2014 (11) TMI 847 - AT - Income Tax

Assessee denied tax exemption, consultancy charges disallowed. Tribunal decision on various tax matters upheld.

Dy. CIT. -VI, Kanpur Versus M/s. MKU (Armours) Pvt. Ltd.

Dy. CIT. -VI, Kanpur Versus M/s. MKU (Armours) Pvt. Ltd. - TMI Issues Involved:1. Allowability of exemption under section 10B of the Income Tax Act.2. Violation of Rule 46A of the Income Tax Rules.3. Disallowance of consultancy charges.4. Addition of deferred expenditure.5. Annulment of assessment under section 143(1) vs. section 143(3).6. Disallowance of interest on FDRs under section 10B.7. Disallowance under section 40(a)(i) for non-deduction of TDS.8. Disallowance of balance claim of insurance.9. Disallowance under section 14A.10. Validity of assessment under section 144.11. Miscellaneous procedural issues.Issue-wise Detailed Analysis:1. Allowability of Exemption Under Section 10B:The primary issue was whether the assessee was eligible for exemption under section 10B. The Tribunal found that the assessee was not engaged in manufacturing activities as most of the processes were outsourced without direct supervision and control. The Tribunal reversed the CIT(A)'s order, which had allowed the exemption, and restored the Assessing Officer's (AO) order disallowing the exemption. The Tribunal emphasized that the assessee did not meet the conditions of section 10B, particularly regarding the formation of the business by splitting or reconstruction of an existing business and the lack of direct supervision over outsourced work.2. Violation of Rule 46A:The Revenue contended that CIT(A) admitted additional evidence without providing the AO an opportunity to examine it, violating Rule 46A. The Tribunal found no merit in this ground, noting that the CIT(A) had the power to make further inquiries under section 250(4) and that the affidavits and statements considered were not new evidence but part of the inquiry process. The Tribunal rejected the Revenue's ground on this issue.3. Disallowance of Consultancy Charges:The AO disallowed consultancy charges paid to Shri Sharad Khandelwal, citing insufficient justification for the services rendered. The CIT(A) deleted the disallowance, but the Tribunal found that the AO had provided a proper opportunity to the assessee to justify the claim, which the assessee failed to do. The Tribunal restored the AO's disallowance.4. Addition of Deferred Expenditure:The AO added a deferred expenditure amount claimed in the Profit & Loss account, which was not disallowed by the assessee while computing the total income. The CIT(A) deleted the addition, but the Tribunal found merit in the AO's addition, restoring it.5. Annulment of Assessment Under Section 143(1) vs. Section 143(3):The assessee argued that the assessment under section 143(3) was invalid as an intimation under section 143(1) had already been issued. The Tribunal rejected this argument, stating that intimation under section 143(1) and assessment under section 143(3) are distinct processes, and the issuance of an intimation does not preclude a subsequent assessment under section 143(3).6. Disallowance of Interest on FDRs Under Section 10B:The assessee claimed exemption on interest earned on FDRs under section 10B. The Tribunal held that since the assessee was not eligible for any deduction under section 10B, the interest income on FDRs could not be considered for exemption under the same section.7. Disallowance Under Section 40(a)(i) for Non-Deduction of TDS:The AO disallowed payments made for inspection services to a foreign entity, citing non-deduction of TDS. The CIT(A) deleted the disallowance, noting that the foreign entity did not have a PE in India, and thus, no TDS was required. The Tribunal upheld the CIT(A)'s decision.8. Disallowance of Balance Claim of Insurance:The AO disallowed the balance claim of insurance, stating that the claim was not finalized in the year under consideration. The CIT(A) upheld the AO's decision, and the Tribunal found no reason to interfere, noting that the claim was not allowable as it was not settled in the relevant year.9. Disallowance Under Section 14A:The AO disallowed expenses under section 14A related to exempt income. The CIT(A) reduced the disallowance, stating that the assessee had sufficient interest-free funds and that major investments were in shares of a foreign company, whose dividend income was not exempt. The Tribunal upheld the CIT(A)'s decision.10. Validity of Assessment Under Section 144:The AO made an assessment under section 144, citing non-compliance by the assessee. The CIT(A) found that the assessee had made sufficient compliance, and the assessment under section 144 was not justified. The Tribunal upheld the CIT(A)'s decision, noting that the AO's estimate of income was without basis and the assessment was not in accordance with the provisions of the Act.11. Miscellaneous Procedural Issues:The Tribunal addressed various procedural issues raised by the Revenue, including the non-production of the register under section 301 of the Companies Act and the sanctity of the transfer agreement. The Tribunal found that the CIT(A) had considered all relevant aspects and upheld the CIT(A)'s order, dismissing the Revenue's grounds.Conclusion:The Tribunal's detailed analysis led to the partial allowance of the Revenue's appeals and the dismissal of the assessee's cross-objections, with specific findings on each issue based on the facts and applicable legal provisions.