2017 (10) TMI 1612 - AT - Income Tax

Tribunal rules for assessee on Section 14A, 143(3), 153A, 192 issues

The Tribunal ruled in favor of the assessee on various issues, including disallowance under Section 14A due to the absence of exempt income, invalidity of ... Disallowance under section 14A in the absence of exempt income - reopening of concluded assessments under section 153A read with section 143(3) where no incriminating material is found during search - capitalisation to capital work in progress and entitlement to depreciation - tax deduction at source on directors' sitting fees - application of section 192 as against section 194J - capital versus revenue characterisation of pre operative and inauguration expensesDisallowance under section 14A in the absence of exempt income - No disallowance under section 14A can be made where the assessee did not earn exempt income; factual dispute as to receipt of exempt income restored to AO for verification. - HELD THAT: - The Tribunal noted that the assessee had investments in mutual funds but, according to the assessee, had not received any dividend (exempt) during the impugned year. In the absence of exempt income, there is no basis for a disallowance under section 14A. Because the Revenue disputed the fact of receipt of exempt income, the Tribunal did not decide the factual question on the papers but remitted the matter to the Assessing Officer to verify whether exempt income was in fact received; if verification establishes absence of exempt income, no disallowance is permissible, otherwise the AO may act in accordance with law. [Paras 5]Restored to the file of the AO for verification; held as a legal proposition that no disallowance under section 14A can be made if no exempt income is earned.Reopening of concluded assessments under section 153A read with section 143(3) where no incriminating material is found during search - Assessments framed under section 143(3) r.w.s. 153A are not sustainable where no incriminating material was found during the search; such assessments are knocked down. - HELD THAT: - The Tribunal examined jurisprudence of the jurisdictional High Court and other authorities and concluded that the statutory scheme of section 153A does not permit reopening of a concluded assessment merely because a search has been conducted if no incriminating material was discovered in the search which forms the basis for reassessment. In the present cases, assessments under section 143(3) had been completed prior to search and undisputedly no incriminating material was found; accordingly, the Tribunal held that the assessments framed under section 153A r.w.s. 143(3) are unsustainable and set them aside. [Paras 11]Knocked down the assessments completed under section 143(3) r.w.s. 153A for lack of incriminating material.Capitalisation to capital work in progress and entitlement to depreciation - CIT(A)'s direction to allow specified expenditure as part of CWIP for the purpose of depreciation is upheld. - HELD THAT: - On scrutiny of the facts and the appellate authority's reasoning, the Tribunal found that the CIT(A) had correctly evaluated the nature of the expenditure incurred in construction of the airport and the consequent allocation to CWIP. The Revenue did not point out specific infirmity in the CIT(A)'s conclusion. In view of this, the Tribunal confirmed the CIT(A)'s order directing the AO to treat the relevant expenditure as eligible for capitalization and to allow depreciation accordingly. [Paras 18]Order of the CIT(A) confirmed in favour of the assessee on capitalization and depreciation treatment.Tax deduction at source on directors' sitting fees - application of section 192 as against section 194J - Sitting fees paid to directors who are in receipt of salary are subject to deduction under section 192 and not under section 194J for the impugned assessment year. - HELD THAT: - The Tribunal observed that the amendment to section 194J was made effective from 1.7.2012 and therefore applies from AY 2014 15; it does not apply to the impugned assessment year (AY 2013 14). The CIT(A) had held that the directors receiving salary should be governed by section 192 and deleted the disallowance. The Tribunal found no infirmity in that conclusion and confirmed the CIT(A)'s order. [Paras 25]CIT(A)'s deletion of the disallowance and application of section 192 confirmed.Capital versus revenue characterisation of pre operative and inauguration expenses - effect of invalid assessment under section 153A on additions made therein - Where assessments framed under section 153A are invalid for lack of incriminating material, additions made in those assessments (including characterisation disputes) do not survive; revenue's appeal in respect of such additions dismissed. - HELD THAT: - The assessee challenged additions treated as capital by it and held revenue in appeal argued that such expenditures were revenue in nature. However, the Tribunal had