2017 (1) TMI 1057 - AT - Income Tax

Disallowance u/s. 14A - Held that - The Co-ordinate Bench of the Tribunal in the case of holding company of M/s. Hari Infrastructure (P) Ltd. has already decided the issue with respect to disallowance u/s. 14A has accepted the contentions of the assessee in respect of disallowance u/s. 14A on both the grounds. Thus, in view of the facts of the case, the order of Coordinate Bench and the CBDT Circular, we direct the Assessing Officer to delete the disallowance made u/s. 14A of the Act Deemed dividend addition u/s 2(22) - Held that - The Commissioner of Income Tax (Appeals) has exceeded his jurisdiction in making addition u/s. 2(22)(e) of the Act as there is no reference of such income either in the return of income or in the assessment proceedings. Thus, the addition made u/s. 2(22)(e) by Commissioner of Income Tax (Appeals) is not sustainable and is therefore set aside being void ab-initio.

Issues Involved:
1. Validity of the assessment order.
2. Disallowance under Section 14A of the Income Tax Act.
3. Addition under Section 2(22)(e) of the Income Tax Act.
4. Eligibility for deduction under Section 80(IA) in respect of disallowed expenditure.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order was bad in law and void ab initio as no tax liability was determined in the assessment order or in the demand notice. However, this ground was not pressed by the assessee during the appeal, and thus, it was dismissed as not pressed.

2. Disallowance under Section 14A of the Income Tax Act:
The assessee, engaged in infrastructure development, made investments in shares using borrowed funds, leading to a disallowance of ?5,63,75,093/- under Section 14A read with Rule 8D by the Assessing Officer. The assessee argued that the investments were strategic and no exempt income was received from them. The Tribunal referred to the Delhi High Court's decision in Commissioner of Income Tax Vs. Oriental Structural Engineers Pvt. Ltd., where disallowance under similar circumstances was deleted. The Tribunal also cited its own decision in Hari Infrastructure Pvt. Ltd. Vs. Dy. CIT, which supported the assessee's claim that investments made in subsidiaries for commercial expediency should not attract disallowance under Section 14A. Additionally, the Tribunal acknowledged the CBDT Circular No. 37/2016, which allows for deductions under Chapter VI-A on enhanced profits due to specific disallowances. Thus, the Tribunal directed the Assessing Officer to delete the disallowance made under Section 14A.

3. Addition under Section 2(22)(e) of the Income Tax Act:
The Commissioner of Income Tax (Appeals) made an addition of ?7,37,68,681/- under Section 2(22)(e), considering it a deemed dividend. The assessee argued that the Commissioner exceeded his jurisdiction by introducing a new source of income not considered by the Assessing Officer. The Tribunal referred to the Supreme Court's rulings in Commissioner of Income Tax Vs. Shapoorji Pallonji Mistry and Commissioner of Income Tax Vs. Rai Bahadur Hardutroy Motilal Chamaria, which restrict the appellate authority from enhancing assessment by discovering new sources of income not considered by the Assessing Officer. The Tribunal also cited the Delhi High Court's full bench decision in Commissioner of Income Tax Vs. Sardari Lal & Co., which reiterated that new sources of income should be dealt with under Sections 147/148 or 263 of the Act. Consequently, the addition made by the Commissioner under Section 2(22)(e) was deemed void ab initio and set aside.

4. Eligibility for Deduction under Section 80(IA):
The assessee contended that even if disallowance under Section 14A was sustained, it should be eligible for deduction under Section 80(IA) on the disallowed amount. The Tribunal accepted this argument, referencing the CBDT Circular No. 37/2016, which clarified that disallowances related to business activities should result in enhanced profits eligible for deductions under Chapter VI-A. Thus, the Tribunal directed the Assessing Officer to allow the deduction under Section 80(IA) on the enhanced profits due to disallowance under Section 14A.

Conclusion:
The appeal was partly allowed. The Tribunal dismissed the grounds not pressed by the assessee, directed the deletion of disallowance under Section 14A, and set aside the addition under Section 2(22)(e) as void ab initio. The Tribunal also upheld the assessee's eligibility for deduction under Section 80(IA) on the enhanced profits due to disallowance under Section 14A.

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