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2017 (10) TMI 1612 - AT - Income TaxDisallowance u/s. 14A - expenditure incurred on exempt income - HELD THAT - We find that though the assessee has made investment in mutual funds but during the impugned assessment years it has not received any dividend income on such investment according to the assessee. Therefore in the absence of exempt income no disallowance u/s. 14A can be made. It has been repeatedly held by the various High Courts and the Tribunal that where assessee did not earn any exempt income no disallowance u/s. 14A can be made. In this case the revenue has disputed the fact of receipt of exempt income therefore we find it appropriate to restore the matter to the file of the AO for verification of the fact. If the assessee does not have any exempt income no disallowance u/s. 14A can be made otherwise the AO may act in accordance with the law. Validity of Order passed under section 143(3) r.w.s. 153A - HELD THAT - We find that undisputedly assessment u/s. 143(3) was completed before the search took place upon the assessee. Nothing has been demonstrated before us that any incriminating material was found during the course of search which was used for completing the assessment u/s. 143(3) r.w.s. 153A - Therefore there is no incriminating material found during the course of search on the basis of which concluded assessment can be reopened and fresh assessment can be framed u/s. 143(3) r.w.s. 153A of the Act. The question that arises in this case is whether the AO can reframe the assessment u/s. 153A on the basis of search conducted upon the assessee wherein no incriminating material is found? This question was examined by this Bench of the Tribunal in which one of the Members was a party to it and the Tribunal having examined both the judgments of the Hon ble jurisdictional High Court passed in the cases of Lancy Constructions 2016 (2) TMI 797 - KARNATAKA HIGH COURT and Canara Housing Development Company 2014 (8) TMI 642 - KARNATAKA HIGH COURT has concluded that in the absence of any incriminating material proceedings u/s. 153A cannot be initiated and concluded assessment cannot be reopened Thus as in the absence of incriminating material the concluded assessment cannot be reopened and assessment u/s. 153A cannot be framed. In the instant case undisputedly no incriminating material was found therefore the assessment framed u/s. 143(3) r.w.s. 153A of the Act is not sustainable and we accordingly knock down the assessments. - Decided in favour of assessee. Depreciation based on the disallowance of expenses as not eligible for depreciation - assessee has allocated capital work-in-progress CWIP to assets and accordingly had claimed depreciation on assets - HELD THAT - CIT(Appeals) correctly re-examined the issue and directed the AO to consider certain amount as not eligible for forming part of CWIP which is to be utilized at the time of achieving the commercial operation of the assessee. AO was directed to consider the amounts as held not eligible for capitalization in deciding the appeal for AY 2007-08 2008-09 for the purpose of allowing depreciation. TDS u/s 192 or 194J - Director sitting fees paid for attending audit committee meetings board meetings etc.- AO has disallowed this expenses on the ground that TDS has not been deducted on the said expenses - HELD THAT - As we find that undisputedly amendment u/s. 194J was brought w.e.f. 1.7.2012 therefore it would apply from AY 2014-15 not in the impugned assessment year. Therefore we find that the CIT(Appeals) has properly adjudicated the issue in the light of relevant provisions of the Act and we find no infirmity therein. We accordingly confirm his order.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Validity of assessment under Section 143(3) read with Section 153A of the Income Tax Act. 3. Depreciation on capital work-in-progress (CWIP). 4. TDS deduction on Directors' sitting fees under Section 192 vs. Section 194J. 5. Nature of pre-operative and inauguration expenses (revenue vs. capital). Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The primary issue was whether the CIT(A) was correct in holding that no disallowance under Section 14A could be made when the assessee had not earned any exempt income during the financial year. The Tribunal noted that the assessee had made investments in mutual funds but had not received any dividend income. Thus, in the absence of exempt income, no disallowance under Section 14A could be made. The CIT(A) followed the Bangalore Tribunal's decision in the case of Alliance Infrastructure Project Pvt. Ltd. The Tribunal restored the matter to the AO for verification of the fact. If the assessee had no exempt income, no disallowance under Section 14A could be made; otherwise, the AO was to act according to the law. 2. Validity of assessment under Section 143(3) read with Section 153A of the Income Tax Act: The Tribunal examined whether the AO could reframe the assessment under Section 153A based on a search where no incriminating material was found. It was noted that the assessment under Section 143(3) was completed before the search, and no incriminating material was found during the search. Citing the Tribunal's previous decision in P.M.A. Razak and judgments from the Delhi High Court (CIT v. Kabul Chawla) and the jurisdictional High Court (CIT v. Lancy Constructions), it was held that in the absence of incriminating material, proceedings under Section 153A could not be initiated. Consequently, the assessments framed under Section 143(3) read with Section 153A were quashed. 3. Depreciation on capital work-in-progress (CWIP): The issue concerned whether the CIT(A) was correct in allowing depreciation based on the disallowance of expenses as not eligible for depreciation in AY 2007-08 and 2008-09. The assessee had allocated CWIP to assets and claimed depreciation. The AO disallowed certain expenditures, considering them ineligible for capitalization. The CIT(A) re-examined the issue and directed the AO to consider certain amounts as not eligible for forming part of CWIP. The Tribunal found that the CIT(A) had adjudicated the issue correctly and confirmed the order. 4. TDS deduction on Directors' sitting fees under Section 192 vs. Section 194J: The AO disallowed the expenditure on Directors' sitting fees for not deducting TDS under Section 194J. The CIT(A) held that the provisions of Section 192 applied to such payments, not Section 194J, as the amendment to Section 194J was effective from 1.7.2012, applicable from AY 2014-15. The Tribunal confirmed the CIT(A)'s order, noting that the amendment did not apply to the impugned assessment year. 5. Nature of pre-operative and inauguration expenses (revenue vs. capital): The issue was whether the expenses towards pre-operative and inauguration expenses were revenue or capital in nature. The CIT(A) held that the expenses were revenue in nature, incurred after the business was set up. The Tribunal noted that the assessment under Section 143(3) was completed before the search, and no incriminating material was found. Therefore, the assessment framed under Section 143(3) read with Section 153A was not valid, and the additions made were not sustainable. The Tribunal dismissed the revenue's appeal on this ground. Conclusion: - The assessee's appeals were allowed. - The revenue's appeals were allowed for statistical purposes, dismissed, or partly allowed for statistical purposes, depending on the specific grounds. - Pronounced in the open court on October 13, 2017.
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