2018 (2) TMI 1629 - AT - Income Tax

Assessment framed u/s 153A - Disallowance made u/s 14A - quantum of disallowance - Held that - Once it is an unabated assessment, then the addition which can be made in the assessment framed u/s 153A would only be with regard to incriminating material or document found during the course of search. This principle is now well settled by catena of judgments including those of Hon ble Jurisdictional High Court in the case of Kabul Chawala (2015 (9) TMI 80 - DELHI HIGH COURT) and Meeta Gutgutia (2017 (5) TMI 1224 - DELHI HIGH COURT). The AO has mainly resorted to make adhoc estimate of ₹ 5 lacs which admittedly is not based on any material or evidence found during the course of search but merely on the perusal of the records/ balance sheet already considered by the AO. Thus, the disallowance of ₹ 5 lacs made in the assessment year 2005-06 is directed to be deleted. For the assessment year 2011-12, it is an admitted fact that the assessee has earned dividend income of ₹ 14,028/- only and as against this the Ld. AO has proceeded to make the disallowance at ₹ 3,69,090/- after applying rule 8D mechanically disallowance of expenditure u/s 14A cannot exceed the exempt income. Accordingly, we direct the AO to delete the disallowance made over and above what has been offered by the assessee for the purpose of disallowance u/s 14A

Summary

Issues Involved:
Challenging disallowance made u/s 14A in assessment years 2005-06, 2007-08, and 2011-12 based on the scope of assessment u/s 153A and application of Rule 8D for disallowance calculation.

Analysis:

Issue 1: Assessment Years 2005-06 and 2007-08
The assessee contested the disallowance u/s 14A for these years, arguing that the additions were beyond the scope of assessment u/s 153A due to finalized assessments before the search. The AO made adhoc disallowances without incriminating material, relying on balance sheet data. The Tribunal ruled in favor of the assessee, citing precedents like CIT vs. Kabul Chawla, holding that additions under 153A must be based on search findings. Thus, the disallowances of &8377; 5,00,000 and &8377; 5,00,705 for 2005-06 and 2007-08, respectively, were directed to be deleted.

Issue 2: Assessment Year 2011-12
In this year, the AO disallowed &8377; 3,69,090 u/s 14A despite the assessee offering a &8377; 1 lac disallowance for a &8377; 14,028 dividend income. The Tribunal referenced the case of Joint investment Pvt. Ltd. and held that disallowances cannot exceed exempt income. Consequently, the AO was directed to delete the disallowance exceeding what the assessee had offered. The appeal for the assessment year 2011-12 was allowed.

In conclusion, the Tribunal allowed the appeals for all three assessment years, emphasizing the importance of adhering to the scope of assessment under Section 153A and ensuring disallowances do not surpass exempt income, as per relevant legal precedents.