2018 (8) TMI 2004 - AT - Income Tax

Reopening of assessment u/s 147 - No communication of reason to believe - HELD THAT - AO had issued notice u/s 148 and the assessee has complied with the notice and requested for reasons. The AO completed the assessment without communicating the reasons. As relying on Trend Electronics 2015 (9) TMI 1119 - BOMBAY HIGH COURT we hold that the assessment made u/s 147 r.w.s. 143(3) without communicating the reasons is bad in law. Accordingly, the orders framed u/s 147 r.w.s. 143(3) are quashed and the appeal of the assessee is allowed. Since, we have quashed the assessment made u/s 143(3), we consider it is not necessary to adjudicate the grounds on merits. In the instant case, it is established that the assessee has complied with the notice issued u/s 148 and requested for the reasons for reopening of the assessment. The AO failed to supply the reasons. Assessment made u/s 147 r.w.s. 143(3) without supplying the reasons is invalid and accordingly, we cancel the assessment made u/s 147 r.w.s.143(3) and dismiss the appeal of the revenue. Deferred revenue expenditure disallowance - Assessee not produced any corroborative evidence of expenditure - In the absence of bills, nature of payment, to whom it was paid etc., the AO doubted the genuineness of the expenditure and accordingly disallowed a sum - CIT-A deleted addition - HELD THAT - Keeping in view of the nature of business and accrual of income and period of the scheme, we hold that Ld.CIT(A) has rightly held that under special circumstances, the law allows such expenditure to be amortized and to be claimed in coming years to avoid distortion of profits. The assessee is earning commission on purchase of ornaments from VEPL on redemption of purchase plans.The assessee also has not claimed the expenditure in the earlier years and there was no double claim or duplication of the claim. Since the assessee is claiming business expenditure on a rational basis, spreading the expenditure over life time of the schemes and the fact is that the assessee is canvassing for purchase plan schemes and the expenditure in question was business expenditure, we hold that the CIT(A) has rightly upheld the expenditure as revenue expenditure and deleted the addition - Decided in favour of assessee. Disallowance u/s 14A read with Rule 8D - HELD THAT - There is no dispute that the assessee did not earn any exempt income during the year under consideration. In the absence of any exempt income, there is no case for making the disallowance u/s 14A r.w.Rule 8D of I.T.Rules, as held by Hon ble Madras High Court in the case of Redington (India) Ltd. 2017 (1) TMI 318 - MADRAS HIGH COURT . Thus we hold that there is no case for disallowance of expenditure relatable to earning of exempt income u/s 14A r.w.Rule 8D of I.T.Rules in the absence of exempt income in the year under consideration. - Decided in favour of assessee. Deemed dividend u/s 2(22)(e) - as argued transactions with VEPL. are business transactions, hence should not be considered as advances or loans u/s 2(22)(e) - HELD THAT - There is no direct or indirect benefit derived by the assessee by withdrawing the amount receivable from the company. Hence, there is no case for making the addition on account of deemed dividend u/s 2(22)(e) of I.T.Act. Accordingly, we hold that the Ld.CIT(A) rightly deleted the addition and the order of the CIT(A) is upheld. Hence, the appeal of the revenue on this ground is dismissed.

Summary

Issues Involved:
1. Validity of assessment made under section 147 read with section 143(3) of the Income Tax Act, 1961.
2. Deferred revenue expenditure.
3. Disallowance under section 14A read with Rule 8D of the Income Tax Rules.
4. Assessment of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of Assessment Made u/s 147 r.w.s. 143(3):
The primary issue was whether the assessment made under section 147 read with section 143(3) was valid. The assessee had filed the return of income for the assessment year 2010-11 on 12.03.2013, which was beyond the prescribed time. The AO issued a notice under section 148 on 26.09.2014 based on information regarding accommodation entries for diamond trade. The assessee responded by requesting the reasons for reopening, but the AO did not supply the reasons, violating the principles of natural justice as per the Supreme Court's decision in G.K.N. Driveshafts (India) Ltd. The CIT(A) invalidated the assessment, citing precedents like Haryana Acrylic Manufacturing Company and Asian Paints. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's failure to supply reasons nullified the proceedings and violated the principles of natural justice.

2. Deferred Revenue Expenditure:
The second issue was the disallowance of deferred revenue expenditure of ?1,99,96,121/-. The AO disallowed the expenditure due to a lack of corroborative evidence. The CIT(A) found that the assessee had provided sufficient evidence and that the expenditure was incurred for business purposes. The CIT(A) allowed the expenditure, following the Supreme Court's decision in Madras Industrial Investment Corporation Limited and Hindustan Aluminium Corporation Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was revenue in nature and that deferring it over the life of the schemes was a prudent practice to avoid distortion of profits.

3. Disallowance u/s 14A r.w. Rule 8D:
The third issue was the disallowance of ?7,61,656/- under section 14A read with Rule 8D. The CIT(A) deleted the addition, holding that no disallowance is required in the absence of exempt income. This decision was based on precedents like Redington (India) Ltd., Chem Investments, and Sintex Industries Ltd. The Tribunal upheld the CIT(A)'s decision, reiterating that disallowance under section 14A cannot be made if there is no exempt income during the year.

4. Assessment of Deemed Dividend u/s 2(22)(e):
The final issue was the assessment of deemed dividend of ?1,51,39,860/- under section 2(22)(e). The AO treated the amount received from M/s Vaibhav Empire Pvt. Ltd. (VEPL) as a loan and assessed it as deemed dividend. The CIT(A) found that the transactions were business-related and that the assessee had a debit balance in its books, indicating no loan or benefit. The Tribunal upheld the CIT(A)'s decision, confirming that there was no case for deemed dividend as the transactions were business-related and there was no benefit derived by the assessee.

Conclusion:
The Tribunal dismissed the revenue's appeals for the assessment years 2010-11 and 2014-15, upholding the CIT(A)'s decisions on all issues. The assessments made under section 147 read with section 143(3) were invalid due to the AO's failure to supply reasons. The deferred revenue expenditure was allowed as business expenditure, the disallowance under section 14A was deleted due to the absence of exempt income, and the assessment of deemed dividend was invalidated due to the nature of the transactions.