already held that assessments completed under section 143(3) r.w.s. 153A in the absence of any incriminating material were not valid. As those assessments are knocked down, the additions made therein cannot be sustained. Consequently, the Tribunal dismissed the revenue's appeal insofar as it attacked the CIT(A)'s treatment on these grounds. [Paras 29]Revenue's appeal dismissed; additions made in the invalid section 153A assessments are not sustainable.Final Conclusion: The Tribunal held that (i) no disallowance under section 14A can be made if the assessee did not earn exempt income and remitted factual dispute to the AO for verification; (ii) assessments reopened and completed under section 143(3) r.w.s. 153A are unsustainable where no incriminating material was found in the search and such assessments are set aside; (iii) CIT(A)'s rulings on capitalization to CWIP and depreciation and on the applicability of section 192 to directors' sitting fees are confirmed; and (iv) additions made in assessments under section 153A which have been held invalid do not survive and the revenue's appeals in respect thereof are dismissed. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Validity of assessment under Section 143(3) read with Section 153A of the Income Tax Act.3. Depreciation on capital work-in-progress (CWIP).4. TDS deduction on Directors' sitting fees under Section 192 vs. Section 194J.5. Nature of pre-operative and inauguration expenses (revenue vs. capital).Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The primary issue was whether the CIT(A) was correct in holding that no disallowance under Section 14A could be made when the assessee had not earned any exempt income during the financial year. The Tribunal noted that the assessee had made investments in mutual funds but had not received any dividend income. Thus, in the absence of exempt income, no disallowance under Section 14A could be made. The CIT(A) followed the Bangalore Tribunal's decision in the case of Alliance Infrastructure Project Pvt. Ltd. The Tribunal restored the matter to the AO for verification of the fact. If the assessee had no exempt income, no disallowance under Section 14A could be made; otherwise, the AO was to act according to the law.2. Validity of assessment under Section 143(3) read with Section 153A of the Income Tax Act:The Tribunal examined whether the AO could reframe the assessment under Section 153A based on a search where no incriminating material was found. It was noted that the assessment under Section 143(3) was completed before the search, and no incriminating material was found during the search. Citing the Tribunal's previous decision in P.M.A. Razak and judgments from the Delhi High Court (CIT v. Kabul Chawla) and the jurisdictional High Court (CIT v. Lancy Constructions), it was held that in the absence of incriminating material, proceedings under Section 153A could not be initiated. Consequently, the assessments framed under Section 143(3) read with Section 153A were quashed.3. Depreciation on capital work-in-progress (CWIP):The issue concerned whether the CIT(A) was correct in allowing depreciation based on the disallowance of expenses as not eligible for depreciation in AY 2007-08 and 2008-09. The assessee had allocated CWIP to assets and claimed depreciation. The AO disallowed certain expenditures, considering them ineligible for capitalization. The CIT(A) re-examined the issue and directed the AO to consider certain amounts as not eligible for forming part of CWIP. The Tribunal found that the CIT(A) had adjudicated the issue correctly and confirmed the order.4. TDS deduction on Directors' sitting fees under Section 192 vs. Section 194J:The AO disallowed the expenditure on Directors' sitting fees for not deducting TDS under Section 194J. The CIT(A) held that the provisions of Section 192 applied to such payments, not Section 194J, as the amendment to Section 194J was effective from 1.7.2012, applicable from AY 2014-15. The Tribunal confirmed the CIT(A)'s order, noting that the amendment did not apply to the impugned assessment year.5. Nature of pre-operative and inauguration expenses (revenue vs. capital):The issue was whether the expenses towards pre-operative and inauguration expenses were revenue or capital in nature. The CIT(A) held that the expenses were revenue in nature, incurred after the business was set up. The Tribunal noted that the assessment under Section 143(3) was completed before the search, and no incriminating material was found. Therefore, the assessment framed under Section 143(3) read with Section 153A was not valid, and the additions made were not sustainable. The Tribunal dismissed the revenue's appeal on this ground.Conclusion:- The assessee's appeals were allowed.- The revenue's appeals were allowed for statistical purposes, dismissed, or partly allowed for statistical purposes, depending on the specific grounds.- Pronounced in the open court on October 13, 2017.