2019 (7) TMI 1322 - AT - Income Tax

Revision u/s 263 - Addition u/s 14A r.w.r. 8D - whether the order passed by the AO u/s 153A/143(3) dated 30.03.2015 is erroneous as well as prejudicial to the interest of the revenue? - HELD THAT - Disallowance under Rule 8D(2) (i) is concerned, as it relates to expenditure directly related to the exempted income. Since the direct expenditure is nil therefore disallowance is not required. Hence, order passed by the AO is neither erroneous nor prejudicial to the interest of Revenue so far Rule 8D (2) (i) disallowance is concerned. We note that Rule 8D (2) (ii) relates to disallowance of interest expenditure. The ld Counsel submitted before us the Balance Sheet for A.Y.2013-14, where we note that total own funds consisting share capital and reserve and surplus are which is more than the total investments of ₹ 20,69,06,913/-. - Bombay High Court in the case of CIT Vs Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that if there were funds available both interest free and over draft/loans are taken, then a presumption would arise that investment would be out of the interest free funds generated or available with the assessee, if the interest free funds were sufficient to meet the investment. Therefore, so far Rule 8D (2) (ii) is concerned, order passed by the AO is neither erroneous nor prejudicial to the interest of Revenue. Coming to the third limb, that is, so far Rule 8D (2) (iii) is concerned, we note that the Co-ordinate Bench of ITAT Kolkata in the case of REI Agro Ltd. 2013 (9) TMI 156 - ITAT KOLKATA has held that it is only the investment which yields dividend during the previous year that has to be considered while adopting the average value of investment for the purpose of Rule 8D(2)(iii). The aforesaid view of the Tribunal has since been affirmed by the Hon ble Calcutta High Court as correct in 2014 (4) TMI 713 - CALCUTTA HIGH COURT in the appeal against the order of the Tribunal in the case of REI Agro Ltd (supra). Therefore, assessing officer is supposed to take dividend bearing investments for the purpose of disallowance under Rule 8D(2) (iii) of the Rules, which he had not done, therefore order passed by him is erroneous and prejudicial to the interest of the Revenue, so far third limp Rule 8D(2) (iii) is concerned. That is, AO has not made disallowance under rule 8D(2) (iii) of the Rules, at all. Therefore, we direct the AO to compute the disallowance under rule 8D (2) (iii) taking into account only dividend bearing securities as narrated in the judgment of the Coordinate Bench in the case of REI Agro (supra). - Decided in favour of assessee.

Summary

Issues:
1. Jurisdiction of Principal CIT under section 263 of the Income Tax Act.
2. Correctness of the order passed by the Assessing Officer under section 143(3)/153A of the Act.
3. Disallowance under Rule 8D of the Income Tax Rules.

Jurisdiction of Principal CIT under section 263 of the Income Tax Act:
The appeal challenges the jurisdiction of the Principal CIT to invoke revisional powers under section 263 of the Act. The judgment refers to the conditions set by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT, emphasizing that for revisional jurisdiction to be valid, the Assessing Officer's order must be both erroneous and prejudicial to the interest of the Revenue. It outlines various scenarios where an order can be considered erroneous, such as incorrect assumption of fact, incorrect application of law, or lack of investigation by the Assessing Officer. Additionally, it explains the concept of prejudicial to the interest of revenue, highlighting that loss of revenue due to a permissible course of action by the Assessing Officer may not always be considered prejudicial unless unsustainable in law.

Correctness of the order passed by the Assessing Officer under section 143(3)/153A of the Act:
The judgment evaluates the correctness of the order passed by the Assessing Officer under section 143(3)/153A of the Act. It specifically focuses on the disallowance under Rule 8D of the Income Tax Rules. The analysis includes a breakdown of the disallowance computation under Rule 8D(2)(i), (ii), and (iii). It discusses the adequacy of the disallowance made by the Assessing Officer and whether the order was erroneous or prejudicial to the interest of Revenue based on the provisions of Rule 8D. The judgment provides detailed reasoning for each limb of Rule 8D, concluding that the Assessing Officer's order was neither erroneous nor prejudicial to the interest of Revenue for Rule 8D(2)(i) and (ii) but was found to be erroneous and prejudicial for Rule 8D(2)(iii).

Disallowance under Rule 8D of the Income Tax Rules:
The judgment delves into the specifics of the disallowance under Rule 8D of the Income Tax Rules. It cites relevant case law and interpretations to determine the correct application of Rule 8D(2)(iii) regarding the disallowance related to dividend-bearing investments. The judgment directs the Assessing Officer to compute the disallowance under Rule 8D(2)(iii) by considering only dividend-bearing securities, in line with previous rulings. Ultimately, the appeal of the assessee is allowed based on the detailed analysis provided for each aspect of the disallowance under Rule 8D.

This comprehensive analysis of the judgment covers the issues related to the jurisdiction of the Principal CIT under section 263, the correctness of the Assessing Officer's order under section 143(3)/153A, and the disallowance under Rule 8D of the Income Tax Rules, providing a thorough examination of each issue involved in the case.