2022 (6) TMI 1010 - AT - Income Tax

Assessment u/s 153C - Whether no satisfaction note was drawn and no incriminating material was found and used in the assessment order? - Disallowance u/s 14A - HELD THAT - We find that Ld. AO has not referred to any incriminating material while making the assessment rather the return has been assessed in regular scrutiny assessment proceedings. The assessee group was searched on 19.04.2012 which falls in AY 2013-14. The provisions of Sec.153C, as stood at that point, mandate Ld. AO to determine the total income of such other person for six assessment years immediately preceding the assessment year (2013-14 in the present case) relevant to the previous year in which search is conducted or requisition is made. In other words, the assessment was to be framed u/s 153C only for AYs 2007-08 to 2012-13 and not for AY 2013-14. Therefore, we do not find any substance in the legal grounds raised by the assessee. Addition u/s 14A - We find that neither assessee nor revenue has made an attempt to draw the nexus of borrowed funds vis- -vis its usage by the assessee. Naturally, if the borrowed funds were used to make the investments in the firms from which interest was earned, the assessee was entitled to claim the interest on borrowed capital otherwise not. In case of mixed funds, a presumption could be drawn in assessee s favor that the borrowed funds were utilized to make investments. Therefore, on the given facts and circumstances of the case, we set-aside the impugned order and remit the matter back to the file of Ld. AO to ascertain the extent to which borrowed funds were utilized by the assessee to make investment in firms and adjudicate accordingly. The assessee is directed to substantiate its case. Regarding disallowance u/s 14A, the assessee is directed to substantiate that the expenditure was allowable from the income earned from partnership firm and no disallowance u/s 14A would be attracted. Needless to add that adequate opportunity of hearing shall be granted to the assessee. Assessee appeal stand partly allowed for statistical purposes.

Issues:
1. Jurisdiction of Assessing Officer under section 153C.
2. Validity of assessment proceedings.
3. Disallowance of interest expenditure.
4. Proportionate disallowance of expenses under section 14A.
5. Opportunity of being heard before confirming additions.

Jurisdiction of Assessing Officer under section 153C:
The appeal raised concerns regarding the jurisdiction of the Assessing Officer (AO) in framing the assessment under section 153C for the Assessment Year 2013-14. The contention was that the assessment should have been based on incriminating material and framed under section 153C. However, the AO initiated regular scrutiny assessment proceedings without invoking section 153C. The Appellate Tribunal noted that the provisions of section 153C mandate the determination of total income for six preceding assessment years, excluding the year of search. As the search occurred in AY 2013-14, the assessment under section 153C was applicable only for AYs 2007-08 to 2012-13. Consequently, the Tribunal dismissed the legal grounds challenging the jurisdiction of the AO.

Validity of Assessment Proceedings:
During the assessment proceedings, the AO disallowed 80% of interest expenditure and made proportionate disallowances under section 14A. The Appellate Tribunal observed that no incriminating material was used in the assessment order, and the assessment was conducted through regular scrutiny proceedings. The Tribunal held that the AO did not utilize any search documents, and the assessment was within the statutory time frame. The legal challenge against the validity of assessment proceedings was rejected by the Tribunal.

Disallowance of Interest Expenditure:
The AO disallowed 80% of interest expenditure incurred by the assessee, attributing it to non-business purposes due to the utilization of borrowed funds for assets generating exempt income. The Appellate Tribunal found that there was a lack of nexus established between the borrowed funds and their utilization by the assessee. The Tribunal directed the matter back to the AO to determine the extent to which the borrowed funds were used for investments in firms, emphasizing the need for the assessee to substantiate its case.

Proportionate Disallowance of Expenses under section 14A:
Under section 14A, the AO made proportionate disallowances of expenses, including disallowance under rule 8D(1). The Tribunal upheld the disallowance under section 14A and directed the assessee to substantiate that the expenses were allowable from income earned from partnership firms to avoid disallowance under section 14A. The Tribunal stressed the importance of providing the assessee with an opportunity to be heard.

Opportunity of Being Heard before Confirming Additions:
The Tribunal highlighted the necessity of providing the assessee with an opportunity to be heard before confirming additions on specific points. It emphasized granting adequate hearing opportunities to the assessee for a fair adjudication process. The appeal was partly allowed for statistical purposes, and the matter was remitted back to the AO for further assessment.

Conclusion:
The Appellate Tribunal's judgment addressed various issues related to the jurisdiction of the Assessing Officer, validity of assessment proceedings, disallowance of interest expenditure, proportionate disallowance of expenses under section 14A, and the importance of providing the assessee with a fair hearing opportunity. The Tribunal emphasized the need for establishing a clear nexus between borrowed funds and their utilization, directing a reassessment by the AO and substantiation by the assessee in relevant aspects.

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