2024 (6) TMI 210 - AT - Income Tax

Admission of Additional Evidence by CIT (A) without Following Rule 46A - as argued CIT(A) deleted the addition without calling for the remand report - Deletion of Addition on Account of Forfeited Amount, Addition on Account of Various Expenses and Disallowance u/s 14A - HELD THAT - In the statement of facts, the assessee wrote only one line that due to unavoidable circumstances beyond control, the representative of the assessee could not attend before the AO. Before the CIT (A) seven hearings took place. In paragraph no.6, the learned CIT (A) has mentioned that the assessee furnished some additional evidences Admittedly, CIT(A) did not follow the provisions of Rule 46A of the income tax Rules 1962. Therefore an order passed in violation of Rule 46A deserves to be set aside and more so for the reason that ld CIT (A) has not even cared to mention satisfaction of any of the conditions which entitles the assessee for admission of additional evidence. Deletion of Addition on Account of Forfeited Amount the issue in dispute is no longer res-integra. Hon ble Delhi High Court in the case Frontier Land Development Pvt. Ltd. 2019 (12) TMI 1261 - DELHI HIGH COURT held that object of business of assessee-company was development of real estate and advance to HDIL was given in ordinary course of business forfeiture of advance could not be categorised as capital expenditure but would be allowed as business expenditure. Deletion of Addition on Account of Various Expenses as during appellate proceedings, the appellant submitted the copy of Profit and Loss Account audited u/s. 44AB of the Act. The reason mentioned in the assessment order is that correctness and genuineness can t be established in absence of details. The relevant details submitted by the appellant are forwarded to AO to submit his comments. However, the AO didn t submit the remand report. Therefore, the details submitted by the appellant on account of expenses claimed under the head Miscellaneous Expenditure, Tour Travel Expenditure, Sale Promotion, Labour Charges and Vehicle Expenses are verified and found in order. In view of the above, the disallowance of 40% made in the assessment order is unreasonable and hereby deleted. So far as the above two issues are concerned, we are of the opinion that the learned CIT (A) has deleted the disallowance without following the rule 46A of the Income Tax Rules. Addition u/s 14A against the exempt income earned - We find no infirmity in the order of the learned CIT (A) as he restricted the disallowance following the judicial precedents laid down by the Hon'ble High Court that disallowance under Section 14A of the Act of expenditure incurred for the earning of exemption incurred in relation to exempt income cannot exceed the exempt income. Therefore, with respect to the deletion of this disallowance, we do not find any infirmity in the order of the learned CIT (A). Thus we restore the ground no. A,B,C,E,F,G to the file do the learned CIT (A) to comply with the provisions of Rule 46A of the Rules and decide the issue afresh.

Summary

Issues Involved:
1. Deletion of addition of forfeited amount of Rs. 1,25,00,000/-.
2. Deletion of addition of expenses claimed under various heads aggregating to Rs. 1,22,14,178/-.
3. Restriction of disallowance made u/s 14A to the extent of exemption claimed u/s 10(34) of the Act at Rs. 60,000/-.
4. Admission of additional evidence without following the provisions of Rule 46A of the Income Tax Rules.

Summary:

Issue 1: Deletion of Addition of Forfeited Amount of Rs. 1,25,00,000/-
The learned CIT (A) deleted the disallowance of Rs. 1,25,00,000/- claimed as an exceptional item. The assessee explained that this amount was forfeiture of a bank guarantee by Maharashtra State Road Development Corporation (MSRDC). The CIT (A) held that the forfeited amount is allowable as a deduction u/s 37(1) of the Act, following judicial precedents, including the Delhi High Court's decision in the case of Pr. CIT-3 vs Frontier Land Development Pvt. Ltd.

Issue 2: Deletion of Addition of Expenses Claimed under Various Heads Aggregating to Rs. 1,22,14,178/-
The learned CIT (A) deleted the disallowance of 40% of expenses claimed under miscellaneous expenditure, tour & travel expenditure, sales promotion, labour charges, and vehicle expenses. The CIT (A) noted that the assessee submitted audited profit and loss accounts, which were forwarded to the Assessing Officer for comments, but no remand report was received. Therefore, the CIT (A) found the expenses to be in order and deleted the disallowance.

Issue 3: Restriction of Disallowance Made u/s 14A to the Extent of Exemption Claimed u/s 10(34) of the Act at Rs. 60,000/-
The CIT (A) restricted the disallowance u/s 14A to Rs. 60,000/-, the amount of exempt income earned. This decision followed judicial precedents that disallowance u/s 14A cannot exceed the exempt income. The Tribunal found no infirmity in this part of the CIT (A)'s order.

Issue 4: Admission of Additional Evidence without Following the Provisions of Rule 46A of the Income Tax Rules
The Tribunal noted that the CIT (A) admitted additional evidence without complying with Rule 46A of the Income Tax Rules, which requires specific conditions to be met for admitting additional evidence. The CIT (A) failed to record reasons for admitting the evidence and did not provide the Assessing Officer a reasonable opportunity to examine the evidence or produce rebuttal evidence.

Conclusion:
The Tribunal restored the issues related to the deletion of Rs. 1.25 crores and the disallowance of Rs. 48,85,671/- to the CIT (A) to comply with Rule 46A and decide the issues afresh. The Tribunal upheld the CIT (A)'s restriction of disallowance u/s 14A to Rs. 60,000/-. The appeal by the Assessing Officer and the cross-objection by the assessee were partly allowed.