2021 (5) TMI 515 - AT - Income Tax

Assessment framed u/s 153A - unabated/ concluded assessments on the date of search in the absence of any incriminating material found during the search relating to such unabated assessment year - HELD THAT - We find that the Hon ble Supreme Court in the case of CIT vs. Sinhgad Technical Education Society 2017 (8) TMI 1298 - SUPREME COURT has already dealt with the issue under consideration. In the aforesaid case, it was held that in order to initiate a valid assessment proceeding u/s 153C of the Act, the seized document must be incriminating in nature and must relate to the Assessment Year whose assessment is sought to be reopened. Hence, if no incriminating material is found during the course of search in respect of an assessment year then the AO does not have any jurisdiction to invoke the provisions of section 153C of the Act. Thus it can be safely concluded that no addition/ disallowance could be validly made in the assessments framed u/s 153A of the Act in respect of concluded assessments on the date of search, unless any incriminating materials were found during the course of search relatable to such assessment year, enabling the ld AO to disturb the earlier stand taken by him in either in the intimation u/s 143(1) of the Act or in the scrutiny assessment u/s 143(3) of the Act, as the case may be - Decided in favour of assessee. Disallowance u/s 14A read with Rule 8D(2) under normal provisions of the Act - Mandation of recording of satisfaction - suo moto disallowance made by the assessee companies rejected - HELD THAT - We are in complete agreement with the arguments advanced by the ld AR that the ld AO had not recorded any objective satisfaction with cogent reasons for rejecting the suo moto disallowance made by the assessee companies. The basis of suo moto disallowance of expenses u/s 14A of the Act was duly submitted before the lower authorities by the assessee companies. We find tha the ld AO had rejected the same and had simply stated that he is not satisfied with the suo moto disallowance made by the assessee, without adducing any reasons. Hence the decision of Hon ble Supreme Court in the case of Maxopp Investment 2018 (3) TMI 805 - SUPREME COURT clearly supports the case of the assessee. Tribunal in the case of Arnav Gruh Ltd. vs. DCIT 2018 (1) TMI 782 - ITAT MUMBAI wherein this Tribunal has held that Assessing Officer was not justified in making disallowance under s. 14A r/w r. 8D without recording his satisfaction as mandated under s. 14A of the Act read with Rule 8D(1) that the claim of assessee was not acceptable AO grossly erred in making disallowance u/s 14A of the Act read with Rule 8D(2) of the Rules without recording the mandatory satisfaction in terms of section 14A(2) of the Act read with Rule 8D(1) of the Rules. Hence the suo moto disallowance of expenses, wherever made by the assessee, voluntarily in the return of income alone would survive. Similarly, the principle of recording objective satisfaction with cogent reasons would squarely apply for cases falling under section 14A(3) of the Act also, where assessee claims that no expenditure was incurred for earning exempt income - Decided in favour of assessee. Disallowance u/s 14A while computing book profits u/s 115JB - HELD THAT - We find that the ld CITA had deleted the disallowance u/s 14A of the Act while computing book profits u/s 115JB of the Act by following the order of the Special Bench of Delhi Tribunal in the case of ACIT vs Vireet Investments Pvt Ltd 2017 (6) TMI 1124 - ITAT DELHI - We find that the Special Bench of Delhi Tribunal in the case of Vireet Investments referred to supra had categorically held that the computation mechanism provided in Rule 8D(2) of the Rules would not apply for making disallowance in terms of clause(f) of Explanation (1) to section 115JB(2) of the Act. But it no where restricted the ld AO to identify the actual expenses incurred for the purpose of earning exempt income which has to be disallowed in terms of clause (f) of Explanation (1) to section 115JB(2) of the Act. We find that the assessee itself had made suo moto disallowance of expenses by identifying the actual expenses incurred thereon which were attributable for the purpose of earning exempt income. These expenses voluntarily disallowed by the assessee in the normal computation should be treated as actual expenditure and be considered for disallowance in terms of clause (f) of Explanation (1) to section 115JB (2) of the Act, wherever disallowance has been made by the assessee. But in the case of IIC Limited, there was no voluntary disallowance of expenses made by the assessee in the returns of income for the Asst Yea₹ 2014-15 and 2015-16. Hence we direct the ld AO to identify the actual expenditure incurred thereon, if any, for the purpose of earning exempt income in the similar fashion as was done in the case of other two assessee M/s. Rattanindia Power Limited for the Asst Yea₹ 2014-15 to 2017-18. In any case, the said disallowance shall not exceed the exempt income for