2016 (4) TMI 1336 - AT - Income Tax

Tribunal directs AO to reconsider disallowance under Section 14A

DCIT, Circle - 6 (2), Mumbai, Free India Assurance Services Ltd Versus M/s. Free India Assurance Services Ltd, ACIT, Circle - 6 (2), Mumbai

DCIT, Circle - 6 (2), Mumbai, Free India Assurance Services Ltd Versus M/s. Free India Assurance Services Ltd, ACIT, Circle - 6 (2), Mumbai - TMI Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Directions by CIT(A) regarding speculative loss from derivatives trading.3. Enhancement of assessment without providing an opportunity to the assessee.4. Jurisdiction of CIT(A) to direct AO to verify new sources of income.Issue-wise Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The assessee contested the disallowance of Rs. 9,21,062/- made under Section 14A of the Income Tax Act read with Rule 8D of the IT Rules. The assessee argued that the Assessing Officer (AO) did not establish any nexus between the expenses incurred and the exempt income. The Tribunal noted that a similar issue was considered in the assessee's own case for the previous assessment year (A.Y. 2008-09), where the matter was restored to the AO for reconsideration. Following this precedent, the Tribunal restored the issue back to the AO for de novo consideration, directing the AO to afford the assessee an opportunity to present relevant details and submissions. Consequently, these grounds were allowed for statistical purposes.2. Directions by CIT(A) regarding speculative loss from derivatives trading:The assessee challenged the CIT(A)'s directions to the AO to verify the loss of Rs. 1,84,10,736/- from derivatives trading, arguing that this issue was not part of the original assessment and thus outside the CIT(A)'s jurisdiction. The Tribunal agreed, citing judicial precedents that the CIT(A) cannot enhance assessment by discovering a new source of income not considered by the AO. The Tribunal referenced decisions from the Hon'ble Supreme Court and the Delhi High Court, which support the view that such matters should be dealt with under Sections 147/148 or 263 if conditions are met. The Tribunal thus deleted the CIT(A)'s directions to the AO regarding the speculative loss.3. Enhancement of assessment without providing an opportunity to the assessee:The assessee also contended that the CIT(A) erred by not providing an opportunity to show cause against the enhancement as required under Section 251(2) of the Act. The Tribunal found merit in this argument, referencing the Hon'ble Madras High Court's decision in CIT vs. Lotte India Corporation Ltd., which held that denying the assessee an opportunity to be heard before making adverse findings or directions constitutes an error. Consequently, the Tribunal deleted the CIT(A)'s directions and observations regarding the speculative loss.4. Jurisdiction of CIT(A) to direct AO to verify new sources of income:The Revenue's appeal argued that the CIT(A) erred in directing the AO to verify and take remedial action on the speculative loss, contending that the AO is not empowered to revisit a completed assessment under Section 143(3). The Tribunal, having already deleted the CIT(A)'s directions in the assessee's appeal, found the Revenue's grounds rendered infructuous and dismissed them accordingly.Conclusion:The Tribunal partly allowed the assessee's appeal, restoring the issue of disallowance under Section 14A read with Rule 8D to the AO for fresh consideration and deleting the CIT(A)'s directions regarding the speculative loss. The Revenue's appeal was dismissed as infructuous. The order was pronounced on 27th April, 2016.