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2015 (10) TMI 1007 - AT - Income TaxRevision u/s 263 - non-disallowance of an alleged amount under the provisions of Section 14A - Held that - Issue of disallowance u/s. 36(1)(iii) and also 14A was examined by the AO in detail in the scrutiny assessment. As briefly stated above, AO disallowed part of the interest claim on the reason that assessee has invested funds in the mutual funds diverting from business purposes. He quantified the disallowance at ₹ 7,85,32,019/- based on the period of investment during the year. Therefore, as far as quantification of interest on diversion of funds for investment in mutual funds are concerned, we cannot subscribe to the Ld. Pr.CIT s opinion of quantifying the amount on a formula under Rule 8D(2)(ii). This issue was already examined and adjudicated by the ITAT in earlier assessment year AY 2009-10 wherein, ITAT was of the opinion (in para 6) that, However, for making any disallowance it has to be established on record how much borrowed fund has been invested in the mutual funds and for what period. AO certainly cannot charge interest for the entire year when the investment is made by assessee for a month or few days. Further, the link is required to be established between the actual amount of investment made out of borrowed funds . In view of the above, the Pr.CIT s action in concluding that amount to be disallowed under Rule 8D(2)(ii) at ₹ 13,40,73,873/- is without any basis. To that extent, the basic presumption for invoking the jurisdiction being wrong, we cannot uphold the action of Pr.CIT in coming to the conclusion that AO s order is erroneous. Apart from the above, it is also to be seen that the very issue of disallowance of interest on borrowed funds, whether u/s. 36(1)(iii) or under Rule 8D(2)(ii) has been examined by the AO and is subject matter of appeal before the CIT(A). Further, CIT(A) s order deleting the disallowance per se was prior to the proceedings u/s. 263. As stated, Ld.CIT(A) passed the order as early as on 24-10-2014, whereas Pr.CIT initiated the proceedings by the show cause letter dt. 03-03-2015. Thus, the issue having been adjudicated by the CIT(A) both u/s. 36(1)(iii) as well as u/s. 14A r.w. Rule 8D, the Pr.CIT can no longer exercise jurisdiction to consider the same issue u/s. 263 - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (Pr.CIT) under Section 263 of the Income Tax Act. 2. Disallowance under Section 14A and Rule 8D of the Income Tax Act. 3. Disallowance under Section 36(1)(iii) of the Income Tax Act. 4. Merger of the Assessing Officer's (AO) order with the Commissioner of Income Tax (Appeals) [CIT(A)]'s order. 5. Adequacy of AO's inquiry during the assessment proceedings. Issue-wise Detailed Analysis: 1. Jurisdiction of Pr.CIT under Section 263: The Pr.CIT invoked jurisdiction under Section 263 to set aside the AO's assessment order dated 30-03-2013, arguing that it was erroneous and prejudicial to the interests of revenue due to the non-disallowance of Rs. 5,55,41,854/- under Section 14A. The assessee contested this, arguing that the assessment order was neither erroneous nor prejudicial to the interests of revenue. 2. Disallowance under Section 14A and Rule 8D: The AO had examined the provisions of Section 14A and disallowed 0.5% of the average investment under Rule 8D(2)(iii) amounting to Rs. 73,76,416/-. The Pr.CIT, however, concluded that the disallowance under Rule 8D(2)(ii) should have been Rs. 13,40,73,873/-, leading to a short computation of income by Rs. 5,51,41,860/-. The assessee argued that the investments were made from interest-free funds and not from borrowed funds, thus Section 14A should not apply. 3. Disallowance under Section 36(1)(iii): The AO disallowed Rs. 7,85,32,019/- under Section 36(1)(iii) for interest on funds diverted to non-business activities. The CIT(A) later deleted this disallowance, following the principles laid down by the Hon'ble Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. The Pr.CIT argued that the AO did not make a proper inquiry, thereby rendering the order erroneous and prejudicial to the revenue. 4. Merger of AO's Order with CIT(A)'s Order: The assessee argued that the AO's order had merged with the CIT(A)'s order, and thus, the Pr.CIT could not invoke Section 263. The Tribunal noted that the issue of disallowance under Sections 36(1)(iii) and 14A was already adjudicated by the CIT(A), and therefore, the Pr.CIT had no jurisdiction to revise the AO's order under Section 263. 5. Adequacy of AO's Inquiry: The Tribunal observed that the AO had examined the issues in detail during the assessment proceedings, issued show cause notices, and made findings in the assessment order. The Tribunal held that the AO had not failed in his duty to examine the issues, and thus, the Pr.CIT's invocation of Section 263 was not justified. Conclusion: The Tribunal concluded that the Pr.CIT was not correct in invoking jurisdiction under Section 263 on an issue that was already examined in detail by the AO and adjudicated by the CIT(A). The Tribunal set aside the Pr.CIT's order under Section 263 and allowed the assessee's appeal. The order was pronounced in the open Court on 18.9.2015. Order: The appeal is allowed.
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