the respective years. This would meet the ends of justice in our considered opinion. However, for the Asst Year 2013-14 in the case of IIC Limited, no disallowance u/s 14A of the Act could be made as it falls in unabated assessment year and we have already held that no incriminating material was found during search relatable to that assessment year. Addition towards cash found during the course of search u/s 69A - AO had contended that the bundles of money found at the Aerocity office had staples on them while RBI directives prohibited banks from stapling notes and thus the money was not earned through regular banking channels - HELD THAT - These are absolutely irrelevant observations for the purpose of assessment of income under the Act. The department is not here to sermonise how a tax payer should keep its currency.What is relevant is whether the cash found during the course of search has been duly accounted by the assessee and its group companies sharing the common office. CIT-A had rightly appreciated the contentions of the assessee and granted relief to the assessee in respect of addition made u/s 69A of the Act in respect of cash found during the course of search - CIT(A) had rightly granted relief to the assessee in the instant case. Disallowance of write off of advance given to subsidiary - HELD THAT - CIT(A) had granted relief by deleting the disallowance made on account of write off of irrecoverable business advance given to the subsidiary allowing it to be a business loss, on merits of the case. We find that the revenue had not raised any ground before us contesting the deletion of disallowance by the ld CIT(A) on merits. As we have already stated earlier, the assessee had not pursued the legal issue u/s 153A of the Act before the ld CIT(A) for the Asst Year 2014-15 and no relief has been granted by the ld CIT(A) on the same. Disallowance of alleged bogus expenditure on protective basis in the case of IIC Limited and disallowance of depreciation on alleged bogus expenditure capitalised on substantive basis - HELD THAT - We find that the ld AO on one hand disallowed the entire purchases made by IIC Limited from the aforesaid 5 vendors as non-genuine purchases, spread over different assessment years as tabulated supra, on protective basis, and on the other hand, simultaneously disallowed the depreciation on such expenditure along with profit thereon, in the hands of Sinner Thermal Power Limited (formerly known as Rattanindia Nasik Power Limited) at the rate of 15% on substantive basis. We find that the nature and principle of the substantive and protective disallowance are also totally different. Hence the basic principles of substantive vs protective disallowance itself has been violated by the ld AO in the instant case. We find that a query was raised by the ld AO in terms of section 142(1) of the Act, which was duly replied by the assessee by filing voluminous documents with supporting evidences thereon. Thereafter the ld AO is bound to carry out inquiries on the said documents and evidences in terms of section 142(2) of the Act, which was admittedly not carried out in the instant case. Hence the applicability of provisions of section 142(3) of the Act does not arise in the instant case since no enquiries were conducted by the ld AO to test the documentary evidences submitted by the assessee. Therefore the question of any adverse material against the assessee does not arise. CIT-A had rightly deleted the disallowance of business expenditures made on protective basis in the hands of IIC Limited and had rightly deleted the disallowance of depreciation on such expenditure made on substantive basis in the hands of Sinner Thermal Power Limited (formerly known as Rattanindia Nasik Power Limited). Disallowance of business loss in the case of IIC limited - HELD THAT - We hold that incurrence of long term capital loss on conversion of investment into stock in trade (which has been accepted by the ld AO in the assessment order itself) and incurrence of loss on sale of such stock in trade is to be treated as business loss and hence they are separate, independent and distinguishable events arising from a bonafide transaction. The said business loss cannot be treated as capital loss in the facts and circumstances of the instant case. Disallowance of deduction with respect to Preliminary expenses - HELD THAT - We find that the assessee company had filed the chart showing details of preliminary expenses incurred together with its supporting evidences - preliminary expenses are incurred by the assessee company solely as fees for registering the company under the provisions of the Companies Act, 1956. We find that the law is amended after 31.3.1998 in the proviso to section 35D(1) of the Act which stipulates grant of deduction at the rate of 1/5th of expenditure incurred thereon. We find that this has been set right by the ld CITA by granting deduction in accordance with the amended law. Hence we do not find any infirmity in the said order of the ld CITA granting relief in this regard.

