Tribunal annuls reassessment, allows appeal for 2002-03, deletes disallowances, directs interest verification

The Tribunal annulled the reassessment proceedings for the assessment year 2003-04 and partially allowed the appeal for the assessment year 2002-03. It deleted disallowances on commission payments and interest on borrowed funds. The AO's jurisdiction was found to be exceeded in making additions/disallowances unrelated to the reassessment issues. The Tribunal directed verification of interest capitalization and disallowance of depreciation if interest is capitalized. The order was issued on 21/12/2016.

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Issues Involved:

1. Validity of reassessment notice and proceedings under sections 147 and 148 of the IT Act.
2. Disallowance of commission paid for export of goods under the Oil for Food Programme.
3. Jurisdiction of the Assessing Officer (AO) in making additions/disallowances while computing "book profit" for Minimum Alternate Tax (MAT).
4. Disallowance of interest paid on borrowed funds utilized for construction of buildings and residential quarters.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Notice and Proceedings:

The assessee contended that the AO erred in issuing notice under section 148 and assuming jurisdiction under section 147 of the Act merely due to a change of opinion. The learned Commissioner (Appeals) upheld the validity of the reassessment notice and proceedings. The Tribunal noted that the AO recorded reasons for reopening based on a CBDT memorandum indicating that the assessee was involved in paying kickbacks to the Iraqi Government under the Oil for Food Programme. However, the Tribunal found that the AO had mechanically recorded the reasons without verifying whether the expenses were charged to the profit and loss account, thus annulling the reassessment proceedings.

2. Disallowance of Commission Paid for Export of Goods:

The AO disallowed the commission payments made under the Oil for Food Programme, considering them illicit payments based on the Volcker Committee Report. The Tribunal, referencing the case of Metro Exporters Pvt. Ltd. and other similar cases, found that the commission payments were made through banking channels with RBI approval and pursuant to agreements approved by the Government of India and the UN. The Tribunal concluded that there was no evidence to prove that the payments were illegal or non-genuine, thus deleting the disallowance of commission payments.

3. Jurisdiction of AO in Making Additions/Disallowances for MAT:

The AO made additions/disallowances of certain items while computing "book profit" for MAT, which were unconnected with the specific issues for which reassessment was initiated. The Tribunal noted that the AO exceeded his jurisdiction by making such additions/disallowances, as these were not the subject matter of the reassessment proceedings. The Tribunal annulled these additions/disallowances.

4. Disallowance of Interest Paid on Borrowed Funds:

The AO disallowed the interest paid on borrowed funds utilized for the construction of buildings and residential quarters, contending that the interest should be capitalized. The Tribunal observed that the proviso to Section 36(1)(iii) inserted by the Finance Act 2003, which mandates capitalization of such interest, was effective from the assessment year 2004-05. Since the assessment year in question was 2002-03, the Tribunal held that no disallowance could be made for such interest payments. However, the Tribunal directed the AO to verify if the interest payment had been added to the cost of construction and, if so, to ensure no depreciation is allowed thereon.

Conclusion:

The Tribunal allowed the appeal for the assessment year 2003-04 and partly allowed the appeal for the assessment year 2002-03, annulling the reassessment proceedings and deleting the disallowances made on account of commission payments and interest on borrowed funds. The Tribunal also directed the AO to verify the capitalization of interest payments and ensure no depreciation is allowed if the interest is capitalized. The order was pronounced in the open court on 21/12/2016.

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