2014 (11) TMI 847 - AT - Income Tax

Violation of Rule 46A Admission of additional evidences without providing opportunity to heard or not - Held that - CIT(A) noted that the assessee has filed an affidavit dated 11/06/2010, sworn by Mr. Manish Khandelwal, Director of the assessee company - CIT(A) has examined the authenticity of the said affidavit and for this purpose, he has also examined the affidavit of technical staff CIT(A) also noted that in compliance to his direction, Shri Manish Khandelwal attended with Shri G. C. Mishra, the technical staff and their statements were recorded on oath - the statements were recorded of Shri Manish Khandelwal along with Shri G. C. Mishra on the direction of CIT(A) and the statements are covered by section 250(4) and for these statements, there is no applicability of Rule 46A - Regarding the affidavit of Shri Manish Khandelwal, Director of the assessee also, affidavit of the Director of the assessee company cannot be considered as a new evidence effected by Rule 46A - various documents were submitted by the assessee in pursuance of his specific directions given u/s 250(4) thus, there is no violation of Rule 46A Decided against revenue. Allowability of exemption u/s 10B Assessee claimed that even job work got done from outside was under the supervision and control of the assessee company but it is not supported by bringing ant cogent material - Held that - The expenses incurred by the assessee company on power, fuel and water is very negligible of ₹ 5.98 lacs only whereas the assessee has incurred huge sum on account of job work expenses of ₹ 117.24 lacs - as per clause (iii) of sub section (2) of section 10B, this is a pre requisite for availing deduction u/s 10B that the new business is not formed by transfer of machinery or plant previously used for any purpose - Apart from stating this that there is change in name, nothing is stated by the A..O. that new business was formed by the assessee by transfer of machinery or plant previously used for any purpose and hence, this objection of the AO is not valid but there is ample force in the his first objection that no manufacturing activity was carried out by the assessee because it has been seen that the assessee company was not even having sufficient technical experts to supervise and control the job work done by outsider and major portion of work was got done from outside that too without own supervision and control. Various judgements relied were relied upon by assessee which are distinguished as not applicable further, the assessee could not establish that the assessee is engaged in manufacturing then this aspect as to whether there is any splitting or reconstruction, is not relevant - it cannot be accepted that the assessee is undertaking any manufacturing activity because it has been seen that the assessee company is getting most of the work on job work basis and at the same time, the assessee company is not having sufficient technical experts to claim that such job work was done under its direct supervision and control. Not some of the activities are outsourced but most of the activities are outsourced and very few activities were undertaken by the assessee which is established from this fact that the expenses incurred on job work charges is 8.5 times more than expenses incurred on wages and salaries and very small amount was incurred on account of power, fuel and water of ₹ 5.98 lacs only- the basis adopted by CIT(A) is totally incorrect because he has stated that some of the activities were outsourced whereas most of the activities were outsourced that too without direct supervision and control of the assessee thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO Decided in favour of revenue. Validity of assessment order u/s 143(3) - Initiation of proceedings u/s 143(1) after the issue of notice u/s 143(2) Held that - As per the provisions of section 143(1), intimation u/s 143(1) has to be issued for intimating the assessee after making adjustment, if any, on account of any arithmetical error in the return or for incorrect claim if such incorrect claim is apparent from the information in the return and no intimation is required to be issued to the assessee if no tax or interest is payable or refundable to him - assessment order u/s 143(3) is to be framed after issue of notice u/s 143(2) after granting hearing to the assessee and after considering the material brought on record by the assessee in course of such hearing - the intimation u/s 143(1) and assessment order u/s 143(3) are two different things and one is not the substitute of the other - Hence, merely because intimation u/s 143(1) was issued to the assessee after issue of notice u/s 143(2), it cannot be said that an assessment order framed by the AO u/s 143(3) on a date after the date of such intimation is bad in law the additional ground is rejected Decided against assessee. Allowability of exemption of interest on FDRs u/s 10B Held that - The assessee is not eligible for any deduction u/s 10B while deciding the appeal of the Revenue, the ground raised by the assessee have become infructuous because when the assessee is not eligible for any deduction u/s 10B, interest income on FDR alone cannot be considered for granting exemption u/s 10B of the Act Decided against assessee. Disallowance u/s 10B deleted Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the assessee is not eligible for deduction u/s 10B because the assessee was not doing manufacturing activity since most of the processing work was outsourced by the assessee without having direct supervision and control - Since the present assessee has acquired the same undertaking from M/s MKU (Armours) Pvt. Ltd., which was not eligible for deduction u/s 10B of the Act, this assessee is also not eligible for deduction u/s 10B because this assessee has acquired an undertaking which was previously operating and was not eligible for deduction u/s 10B - Hence, even if this assessee is not getting the work done by outsourcing to job worker, this assessee is not eligible for exemption u/s 10B because this assessee is using used machineries and the earlier user was not entitled for exemption u/s 10B - Hence, there is violation of the condition of section 10B the order of the CIT(A) is set aside Decided in favour of revenue. Requirement to deduct TDS u/s 195 - Details of goods inspected not furnished by assessee Held that - The main basis of the AO for making disallowance is that no TDS was deducted - As per the finding of CIT(A), it is seen that it is held by him that as per DTAA between India and Egypt (UAR), no TDS was deductible because there can be a business connection but it would not constitute PE in India of the payee company there was no reason to interfere in the order of CIT(A) Decided against revenue. Claim of insurance disallowed Held that - It is noted by AO in the assessment order that on 02/06/2004, a fire broke out in the factory and at that time, loss in file was claimed from the insurance company for a sum of ₹ 98,94,282/- and this amount was debited to insurance company - the claim was not settled by the insurance company till this year - the claim was settled for an amount of ₹ 75,08,888/- and the balance amount was written off by the assessee - Since in assessment year 2005-06, the entire amount was debited to the account of the insurance company and the same was also accounted for as income in that year, any write off is allowable u/s 36(1)(vii) because it takes a character of bad debts written off Decided in favour of assessee. Disallowance u/s 14A Held that - CIT(A) was of the view that the assessee was having interest free fund in the form of share capital and reserve and surplus of ₹ 3,212.26 lacs and investment in shares is of ₹ 38.54 lacs - The CIT(A) has already confirmed the disallowance of ₹ 1,23,327/- in respect of administrative expenses as per Rule 8D(2) of the Act - He has deleted the disallowance of only ₹ 18,14,528/- in respect of disallowance of interest - The major investment is in shares of German company - Since the dividend income from foreign company is not exempt, no disallowance is called for u/s 14A in respect of such investment in shares of a foreign company the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Allowability of exemption under section 10B of the Income Tax Act.
2. Violation of Rule 46A of the Income Tax Rules.
3. Disallowance of consultancy charges.
4. Addition of deferred expenditure.
5. Annulment of assessment under section 143(1) vs. section 143(3).
6. Disallowance of interest on FDRs under section 10B.
7. Disallowance under section 40(a)(i) for non-deduction of TDS.
8. Disallowance of balance claim of insurance.
9. Disallowance under section 14A.
10. Validity of assessment under section 144.
11. Miscellaneous procedural issues.

