2011 (2) TMI 1580 - AT - Income Tax

Tribunal allows appeal, reopens assessment under section 147. Disallows sections 36(1)(iii) and 14A for reconsideration.

The Tribunal partly allowed the appeal, confirming the reopening of assessment under section 147 based on valid reasons to believe income had escaped ... - Issues Involved:1. The reopening of assessment.2. The confirmation of disallowance made u/s.36[1][iii] by the AO, but confirmed by the CIT(A) u/s.14A.Summary:1. The Reopening of Assessment:The original return was processed u/s.143[1] on 30-12-04, and later the assessment was reopened u/s.147. The reasons for reopening included the finding that the assessee was paying interest expenses against unsecured loans, which were invested in acquiring unquoted shares of a subsidiary company. The AO disallowed the interest claimed u/s.14A, asserting that the borrowed funds were not used for business activities but for investment in shares, which generated tax-free dividend income u/s.10(33). The CIT(A) confirmed this action, noting that the original return was processed only u/s.143[1].The assessee argued that the tangible material for reopening was available before the deadline for issuing a notice u/s.143[2], and thus the AO should have issued the notice within the stipulated time. The assessee cited the case of Balkrishna Hiralal Wani, where it was held that assessment could not be reopened without tangible material. However, the Tribunal found that the AO had valid reasons to believe that income had escaped assessment, based on the assessment order for A.Y 2002-2003. The Tribunal referred to the Supreme Court's decision in ACIT vs. Rajesh Jhaveri Stock Brokers P. Ltd., which stated that failure to issue a notice u/s.143[2] does not render the AO powerless to initiate reassessment proceedings if conditions of section 147 are satisfied. Therefore, the Tribunal confirmed the reopening of the assessment.2. The Confirmation of Disallowance u/s.36[1][iii] and u/s.14A:On merits, the assessee contended that in their own case for A.Y 2002-03, an addition u/s.14A was deleted because there was no exempt income. However, the Tribunal noted that this decision was rendered before the Special Bench's decision in Daga Capital Management Pvt. Ltd., which held that provisions of sec.14A are applicable even in the absence of exempt income. The Tribunal also referred to the case of Cheminvest Ltd. vs. ITO, where it was held that disallowance under sec.14A applies irrespective of whether any income is earned.The Tribunal acknowledged that Rule 8D is not retrospective, as held by the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. Therefore, the Tribunal set aside the issue for reconsideration in light of this decision.Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal confirming the reopening of the assessment and setting aside the issue of disallowance for reconsideration. The order was pronounced in the open Court on 4th February 2011.