2018 (4) TMI 1751 - AT - Income Tax

Tribunal Orders Deletion of Disallowances and Expenses, Emphasizes Need for Incriminating Evidence

The Tribunal directed the deletion of disallowances under Section 14A and unexplained advertisement expenses for both AY 2009-10 and AY 2011-12 as no ... Assessment u/s 153A - disallowance made u/s 14A - HELD THAT:- We find that there is no mention of any incriminating material found during the course of search with respect to the unexplained advertisement expenses. Further with respect to the disallowance made u/s 14A of the income tax act there is no reference of any incriminating material found during the course of search. In view of this it is apparent that both the disallowance u/s 14A as well as the disallowance on account of unexplained expenditure on advertisement expenses were made without there being any incriminating material found during the course of search. Hence, respectfully following the decision of CIT versus Kabul Chawla [2015 (9) TMI 80 - DELHI HIGH COURT] wherein it has been held that completed assessments can be interfered with by the assessing officer while making assessments u/s 153A only on the basis of some incriminating material unearthed during the course of search which was not produced or not disclosed or made known in course of original assessment. Therefore, in the present case the impugned assessment year 2009 – 10, which is a concluded assessment, cannot be disturbed without any incriminating material. For both the above additions the AO as well as the Ld. CIT (A) and the Ld. DR could not show us any incriminating material. In view of this we without going into the merit of the disallowances, direct the Ld. assessing officer to delete as they are not based on any incriminating material found during the course of the search. Addition u/s 14A - HELD THAT:- In the instant case the assessee has made an investment in the shares of foreign companies, income from which cannot be exempt as per the provisions of the Income Tax Act. Even otherwise the assessee on its own has disallowed a sum of ₹ 5767092/- only on the assumption that the provisions of section 14A read with Rule 8D is automatic and mandatory. Even otherwise the Ld. assessing officer has not recorded any satisfaction with regard to the disallowance offered by the assessee on its own. Without recording such satisfaction the AO proceeds to make any disallowance invoking rule 8D of the income tax rules is bad in law. In view of above facts we dismiss ground No. 2 of the appeal of the revenue and also dispose the cross objection filed by the assessee involving the grounds relating to disallowance under section 14A Unexplained advertisement expenses - HELD THAT:- In the present case the assessee has produced the complete details of the expenditure incurred by it in assessment and sales promotion expenditure. No fault can be found with the assessee if the parties do not respond to the notice under section 133 (6) of the income tax act. More so in the identical situation in case of assessee for years including assessment year 2010-11 the CIT (A) has deleted the disallowance after considering the overall facts and circumstances of the case. The revenue has accepted that order and therefore there is no reason to challenge the same on identical issue before the coordinate bench in absence of any change in the facts and circumstances of the case. No such change in the facts and circumstances of the case was brought on record before us Issues Involved:1. Deletion of addition under Section 14A of the Income Tax Act.2. Deletion of addition on account of unexplained advertisement expenses.3. Applicability of incriminating evidence found during the course of search under Section 153A of the Income Tax Act.Detailed Analysis:1. Deletion of Addition under Section 14A of the Income Tax Act:The revenue challenged the deletion of the addition made under Section 14A concerning the expenditure incurred to earn exempt income. The Assessing Officer (AO) had initially made a disallowance of Rs. 12,263,917, which was later reduced to Rs. 1,219,330. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this disallowance, stating that the AO had invoked Rule 8D without recording satisfaction. However, CIT(A) confirmed a disallowance of expenses at 0.5% of the average investment. The assessee contended that no addition should be made under Section 153A without incriminating evidence found during the search. The Tribunal observed that no incriminating material was found during the search related to this disallowance. Hence, following the Delhi High Court's decision in CIT vs. Kabul Chawla, the Tribunal directed the AO to delete the disallowance as it was not based on any incriminating material.2. Deletion of Addition on Account of Unexplained Advertisement Expenses:The AO had disallowed Rs. 4,416,836 on account of unexplained advertisement expenses. The CIT(A) deleted this disallowance, stating that no incriminating material was found during the search. The Tribunal noted that the AO and CIT(A) could not show any incriminating material related to the unexplained advertisement expenses. Respecting the Delhi High Court's decision in CIT vs. Kabul Chawla, the Tribunal directed the AO to delete the disallowance as it was not based on any incriminating material.3. Applicability of Incriminating Evidence Found During the Course of Search under Section 153A:The Tribunal emphasized that any addition under Section 153A should be based on incriminating evidence found during the search. For the Assessment Year (AY) 2009-10, the Tribunal noted that the assessment was concluded, and no incriminating material was found during the search. Therefore, any adjustment to the total income returned or assessed should be based solely on incriminating evidence. The Tribunal found that the AO and CIT(A) could not show any incriminating material for both the disallowances under Section 14A and unexplained advertisement expenses. Consequently, the Tribunal directed the AO to delete both disallowances.Separate Analysis for AY 2011-12:1. Deletion of Addition under Section 14A:For AY 2011-12, the AO made a disallowance of Rs. 6,970,436 under Section 14A. The CIT(A) restricted the disallowance to 0.5% of the average value of investment, which amounted to Rs. 5,767,092. The Tribunal noted that the assessee had made investments in foreign companies, and the dividend income from these investments was not exempt. The Tribunal also observed that the AO did not record any satisfaction before invoking Rule 8D. Therefore, the Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection, confirming that no further disallowance should be made.2. Deletion of Addition on Account of Unexplained Advertisement Expenses:The AO disallowed Rs. 19,189,959 on account of unexplained advertisement expenses. The CIT(A) deleted this disallowance, relying on the order for AY 2010-11. The Tribunal noted that the assessee had provided complete details of the expenditure, and the AO disallowed the amount where no confirmation was received from the parties. The Tribunal found that the revenue had accepted the CIT(A)'s order for AY 2010-11, and no change in facts and circumstances was brought on record. Therefore, the Tribunal upheld the CIT(A)'s order and dismissed the revenue's appeal.Conclusion:For both AY 2009-10 and AY 2011-12, the Tribunal directed the deletion of disallowances under Section 14A and on account of unexplained advertisement expenses, as they were not based on any incriminating material found during the search. The Tribunal emphasized the necessity of incriminating evidence for making additions under Section 153A in concluded assessments.Result:- For AY 2009-10: Revenue's appeal dismissed; assessee's cross-objection allowed.- For AY 2011-12: Revenue's appeal dismissed; assessee's cross-objection allowed.Order Pronounced:The order was pronounced in the open court on 06/04/2018.