2014 (8) TMI 1183 - AT - Income Tax

Revision u/s 263 - AO has not examined the issue as to whether these expenses pertaining to handling charges relatable to exempt income or taxable income - AO s decision not to properly examine such expenses as above amounts to failure to examine the applicability of provisions of section 14A and has rendered the assessment erroneous and prejudicial to the interests of revenue - HELD THAT - The total transport and handling charges appears in the accounts is inclusive of transport and service charges. The total handling charges appearing on expenditure side is the actual sum paid to various contractors (After considering the TDS). Thus, there is a direct nexus of expenditure incurred and income reflected in the accounts. Since this activity pertains to taxable income, the expenditure was deducted from transport and handling receipt. The expenditure and handling charges do not pertained to deriving any of the exempted income. The various working submitted during the course of assessment have been verified by the concerned assessing Officer at relevant point of time and there is nothing on record to conclude that handling charges pertains to income from exempt activities as well as taxable activities. AO has passed the order after applying his mind to the facts of the case. In such a situation, the order of Assessing Officer cannot be said to be erroneous so as to prejudicial to the interests of revenue to invoke the provisions of section 263. So, the same is set aside. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the order passed by the Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act.
2. Apportionment of handling charges between exempt and taxable income.
3. Applicability of Rule 8D of the Income Tax Rules for the Assessment Year (A.Y.) 2002-03.

Issue-wise Detailed Analysis:

1. Validity of the order passed by the Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act:

The assessee challenged the order passed by the CIT under section 263, arguing that it did not satisfy the requirements of the said section and that the jurisdiction was not properly resumed. The CIT had set aside the assessment order passed by the Assessing Officer (AO) under section 143(3) read with section 254, stating that the AO failed to examine whether the handling charges pertained to exempt or taxable income. The CIT considered this failure as rendering the assessment erroneous and prejudicial to the interests of revenue. The Tribunal, however, found that the AO had applied his mind and verified the required details before allowing the handling charges as expenses against taxable income. Thus, the Tribunal held that the order passed by the AO was not erroneous and prejudicial to the interests of revenue, and the CIT's order under section 263 was unwarranted and unjustified.

2. Apportionment of handling charges between exempt and taxable income:

The CIT argued that the handling charges of Rs. 17,30,89,840/- should have been apportioned between exempt and taxable income on a pro-rata basis, as they pertained to both activities. The assessee contended that these charges were directly related to taxable income from transport and handling receipts of Rs. 18,58,63,814/-. The Tribunal found that the expenses on handling charges were not incurred on earning tax-free income and were correctly deducted from taxable income only. The AO had considered all relevant facts and circumstances and verified the details before allowing the deduction. Therefore, the Tribunal concluded that there was no need for apportionment, and the AO's decision was correct.

3. Applicability of Rule 8D of the Income Tax Rules for the Assessment Year (A.Y.) 2002-03:

The CIT applied the provisions of Rule 8D for apportioning expenses related to exempt income. However, the assessee argued, citing the Bombay High Court's decision in the case of Godrej & Boyce, that Rule 8D does not have retrospective application and is applicable prospectively from A.Y. 2008-09. The Tribunal agreed with the assessee, stating that Rule 8D did not apply to A.Y. 2002-03. Therefore, the AO's assessment, which did not apply Rule 8D, was in accordance with the law, and the CIT's reliance on Rule 8D was misplaced.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, setting aside the order passed by the CIT under section 263, and held that the AO's assessment order was neither erroneous nor prejudicial to the interests of revenue. The handling charges were correctly deducted from taxable income, and Rule 8D was not applicable for the A.Y. 2002-03. The Tribunal pronounced this judgment on the 25th day of August, 2014.