2014 (11) TMI 99 - AT - Income Tax

Ad hoc estimated disallowance of expenses Scope of assessment u/s 153A Applicability of section 158BB Held that - The language of section 153A has been structured in such a way so as not to permit the making of addition for the assessment year of which the assessment is not pending as on the date of search, without there being any incriminating material found during the course of search - as decided in Sanjay Aggarwal Ver1sus DCIT, Central Circle-5, New Delhi. 2014 (7) TMI 254 - ITAT DELHI - no addition can be made for any assessment u/s 153A of the Act, the assessment for which is not pending on the date of search unless any incriminating material found in the course of search - the action of the AO assuming jurisdictional u/s 153A of the Act was contradictory to the second proviso to section 153A of the Act inasmuch as the assessment for the concern assessment year was not pending - where none of the assessment was pending on the date of search the AO precluded from the re-agitating issues u/s 153A of the Act, which have attained finality in the original assessment dehors any incriminating material found during the course of search the contention of the assessee is accepted that the only action left for the AO in that respect as no addition was conceived on incriminating material as to drop the proceedings - under the provision of the Act only the proceedings which are pending shall got abated - any proceedings that has reached its finality shall not be disturbed unless there is incriminating material found indicating the existence of income embedded in the said incriminating material/document/evidence. No incriminating material has been proved to have been found during the course of search operation which belonging to the assessee warranting the reassessment u/s 153A r.w.s. 143(3) of the Act for the AY - the AO has invoked provision of section 14A of the Act read with Rule 8D of the IT Rules 1962 for the AY 2006-07 but the provision of Rule 8D of the Rules have prospective effects from A.Y. 2008-09 onwards - the AO made addition on wrong and unjustified reasons and basis which was upheld by CIT(A) without considering the factual matrix of the case and without affording due opportunity of hearing for the assessee - adhoc estimated disallowance by invoking provision of section 14A read with Rule 8D of the Rules is not permissible in AY 2006-07 because as per second proviso to section 153A of the Act inasmuch as the assessment for the year was not pending on the date of search then the AO is precluded from re-agitating the issues during reassessment proceedings u/s 153A of the Act which have attained finality in the original assessment dehors any incriminating material found during the course of search - there was no incriminating material was found during the course of search for the year the addition made by the AO has upheld by the CIT(A) is not sustainable Decided in favour of assessee.

Issues Involved:
1. Scope of assessment under section 153A.
2. Ad hoc estimated disallowance of expenses.
3. Opportunity of being heard before making additions.
4. Applicability of Rule 8D for disallowance of administrative expenses.

Detailed Analysis:

1. Scope of Assessment under Section 153A:

The primary issue was whether the scope of assessment under section 153A of the Income Tax Act is restricted to the seized documents and material found during the search or if it extends to assessing the total income irrespective of the material found. The assessee argued that the CIT(A) erred in confirming the AO's order, which made an ad hoc estimated disallowance of expenses, despite no incriminating material being found during the search for the relevant assessment year. The Tribunal referred to the decision in the case of Sanjay Aggarwal, which held that for assessment years where the original assessments were completed before the search, any additions should be based solely on incriminating material found during the search. Since no such material was found for the assessment year 2006-07, the Tribunal concluded that the AO's assumption of jurisdiction under section 153A was incorrect and the addition made was unjustified.

2. Ad Hoc Estimated Disallowance of Expenses:

The AO made a disallowance of Rs. 2,10,311/- at 0.5% of the average investment, arguing that the assessee had claimed common administrative expenses against exempt income, which was not allowable. The CIT(A) upheld this disallowance, stating that changes in the investment portfolio required administrative expenditure, and thus, the disallowance was not ad hoc. However, the Tribunal found that since the original assessment was completed and no incriminating material was found during the search, the disallowance was not justified. The Tribunal emphasized that the disallowance should be based on concrete evidence rather than an arbitrary estimation.

3. Opportunity of Being Heard Before Making Additions:

The assessee contended that the AO did not provide an opportunity to be heard before making the addition, which vitiated the assessment proceedings. The Tribunal noted that the CIT(A) erred in holding that the failure to provide an opportunity did not affect the validity of the assessment. The Tribunal highlighted that due process and fair hearing are essential components of assessment proceedings, and the lack of an opportunity to be heard was a significant procedural lapse.

4. Applicability of Rule 8D for Disallowance of Administrative Expenses:

The AO invoked section 14A read with Rule 8D to disallow administrative expenses for the assessment year 2006-07. However, the Tribunal observed that Rule 8D was applicable prospectively from the assessment year 2008-09 onwards. Therefore, applying Rule 8D for the assessment year 2006-07 was legally incorrect. The Tribunal reiterated that disallowances under section 14A for years prior to the applicability of Rule 8D should be made on a reasonable basis and not arbitrarily.

Conclusion:

The Tribunal concluded that the AO's addition was based on incorrect assumptions and without any incriminating material found during the search. The disallowance of expenses was deemed arbitrary and not permissible under the provisions of the Act for the assessment year 2006-07. Consequently, the Tribunal allowed the appeal of the assessee, directed the AO to delete the impugned addition, and emphasized adherence to due process and fair hearing in assessment proceedings.

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