2012 (11) TMI 332 - AT - Income Tax

Proceedings u/s 263 - tax payable u/s 115JB - rebate under section 88E - disallowance as per the provisions Rule 8D of the IT Rules r.w.s. 14A - erroneous order Held that - Prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue - Assessing Officer was also aware that assessee had claimed rebate u/s 80E in respect of securities transaction tax in return of income - AO accepted the method of working out the tax payable on the deemed total income u/s 115JB after providing rebate u/s 88E. - the order passed by Assessing Officer was neither erroneous nor prejudicial to the interest of revenue on this count. Other issue on which the CIT invoked the provisions of section 263 is not disallowing u/s 14A read with Rule 8D. The assessee himself has disallowed expenses of Rs.3,000/- of peons, conveyance, postage, etc. The Assessing Officer accepted the quantum of disallowance. CIT takes a view that the disallowances should be as per Rule 8D. Various Courts had held that the provisions of Rule 8D cannot be invoked retrospectively. These provisions are applicable prospectively only and w.e.f. assessment year 2008- 09 onwards. In the assessee s case, the year involved is assessment year 2006-07. Thus, the view taken by the Assessing Officer by accepting the reasonable disallowance by not invoking the applicability of Rule 8D is a sustainable view in law. The Assessing Officer accepted the disallowance as made by assessee - order of Assessing Officer was neither erroneous nor prejudicial to the interest of revenue on this count also - CIT was not justified in invoking the provisions of section 263 of the Income-tax Act - appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of the CIT's order under section 263 of the Income-tax Act, 1961.
2. Allowability of rebate under section 88E.
3. Tax payable under section 115JB.
4. Disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Validity of the CIT's Order under Section 263:
The appeal challenges the CIT's order under section 263, which set aside the Assessing Officer's (AO) assessment order dated 29.12.2008. The CIT's intervention was based on the view that the AO's order was erroneous and prejudicial to the interests of the Revenue. The prerequisites for the CIT to exercise jurisdiction under section 263 are that the AO's order must be both erroneous and prejudicial to the interests of the Revenue. The provision cannot be invoked to correct every type of mistake or error. The AO must have made an incorrect assumption of facts or an incorrect application of law for the order to be deemed erroneous.

2. Allowability of Rebate under Section 88E:
The CIT contended that the rebate under section 88E was incorrectly allowed on income other than that chargeable under the head "Profit and Gain of Business Profession" arising from taxable securities transactions. The AO, however, followed the prescribed return of income form, which allows for such a rebate. Various ITAT benches have upheld this method of computing tax liability. The AO's view was considered sustainable in law, making the CIT's intervention a change of opinion rather than correcting an error.

3. Tax Payable under Section 115JB:
The CIT argued that the tax payable under section 115JB was not charged separately without giving rebate under section 88E. However, the prescribed return form provides for computing tax payable on deemed income under section 115JB after allowing rebate under section 88E. The AO's acceptance of this computation method was consistent with the prescribed form and supported by ITAT decisions. Thus, the AO's order was neither erroneous nor prejudicial to the Revenue.

4. Disallowance under Section 14A Read with Rule 8D:
The CIT held that the AO erred by not making disallowance as per Rule 8D for the exempt income on account of dividend. The AO accepted the assessee's reasonable disallowance of Rs. 3,000 for expenses related to exempt income. Courts have held that Rule 8D is not retrospective and applies only from the assessment year 2008-09 onwards. Since the assessment year in question is 2006-07, the AO's decision not to apply Rule 8D was legally sustainable. The AO's acceptance of the assessee's disallowance was a reasonable and sustainable view in law.

Conclusion:
The CIT's order under section 263 was set aside as the AO's original assessment was neither erroneous nor prejudicial to the interests of the Revenue. The AO's views on the allowability of rebate under section 88E, the computation of tax payable under section 115JB, and the disallowance under section 14A were all sustainable in law. The appeal of the assessee was allowed.