2015 (4) TMI 761 - AT - Income Tax

Reopening of assessment - Treatment of Interest income before and after cancellation of NBFC certificate - Dis-allowance under section 14A of the Income Tax Act,1961 - Held that - We notice that the NBFC certificate has been cancelled only on 7.3.2005. Hence in the financial year relating to the AY 2004-05 and in the substantial part of financial year relating to the AY 2005-06, the assessee was holding NBFC certificate. Hence, the reason of the Assessing Officer for reopening of the assessment, in our view, fails in these two years. Accordingly, we are of the view that the re-opening of assessment of AY 2004-05 and 2005-06 are bad in law. The re-opening of assessment of AY 2004-05 is also liable to be cancelled in view of the first proviso to sec. 147 of the Act, since the assessment has been reopened after the expiry of four years from the end of the assessment year after completion of assessment u/s 143(3) of the Act. There is no allegation on the assessee that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Accordingly, we set aside the order of Ld CIT(Appeals) on the issue of re-opening of assessment for AY 2004-05 and 2005-06 and accordingly quash the assessment orders passed for the above said two years. We further notice that the assessee has received interest income only from M/s South India Investments & Associates during the financial years relevant to the assessment years 2006-07 and 2007-08. Thus, it is seen that the assessee has deposited money with only one company, which happens to be a group company. Hence, on merits also, it is seen that the assessee cannot be considered to be carrying on NBFC business. Hence, in our view, there is no justification for the assessee to claim the interest income as its business income . As submitted by Ld D.R, the assessee has set off brought forward loss against the interest income, by offering the interest income as its business income. If the interest income is assessed under the head income from other sources, then the assessee would not be entitled to set off the brought forward business loss against the income declared under the head Income from other sources. In that case, the total income of the assessee would go up by the amount so set off. Hence, in our view, there was reason with the AO to believe about escapement of income in AY 2006-07. Accordingly we uphold the re-opening of assessment of that year. In AY 2009-10, the assessee has also urged one more ground relating to the computation of disallowance to be made under Rule 8D(2)(iii) of the I.T Rules. The Ld A.R contended that the average value of investments should have been computed by considering only those investments that have actually yielded dividend income. However, when it was pointed out that the relevant rules uses the expression does not or shall not , meaning thereby the relevant provision has intended to include all investments, the Ld A.R agreed to the same. Accordingly, this ground of the assessee is also dismissed. - Appeals filed by the assessee for Assessment years 2004-05 and 2005-06 are allowed and the appeals filed for AY 2006-07 and 2009-10 are dismissed.

Summary

Issues:
1. Validity of reopening of assessment under Section 147 of the Income-tax Act, 1961.
2. Correctness of assessing the interest income under the head "income from other sources" instead of assessing the same as business income.
3. Disallowance made under Section 14A of the Income-tax Act, 1961.

Analysis:
1. Validity of Reopening of Assessment:
- The Assessing Officer reopened assessments for AY 2004-05 to 2006-07 based on the cancellation of the NBFC certificate by RBI.
- The Tribunal found the reopening for AY 2004-05 and 2005-06 unjustified as the cancellation occurred after substantial periods of those years.
- The Tribunal quashed the assessment orders for these years, citing the first proviso to sec. 147 of the Act.

2. Assessment of Interest Income:
- The Assessing Officer assessed interest income under "income from other sources" instead of business income due to the cancellation of the NBFC certificate.
- The Tribunal noted the conscious decision of the assessee to exit the NBFC business and upheld the assessment of interest income under "income from other sources" for AY 2006-07 and 2009-10.
- The Tribunal reasoned that as the interest income was received only from a group company, it couldn't be considered business income, leading to the denial of set off against brought forward losses.

3. Disallowance under Section 14A:
- The assessee contested the computation of disallowance under Rule 8D(2)(iii) of the I.T Rules.
- The Tribunal dismissed the ground, stating that all investments, not just those yielding dividend income, should be considered for calculating the disallowance.

In conclusion, the Tribunal allowed the appeals for AY 2004-05 and 2005-06, quashing the assessment orders, while dismissing the appeals for AY 2006-07 and 2009-10, upholding the assessment of interest income under "income from other sources." The disallowance computation under Section 14A was also upheld.