2021 (1) TMI 1083 - AT - Income Tax

Disallowance of running and maintenance expenses of foreign office - as seen that these foreign expenses have been debited by the assessee company to the Profit Loss Account under the head manufacturing, administrative and other expenses under the sub-head miscellaneous expenditure in Schedule-13 of the audited accounts - HELD THAT - A perusal of the assessment order passed u/s 147 of the Act shows that the Assessing Officer has based the addition merely on the reasons recorded for reopening wherein it has been stated that this expenditure was not allowable as per the provisions of the Act. How and why this expenditure was not allowable has not been specified by the AO. Before us also, the Ld. Sr. DR could not point out any perversity in the findings of the Ld. CIT (A) on the issue. This amount has been duly disclosed in the audited financial statements and no fresh material on the issue has been brought on record by the Assessing Officer. Undisputedly, the reassessment is beyond the period of four years and, therefore, it was incumbent upon the Assessing Officer to point out specifically as to how the escapement of income from tax on this issue could be attributed to any fault on the part of the assessee. Therefore, in view of the categorical findings recorded by the Ld. CIT (A) that no adverse inference was drawn by the Assessing Officer and that the payment was duly supported and evidenced by documentary evidences and that the genuineness of expenditure incurred was not doubted by the AO. Addition pertaining to quota expenses - the quota was allotted on year to year basis and, therefore, it had no enduring benefit - HELD THAT - In the Assessment Order passed u/s 147 of the Act, the Assessing Officer has not pointed out any reason for treating this expenditure as capital expenditure but has only as referred to the reasons recorded for reopening and has disallowed the same. Even the Ld. SR. DR could not point out any perversity in the findings of the Ld. CIT (A) on the issue - CIT (A) has also placed reliance on case of M.S. Kandappa Mudaliar vs. CIT 1957 (3) TMI 62 - MADRAS HIGH COURT wherein it was held that the expenditure for acquisition of quota rights is not a capital expenditure. Therefore, on this issue also, the contention of the Department fails and the order of the Ld. CIT (A) is upheld. Addition on account of advance recoverable by way of income from financial transactions - CIT (A) has noted that the amount debited to income from financial transactions receivable was in respect of income already credited under the head income from financial transactions - HELD THAT - CIT (A), while deleting the disallowances, has noted that this was a case of double taxation of income as the same was already part of the profit shown by the assessee in its income tax return and was again added back in the order passed in reassessment proceedings. The Ld. Sr. DR could not point out any perversity in the finding of the Ld. CIT (A) that this amount had come to be taxed twice. Accordingly, on this issue also we find that there is no reason to interfere with the findings of the Ld. CIT (A) and we uphold the same. Appeal of the Department stand dismissed.

Summary

Issues involved:
1. Validity of assumption of jurisdiction u/s 148 of the Income Tax Act.
2. Deletion of additions made on merits.

Issue 1: Validity of assumption of jurisdiction u/s 148 of the Income Tax Act:
The case involved an appeal by the Department against the order passed by the Ld. Commissioner of Income Tax (Appeals) for Assessment Year 2005-06. The Department challenged the assumption of jurisdiction under section 148 of the Act. The assessee objected to the reopening, but the objections were dismissed by the Assessing Officer. The Ld. CIT (A) deleted all three additions made by the Assessing Officer on merits. The Department appealed to the Tribunal challenging the deletion of additions, while the assessee filed Cross Objections challenging the assumption of jurisdiction u/s 148 of the Act.

Issue 2: Deletion of additions made on merits:
The Department's appeal included three grounds challenging the deletion of additions made by the Assessing Officer. The first ground related to running and maintenance expenses of the foreign office, the second ground pertained to quota expenses, and the third ground was about advance recoverable by way of income from financial transactions. The Tribunal analyzed each ground separately.
- Regarding the running and maintenance expenses of the foreign office, the Ld. CIT (A) found that the expenditure was genuine and duly supported by documentary evidence. The Assessing Officer did not specify why this expenditure was disallowed, and no fresh material was presented. The Tribunal upheld the deletion of this addition.
- Concerning quota expenses, the Ld. CIT (A) noted that such expenses did not result in the creation of any tangible or intangible assets and were revenue in nature. The Assessing Officer failed to provide a valid reason for treating the expenditure as capital. The Tribunal upheld the deletion of this addition.
- On the issue of advance recoverable by way of income from financial transactions, the Ld. CIT (A) observed that the amount had already been part of the profit shown by the assessee in its income tax return and was erroneously added back in the reassessment proceedings. The Tribunal found no reason to interfere with the deletion of this addition.

In conclusion, the Tribunal dismissed the Department's appeal as all three additions were deleted by the Ld. CIT (A) on merits. Consequently, there was no need to address the Cross Objections filed by the assessee challenging the assumption of jurisdiction u/s 147/148 of the Act. Therefore, both the Department's appeal and the assessee's Cross Objections were dismissed.