2014 (1) TMI 755 - AT - Income Tax

Disallowance u/s 14A - Held that - Following Maxopp Investment Ltd. vs CIT 2011 (11) TMI 267 - Delhi High Court - Rule 8D is applicable w.e.f. A.Y. 2008-09 - The issue has been restored to AO for fresh adjudication. Undeclared commission income - held that - From the Form No.16 the salary income was Rs.1,12,60,600 which included commission income of Rs.88,60,600. The TDS was Rs.37,50,990 - The gross salary income offered for taxation was Rs.1,13,20,571 - The commission is properly reflected in the return - The issue has been restored to the AO with a direction to verify the reconciliation statement and other documents - Decided in favour of assessee. Whether CIT(A) have the power to set aside the issue to the AO and entertain fresh evidence - - Held that - The CIT(A) has the power to admit fresh evidence by specific order under Rule 46A of the Income Tax Rules, 1962 - The power so exercised has been on the plea advanced on behalf of the assessee that no queries in the course of the assessment proceedings qua the issue were raised by the AO - As such the action of the CIT(A) in admitting fresh evidence cannot be faulted with The rules further require that opportunity to rebut the fresh evidences by evidence, document etc by way of a remand report should have been provided to the AO which admittedly has not been done by the CIT(A) who has instead restored the issue to the AO which he was not empowered to do so as section 251(1)(a) does not empower the CIT(A) to restore the issue to the AO as he can only confirm, reduce, enhance or annul the assessment - In the circumstances holding that the fresh evidence admitted was necessary and crucial for determining the issue as the AO has not proceeded on a sound footing by straightaway making the addition on the ground that Form No-16 was not available which he could have easily called for in the course of the assessment proceedings Grounds of the Revenue are allowed whereas the ground of assessee has been restored for fresh adjudication.

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Addition towards undeclared commission income.
3. Powers of the CIT(A) to set aside issues to the AO.
4. Admission of fresh evidence by the CIT(A) without adhering to Rule 46A.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of Rs. 12,77,139 under Section 14A read with Rule 8D, arguing that only surplus funds generated from business income were invested in mutual funds, and no borrowed funds were used for these investments. The CIT(A) upheld the AO's disallowance. The assessee's submissions, which were not considered by the CIT(A), included detailed explanations and documents demonstrating that investments were made only after the overdraft was cleared. The ITAT restored the issue to the AO, directing it to be reconsidered in light of the Delhi High Court's decision in Maxopp Investment Ltd. vs CIT, emphasizing that Rule 8D applies from the 2008-09 assessment year.

2. Addition towards undeclared commission income:
The AO added Rs. 59,18,524 as undeclared commission income, observing that the amount was credited to the assessee's bank account but not included in the return. The assessee contended that this amount was already included in the salary income and provided reconciliation statements and Form 16 as evidence. The CIT(A) directed the AO to verify these documents. However, the ITAT found that the CIT(A) exceeded its powers by setting aside the issue to the AO, as per Section 251(1)(a), which does not empower the CIT(A) to restore issues to the AO. The ITAT upheld the admission of fresh evidence by the CIT(A) but noted that the AO should have been given an opportunity to rebut the evidence. Consequently, the ITAT restored the issue to the AO for a fresh decision after considering the evidence and providing the assessee a reasonable opportunity to be heard.

3. Powers of the CIT(A) to set aside issues to the AO:
The ITAT clarified that the CIT(A) does not have the power to set aside issues to the AO, as this power was omitted by the Finance Act, 2001. The CIT(A) can only confirm, reduce, enhance, or annul the assessment. Therefore, the ITAT held that the CIT(A)'s action of restoring the issue to the AO was not permissible under Section 251(1)(a).

4. Admission of fresh evidence by the CIT(A) without adhering to Rule 46A:
The ITAT observed that while the CIT(A) has the power to admit fresh evidence under Rule 46A, it must also provide the AO an opportunity to rebut this evidence. In this case, the CIT(A) admitted fresh evidence but failed to follow the procedure under Rule 46A(3), which mandates confronting the AO with the new evidence. The ITAT rectified this by setting aside the CIT(A)'s order and directing the AO to reconsider the issue with the fresh evidence provided by the assessee.

Conclusion:
The ITAT allowed the assessee's appeal for statistical purposes and partly allowed the Revenue's appeal for statistical purposes. The issues were restored to the AO for fresh adjudication in accordance with the law, ensuring that the assessee is given a reasonable opportunity to present its case. The ITAT emphasized adherence to legal procedures and proper consideration of all relevant evidence before arriving at a conclusion.

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