2023 (8) TMI 1259 - AT - Income Tax

Appellant wins on tax treatment, disallowance issue; interest partially allowed.

M/s. Jindal Poly Films Ltd Versus ACIT Central Circle-30 New Delhi

The appellant's claim regarding the treatment of sales tax subsidy/incentive as a capital receipt under the Income Tax Act was partially allowed by the ... Assessment u/s 153A - unabated assessment year reopened/ reassessed - HELD THAT:- As mentioned elsewhere a search and seizure operation was conducted on 14.11.2011 and, therefore, the impugned assessment year is unabated assessment year and, therefore, such unabated assessment can be reopened/ reassessed only on the basis of some incriminating material found at the time of search as held in the case of Abhisar Buildwell Private Limited [2023 (4) TMI 1056 - SUPREME COURT] since the impugned assessment is devoid of any incriminating material found at the time of search the assessment order deserves to be quashed. Since the assessment order has been quashed we do not find any merit in any claim of the assessee and we also do not find it necessary to dwell into the merits of the claim. ISSUES PRESENTED AND CONSIDERED 1. Whether a sales tax subsidy/incentive claimed for the first time before the appellate authority can be treated as a capital receipt not liable to tax when the assessment for the relevant year was completed under section 153A following a search. 2. Whether an assessment completed under section 153A (post-search) that is not supported by any incriminating material found during the search can be sustained, and whether such assessment may be quashed. 3. Whether disallowance under section 14A can be sustained where the assessing officer computed the disallowance in a routine manner without recording specific findings and by considering the entire corpus of investments including those yielding no exempt income. 4. Whether interest under sections 234A, 234B and 234D can be sustained once the assessment is quashed on the ground that there was no incriminating material to justify reassessment after search. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 (Reopening under section 153A; claim of sales tax subsidy as capital receipt raised first time on appeal) Legal framework: Assessments completed under section 153A arise from search and seizure proceedings; such unabated assessments may be reopened/reassessed in light of incriminating material discovered during the search. A claim raised for the first time at the appellate stage must still be considered against the statutory and jurisprudential limits applicable to assessments under section 153A. Precedent Treatment: The Tribunal followed the binding principle laid down by higher judicial authority that an assessment sustained under section 153A can be reopened or sustained only if there is incriminating material found during the search justifying additions/reassessments; in absence of such material the reassessment is vitiated. (Precedent followed.) Interpretation and reasoning: The Court examined the record of the search and the consequential assessment under section 153A. It found no incriminating material on the basis of which the assessing officer could validly make additions or deny reliefs for the unabated assessment year. Because the impugned assessment was not supported by any incriminating material discovered in the search, the statutory premise required to sustain reassessment or additions under section 153A was lacking. Ratio vs. Obiter: Ratio - An assessment completed under section 153A which is not supported by any incriminating material found at the time of search is liable to be quashed. Obiter - The Court did not adjudicate the substantive tax character (capital v. revenue) of the sales tax subsidy because the assessment itself was quashed on jurisdictional grounds. Conclusions: The Court quashed the assessment framed under section 153A for the relevant year on the ground that no incriminating material arose from the search to justify the reassessment. As a corollary, the Court did not decide the substantive claim regarding treatment of the sales tax subsidy as capital receipt; that claim was therefore left undetermined by the Tribunal. Issue 3 (Disallowance under section 14A) Legal framework: Section 14A addresses expenditure incurred in relation to exempt income and authorizes disallowance of expenditure that is in relation to tax-exempt income. The assessing officer must record reasons/satisfaction for invoking section 14A and the computation should be justifiably limited to relevant investments or expenditures that relate to exempt income. Precedent Treatment: The Tribunal did not make a definitive ruling on the correctness of the section 14A disallowance on merits because the assessment was quashed on the ground noted above. Accordingly, prior authorities on the need for nexus and reasoned satisfaction were acknowledged but not applied to finally determine correctness of the AO's computation in this case. (Precedent not applied to decide merits due to disposition.) Interpretation and reasoning: The assessee challenged that the disallowance was routine, without recorded satisfaction, and that the AO used the entire investment corpus (including investments yielding no exempt income) for computation. The Tribunal observed these contentions but, having quashed the assessment under section 153A for lack of incriminating material, declined to address the substantive correctness of the section 14A disallowance. Ratio vs. Obiter: Obiter - Observations that the disallowance may have been routine and that computation included irrelevant investments are recorded but are not binding findings; no conclusive ratio on section 14A was laid down because the assessment was set aside for want of jurisdictional basis. Conclusions: The Tribunal did not uphold or finally decide the section 14A disallowance; the issue remains unadjudicated due to quashing of the assessment under section 153A. Issue 4 (Charging of interest under sections 234A, 234B and 234D) Legal framework: Interest under sections 234A, 234B and 234D is consequential on tax liabilities determined in assessment orders and depends on the correctness and sustainment of additions or disallowances that give rise to tax demand. Precedent Treatment: The Tribunal did not reach a substantive conclusion on interest provisions; instead it applied the consequence of quashing the assessment to the ancillary issues. (Precedent not needed to resolve interest once assessment quashed.) Interpretation and reasoning: Because the primary assessment framed under section 153A was quashed for lack of incriminating material, the tax demand underpinning the interest calculations could not be sustained. The Tribunal therefore found it unnecessary to examine interest liability on merits. Ratio vs. Obiter: Ratio - When the assessment/order giving rise to tax demand is quashed for lack of jurisdictional/incriminating basis, consequential interest under sections 234A/234B/234D premised on that demand cannot be sustained. This is a conclusion drawn from the disposition rather than an independent examination of interest law. Conclusions: Interest charged under the noted sections was not sustained as the underlying assessment was quashed; the Tribunal did not separately adjudicate the correctness of the interest computation. Cross-References and Outcome All substantive claims raised by the assessee, including the contention that the sales tax subsidy/incentive is a capital receipt, were not decided on their merits because the Tribunal quashed the assessment framed under section 153A for the relevant year on the ground that there was no incriminating material discovered at the time of search to justify the reassessment. Consequential issues (section 14A disallowance and interest under sections 234A/234B/234D) were left undetermined or not sustained as fallout of the quashing of the assessment.