2017 (6) TMI 229 - AT - Income Tax

Revision u/s 263 - disallowance u/s 14A - order erroneous and prejudicial to the interest of Revenue - Held that - For the purpose of revision under section 263 of the Act, what is relevant is to decide whether the view adopted by the AO in the order of assessment, while considering the issue of disallowance under section 14A r.w. rule 8D of the Rules, was a possible view, notwithstanding the fact that the learned CIT entertains a different view/opinion on the same set of facts. CIT has not controverted the factual aspects of the AO s finding that no disallowance of interest on loans debited by the assessee is called for thereon (ostensibly under rule 8D(2)(ii) of the Rules) since almost the entire investment was made strategically in group concerns for the purposes of the assessee s business, but proceeded beyond the show cause notice he issued to the assessee by directing inquiry to be carried out under section 57(ii) of the Act also alongwith the disallowance to be made under rule 8D(2)(ii) of the Rules. We are of the opinion that, since it is clear to us that inquiry in respect of the requirement of disallowance of interest under section 14A r.w. rule 8D of the Rules was conducted by the AO in the assessment proceedings, as is evident from the order of assessment for A.Y. 2011-12, and he took a possible view that no disallowance was called for on interest expenditure, ostensibly in respect of rule 8D(2)(ii) of the Rules and that disallowance was called for under rule 8D(2)(iii) of the Rules; the mere fact that the CIT is not in agreement with the view adopted by the AO, would not render the order of assessment erroneous and prejudicial to the interest of Revenue - Decided in favour of assessee.

Issues Involved:
1. Breach of the principles of natural justice.
2. Legality of the revision under section 263 of the Income Tax Act.
3. Merits of the disallowance under section 14A read with Rule 8D of the Income Tax Rules.

Detailed Analysis:

1. Breach of the Principles of Natural Justice:
The appellant argued that the Principal CIT erred in framing the revision order under section 263 of the Income Tax Act without providing proper, sufficient, and effective opportunity of being heard to the appellant. This was claimed to be a breach of the principles of natural justice, rendering the order bad and illegal due to non-application of mind to the facts and contentions brought on record by the appellant.

2. Legality of the Revision Under Section 263 of the Income Tax Act:
The appellant contended that the revisionary order passed by the Principal CIT was illegal and void as the necessary pre-conditions for initiating the revision proceedings were not fulfilled. It was argued that the assessment order had already merged with the appellate order and was not the "record" within the meaning of section 263 of the Act. Furthermore, the appellant asserted that the assessment order was neither "erroneous" nor "prejudicial to the interest of the revenue" within the meaning of section 263 of the Act. The Principal CIT’s direction to the AO to consider disallowance under Rule 8D(2)(ii) was also contested as the AO had already made a detailed inquiry and applied his mind to the issue, concluding that no disallowance of interest expenditure was necessary under section 14A read with Rule 8D(2)(ii).

3. Merits of the Disallowance Under Section 14A Read with Rule 8D:
The appellant argued that the interest payment was fully allowable under section 36(1)(iii) of the Act and that section 14A should not apply automatically just because the interest expense is allowable under section 57(iii). It was emphasized that the AO had examined and verified the details of the investments in associate and subsidiary concerns, which were strategic and made for business purposes. The AO had concluded that the interest incurred was for business purposes and excluded it from disallowance under Rule 8D(2)(ii). The Principal CIT’s reliance on the decision in CIT vs. Sujani Textiles P. Ltd. was contested as distinguishable on facts. The appellant further argued that the revision under section 263 was impermissible if the AO had already conducted an inquiry, even if it was inadequate, and that the CIT could not assume jurisdiction under section 263 merely because he had a different opinion.

Tribunal's Findings:
The Tribunal found that the AO had indeed conducted a detailed inquiry into the issue of disallowance under section 14A read with Rule 8D. The AO had examined the details and submissions provided by the appellant and concluded that no disallowance of interest was necessary under Rule 8D(2)(ii) as the investments were strategic and made for business purposes. The Tribunal held that the Principal CIT had not disputed the basic facts or found any fresh or different facts, but had merely taken a different view on the same set of facts. The Tribunal emphasized that if the AO had taken one of the possible views, the CIT could not exercise revisionary powers under section 263 merely because he had a different opinion.

The Tribunal concluded that the conditions for invoking jurisdiction under section 263 did not exist as the AO had taken a possible view after due application of mind. Therefore, the Principal CIT exceeded his jurisdiction under section 263. The Tribunal set aside and quashed the order of the Principal CIT passed under section 263 for A.Y. 2011-12.

Conclusion:
The assessee’s appeal for A.Y. 2011-12 was allowed, and the order of the Principal CIT under section 263 was quashed. The Tribunal pronounced the order in the open court on 12th April 2017.

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