2014 (7) TMI 458 - AT - Income Tax

Reopening of assessment u/s 147 of the Act Change of opinion Held that - The AO has pointed out five issues, on the basis of which he has entertained the belief that there was escapement of income - the assessee contended that the AO has already examined the issues and formed opinion, yet no material was placed to substantiate the claim - one of the issues related to the excessive claim of depreciation that was allowed in the original assessment order - AO found it to be excessive on the basis of tax audit report, the eligible depreciation certified by the tax auditor differed from the amount that was actually allowed in the assessment order - it cannot be said that the AO had formed any opinion - the assessee did not produce any material to substantiate its claim that the AO thus, the contentions of the assessee cannot be accepted. Depreciation on fixed assets Held that - There was difference in the amount of depreciation that was claimed in the return of income and that was certified by the tax auditor - the assessee has furnished an explanation, viz., the opening WDV of automatic voltage controller and motor cars purchased in the earlier years got changed due to the application of wrong rate of depreciation in the earlier years - the explanation of the assessee was not examined by the AO - the AO was not justified in not examining the explanations given by the assessee before making the disallowance thus, the matter is remitted back for fresh Adjudication Decided in favour of Assessee. Assessment of inter-branch credit balance transferred to the reserve account Held that - As decided in assessee s own case for the earlier assessment year, it has been held that, if the assessee bank has not claimed debit of such entries made in the branch, then credit of such entries cannot be treated as income the AO will be required to ascertain as to whether the corresponding debit entry has been claimed by the branch as expenditure and if the same has not been claimed as expenditure, then the amount credited cannot be taxed as income - CIT(A) has followed the decision rendered by the co-ordinate bench of the Tribunal in the assessee s own case thus, there is no reason to interfere in the order of the CIT(A) Decided against Assessee. Appreciation in valuation of securities held as Stock in trade Held that - The AO has not been properly appreciated about the method adopted by the assessee - If the assessee is following the method of valuation, the appreciation of value of any stock, the loss of which was claimed in the earlier year, would be automatically get adjusted in the valuation - the assessee has failed to furnish the details of valuation of stock in trade and has also failed to clarify the doubts raised by the AO and hence the AO was constrained to make adhoc disallowance - the assessee is claiming that it is following consistent method of valuation, the assessee should furnish all the relevant details and clarify the doubts raised by the AO in respect of the claim thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee. Provision for bad debts written off u/s 36(1)(viia) of the Act Held that - The issue requires only clarification as to whether the assessee has to satisfy the AO that it has debited the bad debts written off by it (a) first to the Provision for bad and doubtful debts account and (b) the net debit balance found in the provision account was only claimed as deduction u/s 36(1)(vii) of the Act - the disallowance has been made since the AO was not properly appreciated of the methodology followed by the assessee for claiming deduction u/s 36(1)(vii) and 36(1)(viia) of the Act - this matter also requires examination at the end of the AO thus, the matter is remitted back to the AO for fresh examination Decided in favour of Revenue.

Summary

Issues Involved:
1. Validity of re-opening of the assessment.
2. Disallowance of depreciation on fixed assets.
3. Assessment of inter-branch credit balance transferred to the reserve account.
4. Assessment of appreciation in valuation of securities held as "Stock in trade".
5. Disallowance made u/s 36(1)(viia) of the Act.
6. Disallowance made u/s 14A of the Act.
7. Disallowance of contribution to retired employees medical benefit scheme.

Detailed Analysis:

1. Validity of Re-opening of the Assessment:
The assessee argued that the re-opening of the assessment was based on a change of opinion, citing the Supreme Court decision in CIT vs. Kelvinator India Limited. The Assessing Officer (AO) had recorded reasons for re-opening, including an excessive claim of depreciation. The tribunal upheld the re-opening, noting the absence of material evidence from the assessee to substantiate that the AO had previously examined these issues and formed an opinion.

2. Disallowance of Depreciation on Fixed Assets:
The AO disallowed Rs. 1.23 crores in depreciation, relying on the statutory auditor's report, which differed from the assessee's claim. The tribunal found that the AO had not examined the explanations provided by the assessee regarding discrepancies in depreciation rates for certain assets. The tribunal set aside the order and directed the AO to re-examine the issue considering the assessee's explanations.

3. Assessment of Inter-branch Credit Balance Transferred to the Reserve Account:
The AO assessed Rs. 23.87 crores transferred to the reserve account as income, contrary to the assessee's claim of mutuality. The CIT(A) and the tribunal referred to a prior decision in the assessee's own case, directing the AO to verify if the corresponding debit entries were claimed as expenditure. If not, the credit entries could not be treated as income. The tribunal upheld this approach.

4. Assessment of Appreciation in Valuation of Securities Held as "Stock in Trade":
The AO disallowed 50% of the claimed loss due to the assessee's failure to provide details of appreciated securities. The tribunal noted the assessee's consistent method of valuing stock at cost or market value, whichever is less, and found that the AO had not properly understood this method. The tribunal directed the AO to re-examine the issue, requiring the assessee to furnish relevant details and clarify valuation methods.

5. Disallowance Made u/s 36(1)(viia) of the Act:
The AO disallowed the claim, alleging duplication of bad debts. The assessee contended it debited bad debts to the "Provision for bad and doubtful debts account" and claimed only the net debit balance. The tribunal noted the contradiction between the AO's observations and the assessee's submissions, directing the AO to re-examine the issue and verify compliance with the proviso to section 36(1)(vii).

6. Disallowance Made u/s 14A of the Act:
The CIT(A) upheld the disallowance under section 14A, following the Kerala High Court decision in Catholic Syrian Bank. The tribunal agreed and upheld the CIT(A)'s order.

7. Disallowance of Contribution to Retired Employees Medical Benefit Scheme:
The CIT(A) deleted the disallowance, following a prior tribunal decision in the assessee's own case. The tribunal found no evidence of the High Court reversing this decision and upheld the CIT(A)'s order.

Conclusion:
The appeals for AY 2006-07 and AY 2007-08 were partly allowed, with several issues remanded to the AO for re-examination. The appeal for AY 2007-08 was dismissed, and the tribunal upheld the CIT(A)'s decision on the disallowance u/s 14A and the contribution to the retired employees' medical benefit scheme.