2015 (4) TMI 1265 - AT - Income Tax

Court overturns assessments due to lack of material facts; jurisdiction under Section 263 unwarranted. Profit on securities treated as revenue.

The appeals were allowed, and the reopening of assessments after four years was annulled due to absence of material facts necessary for reopening. ... Validity of reopening of assessment - reopening was made after the end of the four years from the assessment orders - HELD THAT:- There is no allegation by the Assessing Officer that there is any failure on the part of the assessee to disclose all material facts for the purpose of assessment. The assessee having furnished all material facts for the purpose of assessment, even if an assessee erroneously placed higher deduction, in respect of issues raised by the Assessing Officer in his reasons recorded, it will not be a case of failure to disclose fully and truly all material facts and the notice u/s.148 issued to the assessee beyond the period of 4 years from the end of the relevant assessment year is liable to invalid, the same to be annulled. Our view is fortified by the judgment of Fenner (India) Ltd. v. ITO [1998 (11) TMI 66 - MADRAS HIGH COURT] wherein it was held that to initiate any proceedings u/s.147 of the Act, after the expiry of four years from the end of the assessment year, the Assessing Officer must necessarily record not only his reasonable belief that income has escaped assessment but also the default or failure committed by the assessee, which was not done by the Assessing Officer. - Decided in favour of assessee Original assessment was completed u/s.143(3) - reopening of assessment - HELD THAT:- Assessing Officer has not pointed out any new material, which came into possession after completing the assessment u/s.143(3). In our opinion, after 1st April, 1989, the Assessing Officer has the power to reopen the assessment u/s.147, if the Assessing Officer has reason to believe that income has escaped assessment and if there is no tangible material to come to the conclusion that there is escapement of income; “mere change of opinion” cannot be a reason to reopen the assessment, as held by the Supreme Court in the case of CIT vs. Kelvinator India Ltd. [2010 (1) TMI 11 - SUPREME COURT] . In these cases, issues are already considered by the Assessing Officer in his original assessments u/s.143(3). Being so, he cannot relook the same records so as to make additions, which amounts to double taxation. - Decided in favour of assessee Revision u/s 263 - disallowance of depreciation on securities - AO added back and disallowed the same. Similarly, the Assessing Officer disallowed a sum in the net appreciation of the value of AFS and HFT categories - HELD THAT:- the issue dealt with by the Commissioner of Income-tax was actually examined by the Assessing Officer, which was resulted in excess tax than required. The same is evidenced by the consequential order passed by the Assessing Officer dated 27.3.2014 and there was no addition whatsoever in the order of the Assessing Officer. In our humble opinion, the twin conditions stipulated in sec.263; i.e. an assessment order should be erroneous and prejudicial to the interests of the Revenue, are not complied with. Being so, the order passed by the Commissioner of Income-tax under sec.263 of the Act is devoid of merit. Accordingly, the same is annulled and the appeal of the assessee is allowed. Computing the profit on sale of securities at the time of sale - assessee contended that the claim is revenue in nature and being allowable it was not added back. But the Assessing Officer has rejected - HELD THAT:- In our opinion, this issue is squarely covered in favour of the assessee by the judgment of the Supreme Court in the case of UCO Bank [1999 (9) TMI 4 - SUPREME COURT] and KARUR VYSYA BANK LTD. [2004 (7) TMI 52 - MADRAS HIGH COURT] the securities are held by the assessee bank as stock in trade of the business and the profit and/or loss on sale of securities have been regularly accounted as revenue income and revenue loss in the books of accounts of the assessee. The profit or loss on sale of securities is treated as revenue in nature since the securities are held as stock in trade in the case of the assessee bank. Disallowance of expenditure incurred on earning of exempted income by invoking the provisions under sec.14A - HELD THAT:- 2% of the exempt income to be disallowed. This ground of appeal is partly allowed. Disallowance of broken period interest - HELD THAT:- The income from interest on securities is to be assessed only on due/receipt basis and not on mercantile basis as adopted by the Assessing Officer . See KARUR VYSYA BANK LTD. [2009 (7) TMI 1210 - MADRAS HIGH COURT] and CITY UNION BANK LIMITED. [2007 (2) TMI 187 - MADRAS HIGH COURT] Disallowance of fees paid