2016 (4) TMI 1336 - AT - Income Tax

Disallowance u/s 14A r.w. rule 8D - establishment of nexus between the expenses incurred and the exempt income - Held that - As relying on assessee s own case we restore the issue of disallowance under section 14A of the Act r.w. Rule 8D of the IT Rules to the file of the AO with a direction to consider the issue afresh, after affording the assessee adequate opportunity of being heard and to submit details/submissions required in the matter, and to then adjudicate the matter afresh. Claim of loss from derivative transactions (futures and options trading) - CIT(A) giving directions to the AO to verify the assessee s claim - power of CIT-A - Held that - As clearly evident that the learned CIT(A) in issuing the directions, he did to the AO, went beyond the grounds raised in the assessee s appeal and the issues which were the subject matter of the order of assessment, thereby clearly exceeding his jurisdiction in the matter. As decided in the case of CIT vs. Sardari Lal and Co. 2001 (9) TMI 1130 - DELHI HIGH COURT has held that the CIT(A) has no power to direct the AO to bring to tax a new source of income, which was not considered by the AO in the order appealed against him. Wherever the question of taxability of income from a new source of income is concerned, which has not been considered by the AO, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 and 263 if requisite conditions are fulfilled. It was also observed that in the presence of such specific provisions, the learned CIT(A) had no power to tax a new source of income not considered by the AO in the order of assessment which was appealed against before him - we delete the directions/observations issued by the learned CIT(A) to the AO - Decided in favour of assessee Loss from derivatives (future & options) trading - enhancement of assessment without affording the appellant reasonable opportunity of showing cause against such enhancement as provided u/s 249(2) - Held that - From the observations and directions of CIT(A) it is not clear as to how the business loss from derivatives (futures and options) trading has been allowed by the AO, expressing his disagreement therewith and further directing the AO to re-examine this issue, in our view, can lead to a possible enhancement of assessment and/or levy of penalty as the case may be. As contemplated under section 251(2) of the Act, the learned CIT(A), in not affording the assessee reasonable opportunity to show cause against such adverse findings/directions to the AO for examination of a fresh issue that could lead to possible enhancement, etc., committed an error - we hold that the learned CIT(A) erred in rendering such observation and directions on the issue of losses from derivatives (futures and options) trading without affording the assessee reasonable opportunity of being heard as contemplated under section 251(2) - Decided in favour of assessee

Summary

Issues Involved:

1. Disallowance under Section 14A read with Rule 8D.
2. Directions by CIT(A) regarding speculative loss from derivatives trading.
3. Enhancement of assessment without providing an opportunity to the assessee.
4. Jurisdiction of CIT(A) to direct AO to verify new sources of income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The assessee contested the disallowance of ?9,21,062/- made under Section 14A of the Income Tax Act read with Rule 8D of the IT Rules. The assessee argued that the Assessing Officer (AO) did not establish any nexus between the expenses incurred and the exempt income. The Tribunal noted that a similar issue was considered in the assessee's own case for the previous assessment year (A.Y. 2008-09), where the matter was restored to the AO for reconsideration. Following this precedent, the Tribunal restored the issue back to the AO for de novo consideration, directing the AO to afford the assessee an opportunity to present relevant details and submissions. Consequently, these grounds were allowed for statistical purposes.

2. Directions by CIT(A) regarding speculative loss from derivatives trading:

The assessee challenged the CIT(A)'s directions to the AO to verify the loss of ?1,84,10,736/- from derivatives trading, arguing that this issue was not part of the original assessment and thus outside the CIT(A)'s jurisdiction. The Tribunal agreed, citing judicial precedents that the CIT(A) cannot enhance assessment by discovering a new source of income not considered by the AO. The Tribunal referenced decisions from the Hon'ble Supreme Court and the Delhi High Court, which support the view that such matters should be dealt with under Sections 147/148 or 263 if conditions are met. The Tribunal thus deleted the CIT(A)'s directions to the AO regarding the speculative loss.

3. Enhancement of assessment without providing an opportunity to the assessee:

The assessee also contended that the CIT(A) erred by not providing an opportunity to show cause against the enhancement as required under Section 251(2) of the Act. The Tribunal found merit in this argument, referencing the Hon'ble Madras High Court's decision in CIT vs. Lotte India Corporation Ltd., which held that denying the assessee an opportunity to be heard before making adverse findings or directions constitutes an error. Consequently, the Tribunal deleted the CIT(A)'s directions and observations regarding the speculative loss.

4. Jurisdiction of CIT(A) to direct AO to verify new sources of income:

The Revenue's appeal argued that the CIT(A) erred in directing the AO to verify and take remedial action on the speculative loss, contending that the AO is not empowered to revisit a completed assessment under Section 143(3). The Tribunal, having already deleted the CIT(A)'s directions in the assessee's appeal, found the Revenue's grounds rendered infructuous and dismissed them accordingly.

Conclusion:

The Tribunal partly allowed the assessee's appeal, restoring the issue of disallowance under Section 14A read with Rule 8D to the AO for fresh consideration and deleting the CIT(A)'s directions regarding the speculative loss. The Revenue's appeal was dismissed as infructuous. The order was pronounced on 27th April, 2016.