Summary

Issues Involved:

(A) Addition/Disallowance in Assessment u/s 153A without Incriminating Material
(B) Disallowance u/s 14A read with Rule 8D(2) under Normal Provisions
(C) Disallowance u/s 14A read with Rule 8D(2) while Computing Book Profits u/s 115JB
(D) Addition u/s 69A for Cash Found during Search
(E) Disallowance of Write-off of Business Advances to Subsidiary
(F) Disallowance of Expenditure on Alleged Bogus Purchases and Depreciation
(G) Disallowance of Business Loss on Conversion of Investment into Stock-in-Trade
(H) Amortization of Preliminary Expenses over 10 Years Instead of 5

Detailed Analysis:

(A) Addition/Disallowance in Assessment u/s 153A without Incriminating Material:

No additions could be made in assessments framed u/s 153A in respect of concluded/unabated assessments on the date of search, in the absence of any incriminating material found during the search. The Tribunal found that for the entities involved, no incriminating material was found during the search relating to the concluded assessments. The Tribunal relied on the Hon'ble Bombay High Court's decision in CIT vs Continental Warehousing (Corporation) Nhava Sheva Ltd (374 ITR 645) which held that completed assessments cannot be disturbed unless incriminating material is found. The appeals of the revenue for the relevant assessment years were dismissed on this ground.

(B) Disallowance u/s 14A read with Rule 8D(2) under Normal Provisions:

The Tribunal found that the Assessing Officer (AO) did not record any satisfaction as required under Section 14A(2) of the Act read with Rule 8D(1) of the Rules before making disallowance. The Tribunal held that the AO must record satisfaction that the suo-moto disallowance made by the assessee was incorrect. The Tribunal relied on the decision of the Hon'ble Supreme Court in Maxopp Investment Ltd vs CIT (402 ITR 640). It was also noted that the assessee companies had sufficient own funds for making investments, negating the need for disallowance of interest under Rule 8D(2)(ii). The Tribunal directed that only the suo-moto disallowance made by the assessee should survive.

(C) Disallowance u/s 14A read with Rule 8D(2) while Computing Book Profits u/s 115JB:

The Tribunal upheld the CIT(A)'s decision to delete the disallowance u/s 14A while computing book profits u/s 115JB, following the Special Bench of Delhi Tribunal in ACIT vs Vireet Investments Pvt Ltd (165 ITD 27). The Tribunal directed that only the actual expenditure incurred for earning exempt income should be disallowed, not applying the computation mechanism of Rule 8D(2). For assessment years where no suo-moto disallowance was made, the AO was directed to identify the actual expenditure incurred.

(D) Addition u/s 69A for Cash Found during Search:

The Tribunal upheld the CIT(A)'s decision to delete the addition made u/s 69A for cash found during the search. It was found that the cash balance as per the books of accounts was more than sufficient to explain the cash found during the search. The Tribunal noted that the AO's observations regarding the physical condition of the cash were irrelevant and that the cash was duly accounted for in the books of the group companies.

(E) Disallowance of Write-off of Business Advances to Subsidiary:

The Tribunal upheld the CIT(A)'s decision to allow the write-off of advances given to a subsidiary company as a business loss. The Tribunal noted that the advances were given in the normal course of business for setting up a thermal power plant, which was within the objects of the assessee company. The Tribunal found that the write-off was supported by legal advice and the subsidiary's inability to proceed with the project due to environmental clearance issues.

(F) Disallowance of Expenditure on Alleged Bogus Purchases and Depreciation:

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of expenditure on alleged bogus purchases and the related depreciation. The Tribunal found that the AO did not conduct any independent enquiry to verify the genuineness of the transactions and relied solely on the investigation wing's report. The Tribunal noted that the assessee had provided sufficient documentary evidence to support the purchases and that the materials were duly consumed in the power project.

(G) Disallowance of Business Loss on Conversion of Investment into Stock-in-Trade:

The Tribunal upheld the CIT(A)'s decision to allow the business loss on the sale of stock-in-trade (OCDs) after conversion from investment. The Tribunal found that the conversion was duly documented and supported by a board resolution. The Tribunal rejected the AO's contention that the conversion was an afterthought, noting that the entries were passed in the books of accounts well before the assessment proceedings commenced.

(H) Amortization of Preliminary Expenses over 10 Years Instead of 5:

The Tribunal upheld the CIT(A)'s decision to allow the amortization of preliminary expenses over 5 years as per the amended law. The Tribunal found that the AO had erroneously applied the provisions of Section 35D(1) instead of the amended Section 35D(2), which allows amortization at the rate of 1/5th.

Conclusion:

The Tribunal dismissed the revenue's appeals and upheld the CIT(A)'s decisions on various grounds, providing relief to the assessee companies for the respective assessment years. The detailed analysis and reliance on judicial precedents ensured that the assessments were conducted in accordance with the law and principles of natural justice.