By TIOL News Service

NEW DELHI, MAY 03, 2018: THE ISSUE BEFORE THE BENCH IS - Whether inspite of having information regarding income, investment and expenditure Revenue can reopen assessment merely on ground assessee not disclosed the method of calculation of the disallowance made u/s 14A. NO IS THE VERDICT.

Facts of the case:

The assessee is a Bank. The assessment for relevant year was completed u/s 143(3) of the Act. The AO subsequently noted that the assessee did not disclosed the method of arriving at the disallowance made u/s 14A either in the return of income or during the course of assessment proceedings, it resulted into the failure on the part of the assessee to disclose fully and truly all the material facts necessary for its assessment and the disallowance warranted u/r 8D(2)(ii) of the Income-tax Rules, could not be considered and thereby it escaped assessment. The AO proceeded to reopen the assessment and made addition on this account. On appeal, CIT(A), held that the reopening of the proceedings was valid but, as the interest free funds of the assessee were far exceeding the investment, question of invoking the provisions under Rule 8D directly and mechanically did not arise. Aggrieved with the decision, both assessee and Revenue filed appeal before Tribunal.

Tribunal held that,

++ when the assessee furnished all the facts and figures including the earning of the tax free income and the expenditure which was accepted by the AO, it is not open for the AO to say that the income escaped assessment because assessee did not reveal the method of arriving at the disallowance made u/s 14A during the assessment proceedings. The assessment proceedings are meant for verification of such thing and to say that no income has escaped assessment in so far as the facts and figures revealed in the return of income. If the AO accepts a figure under Rule 8D of the Rules in the order u/s 143(3) of the Act inasmuch as Section 14A and Rule 8D there on the statute book, the AO cannot say that since the assessee did not disclose the method of calculation, income escaped from assessment. The method to be followed is available in the shape of the provisions of Rule 8D of the Rules;

++ there is no dispute as to the fact recorded by the CIT for both the years that there was an average balance in the current account of the assessee in bank to the tune of Rs.142.51 crores for the AY 2008-09 and Rs.130.27 crores in respect of AY 2009-10 whereas the investment in interest free funds is Rs.34.32 crores for AY 2008-09, and Rs. 66.82 crores for AY 2009-10 which constitute only 11.19% for AY 2008-09 and 18.82% for the AY 2009-10 respectively. This fact is well demonstrated with reference to the financials of the assessee incorporated in the paper book. For that matter, the revenue does not dispute this factual finding nor did place any material on record to brush such factual finding aside. The CIT(A) observed that when the own funds of the assessee far exceeds the investment, the presumption is that the investment is made from the interest free funds available with the assessee and no question of any addition under Rule 8D(2)(ii) arises. No irregularity or illegality was found in this approach and reasoning of the CIT(A) or the conclusion reached by him. Therefore the addition made by the AO under Rule 8DE(2)(ii) cannot be sustained. In the result, appeals of the assessee for both the assessment years are allowed whereas the appeals of the revenue for both the years are dismissed.

(See 2018-TIOL-640-ITAT-DEL)