2020 (5) TMI 526 - AT - Income Tax

Assessment u/s 153A - Disallowance u/s 14A - Addition based on incriminating materials or not? - HELD THAT - We note that both AYs i.e. AYs. 2013-14 and 2014-15 were not pending before the AO on the date of search on 01.12.2015 and, therefore, both assessment years are unabated assessment and, therefore, as per the settled position of law, no addition/disallowance is permissible in AYs. 2013-14 and 2014-15 without the aid of incriminating materials unearthed qua the issue, and the year under consideration u/s. 153A - Since there is no whisper by the AO/Ld. CIT(A) about any incriminating material to show that assessee had in fact had incurred expenditure for earning the exempt income in these two assessment years, no disallowance could have been resorted to by the AO u/s. 153A - We find merit in the contention of the Ld. AR for assessee and allow the appeal by directing deletion of addition made u/s. 14A read with Rule 8D of the Rules. AY 2016-17 - limited prayer of the Ld. AR of the assessee is that the disallowance made u/s.14A read with Rule 8D(2)(iii) may be restricted to 0.5% of the investment made in the dividend yielding scrips - HELD THAT - We find force in the contention of the Ld. AR and this Tribunal have been consistently taking such a view after the decision in REI Agro Ltd. vs. DCIT 2013 (9) TMI 156 - ITAT KOLKATA - So, we direct the AO to restrict the disallowance under Rule 8D2(iii) at .5% of the investment in dividend yielding scrips. With this direction, we dispose of this appeal of the assessee for AY 2016-17.

Summary

Issues:
- Disallowance under section 14A of the Income-tax Act, 1961 for AYs. 2013-14, 2014-15, and 2016-17.
- Unabated assessment years and the requirement of incriminating materials for additions/disallowances under section 153A.
- Disallowance calculation under Rule 8D for exempt income.

Analysis:

1. Disallowance under Section 14A:
- The appeals were against the disallowance upheld by Ld. CIT(A) under section 14A of the Income-tax Act, 1961 for AYs. 2013-14, 2014-15, and 2016-17.
- The AO disallowed amounts without incriminating materials for AYs. 2013-14 and 2014-15, leading to the issue of whether such disallowances were legally valid.
- The Ld. AR contended that in unabated assessments, disallowances can only be made based on incriminating materials under section 153A, which were absent in this case.
- The Tribunal agreed, noting that since the assessments were not pending before the AO at the time of the search, no disallowance could be made without incriminating materials, thereby allowing the appeals for AYs. 2013-14 and 2014-15.

2. Unabated Assessment Years and Incriminating Materials:
- The principle of requiring incriminating materials for additions/disallowances under section 153A in unabated assessments was crucial in this case.
- The Ld. AR relied on legal precedents to support the argument that additions in unabated assessments must be based on undisclosed incriminating materials found during the search.
- The Tribunal concurred, emphasizing that without any mention of incriminating material, disallowances under section 14A could not be sustained for AYs. 2013-14 and 2014-15.

3. Disallowance Calculation under Rule 8D:
- For AY 2016-17, where the assessment was abated, the AO made a disallowance under Rule 8D for exempt income.
- The Ld. AR sought a modification to restrict the disallowance under Rule 8D(2)(iii) to .5% of the investment in dividend-yielding scrips, which the Tribunal accepted.
- Following the established precedent, the Tribunal directed the AO to limit the disallowance under Rule 8D(2)(iii) accordingly, partially allowing the appeal for AY 2016-17.

In conclusion, the Tribunal allowed the appeals for AYs. 2013-14 and 2014-15 due to the absence of incriminating materials for disallowances under section 14A in unabated assessments. For AY 2016-17, the disallowance under Rule 8D(2)(iii) was restricted to .5% of the investment in dividend-yielding scrips, resulting in a partial allowance of the appeal.