2019 (7) TMI 418 - AT - Income Tax

Assessment u/s 153A - addition made by the A.O. without incriminating material and the assessment was completed and not pending on the date of order - violation of principles of natural justice due to non-allowing the cross examination of the witness - addition made U/s 68 of the Act in respect of the unsecured loan and share capital received from M/s Jalsagar Commerce Pvt. Ltd - benefit of telescoping, recycling and rotation of funds by rejecting the peak credit theory - HELD THAT - As relying on M/S. KOTA DALL MILL VERSUS THE DEPUTY COMMISSIONER OF INCOME-TAX AND VICE-VERSA 2019 (1) TMI 344 - ITAT JAIPUR and M/S. BARAN ROLLER FLOUR MILLS P. LTD. AND VICE-VERSA 2019 (1) TMI 1543 - ITAT JAIPUR addition made by the A.O. U/s 153A of the Act is not sustainable and liable to be deleted when the assessment for the A.Y. 2010-11 was completed U/s 143(3) of the Act and was not pending as on the date of search on 02/7/2015. grounds of the assessee s appeal stands allowed. Disallowance u/s 14A - HELD THAT - The fact recorded by the ld. CIT(A) that the assessee has not earned any exempt income during the year under consideration has not been disputed by the department and therefore, in view of the settled proposition of law on this point and particularly the decision of Hon ble Delhi High Court in the case of Chemvest Ltd. Vs CIT 2015 (9) TMI 238 - DELHI HIGH COURT we do not find any error or illegality in the order of the ld. CIT(A) qua this issue. Hence, we uphold the same. Disallowance on account of depreciation - assessee company has not carried out any business activity during the year - HELD THAT - In the immediate preceding year, the assessee has disclosed substantial amount of turnover and business income and the A.O. has allowed the depreciation. Therefore, merely because there is no turnover during the year under consideration, cannot be a reason for disallowance of deprecation once the asset was already put to use in the preceding years. We find that the disallowance of depreciation on the ground of the asset not to put use can be considered only at the first year of acquisition of asset but once the asset was duly used in the business of the assessee then in the subsequent year if there is no business activity due to temporary suspension of activity or lull in the business, the claim of depreciation being a statutory allowance cannot be disallowed. Accordingly, we do not find any error or illegality in the order of the ld. CIT(A) qua this issue.

Summary

Issues Involved:
1. Addition made by A.O. without incriminating material.
2. Violation of principles of natural justice due to non-allowing cross-examination of the witness.
3. Addition made under Section 68 of the Income Tax Act, 1961 in respect of unsecured loans and share capital.
4. Denial of benefit of telescoping, recycling, and rotation of funds.
5. Deletion of disallowance under Section 14A of the Income Tax Act, 1961.
6. Deletion of disallowance on account of depreciation.

Detailed Analysis:

1. Addition Made by A.O. Without Incriminating Material:
The Tribunal noted that the assessment for the A.Y. 2010-11 to 2012-13 were not pending on the date of search and therefore, the proceedings under Section 153A would be in the nature of reassessment. The Tribunal emphasized that no addition can be made in the absence of incriminating material found during the course of search. It was held that the additions made by the A.O. were not sustainable as they were based solely on the information received from the Investigation Wing, Kolkata, and not on any material found during the search.

2. Violation of Principles of Natural Justice:
The Tribunal found that the assessee was not given an opportunity to cross-examine the witnesses whose statements were relied upon by the A.O. The Tribunal cited the Supreme Court's decision in Andaman Timber Industries vs. CCE, which held that not allowing cross-examination of witnesses amounts to a violation of principles of natural justice. Consequently, the orders passed based on such statements were deemed unsustainable.

3. Addition Made Under Section 68:
The Tribunal observed that the A.O. made additions under Section 68 on account of unsecured loans and share capital received from various companies. The Tribunal noted that the assessee produced all relevant documents, including income tax returns, financial statements, bank statements, and confirmations from the loan creditors. The A.O. did not bring any material to contradict the evidence provided by the assessee. The Tribunal concluded that the additions were not justified and deleted them.

4. Denial of Benefit of Telescoping, Recycling, and Rotation of Funds:
Since the Tribunal deleted the additions made by the A.O., the issue of telescoping, recycling, and rotation of funds became infructuous.

5. Deletion of Disallowance Under Section 14A:
The Tribunal upheld the deletion of disallowance made by the A.O. under Section 14A, noting that the assessee had not earned any exempt income during the year under consideration. The Tribunal relied on the decision of the Delhi High Court in Chemvest Ltd. vs. CIT, which held that no disallowance under Section 14A can be made if no exempt income is earned.

6. Deletion of Disallowance on Account of Depreciation:
The Tribunal upheld the deletion of disallowance on account of depreciation, noting that the A.O. had not discussed the reasons for the disallowance in the assessment order. The Tribunal found that the assets were business assets, and merely because there was no turnover during the year, the claim of depreciation could not be disallowed.

Conclusion:
The Tribunal allowed the appeals and cross objections of the assessee, deleting the additions made by the A.O. and upholding the deletions made by the CIT(A). The Tribunal emphasized the importance of incriminating material for additions under Section 153A, the necessity of cross-examination for fair assessment, and the requirement of evidence to support additions under Section 68.