to SEBI - HELD THAT:- As decided in assessee’s own case for the assessment years 1991-92, 1995-96 and 1996-97 Commissioner(Appeals) has deleted this disallowance and that the same has become final inasmuch as the department has not preferred any appeal on this decision of the Commissioner(Appeals). Addition made on account of payment of filing fees to Registrar of Companies to increase the authorized capital - HELD THAT:- Similar issue came up for consideration before the Tribunal, Mumbai Bench ‘B’ in the case of Navi Mumbai SEZ (P.) Ltd. vs. ACIT [2015 (3) TMI 314 - ITAT MUMBAI] , wherein it was held that where the assessee incurred certain expenditure for increase in share capital, the entire incremental share capital was used for the purpose of trading stock, then expenditure in question was to be allowed as revenue expenditure and the judgment of the Supreme Court in the case of Brooke Bond India Ltd. vs. CIT [1997 (2) TMI 11 - SUPREME COURT] has no application as in that case, it was increased capital base. Respectfully following the order of the Tribunal, Mumbai Bench ‘B’ cited supra, we are inclined to decide the issue in favour of the assessee Disallowance of advertisement and publicity expenses - HELD THAT:- In this case, the expenditure was incurred by the assessee wholly and exclusively for the purpose of carrying on the business and it is to be allowed. Accordingly, we confirm the order of the Commissioner of Income-tax(Appeals) and reject this ground. Addition made on account of excess bonus provision debited in profit and loss account relating to earlier years - HELD THAT:- In our opinion, the assessee claimed bonus every year in respective assessment years and the amount transferred has already been suffered tax in respective assessment years. Being so, the Commissioner of Income-tax(Appeals) is justified in deleting the addition made by the Assessing Officer. This ground is rejected. Addition made on account of payment of architect fee for interior decoration - HELD THAT:- This ground is not emanating from the order of the Commissioner of Income-tax(Appeals) and the ld. DR was not able to show in which paragraph the Commissioner of Income-tax(Appeals) has dealt with this issue. Since the issue is not arising out of the order of the Commissioner of Income-tax(Appeals), this ground is rejected. Claim of deduction fully u/s.36(1)(vii) - HELD THAT:- This issue is squarely covered in favour of the assessee by the judgment of the Supreme Court in the case of Catholic Syrian Bank [2012 (2) TMI 262 - SUPREME COURT] wherein held that schedule commercial banks would continue to get the full benefit of the write off of irrecoverable debts u/s.36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debts u/s.36(1)(viia . Respectfully following the aforesaid judgment of the Supreme Court, we decide this issue in favour of the assessee. Accordingly, this ground is dismissed in both these appeals. Addition made towards payment of arrears though it was ascertained liability - HELD THAT:- The assessee is following mercantile system of accounting and accounting system of recognition of expenditure on accrual basis is accepted method of accounting. Hence, the Commissioner of Incometax( Appeals) is justified in deleting the addition. This ground is rejected. Addition on account of amortization charges, though it was a capital expenditure - HELD THAT:- . In our opinion, this issue is covered in favour of the assessee by the decision of the Jurisdictional High Court in the case of City Union Bank Ltd. [2007 (2) TMI 187 - MADRAS HIGH COURT] wherein it was held that the investments are made in accordance with the requirements of the Act, wherein the market price charged from the value shown in the opening balance and at the end of the year, the same could be allowed as depreciation. Accordingly, we decide this issue in favour of the assessee and this ground is rejected. Issues Involved:1. Validity of reopening assessments after four years.2. Reopening of assessments without tangible material and mere change of opinion.3. Assumption of jurisdiction under Section 263.4. Computation of profit on sale of securities.5. Disallowance of expenditure incurred on earning exempted income under Section 14A.6. Disallowance of broken period interest.7. Disallowance of fees paid to SEBI.8. Disallowance of filing fees to Registrar of Companies for increasing authorized capital.9. Disallowance of advertisement and publicity expenses.10. Addition on account of excess bonus provision.11. Treatment of unclaimed balances written off.12. Deduction under Section 36(1)(viia) for bad debts.13. Disallowance of provision for arrears of salary.14. Addition on account of amortization charges.Detailed Analysis:1. Validity of Reopening Assessments After Four Years:The first common ground