2013 (1) TMI 955 - HC - Income Tax

Revision u/s 263 - addition u/s 14A - Held that - We note that one of the ingredient to exercise jurisdiction under Section 263 of the Act is not satisfied viz. prejudice to the revenue. As pointed out by the Tribunal the respondent is being assessed to tax on book profits under Section 115JB of the Act and even if the dis-allowance is higher than that allowed by Assessing officer under Section 14A of the Act would not have any effect on the book profits on which the tax is payable. Thus the entire exercise is academic.

Summary

Issues:
1) Whether the Tribunal was right in setting aside the order of the Commissioner of Income Tax passed u/s. 263 of the Income Tax Act?

Analysis:
1) The Assessing Officer determined the assessee's income and book profits for the assessment year 2006-07. The AO disallowed an amount under Section 14A of the Act based on the ratio of exempted income to total income. However, due to carried forward losses, the business income was determined at Nil, and tax was payable on book profits under Section 115JB of the Act.

2) The Commissioner of Income Tax issued a notice under Section 263, contending that the AO's disallowance was incorrect, resulting in under-assessment of income. The Commissioner directed the AO to re-compute the disallowance of interest on borrowed funds invested in shares under Section 14A of the Act.

3) The respondent assessee appealed to the Tribunal, arguing that the AO's order was not prejudicial to the revenue. The Tribunal found that the jurisdiction under Section 263 was not warranted as the tax payable on book profits was more than on regular income. Even after the reassessment, the assessed income/book profits remained the same, causing no prejudice to the revenue.

4) The High Court noted that the jurisdiction under Section 263 requires prejudice to the revenue, which was not present in this case. The Court agreed with the Tribunal that the disallowance amount would not affect the book profits on which tax was payable. Thus, the exercise was deemed academic, leading to the dismissal of the appeal with no costs awarded.