2008 (2) TMI 541 - AT - Income Tax

Tribunal Rules AO Lacked Jurisdiction; Orders Keyman Insurance and Expenses Allowed, Dismisses Revenue's Appeal.

The Tribunal allowed the assessee's appeal, setting aside the Revenue authorities' orders concerning jurisdiction under Section 143(2) and assessment ... Violation of the CBDT Instruction - assuming the jurisdiction u/s 143(2) - Disallowance out of Keyman Insurance Policy and out of the selling and administrative expenses - Addition of setting off brought forward losses on the basis of return earlier filed. Violation of the CBDT Instruction - assuming the jurisdiction u/s 143(2) - As per the interpretation of the Addl. CIT, if action plan for financial year 2005-06 published is considered for returns for the asst. yr. 2004-05, then no time was available for selection for scrutiny cases of the asst. yr. 2004-05 except belated returns under s. 139(4). Even as per that instruction for the financial year 2005-06, the case is not fit for scrutiny. The judicial decisions relied upon by the learned counsel for the assessee clearly support the case of the assessee. In our considered view the CBDT instructions are binding on the Revenue authorities and, therefore, in this case, the selection for scrutiny of the case has not been as per the Board instructions referred to above. In view of the above we hold that the learned AO erred in assuming the jurisdiction under s. 143(2) of the Act in contravention of the CBDT instructions and in completing the assessment under s. 144 which is bad in law and the learned CIT(A) erred in confirming the order of the AO. The orders of the Revenue authorities are set aside. Disallowance out of Keyman Insurance Policy and out of the selling and administrative expenses - While the Act is amended in many places to the effect that the amount received will be taxable, it is nowhere provided that the premium paid on the Keyman Insurance Policy is allowable as business expenditure except by a circular of CBDT. The Circular No. 762 is binding on the Revenue authorities. The assessee's counsel has filed the xerox copies of the premium paid in respect of these policies. thus, we are of the considered opinion that the premium paid by the assessee on the Keyman Insurance Policy is allowable as business expenditure. We direct the AO to allow the claim of the assessee subject to verification of the premium paid by the assessee company. It is also seen that the net profit disclosed by the assessee for the year under consideration is better as compared to the earlier years. Since all the expenses are verifiable and vouched and no other disallowances are made by the AO, we do not find any justification for the AO to disallow out of selling and administrative expenses. No convincing reasons are given by the Revenue authorities to make the disallowance and confirm the same. The disallowance made by the AO is on ad hoc basis under the assessment framed under s. 144. Thus, since no disallowance is called for the AO is directed to delete the same. Addition of setting off brought forward losses on the basis of return earlier filed - No evidences produced - It is clear that the AO is directed to allow the claim of the assessee subject to verification. The learned CIT(A) has given only directions to verity the correctness of the claim of the assessee and not allowed the claim of the assessee. The ld DR also submitted that the appeal is infructuous, In our view, the appeal of the Revenue is to be dismissed as infructuous and the same is dismissed as such. In the result, the appeal of the assessee is allowed whereas the appeal of the Revenue is dismissed. Issues Involved:1. Jurisdiction under Section 143(2) and completion of assessment under Section 144.2. Disallowance of Rs. 27,12,120 out of Keyman Insurance Policy.3. Disallowance of Rs. 4,67,040 out of selling and administrative expenses.4. Deletion of addition of Rs. 9,47,684 on account of setting off brought forward losses.Detailed Analysis:1. Jurisdiction under Section 143(2) and completion of assessment under Section 144:The assessee contended that the Assessing Officer (AO) erred in assuming jurisdiction under Section 143(2) in contravention of CBDT instructions and completing the assessment under Section 144. The CBDT Instruction No. 9 of 2004 mandated that the selection of cases for scrutiny for returns filed up to 31st March 2004 must be completed by 15th October 2004, and for returns filed in the financial year 2004-05, the selection must be completed within three months of filing the return. The assessee filed the return on 29th October 2004, implying the selection for scrutiny should have been completed by 28th January 2005. The AO issued the notice under Section 143(2) on 10th October 2005, which was beyond the prescribed period, thereby making the selection invalid. The Tribunal found merit in the assessee's argument, holding that the AO erred in assuming jurisdiction under Section 143(2) and completing the assessment under Section 144, thus setting aside the orders of the Revenue authorities.2. Disallowance of Rs. 27,12,120 out of Keyman Insurance Policy:The AO disallowed 30% of the premium paid on the Keyman Insurance Policy, amounting to Rs. 27,12,120, on the grounds that the premium was excessive relative to the company's turnover and worth. The assessee argued that the premium paid was allowable as business expenditure under the CBDT Circular No. 762 dated 18th February 1998, which clarified that premium paid on Keyman Insurance Policy should be treated as business expenditure. The Tribunal agreed with the assessee, stating that the premium paid on the Keyman Insurance Policy is allowable as business expenditure, directing the AO to verify and allow the claim.3. Disallowance of Rs. 4,67,040 out of selling and administrative expenses:The AO disallowed 10% of the selling and administrative expenses, amounting to Rs. 4,67,040, due to the non-production of relevant bills and vouchers by the assessee. The assessee presented a comparative chart showing better net profit for the year under consideration and argued that all expenses were verifiable and vouched. The Tribunal found that the disallowance was made on an ad hoc basis without convincing reasons and directed the AO to delete the disallowance, citing that all expenses were verifiable and vouched.4. Deletion of addition of Rs. 9,47,684 on account of setting off brought forward losses:The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 9,47,684 made by the AO for setting off brought forward losses without proper evidence. The CIT(A) directed the AO to verify the return of the immediately preceding year and earlier years to ascertain the correctness of the assessee's claim. The Tribunal observed that the CIT(A) had only given directions for verification and had not allowed the claim outright. Consequently, the Tribunal dismissed the Revenue's appeal as infructuous.Conclusion:The Tribunal allowed the assessee's appeal, setting aside the orders of the Revenue authorities regarding jurisdiction and the disallowances made. The Revenue's appeal was dismissed as infructuous, as the CIT(A) had only directed verification of the assessee's claims.