2022 (3) TMI 1195 - AT - Income Tax

Assessment u/s 153A - whether no incriminating material was discovered? - HELD THAT - We note that at the time when the search operations were carried out on 15-06-2011, the original assessment proceedings had been finalized. We also note that during the course of search operation no fresh material or incriminating evidence was found by the Department - The assessment was not pending when the search took place in this case. The assessment therefore did not abate as per the provisions of second proviso to section 153A(1) - It is a settled position of law that in case of unabated assessment to be made u/s.153A of the Act no addition could be made de-hors the material found during the search. If there is no fresh and incriminating material found during the search, the previously made assessment is to be reiterated. In view of the above factual and legal position, in our view, the Pr. CIT has erred in law and in fact in initiating proceedings u/s. 263 of the Act. The ground of appeal raised by the assessee is thus allowed. Revision u/s 263 - expenditure of foreign exchange rate difference and addition u/s 14A - HELD THAT - CIT noted that the assessee had debited foreign exchange rate difference in its profit and loss account but it had not shown any export income and nor had incurred any expense towards import of goods or services. The Assessing Officer had further allowed the aforesaid expenditure of foreign exchange rate difference. Second point noted by the ld. Pr. CIT was that the assessee had debited interest expense in the profit and loss account but as per balance sheet assessee had made an investment in equity shares of Kutch Salt Allied Industries Ltd. which was an investment yielding exempt income. The assessee had however not disallowed any part of the expenditure u/s.14A in the statement of total income. AO has also not made any disallowance u/s. 14A - Pr. CIT accordingly in view of the above two issues issued show cause notice u/s. 263 and proceeded to pass orders u/s. 263 holding that the order passed by the Ld. A.O. u/s. 143(3) r.w.s. 153A(1)(b) is erroneous and prejudicial to the interest of the Revenue. - Decided in favour of assessee.

Issues Involved:
1. Legality of the Principal Commissioner of Income Tax (Pr. CIT) cancelling the order passed under Section 143(3) read with Section 153A(1)(b) of the Income Tax Act.
2. Validity of the direction to make a fresh assessment.
3. Examination of foreign exchange rate difference and interest expense claims.
4. Application of Section 14A disallowance for exempt income.

Issue-Wise Detailed Analysis:

1. Legality of the Principal Commissioner of Income Tax (Pr. CIT) cancelling the order passed under Section 143(3) read with Section 153A(1)(b) of the Income Tax Act:
The assessee contested that the Pr. CIT erred in law and on facts in cancelling the order passed under Section 143(3) read with Section 153A(1)(b) of the Act dated 28.03.2014. The original assessment was finalized under Section 143(3) on 10-12-2009, with a total income of ?5,08,546/-. The Pr. CIT noticed discrepancies in the foreign exchange rate difference and interest expenses but did not find any incriminating material during the search conducted on 15-06-2011. The Tribunal noted that no new material was found during the search and thus, the original assessment should stand. The Tribunal cited multiple cases, including the Delhi High Court in Kabul Chabla and the Gujarat High Court in PCIT v. Rameshbhai Jivraj Desai, supporting that no addition can be made in the absence of incriminating material. Therefore, the Tribunal concluded that the Pr. CIT’s initiation of proceedings under Section 263 was erroneous.

2. Validity of the direction to make a fresh assessment:
The Tribunal found that the direction by the Pr. CIT to make a fresh assessment was not justified. The original assessment was not pending at the time of the search, and no incriminating material was discovered. The Tribunal reiterated that in the case of an unabated assessment, no addition could be made without new material found during the search. Consequently, the Tribunal allowed the appeal, invalidating the Pr. CIT's direction for a fresh assessment.

3. Examination of foreign exchange rate difference and interest expense claims:
The Pr. CIT had raised concerns about the foreign exchange rate difference of ?2,97,796/- and interest expenses of ?55,22,432/- claimed by the assessee. The Pr. CIT noted that the assessee had not shown any export income or incurred expenses towards imports, and no verification was made regarding these claims during the assessment. However, the Tribunal observed that these issues were part of the original assessment, which had already been finalized, and no new incriminating material was found during the search. Thus, the Tribunal concluded that the original assessment should be reiterated without any adjustments.

4. Application of Section 14A disallowance for exempt income:
The Pr. CIT noted that the assessee had made significant investments in equity shares yielding exempt income but did not disallow any part of the expenditure under Section 14A. The Tribunal referred to the CBDT Circular No. 5/2014, which clarifies that disallowance under Section 14A applies even if no exempt income is earned in a particular year. However, since no new material was found during the search, the Tribunal held that the original assessment, which did not include any disallowance under Section 14A, should stand.

Separate Judgments Delivered:
The Tribunal applied the same rationale to the appeal for Assessment Year 2008-09 (ITA No. 154/Rjt/2016), as the facts and issues were almost identical to those of Assessment Year 2007-08. The Tribunal allowed both appeals, concluding that the Pr. CIT's orders were erroneous and prejudicial to the interest of the Revenue.

Conclusion:
In both appeals, the Tribunal found that the Pr. CIT had erred in cancelling the original assessments and directing fresh assessments without any new incriminating material found during the search. The Tribunal allowed the appeals, reinforcing the principle that no addition can be made in an unabated assessment without new material discovered during a search.

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