2018 (7) TMI 1753 - AT - Income Tax

Rectification order under section 154 - validity of returns filed under section 139(5) - CIT(A) rectifying the mistake under section 154 of the Act and disallowing the carry forward and set off of the long term capital loss incurred on sale of the property in Netherlands by observing that the assessee is not entitled to claim for carry forward of long term capital loss relying on section 80 r.w.s 139(1) - Held that - Where the assessee has filed a positive return of income, it cannot be said that the return is a loss return and the return of income is to be treated as a return under section 139 of the Act. The long term capital loss has no effect on the positive total income of the assessee for the current assessment year and hence all the returns of income filed by him need to be considered as a return of income filed under section 139(1) of the Act. Here, the returns filed under section 139(5) of the Act and claim made therein in the revise return, which has no effect on the positive total income as reflected in the return filed under section 139(1) of the Act, should be allowed to be carried forward and set off. We direct the AO accordingly. Both the orders of CIT(A) are quashed on the above issue. Ad hoc disallowance - Held that - AO to restrict the disallowance at a 10% on all the items above mentioned and recompute the disallowance accordingly. For this we are of the view that neither the AO nor CIT(A) has doubted the genuineness of expenses or unreasonableness of expenses. Just to make it reasonable, we cannot rule out some personal element in some of the expenses, hence, a reasonable disallowance of 10% is restricted. This issue of assessee s appeal is partly allowed.

Summary

Issues Involved:
1. Enhancement of assessment without issuing statutory notice.
2. Non-allowance of carry forward and set off of long-term capital loss on the sale of property in the Netherlands.
3. Ad-hoc disallowance of professional fees, business promotion expenses, and other expenses.

Issue-wise Detailed Analysis:

1. Enhancement of Assessment without Issuing Statutory Notice:
The assessee contended that the Commissioner of Income Tax (Appeals) [CIT(A)] enhanced the assessment without issuing a statutory notice, thus violating the principles of natural justice. The CIT(A) noted a mistake in law regarding the carry forward of long-term capital loss on the sale of property in the Netherlands, which was claimed in the revised returns. The CIT(A) held that this was a mistake apparent from the records and disallowed the carry forward of the loss under section 80 read with section 139(1) of the Income Tax Act, 1961. The assessee argued that no show cause notice was issued for this enhancement, which is a violation of Section 251(2) of the Act and principles of natural justice. The Tribunal agreed with the assessee, citing the Andhra Pradesh High Court decision in Y Bramiah V. ITO, which emphasized the necessity of issuing a notice when enhancing tax liability to the detriment of the assessee.

2. Non-allowance of Carry Forward and Set Off of Long-Term Capital Loss on Sale of Property in the Netherlands:
The assessee filed revised returns claiming a long-term capital loss of ?2,56,43,744 on the sale of property in the Netherlands, which the Assessing Officer (AO) allowed to be carried forward. However, the CIT(A) disallowed this claim, stating it was not allowable under section 80 read with section 139(1) of the Act. The Tribunal noted that the revised returns were filed within the permissible time and the AO had accepted the loss. The Tribunal relied on the decision in Ramesh R. Shah vs. ACIT, which held that if a return of positive income is filed, subsequent revised returns should be treated as valid, and the loss should be allowed to be carried forward. The Tribunal directed the AO to allow the carry forward and set off of the long-term capital loss as claimed by the assessee.

3. Ad-hoc Disallowance of Professional Fees, Business Promotion Expenses, and Other Expenses:
The AO made ad-hoc disallowances of 50% of professional fees, 25% of business promotion expenses, and 25% of other expenses (car expenses, mobile expenses, etc.) without rejecting the books of accounts. The CIT(A) restricted some of these disallowances but retained others. The Tribunal, after hearing both sides, directed the AO to restrict the disallowance to 10% on all the items, noting that neither the AO nor the CIT(A) doubted the genuineness or reasonableness of the expenses. The Tribunal aimed to balance the need for reasonable disallowance while acknowledging the personal element in some expenses.

Conclusion:
The Tribunal allowed the appeal regarding the enhancement of assessment without issuing statutory notice and the non-allowance of carry forward and set off of long-term capital loss. It partly allowed the appeal concerning the ad-hoc disallowance of expenses by directing a 10% disallowance on all items. The orders of the CIT(A) on these issues were quashed, and the AO was directed to recompute the disallowances accordingly.