2016 (6) TMI 1283 - AT - Income Tax

Tax Tribunal overturns Principal Commissioner's decision on depreciation & interest disallowance

The Tribunal held that the Principal Commissioner of Income Tax erred in directing reassessment proceedings for a Limited Company's higher rate of ... Revisional powers under section 263 of the Income Tax Act, 1961 - Entitlement to higher rate of depreciation for motor buses where used on hire - Disallowance of expenditure in relation to exempt income under section 14A - Limitations on exercise of revisional jurisdiction where assessing officer's view is sustainable in law - Time-bar for exercise of revisional jurisdiction under the two year limitationEntitlement to higher rate of depreciation for motor buses where used on hire - Revisional powers under section 263 of the Income Tax Act, 1961 - Limitations on exercise of revisional jurisdiction where assessing officer's view is sustainable in law - Whether the Principal CIT was justified in invoking revisional jurisdiction under section 263 to hold that the assessee was not entitled to higher depreciation rate on buses and direct reframing of assessment. - HELD THAT: - The Tribunal found that the AO had considered the assessee's submissions and a number of judicial precedents and, on that basis, legitimately concluded that the assessee was entitled to higher depreciation. The Principal CIT disagreed with the conclusion and invoked section 263, treating the AO's view as erroneous and prejudicial. The Tribunal held that revisional jurisdiction cannot be exercised merely because the Principal CIT disagrees with a conclusion reached by the AO where the AO's view is one of the courses permissible in law and is supported by binding decisions; such exercise is impermissible unless the AO's view is unsustainable in law. The AO had relied on relevant authorities and after application of mind had dropped reopening; therefore the Principal CIT erred in invoking section 263 and in reframing the assessment rather than remanding for fresh consideration. On merits, the Tribunal also held that the judicial precedents relied on by the AO supported allowance of higher depreciation to the assessee. [Paras 26, 27, 28, 29, 30]The invocation of section 263 in relation to depreciation was unsustainable; the AO's view allowing higher depreciation was upheld and the revisional orders on this count are reversed.Disallowance of expenditure in relation to exempt income under section 14A - Revisional powers under section 263 of the Income Tax Act, 1961 - Time-bar for exercise of revisional jurisdiction under the two year limitation - Whether the Principal CIT could, under section 263, direct reassessment to disallow proportionate interest under section 14A for the assessment years and whether the notices were time barred. - HELD THAT: - The Tribunal reiterated that powers under section 263 cannot be exercised to make a fresh disallowance under section 14A where the AO's order is not shown to be unsustainable in law; mere possibility that the AO could have taken a different view does not render the order erroneous or prejudicial. The assessee disclaimed any exempt income in the relevant years and the AO had applied his mind; consequently, there was no basis for the Principal CIT to invoke section 263 to raise a section 14A disallowance. Further, for assessment years where assessments were framed prior to 31.03.2012, notices under section 263 issued in November 2015 were beyond the two year period permitted by law and thus time barred. Applying these principles, the Tribunal held the Principal CIT's action on the section 14A point and the issuance of notices when time barred to be unsustainable. [Paras 36, 37, 38, 39, 40]The Principal CIT could not validly invoke section 263 to direct disallowance under section 14A; moreover the revisional notices for the years framed before 31.03.2012 were time barred. The revisional orders on this count are reversed.Final Conclusion: The appeals are allowed; the orders passed by the Principal CIT under section 263 for assessment years 2008-09 to 2012-13 are set aside and the assessments as framed by the AO (including allowance of higher