Issue-wise Detailed Analysis:

1. Allowability of Exemption Under Section 10B:
The primary issue was whether the assessee was eligible for exemption under section 10B. The Tribunal found that the assessee was not engaged in manufacturing activities as most of the processes were outsourced without direct supervision and control. The Tribunal reversed the CIT(A)'s order, which had allowed the exemption, and restored the Assessing Officer's (AO) order disallowing the exemption. The Tribunal emphasized that the assessee did not meet the conditions of section 10B, particularly regarding the formation of the business by splitting or reconstruction of an existing business and the lack of direct supervision over outsourced work.

2. Violation of Rule 46A:
The Revenue contended that CIT(A) admitted additional evidence without providing the AO an opportunity to examine it, violating Rule 46A. The Tribunal found no merit in this ground, noting that the CIT(A) had the power to make further inquiries under section 250(4) and that the affidavits and statements considered were not new evidence but part of the inquiry process. The Tribunal rejected the Revenue's ground on this issue.

3. Disallowance of Consultancy Charges:
The AO disallowed consultancy charges paid to Shri Sharad Khandelwal, citing insufficient justification for the services rendered. The CIT(A) deleted the disallowance, but the Tribunal found that the AO had provided a proper opportunity to the assessee to justify the claim, which the assessee failed to do. The Tribunal restored the AO's disallowance.

4. Addition of Deferred Expenditure:
The AO added a deferred expenditure amount claimed in the Profit & Loss account, which was not disallowed by the assessee while computing the total income. The CIT(A) deleted the addition, but the Tribunal found merit in the AO's addition, restoring it.

5. Annulment of Assessment Under Section 143(1) vs. Section 143(3):
The assessee argued that the assessment under section 143(3) was invalid as an intimation under section 143(1) had already been issued. The Tribunal rejected this argument, stating that intimation under section 143(1) and assessment under section 143(3) are distinct processes, and the issuance of an intimation does not preclude a subsequent assessment under section 143(3).

6. Disallowance of Interest on FDRs Under Section 10B:
The assessee claimed exemption on interest earned on FDRs under section 10B. The Tribunal held that since the assessee was not eligible for any deduction under section 10B, the interest income on FDRs could not be considered for exemption under the same section.

7. Disallowance Under Section 40(a)(i) for Non-Deduction of TDS:
The AO disallowed payments made for inspection services to a foreign entity, citing non-deduction of TDS. The CIT(A) deleted the disallowance, noting that the foreign entity did not have a PE in India, and thus, no TDS was required. The Tribunal upheld the CIT(A)'s decision.

8. Disallowance of Balance Claim of Insurance:
The AO disallowed the balance claim of insurance, stating that the claim was not finalized in the year under consideration. The CIT(A) upheld the AO's decision, and the Tribunal found no reason to interfere, noting that the claim was not allowable as it was not settled in the relevant year.

9. Disallowance Under Section 14A:
The AO disallowed expenses under section 14A related to exempt income. The CIT(A) reduced the disallowance, stating that the assessee had sufficient interest-free funds and that major investments were in shares of a foreign company, whose dividend income was not exempt. The Tribunal upheld the CIT(A)'s decision.

10. Validity of Assessment Under Section 144:
The AO made an assessment under section 144, citing non-compliance by the assessee. The CIT(A) found that the assessee had made sufficient compliance, and the assessment under section 144 was not justified. The Tribunal upheld the CIT(A)'s decision, noting that the AO's estimate of income was without basis and the assessment was not in accordance with the provisions of the Act.

11. Miscellaneous Procedural Issues:
The Tribunal addressed various procedural issues raised by the Revenue, including the non-production of the register under section 301 of the Companies Act and the sanctity of the transfer agreement. The Tribunal found that the CIT(A) had considered all relevant aspects and upheld the CIT(A)'s order, dismissing the Revenue's grounds.

Conclusion:
The Tribunal's detailed analysis led to the partial allowance of the Revenue's appeals and the dismissal of the assessee's cross-objections, with specific findings on each issue based on the facts and applicable legal provisions.