2018 (12) TMI 318 - AT - Income Tax

Assessment u/s 153A - Calculation of deduction u/s 80HHC - excluding 90% of net surplus received on cancellation of foreign exchange contracts while calculating deduction - Held that - Though the terminology used is incriminating material by the Revenue regarding the documents found during the search from the records of the original assessment u/s 143(1), it appears that all these materials were present during the original assessment proceedings for which entries are available in books of accounts. The decision in case of CIT vs. Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT which lays down the entire law with regard to Section 153A has given certain conditions while proceedings with Section 153A proceedings and when there is no incriminating material. The decision in case of Kabul Chawla (supra) clearly stated that Section 153A cannot be invoked in absence of any incriminating material found /seized during the course of search. Therefore, we are allowing the additional legal ground in A.Y. 2002-03 - decided in favour of the assessee AO jurisdiction to revisit the claim u/s 80HHC allowed in the original assessment u/s 143(3) - Held that - Assessing Officer had no jurisdiction to revisit the claim u/s 80HHC allowed in the original assessment u/s 143(3), which was completed well before the search; it was because no incriminating material was found in search or in subsequent enquiry. Since, no evidence was found during search and there is no remote nexus with the determination of claim u/s 80HHC, the Assessing Officer had no jurisdiction to revisit the claim in re-assessment u/s 153A.

Issues Involved:
1. Exclusion of 90% of net surplus received on cancellation of foreign exchange contracts while calculating deduction under Section 80HHC.
2. Treatment of interest earned on FDRs placed with banks as "income from other sources".
3. Validity of reassessment under Section 153A without incriminating material.
4. Jurisdiction of Assessing Officer to revisit claims allowed in original assessment under Section 143(3).

Issue-wise Detailed Analysis:

1. Exclusion of 90% of Net Surplus on Cancellation of Foreign Exchange Contracts:
The Commissioner of Income-tax (A) confirmed the action of the assessing officer in excluding 90% of the net surplus received on cancellation of foreign exchange contracts while calculating deduction under Section 80HHC of the Income Tax Act, 1961, in terms of clause (baa) of Explanation thereto. This was contested by the assessee, arguing that the profit arising from the cancellation of forward foreign exchange contracts should not be reduced from 'profit of business' while computing deduction under Section 80HHC.

2. Treatment of Interest Earned on FDRs:
The Commissioner of Income-tax (A) also confirmed the action of the assessing officer in treating interest earned on FDRs placed with banks as margin money for obtaining bank guarantees/opening of letters of credit as "income from other sources". The assessee contended that this interest should be considered as 'business income' and not 'income from other sources'. Furthermore, the CIT(A) erred in denying deduction under Section 80HHC with reference to the aforesaid interest income. The CIT(A) and the Assessing Officer ignored the evidence filed on record, leading to this issue being set aside to the file of the Assessing Officer for reconsideration.

3. Validity of Reassessment under Section 153A without Incriminating Material:
For Assessment Year 2002-03, the assessee argued that the Assessing Officer cannot revise an opinion in a reassessment under Section 153A on a pure question of law without any fresh material or incriminating documents found during the search. The Tribunal agreed, stating that no assessment proceeding was pending for Assessment Year 2002-03 & 2003-04 on the date of search, and no incriminating material was found during the search or in the post-search enquiry. The Tribunal relied on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Kabul Chawla, which stated that Section 153A cannot be invoked in the absence of any incriminating material found/seized during the course of the search.

4. Jurisdiction of Assessing Officer to Revisit Claims Allowed in Original Assessment:
For Assessment Year 2003-04, the CIT(A) held that the Assessing Officer had no jurisdiction to revisit the claim under Section 80HHC allowed in the original assessment under Section 143(3), as no incriminating material was found during the search. The Tribunal upheld this view, stating that the CIT(A)'s order was in consonance with the judgment of Hon’ble Delhi High Court in the case of Kabul Chawla. Consequently, the Revenue's appeal for A.Y. 2003-04 was dismissed, and the cross objections filed by the assessee were also dismissed.

Conclusion:
The Tribunal allowed the assessee's appeal for A.Y. 2002-03, dismissed the Revenue's appeal and the assessee's cross objections for A.Y. 2003-04, and partly allowed the assessee's appeal for A.Y. 2004-05 for statistical purposes, directing the Assessing Officer to reconsider the evidence filed on record. The order was pronounced in the Open Court on 29th November, 2018.

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