2014 (9) TMI 512 - AT - Income Tax

Validity of revision u/s 263 Held that - An order cannot be termed as erroneous unless it is not in accordance with law - This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous - If the Income-tax Officer had applied his mind while making an assessment and determines the income either by accepting the accounts or by making some estimate himself after making due enquiries, then the said assessment order cannot be termed as erroneous simply because, the Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side - there must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. CIT has initiated the revision proceedings mainly on the reasoning that the AO has failed to follow the procedure prescribed under Rule 8D of the I.T Rules - the revision proceeding is liable to be quashed, as the view entertained by CIT on the issue of disallowance u/s 14A is not in accordance with the law - the AO has examined the issue of disallowance to be made u/s 14A of the Act - the assessee had declared a dividend income and the net profit returned by it was 129.34 crores - the issue relating to invoking of the provisions of Rule 8D was specifically questioned by the AO and the assessee has given above reply - the AO has proceeded to compute the disallowance - the AO has examined the applicability of Rule 8D to the case of the assessee herein - the AO has examined the issue of disallowance to be made u/s 14A of the Act - the assessment order cannot be termed as erroneous and prejudicial to interests of revenue simply because the CIT is having a different view in this matter Decided in favour of assessee.

Issues Involved:
1. Validity of the revision order under Section 263 of the Income Tax Act.
2. Applicability of Rule 8D for disallowance under Section 14A of the Income Tax Act.
3. Classification of income from a partnership firm as exempt income.
4. Proper examination and application of Rule 8D by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Validity of the Revision Order under Section 263 of the Income Tax Act:
The appeal challenges the revision order dated 18.3.2013 passed by the Commissioner of Income Tax (CIT), Central IV, Mumbai under Section 263 of the Income Tax Act. The assessee contends that the assessment order passed by the AO was neither erroneous nor prejudicial to the interests of revenue. The CIT initiated revision proceedings on the grounds that the AO's order was erroneous in terms of disallowance under Section 14A of the Act.

2. Applicability of Rule 8D for Disallowance under Section 14A of the Income Tax Act:
The CIT observed that the AO had disallowed only Rs. 8,20,304 under Section 14A, whereas disallowance should have been computed as per Rule 8D of the Income Tax Rules. The CIT held that the AO failed to disallow under Rule 8D(2)(ii) and Rule 8D(2)(iii), thus rendering the order erroneous and prejudicial to revenue. However, the assessee argued that the AO had made the disallowance after due consideration and that Rule 8D should not be applied mechanically without examining the claim made by the assessee.

3. Classification of Income from a Partnership Firm as Exempt Income:
The assessee argued that income from the partnership firm should not be considered exempt income under Section 14A. They cited the Supreme Court's decision in CIT Vs. A.W. Figgies & Co. & Ors., asserting that a partnership firm does not have a separate legal existence from its partners, and thus, the income earned by a partner from the firm should not be treated as exempt income. The CIT did not accept this argument and relied on the decision of the Special Bench of the Tribunal in Daga Capital Management (P) Ltd., which includes interest paid on borrowed capital for acquiring shares held as stock in trade in the disallowance computation under Section 14A.

4. Proper Examination and Application of Rule 8D by the Assessing Officer (AO):
The assessee contended that the AO had duly examined the issue of disallowance under Section 14A during the assessment proceedings. The AO had considered the accounts and made a disallowance of Rs. 8,20,304 after examining the facts. The CIT, however, believed that the AO did not make proper enquiries and failed to apply Rule 8D correctly. The Tribunal found that the AO had indeed examined the applicability of Rule 8D and had adopted one of the possible courses permissible in law. The Tribunal emphasized that an order cannot be termed erroneous simply because the CIT has a different view.

Conclusion:
The Tribunal concluded that the CIT's view that Rule 8D is mandatory was incorrect in light of the jurisdictional High Court's decision in Godrej & Boyce Mfg. Co. Ltd. The AO had examined the issue and made a disallowance based on the accounts, which is a permissible course of action. Thus, the revision order passed by the CIT was set aside, and the appeal filed by the assessee was allowed. The Tribunal reiterated that the AO's order was not erroneous or prejudicial to the interests of revenue, and the CIT was not justified in passing the revision order.

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