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2019 (11) TMI 406 - AT - Income TaxAssessment u/s 153A - disallowance being 20% of fee paid to ROC as capital expenditure - Penalty u/s 271(1)(c) - HELD THAT - Nature of addition which is made in the hands of the assessee is 20% fee paid to ROC for increase in share capital. The disallowance has not been made on the basis of any incriminating material found during the course of search. In absence of the same, the Assessing Officer cannot exercise his jurisdiction u/s 153C of the Act for the captioned Assessment Year. We place reliance on the ratio laid down by the Hon ble Apex Court in the case of Sinhgad Technical Education Society 2017 (8) TMI 1298 - SUPREME COURT and Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT Hence, the assessment order passed by the assessee u/s 153C r.w.s. 143(3) do not stand. The additional ground raised by the assessee is thus allowed. Disallowance of interest paid to Y2K System, on the ground that the loan taken from Y2K System, was treated as unexplained in Assessment Year 2003-04 - HELD THAT - Admittedly, the said loan which was raised vide loan agreement dated 16.03.2002 was advanced to the assessee was interest free for a period of four years. - earlier agreement came to an end and a fresh loan agreement was entered into between the parties, under which it was agreed that the interest @ 6 % would be charged. There is no dispute of the aforesaid stand of the assessee. The only question whether by a subsequent agreement between the parties, interest free loan can be converted to interest bearing loan the answer to the same is yes . The parties in the first go had agreed that the loan would be non interest bearing but later on lender had demanded interest @ 6 % w.e.f. 01.04.2006 which was agreed upon by the borrower of the assessee company. In these circumstances, the interest claimed by the assessee was to be allowed in its hands in its entirety. Coming to the next statement of the assessee that since it had losses, the interest expenditure was reversed back in Assessment Year 2009-10 on which taxes were paid in the said year. The said fact is again not disputed and while deciding the present appeal, we consider the facts for the present year and decide the issue on its merit. Accordingly, we allow the claim of the assessee vis- -vis the interest expenditure. Diminution in value of foreign exchange loan - HELD THAT - Loss on re-statement of the foreign exchange loan was claimed as deductible in the hands of the assessee. As per the Standard AS-11 of Accounting principles, such restatement of foreign exchange loan is the requirement of accounting principles. On such re-statement, the loss or gain arising there from is to be allowed as a deduction or added as income in the hands of the assessee, as the case may be. The assessee has filed tabulated chart in this regard wherein in Assessment Year 2005-06 loss arises in the hands of the assessee of ₹ 17,20,000/-, which has been allowed as a deduction. Further, the gain arising in all the other years has been added in the hands of the assessee. Following the similar principle of accounting, the assessee in the year under consideration had debited expenditure of ₹ 2.22 crore, which merits to be allowed as revenue expenditure. Accordingly, we hold so. We also find that the said issue stands covered by the ratio laid down by the decision of Hon ble Supreme Court in the case of CIT vs Woodward Governor India Pvt.Ltd 2009 (4) TMI 4 - SUPREME COURT Disallowance u/s 14A - HELD THAT - wherein no exempt income has been earned by the assessee during the year. Following the ratio laid down by the Hon ble High Court in the case of Cheminvest Ltd. vs CIT 2015 (9) TMI 238 - DELHI HIGH COURT , we hold that no disallowance in such cases is to be made in the hands of the assessee. Hence, Ground No.4 raised by the assessee is thus allowed. Penalty u/s 271(1)(c) - disallowance of foreign exchange loss and the disallowance made u/s 14A - HELD THAT - CIT(A) deleted the penalty against which the Revenue is in appeal. We have in paras above already deleted the disallowance made in the hands of the assessee both on account of foreign exchange loss and addition u/s 14A of the Act. Hence, there is no basis for levy of any penalty for concealment of income u/s 271(1)(c)
Issues Involved:
1. Validity of assessment under section 153C in the absence of incriminating documents. 2. Disallowance of interest paid on loan from Y2K System. 3. Disallowance of foreign exchange loss. 4. Disallowance under section 14A of the Income-tax Act. 5. Deletion of penalty under section 271(1)(c). Detailed Analysis: 1. Validity of Assessment under Section 153C: The primary issue was whether proceedings under section 153C of the Income-tax Act, 1961 could be initiated in the absence of any incriminating documents found during the search. The Tribunal held that in the absence of any incriminating material found/seized relating to the disallowance of ?5,22,238/- being 20% fees paid to ROC, no assessment could be made under section 153C. The Tribunal relied on the decisions of the Hon'ble Supreme Court in Sinhgad Technical Education Society [2017] 397 ITR 344 and the Hon'ble Delhi High Court in Kabul Chawla 380 ITR 573. Consequently, the assessment order passed under section 153C read with section 143(3) was deemed invalid. 2. Disallowance of Interest Paid on Loan from Y2K System: The issue in Assessment Year 2007-08 was the disallowance of interest of ?55,12,800/- on the ground that the loan taken from Y2K System was treated as unexplained in Assessment Year 2003-04. The Tribunal noted that the loan was held genuine by the Tribunal in Assessment Year 2003-04. The Tribunal also acknowledged that the loan agreement was extended and interest was charged @ 6% from 01.04.2006. The Tribunal allowed the interest expenditure claimed by the assessee, holding that the interest-free loan could be converted to an interest-bearing loan by a subsequent agreement. 3. Disallowance of Foreign Exchange Loss: For Assessment Year 2009-10, the issue was the disallowance of foreign exchange loss of ?2,20,90,211/- on the ground that the loan from Y2K System was treated as unexplained in A.Y. 2003-04. The Tribunal, referencing its earlier decision, held that the loan was genuine. The Tribunal also relied on the accounting principle AS-11 and the Supreme Court decision in CIT vs Woodward Governor India Pvt. Ltd. [2009] 312 ITR 254 (SC), allowing the foreign exchange loss as a deductible expenditure under section 37(1) of the Act. 4. Disallowance under Section 14A: The Tribunal addressed the disallowance of ?32,935/- made under section 14A of the Act in Assessment Year 2009-10. It was held that no exempt income was earned by the assessee during the year, and following the High Court decision in Cheminvest Ltd. vs CIT [2015] 378 ITR 33 (Del.), no disallowance should be made. Therefore, the ground was allowed in favor of the assessee. 5. Deletion of Penalty under Section 271(1)(c): The Revenue's appeal against the deletion of penalty levied under section 271(1)(c) for Assessment Year 2009-10 was based on the disallowance of foreign exchange loss and the addition under section 14A. Since the Tribunal had already deleted these disallowances, there was no basis for the penalty. Consequently, the grounds raised by the Revenue were dismissed. Conclusion: The Tribunal allowed all four appeals filed by the assessee, holding the assessment under section 153C invalid, allowing the interest expenditure, foreign exchange loss, and disallowance under section 14A. The Revenue's appeal regarding the penalty under section 271(1)(c) was dismissed. The order was pronounced on 22nd October 2019.
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