depreciation and no section 14A disallowance) are upheld. Issues Involved:1. Higher rate of depreciation allowed to the assessee.2. Investment in shares not subjected to disallowance of proportionate interest under section 14A.Issue-wise Detailed Analysis:1. Higher Rate of Depreciation Allowed to the Assessee:The assessee, a Limited Company engaged in the business of carrying passengers in buses, claimed depreciation on its buses at 30% under Para-III(3)(ii) of Appendix-1 of the Income Tax Rules, 1963. This claim was initially allowed by the Assessing Officer (AO) during scrutiny assessment proceedings. However, reassessment proceedings were initiated on the ground that the assessee was not entitled to a higher rate of depreciation. The AO, after considering the assessee’s reply and judicial decisions cited, dropped the reassessment proceedings.The Principal Commissioner of Income Tax (Pri. CIT) issued a notice under section 263 of the Income Tax Act, observing that the AO's order dropping the proceedings under section 147 appeared erroneous and prejudicial to the interests of the Revenue. The Pri. CIT held that the assessee was not entitled to a higher rate of depreciation and directed the AO to reframe the assessment after giving the assessee a reasonable opportunity of being heard.The Tribunal reviewed the case laws cited by the assessee, including:- 'CIT v. Balakrishna Transports' [1998] 233 ITR 133 (Kerala)- 'CIT v. Sham Motor Service' [1999] 235 ITR 89 (MP)- 'Sarojini Transports (P.) Ltd.' [1986] 17 ITD 1014 (Mad.)- 'Pepsu Road Transport Corporation v. ACIT' [IT Appeal No. 956/Chd/2007]- 'CIT v. Madan Lal & Co.' [2002] 254 ITR 445- 'Northern Western Karnataka Road Transport Corpn. Hubli v. Dy. CIT' [IT Appeal Nos.734 & 735/Bang/2010]- 'CIT v. Bansal Credits Ltd.' [2003] 259 ITR 69- 'Asstt. CIT v. Solapur Siddheshwar Sahakari Bank Ltd.' [2015] 57 taxmann.com 183 (Pune - Trib.)The Tribunal found that the AO had duly examined these case laws and dropped the reopening proceedings after due application of mind. The Tribunal concluded that the Pri. CIT’s order was in stark oblivion of the judicial decisions relied upon by the assessee and taken into consideration by the AO. The Tribunal held that the Pri. CIT erred in invoking the provisions of section 263, as the AO's order was well-reasoned and based on judicial precedents.2. Investment in Shares Not Subjected to Disallowance of Proportionate Interest under Section 14A:The Pri. CIT observed that the assessee had invested in shares of companies closely connected with the Directors and that these investments were made to earn dividend income. The Pri. CIT held that the proportionate interest on these investments should have been disallowed under section 14A, which had not been done by the AO. Consequently, the Pri. CIT found the assessment order to be erroneous and prejudicial to the interests of the Revenue on this count as well.The Tribunal, however, noted the settled proposition in 'CIT v. DLF Ltd.' [2013] 350 ITR 555, which held that powers under section 263 cannot be invoked for making disallowance under section 14A. The Tribunal observed that the assessee did not earn any exempt income during the relevant years, and therefore, no disallowance under section 14A was warranted. The Tribunal also referred to the following case laws supporting this view:- 'CIT v. Lakhani Marketing Inc.' 226 Taxman 45 (Punj & Har.)- 'CIT v. Holcim India (P.) Ltd.' [2015] 57 taxmann.com 28 (Delhi)- 'CIT v. Corrtech Energy (P.) Ltd.' [2015] 372 ITR 97- 'CIT v. Shivam Motors (P.) Ltd.' [2015] 55 taxmann.com 262 (All.)- 'Cheminvest Ltd. v. CIT-IV' [2015] 378 ITR 33The Tribunal also noted that the notices under section 263 for the assessment years 2008-09 to 2011-12 were issued much after the statutory period of two years from the end of the financial year in which the assessment was framed, making the Pri. CIT’s actions unsustainable in law.Conclusion:The Tribunal found the impugned orders of the Pri. CIT for all the years under appeal to be unsustainable in law concerning both issues raised by the assessee. Consequently, all the appeals were allowed, and the orders under section 263 were reversed.