2018 (4) TMI 454 - AT - Income Tax

Reopening of assessment - Disallowance u/s 14A - Change of opinion - Held that - The entire material is available before the AO when he framed the assessment u/s 143(3) of the Act and being aware of the assessee earning tax free income and incurring some expenditure, the AO accepted the expenditure offered by the assessee under Rule 8D of the Rules In so far as the assessee had disclosed the interest expense in the Profit & Loss account and investment in the balance sheet and also disclosed exempt income in the returns, there is no failure on the part of the assessee to disclose all the material facts necessary for assessment and having accepted the same, the AO does not get jurisdiction to reopen the assessment beyond the period of four years and such a course is not permissible under law. In view of the facts and circumstances adverted to above and the case laws referred to, we are of the considered opinion that reopening of the proceedings in the matter are not in accordance with law and we find it difficult to sustain the same. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening assessment proceedings under Section 147 of the Income-tax Act, 1961.
2. Applicability of Rule 8D(2)(ii) for disallowance under Section 14A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of Reopening Assessment Proceedings under Section 147 of the Income-tax Act, 1961
The primary issue was whether the reopening of assessment proceedings under Section 147 was valid. The Assessing Officer (AO) reopened the assessment on the grounds that the assessee did not disclose the method of arriving at the disallowance under Section 14A during the original assessment proceedings. The AO argued that this non-disclosure led to a failure to fully and truly disclose all material facts necessary for assessment, resulting in escaped assessment.

The assessee contended that the AO was already aware of the tax-free income and administrative expenses during the original assessment. The assessee had complied with the disallowance requirements under Rule 8D for the relevant years. The Tribunal noted that the AO had indeed considered these facts during the original assessment under Section 143(3), and no new tangible material had surfaced to justify reopening the case. The Tribunal concluded that reopening the assessment was merely a change of opinion, which is not permissible under law. The Tribunal cited several judicial precedents to support this conclusion, including decisions from the Hon’ble High Courts in the cases of M/s Sun Pharmaceuticals Industries Ltd., H.C.L. Technologies Ltd., and others.

2. Applicability of Rule 8D(2)(ii) for Disallowance under Section 14A of the Income-tax Act, 1961
The second issue was whether the AO correctly applied Rule 8D(2)(ii) for disallowance under Section 14A. The CIT(A) held that the reopening was valid but found that the interest-free funds of the assessee far exceeded the investments during the relevant years. Therefore, invoking Rule 8D directly and mechanically was not appropriate. The CIT(A) noted that similar issues had arisen in the assessee’s own case in previous years, and both the Tribunal and the High Court had ruled that for Section 14A to apply, there must be a direct nexus between the earning of income and the incurring of expenditure.

The Tribunal agreed with the CIT(A)'s findings, noting that the assessee had substantial interest-free funds, which were more than sufficient to cover the investments. Consequently, there was no basis for attributing any portion of interest expenditure to the earning of tax-free income. The Tribunal upheld the CIT(A)’s direction to delete the additions made under Rule 8D(2)(ii).

Conclusion:
The Tribunal allowed the appeals filed by the assessee and dismissed the appeals filed by the revenue. It concluded that the reopening of the assessment proceedings was not in accordance with the law, as it was based on a change of opinion without any new tangible material. Furthermore, it upheld the CIT(A)’s decision that no disallowance under Rule 8D(2)(ii) was warranted, given the assessee’s substantial interest-free funds. The orders pronounced in the open court on 6th April 2018, reflected these conclusions.