the assessee discovers any omission or any wrong statement in the return of income, he may furnish revised return as prescribed u/s. 139(5) provided the original return having been furnished by the assessee u/s.139(1)- as before the expiry of the limitation to file the revised return, the assessee had discovered that no income had accrued to the assessee and accordingly the return had been revised for the reasons of withdrawal of the scheme by the Government, the action of the assessee in revising the return on principle of real income cannot be said to be false or against the provisions contained in Section 139(5) - in favour of assessee Considering the service charges as income of the year under consideration - Held that - The matter is restored back to the file of AO to decide the taxability of income and exclusion of service charges, in the assessment year 2004-06 in view of decision regarding revised return - in favour of assessee.

Issues Involved:
1. Deletion of disallowance made under Section 14A of the Income Tax Act, 1961.
2. Validity of the revised return of income filed by the assessee.
3. Taxability of service charges and their exclusion from income for the assessment year 2004-05.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance Made Under Section 14A of the Income Tax Act, 1961:
The Revenue appealed against the deletion of a disallowance of Rs. 6,62,50,000 made under Section 14A by the CIT(A). The Assessing Officer (AO) had observed that the assessee had obtained unsecured government loans and paid interest on these loans while making investments in equity shares, which yielded tax-free dividend income. The AO disallowed the interest expenditure proportionate to the investments made in tax-free yielding equity shares, citing that such investments amounted to diversion of business funds, which is not permissible under the IT Act.

The CIT(A) deleted the disallowance, stating that the Department must show a proper nexus between the interest-bearing funds borrowed and those invested. The CIT(A) noted that the assessee had sufficient non-interest-bearing funds to cover the investments in question. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order and noting that the Department had not established a nexus between the borrowed funds and the investments.

2. Validity of the Revised Return of Income Filed by the Assessee:
The assessee filed a revised return under Section 139(5) to increase its total loss, citing the cancellation of a sales tax deferment scheme by the Government of Gujarat (GOG) as the reason. The AO rejected the revised return, arguing that the conditions for filing a revised return under Section 139(5) were not met, as there was no omission or wrong statement in the original return.

The Tribunal reversed the CIT(A)'s decision, stating that the assessee had discovered the omission or wrong statement within the permissible time frame and had revised the return accordingly. The Tribunal directed the AO to accept the revised return, emphasizing that the principle of real income should prevail.

3. Taxability of Service Charges and Their Exclusion from Income for the Assessment Year 2004-05:
The assessee contended that the service charges of Rs. 4,49,95,181 should be excluded from the income for the assessment year 2004-05, as no real income had accrued due to the cancellation of the sales tax deferment scheme by the GOG. The CIT(A) dismissed the assessee's plea, stating that the real income was in existence during the relevant period and that the GOG's cancellation of the scheme did not change the character of the receipt.

The Tribunal found that the CIT(A)'s findings were invalid in light of its decision on the validity of the revised return. The Tribunal restored the matter to the AO to decide on the taxability of the service charges, directing the AO to afford the assessee a reasonable opportunity of being heard.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes. The Tribunal upheld the deletion of the disallowance under Section 14A, accepted the revised return filed by the assessee, and remanded the issue of the taxability of service charges back to the AO for reconsideration.

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