in these appeals concerns the validity of reopening assessments after four years from the assessment orders. The original assessments were completed under Section 143(3) of the Income-tax Act. The appellant argued that the initiation of proceedings under Section 148 was invalid as the conditions precedent for reopening were absent. The Tribunal found that there was no failure on the part of the assessee to disclose material facts necessary for the assessments, and therefore, the notices issued under Section 148 were invalid. The appeals were allowed, and the reopening was annulled.2. Reopening of Assessments Without Tangible Material and Mere Change of Opinion:In appeals ITA Nos.842, 845, 846 & 851/Mds/2015, the grievance was that the reopening of assessments was based on a mere change of opinion without any new tangible material. The Tribunal held that after April 1, 1989, the Assessing Officer could reopen assessments only if there was tangible material indicating income escapement. Mere change of opinion was not a valid reason for reopening. The Tribunal annulled the assessments made under Section 147.3. Assumption of Jurisdiction Under Section 263:In ITA No.1133/Mds/2013, the issue was the assumption of jurisdiction under Section 263. The Commissioner of Income-tax found an error in the computation of net appreciation regarding securities in the AFS and HFT categories. The Tribunal held that the assessment order was not erroneous or prejudicial to the interests of the Revenue, as the Assessing Officer had already considered the issue, resulting in excess tax. The order under Section 263 was annulled.4. Computation of Profit on Sale of Securities:In ITA Nos.959, 960 & 961/Mds/2014, the issue was the computation of profit on the sale of securities. The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision that the profit or loss on the sale of securities held as stock-in-trade should be treated as revenue in nature. This was supported by the Supreme Court judgment in UCO Bank and the Jurisdictional High Court decisions.5. Disallowance of Expenditure Incurred on Earning Exempted Income Under Section 14A:The Assessing Officer made an addition for expenses incurred on earning interest income from tax-free bonds. The Tribunal partially allowed the appeal, directing that 2% of the exempt income be disallowed, following the Jurisdictional High Court's decision in Simpson & Co. Ltd. vs. DCIT.6. Disallowance of Broken Period Interest:The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision to assess interest on Government securities on a due/receipt basis rather than on an accrual basis, following the Jurisdictional High Court's decision in the assessee's own case.7. Disallowance of Fees Paid to SEBI:The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision to treat the renewal registration fee paid to SEBI as revenue expenditure, following the Tribunal's earlier decision in the assessee's own case.8. Disallowance of Filing Fees to Registrar of Companies for Increasing Authorized Capital:The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision to treat the filing fees paid to increase authorized capital as revenue expenditure, following the Tribunal's decision in Navi Mumbai SEZ (P.) Ltd. vs. ACIT.9. Disallowance of Advertisement and Publicity Expenses:The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision to allow advertisement and publicity expenses as revenue expenditure, as they were incurred wholly and exclusively for business purposes.10. Addition on Account of Excess Bonus Provision:The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision to delete the addition made for excess bonus provision, as the amount had already been taxed in the respective assessment years.11. Treatment of Unclaimed Balances Written Off:This ground was not arising from the order of the Commissioner of Income-tax(Appeals) and was dismissed.12. Deduction Under Section 36(1)(viia) for Bad Debts:The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision to allow the deduction for bad debts under Section 36(1)(viia), following the Supreme Court judgment in Catholic Syrian Bank Ltd. vs. CIT.13. Disallowance of Provision for Arrears of Salary:The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision to delete the disallowance for provision for arrears of salary, as the assessee followed the mercantile system of accounting.14. Addition on Account of Amortization Charges:The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision to delete the addition for amortization charges, following the Jurisdictional High Court's decision in City Union Bank Ltd.Conclusion:All appeals filed by the assessee were allowed, and the appeals by the Revenue in ITA Nos.959, 960, and 961/Mds/2014 were partly allowed, while ITA Nos.962 & 963/Mds/2014 were dismissed.