2021 (11) TMI 997 - AT - Income Tax

Tribunal Validates Reopening Assessment, Remits Section 14A Issue for Recomputation

The Tribunal upheld the validity of reopening the assessment under Section 147, finding tangible material in the balance sheet. Regarding the application ... Reopening of assessment u/s 147 - Disallowance u/s 14A - Mandation of recording satisfaction - HELD THAT:- Though the original assessment was completed u/s.143(3) of the Act, the AO has not examined application of Section 14A r.w.R.8D of the Income Tax Rules, 1962. Therefore, the change of opinion does not arise. Thus, the AO had rightly reopened the assessment. So far as tangible material is concerned, we find that the Assessing Officer after examining the entire file, has come to a conclusion that the suo-muto disallowance made by the Assessee is not correct and that the Assessee has not followed the formula prescribed in the Act to calculate the dividend income u/s.14A r.w.R.8D of the Income Tax Rules, 1962. Therefore, the reopening is based on the material available on record which is sufficient to reopen the assessment. The tangible material available to the Assessing Officer in this case is the balance-sheet on the basis of which the assessment is reopened. In our opinion, the balance-sheet which is the tangible material and supposed to have been considered by the Assessing Officer while passing the Assessment Order u/s.143(3) of the Act had totally ignored the balance-sheet. If at all he has considered, he has not even passed the assessment order by ignoring the provisions of law, i.e. Section 14A r.w.R.8D of the Income Tax Rules, 1962 - As in this case, tangible material is clearly available to the Assessing Officer and therefore the Assessing Officer validly reopened the assessment. In view of the above, we upheld the reopening made by the Assessing Officer u/s.147. - Decided against assessee. Addition u/s 14A r.w.r.8D - In the assessment order, the Assessing Officer has not discussed details of the own and borrowed funds. In the order of the Commissioner of Income Tax (Appeals), CIT(A) has categorically given a finding that the Assessee has not maintained separate books of account, year-wise to prove that only interest-free source has been utilized for investments. By considering the above findings Commissioner of Income Tax (Appeals) and by keeping in view the facts and circumstances of the case, we are of the opinion that one more opportunity should be given to the Assessee to substantiate his case before the Assessing Officer. In so far as the application of Section 14A of the Income Tax Act, 1961 r.w.R.8(2)(iii) of the Income Tax Rules, 1962 is concerned, this argument is neither placed before the Assessing Officer nor before Commissioner of Income Tax (Appeals). This argument is placed for the first-time before us. This issue is also to be examined by considering the relevant facts and materials. We set aside the order passed by the learned Commissioner of Income Tax (Appeals) and we remit back this issue to the Assessing Officer with a direction to re-compute the disallowance u/s.14A r.w.R.8D of the Income-Tax Rules, 1961, in the light of the decision of the Hon’ble Bombay High Court in the case of Commissioner of Income Tax Vs. Reliance Utilities and Power Limited [2009 (1) TMI 4 - BOMBAY HIGH COURT] as held in respect of the interest disallowance that “if there are funds available both, interest-free and overdraft and/or loans are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments”. As regards, disallowance of other expenses, Section 14A r.w.R.8D(2)(iii), the Delhi Special Bench of this Tribunal in the case of ACIT Vs. Vireet Investment Private Limited [2017 (6) TMI 1124 - ITAT DELHI] wherein has held that “only those investments are to be considered for computing the average value of investment which yielded exempt income during the year.” Accordingly, the Assessing Officer is directed to consider only those investments which yield exempt income for the year under consideration is to be considered. - Decided partly in favour of assessee. Issues Involved:1. Validity of reopening the assessment under Section 147.2. Application of Section 14A read with Rule 8D for disallowance of expenditure.Detailed Analysis:1. Validity of Reopening the Assessment under Section 147:The primary issue revolves around whether the reopening of the assessment under Section 147 of the Income Tax Act, 1961, was valid. The Assessee argued that there was no tangible material to justify the reopening, asserting that the original assessment was completed under Section 143(3) and that any reopening must be based on new tangible material. The Assessee cited the case of M/s. Tenzing Match Works to support this argument.The Assessing Officer (AO) contended that the reassessment was valid as the original assessment did not consider Section 14A read with Rule 8D. The AO argued that the material available on record, specifically the balance sheet, was sufficient to reopen the assessment. The Tribunal agreed with the AO, stating that the balance sheet constituted tangible material and that the AO had recorded proper satisfaction regarding the insufficiency of the Assessee's suo-motu disallowance. The Tribunal upheld the reopening of the assessment, distinguishing the facts from the Tenzing Match Works case.2. Application of Section 14A read with Rule 8D for Disallowance of Expenditure:The second issue concerns the application of Section 14A read with Rule 8D for disallowing expenditure related to exempt income. The Assessee argued that it had more own funds than borrowed funds, implying that no interest disallowance should be made. The Assessee also contended that the AO incorrectly taxed the entire investments and that the provisions of Section 14A read with Rule 8D(2)(iii) apply only to investments yielding exempt income.The Departmental Representative countered that the Assessee did not provide details of borrowed and own funds, and thus the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] rightly decided the issue. The Tribunal noted that the AO had not discussed the details of own and borrowed funds in the assessment order and that the CIT(A) found that the Assessee did not maintain separate books of account to prove the use of interest-free sources for investments.The Tribunal decided to remit the issue back to the AO for re-computation of the disallowance under Section 14A read with Rule 8D, considering the decision of the Bombay High Court in the case of Commissioner of Income Tax Vs. Reliance Utilities and Power Limited, which presumes that investments are made from interest-free funds if such funds are sufficient. Furthermore, the Tribunal directed the AO to consider only those investments that yielded exempt income during the year, as held by the Delhi Special Bench in the case of ACIT Vs. Vireet Investment Private Limited.Conclusion:The Tribunal upheld the validity of reopening the assessment under Section 147, finding that the AO had sufficient tangible material in the form of the balance sheet. On the merits, the Tribunal remitted the issue back to the AO to re-compute the disallowance under Section 14A read with Rule 8D, considering the relevant judicial precedents and only those investments yielding exempt income during the year. The appeal was allowed for statistical purposes.