2019 (8) TMI 1330 - AT - Income Tax

Revision u/s 263 - interest income and turnover mismatch - application of provision of section 14A r.w. Rule 8D - HELD THAT - If, you go through the points taken up by the PCIT for verification regarding interest income and turnover mismatch, the figure taken up by the PCIT is exactly one and the same. The assessee has reported interest income under the head sales turnover in its audit reports, whereas in ITR sales turnover and interest income has been shown separately. If, you add back sales turnover and interest income, then there would be no difference in turnover reported by the assessee in its audit report. This fact has been accepted by the PCIT, but he went on to direct the AO to verify the facts, in light of reconciliation filed by the assessee without pointing out, how the order passed by the AO is erroneous, in so far as, it is prejudicial to the interest of the revenue. Similarly, in respect of disallowances of interest expenditure u/s 14A, the assessee has made out a case of availability of own funds in form of capital, which is over and above, the amount of investments in shares and securities, which could yield exempt income. The assessee has also made out a case of no exempt income for the year under consideration. It is settled position of law that in case there is no exempt income earned for the year under consideration, then there would be no disallowances of expenditure incurred in relation to exempt income u/s 14A. This legal proposition is supported by number judicial precedents, including decision of Hon ble Supreme Court in the case of CIT vs Chettinad Logistics Pvt.Ltd. 2018 (7) TMI 567 - SC ORDER where, the Hon ble Supreme Court has dismissed SLP filed by the revenue and upheld the findings of Hon ble Madras High Court regarding no exempt income, no disallowances of expenditure u/s 14A of the I.T.Act, 1961. This legal proposition was further supported by the decision of Hon ble Bombay High Court, in the case of Pr.CIT vs Ballarpur Industries Limited 2016 (10) TMI 1039 - BOMBAY HIGH COURT where, similar view has been expressed by the High Court. Therefore, we are of the considered view that the Ld.PCIT has set aside assessment order passed by the AO without pointing out, how the assessment order passed by the AO is erroneous, in so far as, it is prejudicial to the interest of the revenue.

Issues Involved:
1. Legality and jurisdiction of the notice and order under section 263.
2. Erroneous and prejudicial nature of the assessment order.
3. Lack of investigation by the Assessing Officer (AO).
4. Disallowance under section 14A without exempt income.
5. Classification of interest income.
6. Mismatch in sales/turnover reported.
7. Sufficiency of enquiries made by AO.
8. Independent enquiry by Principal Commissioner of Income Tax (PCIT).

Detailed Analysis:

1. Legality and Jurisdiction of Notice and Order under Section 263:
The assessee argued that the notice issued under section 263 and the subsequent order passed by the Principal Commissioner of Income Tax (Pr CIT) were illegal, bad in law, and without jurisdiction. The Tribunal examined whether the Pr CIT had the jurisdiction to issue the notice and pass the order under section 263. It was determined that the Pr CIT could only assume jurisdiction if the assessment order was both erroneous and prejudicial to the interest of the revenue.

2. Erroneous and Prejudicial Nature of the Assessment Order:
The Pr CIT issued a show cause notice questioning the large interest expenses related to exempt income under section 14A and a mismatch between gross income shown under sales turnover in the audit report and interest income shown under the head income from other sources. The Pr CIT opined that the AO completed the assessment without verifying the necessary records, making the assessment order erroneous and prejudicial to the interest of the revenue.

3. Lack of Investigation by the Assessing Officer (AO):
The Pr CIT contended that the AO failed to carry out sufficient investigations regarding the interest expenditure and its relation to exempt income under section 14A. The Tribunal noted that the AO had issued a notice under section 142(1) and obtained an overall view of the financials but did not specifically question the disallowance under section 14A. The Tribunal found that the AO had examined the issue during the assessment proceedings and was satisfied with the explanations provided by the assessee.

4. Disallowance under Section 14A Without Exempt Income:
The assessee argued that no expenditure could be disallowed under section 14A as no exempt income was earned during the relevant assessment year. The Tribunal supported this argument by citing judicial precedents, including the Hon'ble Supreme Court’s decision in CIT vs Chettinad Logistics Pvt. Ltd., which held that no disallowance under section 14A should be made if no exempt income is earned.

5. Classification of Interest Income:
The Pr CIT questioned the classification of interest income shown as NIL under the head income from other sources, which was lesser than the gross interest receipts. The Tribunal noted that the Pr CIT accepted the assessee’s explanation regarding the classification of interest income and the mismatch in sales turnover, indicating that these issues were not prejudicial to the interest of the revenue.

6. Mismatch in Sales/Turnover Reported:
The Pr CIT raised concerns about a mismatch of ?1,34,82,973 in sales/turnover reported in the audit report and ITR. The Tribunal found that the Pr CIT accepted the assessee’s reconciliation of the turnover mismatch, suggesting that this issue did not warrant a revision of the assessment order.

7. Sufficiency of Enquiries Made by AO:
The Tribunal observed that the AO had examined the issues during the assessment proceedings and was satisfied with the explanations provided by the assessee. The Pr CIT’s direction to re-do the assessment was based on the belief that the AO should have conducted further enquiries, which the Tribunal found unwarranted.

8. Independent Enquiry by PCIT:
The Tribunal noted that the Pr CIT had not provided specific findings on the issues but only pointed out mistakes committed by the AO. The Tribunal held that the Pr CIT could not assume jurisdiction to revise the assessment order based on the belief that further enquiries should have been made by the AO.

Conclusion:
The Tribunal concluded that the Pr CIT set aside the assessment order without adequately demonstrating how it was erroneous and prejudicial to the interest of the revenue. The Tribunal set aside the Pr CIT's order and restored the assessment order passed by the AO under section 143(3), thereby allowing the appeal filed by the assessee. The order was pronounced in the open court on 28/08/2019.

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