2023 (5) TMI 1479 - AT - Income Tax

Depreciation and interest deductions in income tax assessment upheld; allocation to exempt income and reassessment validity sent back for fresh scrutiny.

Rejection of depreciation on computer hardware was found to rest on untested statements, violating natural justice; on circumstantial evidence the ... Depreciation on computer hardware and interest paid to bank for term loan and working capital - disallowance is based upon the findings given in the first round of litigation - HELD THAT:- Revenue's rejection of the claim of depreciation is only based on the statements of Parikh couple who were not allowed to be cross examined by the assessee; therefore, their statements are in complete violation of principles of natural justice. On the basis of circumstantial evidences mentioned elsewhere, we are of the opinion that the assessee had purchased computers and is eligible for the claim of depreciation. We have no hesitation to hold that the money has been borrowed for the purpose of business and therefore any interest paid has to be allowed as business expenditure. The second grievance is accordingly allowed. Disallowance of 14A - AO made pro-rata disallowance of administrative expenses - contention of the DR is that even if Rule 8D does not strictly apply to the impugned under consideration, even then reasonable amount should have been disallowed - HELD THAT:- We observe that in case of CIT vs. Godrej & Boyce [2010 (8) TMI 77 - BOMBAY HIGH COURT], on which the assessee has placed reliance upon, the Bombay High Court has held that even prior to the assessment year 2008-09, when Rule 8D was not applicable, the AO had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the Assessing Officer was duty bound to determine the expenditure which had been incurred in relation to income which did not form part of the total income under the Act. AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. Hon’ble Supreme Court in the case of Godrej & Boyce [2017 (5) TMI 403 - SUPREME COURT] held that section 14A would apply to dividend income on which tax is payable u/s. 115-O. Assessment order has been passed for the impugned assessment year u/s. 143(3) and the order is barred by limitation since the first notice u/s. 143(2) was issued beyond the due prescribed date - As in the interest of justice, this issue is being set aside to the file of CIT(A) to ascertain the correct set of facts. It needs to be ascertained whether any notice u/s. 148 of the Act was issued to the assessee, whether reasons for reopening of assessment were furnished to the assessee, whether the assessee has sought for “ reasons” for reopening the case for the impugned assessment year and whether it could be inferred that non-mentioning of section 147 in the assessment order was an inadvertent omission if other conditions of proceedings u/s. 147/148 of the Act have been complied with by the Department. Issues: (i) Whether the CIT(A) was justified in directing the AO to allow depreciation of Rs.10,25,20,281/- and interest expenses of Rs.2,91,97,097/- (ii) Whether the CIT(A) was justified in deleting the disallowance under section 14A of Rs.1,47,487/- (iii) Whether the reassessment/assessment order is invalid or time-barred for failure to comply with limitation and reopening requirements and whether reasons for reopening were furnished.Issue (i): Whether the claim of depreciation and consequential claim of interest for AY 2002-03 should be allowed in view of the ITAT's earlier decision and the material on record.Analysis: The Tribunal noted that ITAT in assessee's own case for AY 2000-01 restored the genuineness of purchases to the file of the AO and ultimately held on facts that circumstantial evidence and lack of opportunity to cross-examine adverse witnesses supported the assessee. The CIT(A) applied that binding tribunal view and examined evidentiary material (affidavits, bank financing, insurance, payment by account payee cheques) and concluded purchases were genuine; interest was held to be for business borrowing. The Tribunal before whom the department appealed found no error in the CIT(A)'s factual appreciation and observed the assessment order for AY 2002-03 was primarily based on the predecessor AO's findings which were set aside by ITAT.Conclusion: In favour of Assessee.Issue (ii): Whether deletion of disallowance under section 14A (Rs.1,47,487/-) was correct for AY 2002-03.Analysis: The CIT(A) followed judicial authorities including the reasoning that the statutory amendments and Rule 8D operate prospectively and that Rule 8D was notified w.e.f. 24-03-2008; prior thereto AO must determine, under section 14A(1), expenditure attributable to exempt income by a reasonable method. The Tribunal applied precedents (Bombay High Court and Supreme Court guidance) and concluded that while Rule 8D is prospective, the AO still must adopt a reasonable basis; on the facts a modest disallowance was appropriate.Conclusion: Partly against Assessee (in favour of Revenue) to the extent of allowing a limited disallowance; the departmental appeal on this ground is partly allowed.Issue (iii): Whether the assessment/re-assessment order is invalid or time-barred because notices under section 143(2) were issued beyond prescribed time, and whether requirements of sections 147/148 (reopening) including furnishing reasons were complied with.Analysis: The Tribunal found conflicting pleadings and submissions on record as to the exact section under which the order was passed (references in Form No.35 and written submissions to reopening under section 147/148 versus assertions at hearing that order was under section 143(3)). Given this confusion and the factual questions whether notice under section 148 was issued, whether reasons for reopening were furnished and whether omission of reference to section 147 in the order was inadvertent, the Tribunal considered it appropriate in the interests of justice to remit the issue to the CIT(A) for factual ascertainment and compliance with statutory requirements.Conclusion: Remitted to CIT(A) for factual determination; cross objection allowed for statistical purposes.Final Conclusion: The departmental appeal is partly allowed (department succeeds on the section 14A disallowance ground in part but fails on depreciation and interest), and the assessee's cross-objection is allowed for statistical purposes with the question on validity/limitation of reopening remitted to the CIT(A) for factual verification.Ratio Decidendi: Where an ITAT order in the assessee's own case has set aside predecessor AO findings after evaluating circumstantial evidence and failure to afford opportunity for cross-examination, subsequent assessing actions based on those discredited findings must yield; Rule 8D applies prospectively and, before its applicability, the AO must determine section 14A disallowance by a reasonable method consistent with facts and after giving opportunity to the assessee.