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2018 (5) TMI 794 - AT - Income TaxRevision u/s 263 - disallowance u/ 14A - apportionment of expenditure in relation to the income not forming part of the total income - Held that - It was immaterial if dividend income was actually earned or not, which, rather, may be a consideration where the shares, as in the present case, are held to retain control over the investee company, i.e., for strategic reasons, as was the case with regard to the investment by Maxopp Investment Ltd. one of the assessees in that case. 2018 (3) TMI 805 - SUPREME COURT OF INDIA The related expenditure has to be reckoned on an expansive basis, i.e., as attributable thereto. The constitutionality of r.8D, providing for rules of apportionment of both direct and indirect expenditure, stands already upheld by the Hon ble High Court in Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT). Earlier, in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT (2017 (5) TMI 403 - SUPREME COURT OF INDIA), with reference to the language of section 14A, the title of which is itself clarificatory, the Apex Court clarified that income must not be includible in the total income, so that once this condition is satisfied, the expenditure incurred in earning the same cannot be allowed to be deducted. The AO in the present case has clearly failed to apply the law in the matter, which gets reiterated time and again by the Hon ble Apex Court. We find no merit in the assessee s case. We, accordingly, uphold the impugned order, both on the aspect of lack of inquiry by the assessing authority, as well as his non-observance of the Board Circular 5/2014, which we have found to be in consonance with the law as explained by the Apex Court. The impugned order being after the date of amendment (by way of Explanation 2) to section 263, i.e., 01.06.2015, the same is an equally valid ground for the exercise of revisionary power u/s. 263. It is this power, i.e., to deem an order as erroneous in-so-for as it is prejudicial to the interests of the Revenue, that stands conferred w.e.f. 01.06.2015. That is, the law, w.e.f. 01.06.2015, deems an order as so, where any of the circumstances specified is, in the opinion of the competent authority, satisfied. It has nothing to do with the date of the passing of the order deemed erroneous, or the year to which it pertains. Being a part of the procedural law, the provision shall have effect from 01/06/2015 (also refer CWT v. Sharvan Kumar Swarup & Sons 1994 1994 (9) TMI 2 - SUPREME Court). - Decided against assessee.
Issues Involved:
1. Invocation of Section 263 of the Income Tax Act. 2. Applicability of Section 14A despite no tax-exempt income being earned. 3. Assessment of expenditure incurred in relation to tax-exempt income. 4. Compliance with Board Circular 5/2014. Issue-wise Detailed Analysis: 1. Invocation of Section 263 of the Income Tax Act: The primary issue was whether the provision of Section 263 was rightly invoked by the Principal Commissioner of Income Tax (Pr. CIT). The Pr. CIT noted that the Assessing Officer (AO) had failed to examine the expenditure incurred by the assessee in relation to its investment in shares, which could yield tax-exempt income. The AO accepted the assessee's contention without proper inquiry, which the Pr. CIT deemed erroneous and prejudicial to the interests of the Revenue. The Tribunal upheld this view, emphasizing that the AO's lack of inquiry justified the invocation of Section 263, as per settled law, including the Supreme Court's decision in Malabar Industrial Co. Ltd. vs. CIT. 2. Applicability of Section 14A Despite No Tax-Exempt Income Being Earned: The Pr. CIT and the Tribunal both held that Section 14A applies even if no tax-exempt income is actually earned, as long as expenditure is incurred for earning such income. This interpretation is supported by Board Circular 5/2014 and various judicial precedents, including the Supreme Court's decision in CIT v. Walfort Share & Stock Brokers P. Ltd. The Tribunal noted that the legislative intent behind Section 14A is to prevent the deduction of expenses incurred in relation to tax-exempt income from taxable income. 3. Assessment of Expenditure Incurred in Relation to Tax-Exempt Income: The Tribunal observed that the assessee had incurred significant interest and administrative expenses, which were not properly examined by the AO in relation to the investment in shares. The AO's failure to investigate whether these expenses were related to the tax-exempt income warranted the revision of the assessment. The Tribunal emphasized that the principle of net income, which includes apportioning expenses between taxable and non-taxable income, is fundamental to taxation and must be applied. 4. Compliance with Board Circular 5/2014: The Tribunal found that the AO did not adhere to Board Circular 5/2014, which clarifies that Section 14A applies even if no tax-exempt income is earned. The Circular is binding on the AO and aligns with the legislative intent and judicial interpretations. The Tribunal noted that the Circular had not been set aside or stayed by any High Court, making it obligatory for the AO to follow it. Decision: The Tribunal upheld the Pr. CIT's order directing the revision of the assessment. The Tribunal found no merit in the assessee's appeal and dismissed it. The decision emphasized the necessity for proper inquiry by the AO and adherence to Board Circular 5/2014, affirming the revisionary jurisdiction under Section 263. The Tribunal also noted that the amendment to Section 263 by way of Explanation 2, effective from 01.06.2015, further justified the revision.
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