2012 (9) TMI 626 - HC - Income Tax

Revision ou/s 263 - proportionate expenditure related to the dividend income claimed exempt u/s 10 (33), as per provisions of section 14A - revenue appeal - Held that - The record reveals that the AO had issued notice and held proceedings on several dates (of hearing) before proceeding to frame the assessment. He added nearly Rs. 2 crores to the income at that time. The Commissioner took the view that the assessment order disclosed an error, in that the deduction under Section 14-A had not been made. Now, while the statutory direction to the AO to calculate, proportionately, the expenditure which an assesse may incur to obtain dividend income, for purposes of disallowance, cannot be lost sight of, equally, such a requirement has to be viewed in the context and circumstances of each given case. In the present case, it was repeatedly emphasized that the assesse s dividend income was confined to what it received from investment made in a sister concern, and that only one dividend warrant was received. These facts were material, and had been given weightage by the Tribunal in its impugned order. There is no dispute that the investment to the sister concern, was not questioned even the Commissioner has not sought to undermine this aspect. Equally, there is no material to say that apart from that single dividend warrant, any other dividend income was received. Furthermore, there is nothing on record to say that the assessee had to expend effort, or specially allocate resources to keep track of its investments, especially dividend yielding ones. In these circumstances, it can be said that whether the deduction under Section 14-A was warranted, was a debatable fact. In any event, even if it were not debatable, the error by the AO is not unsustainable . Possibly he could have taken another view yet, that he did not do so, would not render his opinion an unsustainable one, warranting exercise of Section 263 - in favour of assessee.

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act.
2. Disallowance of expenditure related to exempt dividend income under Section 14A.
3. Tribunal's interpretation and application of Section 14A and Section 263.
4. Jurisdiction of the Commissioner under Section 263.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act:
The core question was whether the Tribunal erred in holding that the provisions of Section 263 could not be invoked based on the facts and circumstances of the case. The Commissioner issued a notice under Section 263 concerning the disallowance of expenditure related to exempt dividend income received by the assessee, which was claimed under Section 10(33). The Commissioner found that the Assessing Officer (AO) had not examined the issue of disallowance of expenditure related to the exempt dividend income as required under Section 14A, making the assessment order erroneous and prejudicial to the interests of the revenue.

2. Disallowance of Expenditure Related to Exempt Dividend Income Under Section 14A:
The Tribunal concluded that the AO had asked for the breakup of interest and dividend income and that the assessee had demonstrated that no extra expenditure was incurred for earning the dividend income, which was received through a single cheque. The Tribunal emphasized that the AO must pinpoint the particular expenditure incurred for earning exempt income and cannot artificially disallow a proportionate amount without clear linkage to the exempt income.

3. Tribunal's Interpretation and Application of Section 14A and Section 263:
The Tribunal observed that Section 14A disallows only the expenditure proven to be incurred in relation to earning tax-free income and does not extend to assumed expenditures. The Tribunal cited previous cases (Wimco Seeding and Impulse Pvt. Ltd.) to support its view that the AO must establish a direct relationship between the expenditure and the exempt income. The Tribunal found that the Commissioner had not provided a specific finding of any particular expenses incurred for earning the exempt income and only directed the AO to make further inquiries.

4. Jurisdiction of the Commissioner Under Section 263:
The Tribunal's order was challenged on the grounds that the Commissioner could not conduct a roving and fishing inquiry and must confine himself to the materials on record. The Tribunal's decision was supported by the Supreme Court judgments in Malabar Industrial Company Ltd. v. CIT and CIT v. Max India Ltd., which clarified that the Commissioner could invoke Section 263 only if the AO's order was erroneous and unsustainable in law. The Tribunal found that the AO had conducted proceedings and considered the necessary factors, and the Commissioner's order did not meet the criteria for invoking Section 263.

Conclusion:
The High Court upheld the Tribunal's decision, stating that the AO's order was not unsustainable and that the Tribunal had correctly interpreted the provisions of Section 14A and Section 263. The Court found that the AO had conducted a thorough examination, and the Commissioner's order did not demonstrate a clear error or prejudice to the revenue. Consequently, the appeals were dismissed, and the question of law was answered in favor of the assessee.

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