2016 (11) TMI 284 - AT - Income Tax

Reopening of assessment - assessee is earning high level of operating profits and consequently the claim of assessee of deduction u/s 10A of the Act is excessive - Held that - The reopening based on the findings in the assessment proceedings of subsequent years cannot be used to reopen assessment of previous assessment years when there was no specific allegation with regard to the order in question. Here also we have perused the order of the Tribunal dated 26.08.2014 in case of the assessee for Assessment Year 2009-10 whereby an addition with respect to disallowance u/s 10A has been deleted. Almost two years have passed after the date of pronouncement of the order. On a specific question of the bench about filing of the appeal against this order before higher forum the parties could not point out whether an appeal has been filed before Hon ble Hon ble Delhi High Court against the order of the Tribunal. In AY 2006-07, Hon ble Delhi High Court did not quashed reopening notice only because of the reason that there was still time for filing the appeal by revenue before the Hon ble High Court. In the present case the time limit has already been expired for filing of appeal against that order. In view of this we are of the opinion that when the very basis for the issue of notice u/s 148 no longer survives, the reopening is invalid on that count. Interest earned on deposits with banks - amount shown by the assessee under the head business income but according to AO it is taxable under the head income from other source - Held that - As there is no order framed in the case of the assessee u/s 143(3) and return is accepted u/s 143(1) of the Act we are of the view that there is no error in the order of the ld CIT(A) in upholding the validity of the reopening following the decision of the Hon ble Supreme Court in the case of ACIT Vs. Rajesh Javeri Stock Brokers Pvt. Ltd. 2007 (5) TMI 197 - SUPREME Court . In view of this we uphold the reopening of the assessment in the case of the assessee u/s 147 of the Act Reduction in deduction available u/s 10A - Held that - In view of admission of the parties that there is no change in the facts and circumstances of the case in the present year compared to Assessment Year 2009-10 , therefore following the decision of the coordinate bench we delete the addition made by the Assessing Officer in restricting the amount of deduction claimed u/s 10A of ₹ 39280361/- to ₹ 11374842/-. denying deduction u/s 10A on interest income from bank deposits - Held that - No infirmity in the order of the ld CIT(A) in holding that the interest income earned by the assessee on surplus funds is chargeable to tax under the head income from other sources and not business income. Non granting the set off and carry forward unabsorbed amount of depreciation - Held that - From the detail available on record it is not possible to ascertain about the exact claim of depreciation which remained unabsorbed in the hands of the assessee same is allowable to assessee as current years depreciation as per provisions of section 32(2) of the Act. In view this we set aside this ground of appeal to the file of Assessing Officer to grant set off of this, sum if any remaining unabsorbed , in accordance with provision of section 32(2) of the Act making consequential adjustment to the computation of income after affording opportunity of hearing to the assessee

Issues Involved:
1. Validity of reassessment proceedings under Section 147.
2. Applicability of Section 10A(7) read with Section 80IA(10).
3. Classification of interest income as "business income" or "income from other sources".
4. Set off of unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147:
The assessee challenged the reassessment proceedings arguing they were bad in law. The reassessment was based on the allegation that the assessee was earning high operating profits and claimed excessive deduction under Section 10A. The court referred to a previous decision where the reopening was held invalid due to the absence of new tangible material. However, the court upheld the reassessment for the interest income issue, citing the Supreme Court's decision in ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., which allows reopening based on the return and accompanying documents, even without new tangible material. Thus, the ground challenging the reassessment was dismissed.

2. Applicability of Section 10A(7) read with Section 80IA(10):
The assessee argued against the reduction of the deduction under Section 10A based on the application of Section 80IA(10), which allows the AO to recompute profits if transactions between related parties yield more than ordinary profits. The court referred to a previous decision in the assessee's own case for AY 2009-10, where it was held that higher profits alone do not justify invoking Section 80IA(10) without proving an "arrangement" between related parties. The court found no evidence of such an arrangement in the current case and thus allowed the full deduction under Section 10A, reversing the AO's decision.

3. Classification of Interest Income:
The assessee treated interest income from bank deposits as "business income," eligible for deduction under Section 10A. The AO classified it as "income from other sources," disallowing the deduction. The court upheld the AO's classification, citing decisions from the Supreme Court in Liberty India vs. CIT and Pandian Chemicals Ltd. vs. CIT, which state that interest income does not have a direct nexus with the business of the industrial undertaking. Thus, the ground was dismissed, and the interest income remained classified as "income from other sources."

4. Set off of Unabsorbed Depreciation:
For AY 2007-08, the assessee claimed a set-off for unabsorbed depreciation, which was not allowed by the AO due to pending adjustments from AY 2006-07. The court set aside this issue to the AO for verification and adjustment in accordance with Section 32(2) of the Act, allowing the ground for statistical purposes.

Conclusion:
- The reassessment proceedings were upheld for the interest income issue.
- The reduction in deduction under Section 10A was reversed, allowing the full claimed amount.
- The classification of interest income as "income from other sources" was upheld.
- The issue of unabsorbed depreciation was remanded to the AO for verification and adjustment.

Order Pronounced:
The appeals for AY 2005-06 and AY 2007-08 were partly allowed, providing relief on specific grounds while upholding the AO's decisions on others.

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