2018 (2) TMI 304 - AT - Income Tax

Rectification of mistake u/s 154 - assessment of income - Held that - As far as the service charges paid to BTC is concerned this was never the subject matter of addition in the original order of assessment passed by the AO u/s 143(3) of the Act dated 20.12.2007. In the appeal by the assessee against the order of the AO the only issue was whether income declared by the assessee under the head capital gain should be assessed under the said head or under the head income from business . CIT(A) held that income declared by the assessee under the head capital gain should be assessed under the head capital gain . If the AO was aggrieved by the absence of direction by CIT(A) in his order with regard to service charges paid to BTC, he ought to have filed either an appeal against the order of CIT(A) dated 31.03.2009 or an application u/s 154. The AO did not even bring to the notice of CIT(A) in the course of appellate proceedings the issue with regard to service charges paid to BTC. In these circumstances while giving effect to the directions of CIT(A) in his order dated 15.06.2009, the AO could not have disallowed the service charges paid to BTC. In the case of Bhgwandas Associates vs ITO (2007 (9) TMI 333 - ITAT PUNE-B) wherein it was held that when the AO in an order giving effect to the appellate order commits a mistake by travelling beyond the subject matter of the appeal before CIT(A) it gives rise to a mistake apparent on the face of the record which should be rectified u/s 154 of the Act. The aforesaid decision support the conclusion of CIT(A). Therefore we do not find merit in ground no.1 and 3 raised by the revenue. Disallowance u/s 14A - Held that - This issue cannot be the subject matter of proceedings u/s 154 of the Act. The question whether the CIT(A) enhanced the disallowance u/s 14A of the Act without proper notice or any disallowance could at all be made u/s 14A of the Act cannot be subject matter of the order dated 15.06.2009 u/s 251 of the Act passed by the AO. If the assessee is aggrieved with the directions of CIT(A) he ought to have fled an appeal against such directions. Filing the application u/s 154 of the Act was not an appropriate remedy available to the assessee. The CIT(A) in our view erred in directing the AO to restrict the disallowance u/s 14A of the Act to 1% of the exempt income. To this extent we find merits in ground no.2 raised by the revenue.

Summary

Issues Involved:
1. Allowance of expenses of ?36,12,000/- claimed by the assessee as service charges paid to BTC.
2. Disallowance under Section 14A of the Income Tax Act.
3. Opportunity to file Co-Objection to the appeal effect order.

Issue-wise Detailed Analysis:

1. Allowance of Expenses of ?36,12,000/- Claimed by the Assessee as Service Charges Paid to BTC:
The Revenue appealed against the CIT(A)'s decision to allow the expenses of ?36,12,000/- claimed by the assessee as service charges paid to BTC for professional advice on the purchase and sale of shares. The AO initially allowed this deduction, treating the income as business income. However, the CIT(A) later classified the income as capital gains, which led the AO to disallow the service charges in the order giving effect to the CIT(A)'s directions. The CIT(A) did not address this specific issue in the appeal, leading to the assessee's application under Section 154, which was dismissed by the AO without a hearing. The Tribunal concluded that the AO could not disallow the service charges paid to BTC while giving effect to the CIT(A)'s order as it was beyond the scope of the appeal. The Tribunal upheld the CIT(A)'s decision, referencing the Calcutta High Court's ruling in ITO vs. Ryam Sugar Co. Ltd. and the ITAT Pune's decision in Bhagwandas Associates vs. ITO.

2. Disallowance under Section 14A of the Income Tax Act:
The AO initially disallowed 5% of the exempt income, amounting to ?23,195/-, under Section 14A. However, following the CIT(A)'s directions, the AO recalculated the disallowance as ?1,15,380/- under Rule 8D(2)(iii). The assessee's application under Section 154 argued that the disallowance should be limited to 5% of the exempt income. The Tribunal found that the issue of disallowance under Section 14A could not be addressed in a Section 154 application, as it was not an apparent error on the face of the record. The Tribunal concluded that the CIT(A) erred in directing the AO to restrict the disallowance to 1% of the exempt income, thereby allowing the Revenue's ground on this issue.

3. Opportunity to File Co-Objection to the Appeal Effect Order:
The Revenue contended that the CIT(A) erred by allowing relief to the assessee concerning the service charges without considering the opportunity to file a Co-Objection to the appeal effect order. The Tribunal, however, found no merit in this ground, as the AO had not raised the issue of service charges during the appellate proceedings or filed an appeal or application under Section 154 against the CIT(A)'s order. The Tribunal dismissed this ground, supporting the CIT(A)'s decision.

Conclusion:
The Tribunal partly allowed the Revenue's appeal. It upheld the CIT(A)'s decision on the service charges paid to BTC and dismissed the Revenue's grounds on this issue. However, it found merit in the Revenue's contention regarding the disallowance under Section 14A, concluding that the CIT(A) erred in restricting the disallowance to 1% of the exempt income. The appeal was thus partly allowed, with the Tribunal's order pronounced in open court on 02.02.2018.