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2012 (11) TMI 538 - AT - Income TaxQuantum of loans less than the investments made - Disallowance u/s 14A r.w.r. 8D is warranted - reopening of assessment - Held that - AO had finalized assessment u/s 143(3) on 31.3.2005 wherein amount of loss claimed in return of Rs.3,73,69,044/- was modified to Rs.3,02,01,092/-. No doubt, in the assessment order, the issue of disallowance u/s.14A was not considered. However, the assessment was completed after considering assessee s claim of Rs.1.55 crores as exempt u/s.10(33). The assessment finalized on 31.3.2005 was reopened by notice u/s 148 after more than five years from the end of relevant Asst. Year and it is evident that in the notice of reopening there is not even an iota of allegation that any income had escaped assessment attributable to failure on the part of the assessee in not disclosing full particulars. Thus except bald reference, there are no such reasons forthcoming in reopening notice. The notice was based on the assumption that on the opening and closing dates of balance sheet quantum of loans turned out to be less than the investments made & it suggested that loans were obtained for purpose of meeting and sustaining investments leading to exempt income but it cannot be accepted as it can be easily implied in such circumstances that the assessee had its own funds available for investment. Thus mere escape of income is insufficient to justify the initiation of action after the expiry of four years from the end of the assessment year - in favour of assessee.
Issues Involved:
1. Legality of reopening the assessment under section 148 of the Income Tax Act. 2. Merits of the disallowance under section 14A of the Income Tax Act. Issue-wise Detailed Analysis: 1. Legality of Reopening the Assessment: The primary issue concerns the legality of the reopening of the assessment by the Assessing Officer (AO) under section 148 of the Income Tax Act. The assessee argued that the reopening was time-barred and lacked the necessary satisfaction from the Chief Commissioner or Commissioner as required by the first proviso of section 151 of the Act. The reopening notice was issued on 7.5.2008, beyond the four-year limit from the end of the relevant assessment year (2002-03), which expired on 31.3.2007. The assessee contended that the notice was invalid as it did not have the required satisfaction from the higher authorities, citing case laws such as Shanti Vijay & Co. v. ITO and AayojAn Developers v. ITO. The assessee also argued that there was no failure on its part to disclose fully and truly all material facts necessary for the assessment, as required under the first proviso of section 147. The reasons for reopening did not specify any fault or failure by the assessee in disclosing income particulars. The AO's belief that income had escaped assessment was based on a mere change of opinion, which is not sufficient for reopening under the principles laid down by the Supreme Court in CIT v. Kelvinator of India and the Madras High Court in CIT v. Elgi Finance Ltd. The Tribunal agreed with the assessee's arguments and held that the reopening was invalid. The AO did not have tangible material to justify the belief that income had escaped assessment, and there was no failure on the part of the assessee to disclose material facts. The reopening was deemed a mere change of opinion, which is not permissible under the law. 2. Merits of the Disallowance under Section 14A: On the merits of the disallowance under section 14A, the AO had disallowed Rs. 21,61,600/- as expenditure attributable to earning exempt income. This was based on the assumption that loans were taken for the purpose of making and sustaining investments that generated exempt income. The AO's calculation included interest payments and a proportion of the average value of investments. The assessee argued that it had not incurred any expenditure specifically for earning exempt income and that its investments were made using its own funds. The CIT(Appeals) had partially accepted the assessee's arguments, reducing the disallowance to Rs. 7,23,719/-, which included admitted direct expenses and 2% of the dividend income. The Tribunal, after considering the arguments and the evidence, found that there was no material to support the AO's assumption that loans were used for investments generating exempt income. The Tribunal observed that the assessee had its own funds available for investments and that the AO's conclusion was not based on any new evidence or material that was not already available at the time of the original assessment. Conclusion: The Tribunal allowed the assessee's cross-objections, holding that the reopening of the assessment was invalid and that the disallowance under section 14A was not justified. Consequently, the Revenue's appeal was dismissed.
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