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2019 (12) TMI 1608 - AT - Income TaxRevision u/s 263 - Addition u/s 14A r.w.r. 8D - HELD THAT - Assessee has taken unsecured loans, which have been utilized for the purpose of investment in shares of private limited companies controlled by the family members and investment in partnership firm. Such investment was at Rs.26.55 crores as on 31.03.2013 and Rs.27.17 crores as on 31.03.2014. The assessee has paid interest of Rs.2,91,18,343/- on unsecured loans and claimed deduction out of income, which has been during allowed by the AO. CIT viewed that such interest is not allowable under section 14A and under section 57(iii) as investment made was related to exempt income and interest expenses were incurred for earning income from other source. However, it is noticed that there was negative income from partnership firm and no dividend income has been earned during the year under consideration, therefore, no expenditure has been incurred for earning exempt income, hence, disallowance under section 14A read with Rule 8D cannot be made as held by the Hon ble Gujarat High Court in the case of CIT v. Corrtech Energy Pvt. Ltd 2014 (3) TMI 856 - GUJARAT HIGH COURT Hon ble Supreme Court in CIT v. Max India Ltd. 2007 (11) TMI 12 - SUPREME COURT reiterated that the phrase prejudicial to the interests of the Revenue as used in section 263(1) of the Act must be read in conjunction with the expression erroneous and unless the view taken by the Assessing Officer is found to be unsustainable in law, the powers under section 263 of the Act cannot be invoked. The order passed by the AO, in our opinion, shall be deemed to be erroneous in so far as it prejudicial to the interest of the Revenue, if the Pr. CIT would have specifically pointed out which of inquiries or verification should have been carried out by the AO in this regard and the AO failed to carry out those inquiries and verification as desired by the Pr. Commissioner of Income-tax. Since the Pr. CIT has not suggested the basis of inquiry or verification to be carried out by the AO, the order passed by the AO cannot be deemed to be erroneous in so as far as it is prejudicial to the interest of the Revenue. We are of the opinion that the AO has adopted one possible legal view sustainable in law on the issue and mere invoking proviso based on revenue audit objection amounts non application of mind. Merely just because the view taken by the AO was not found acceptable does not mean that the AO has failed to make requisite enquiries. Thus, the view taken by the AO was plausible view, which cannot be disturbed by the Pr.CIT. Therefore, we find that twin condition were not satisfied for invoking the jurisdiction under section 263 of the Act. Therefore, in absence of the same the ld. Pr.CIT was not correct in exercise the jurisdiction under section 263 of the Act. In view of these facts and circumstances, we quash the impugned order passed under section 263 of the Act and allow the appeal of the assessee.
Issues Involved:
1. Whether the order passed under section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (Pr. CIT) was justified. 2. Whether the assessment order passed under section 143(3) was erroneous and prejudicial to the interest of the Revenue. 3. Applicability of Section 14A read with Rule 8D for disallowance of expenses. 4. Deductibility of interest expenses under Section 57(iii) of the Act. Issue-wise Detailed Analysis: 1. Justification of Order under Section 263: The appeal by the assessee challenges the order passed by the Pr. CIT under section 263 of the Income Tax Act, 1961. The Pr. CIT invoked Explanation-2 of Section 263, setting aside the assessment order with directions to reframe it after considering disallowance under Section 14A read with Rule 8D and verifying the claim under Section 57(iii). The assessee contended that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue, and the initiation of proceedings under section 263 was based on audit objections without independent application of mind by the Pr. CIT. 2. Erroneous and Prejudicial Nature of the Assessment Order: The Tribunal noted that for the Pr. CIT to exercise jurisdiction under section 263, the assessment order must be both erroneous and prejudicial to the interest of the Revenue. The Pr. CIT must demonstrate that the AO failed to conduct necessary inquiries or verifications. The Tribunal observed that the AO had taken a plausible view sustainable in law, and mere disagreement with the AO’s view does not justify the invocation of section 263. The Tribunal emphasized that the Pr. CIT did not provide specific findings on how the assessment order was prejudicial to the Revenue. 3. Applicability of Section 14A read with Rule 8D: The Pr. CIT argued that expenses related to earning exempt income should be disallowed under Section 14A read with Rule 8D. However, the Tribunal noted that the assessee had not earned any exempt income during the assessment year 2014-15. Citing the Gujarat High Court’s decision in CIT v. Corrtech Energy Pvt. Ltd., the Tribunal held that in the absence of exempt income, no disallowance under Section 14A could be made. The Tribunal also referenced the Supreme Court’s decision in CIT v. Max India Ltd., which supports that disallowance under Section 14A is not applicable if no exempt income is earned. 4. Deductibility of Interest Expenses under Section 57(iii): The Tribunal examined the assessee’s claim of interest expenses under Section 57(iii). The Pr. CIT had disallowed the interest expenses, arguing that the investments were in private limited companies controlled by family members and not for earning income. The Tribunal, however, relied on the Supreme Court’s decision in CIT v. Rajendra Prasad Moody, which held that interest paid on money borrowed for investment in shares is deductible under Section 57(iii) even if no dividend is earned. The Tribunal concluded that the AO’s view of allowing the interest expenses was a plausible view and sustainable in law. Conclusion: The Tribunal quashed the order passed under section 263 by the Pr. CIT, holding that the twin conditions of the assessment order being erroneous and prejudicial to the interest of the Revenue were not satisfied. The Tribunal emphasized that the AO had adopted a plausible view sustainable in law, and mere disagreement with this view does not justify the invocation of section 263. The appeal of the assessee was allowed.
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