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2021 (6) TMI 169 - AT - Income TaxRevision u/s 263 - Doctrine of merger - while computing disallowance u/s 14A by applying formula under Rule 8D item (iii) being percent of average investment, investment in partnership firm M/s. Gokulanand Petro Fibers was not considered - HELD THAT - PCIT under 263 revision proceedings directed the assessing officer to recompute the disallowance under section 14A r.w.r.8D, although in the meantime the order of assessment passed by the assessing officer under section 143(3) r.w.s. 92CA(3) of the Act, had been the subject-matter of appeal before the Commissioner of Income Tax (Appeals). Therefore, order passed by the assessing officer has merged with the Commissioner of Income Tax (Appeals), hence ld Principal Commissioner of Income Tax ( Ld. PCIT) does not have power under section 263 to exercise his jurisdiction on the issue of disallowance under section 14A r.w.r.8D , since the said issue has been already adjudicated by the Commissioner of Income Tax (Appeals) Provision contained in clause (c) of Explanation 1 to section 263(1) has been inserted by amendment by the Finance Act, 1989 with effect from 1-6-1988. We note that the subject-matter in question Disallowance under section 14A r.w.r.8D has been considered and decided by the Commissioner of Income Tax (Appeals), therefore, now ld PCIT could not invoke the revisional jurisdiction under section 263(1) of Act. The power of revision conferred on the Commissioner by section 263 to call for and examine then record of any proceeding under the Act and to interfere if he considers that any order passed therein by the assessing officer is erroneous insofar as it is prejudicial to the interest of the revenue, does not empower the Commissioner to interfere with any order passed by the Commissioner of Income Tax (Appeals). Therefore, if any order of the assessing officer had merged in the order passed in appeal by the Commissioner of Income Tax (Appeals), the same cannot be set aside under section 263, in revision, by the Principal Commissioner of Income Tax. For the reasons given above, we are of the view that order of the Principal Commissioner of Income Tax passed under section 263 is without jurisdiction and hence, invalid in law - Appeal of the assessee is allowed.
Issues Involved:
1. Whether the order passed by the Assessing Officer (AO) under section 143(3) r.w.s. 92CA(3) was erroneous and prejudicial to the interest of the Revenue. 2. Disallowance under section 14A r.w. Rule 8D of the Income Tax Rules. 3. Exemption claimed under section 10(38) of the Income Tax Act. Detailed Analysis: Issue 1: Erroneous and Prejudicial Order The assessee challenged the correctness of the order dated 24.04.2020 passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961. The PCIT invoked Explanation 2 of Section 263, arguing that the assessment order passed under section 143(3) was erroneous and prejudicial to the interest of the Revenue. The assessee contended that the AO had thoroughly examined the issues, and thus, the order was neither erroneous nor prejudicial to the Revenue. Issue 2: Disallowance under Section 14A r.w. Rule 8D The PCIT observed that the AO did not consider the investment in the partnership firm M/s. Gokulanand Petro Fibers while computing disallowance under section 14A by applying Rule 8D. The PCIT noted that the assessee received a share of profit from the firm, which was claimed as exempt income under section 10(2A). The PCIT argued that this investment should have been considered for disallowance under section 14A read with Rule 8D. The assessee argued that during the assessment proceedings, the AO had already made a disallowance of ?34,52,937/- under section 14A r.w. Rule 8D. The CIT(A) deleted this disallowance, following the decision of the Apex Court in PCIT vs. Sintex Industries Ltd., which held that when the assessee has sufficient interest-free funds, no disallowance under section 14A is warranted. The assessee also argued that the doctrine of merger applied, as the issue had been adjudicated by the CIT(A). Issue 3: Exemption under Section 10(38) The PCIT noted that the AO allowed the exemption claimed under section 10(38) for Long Term Capital Gain (LTCG) on the sale of mutual funds without proper examination. The PCIT argued that the AO did not verify whether the conditions for availing the exemption were fulfilled, particularly noting that the investments were in liquid mutual funds, which are not equity-oriented and thus not exempt under section 10(38). The assessee contended that the AO had examined the details and documents related to the exempt income during the assessment proceedings. The AO took a possible view, and therefore, the order was neither erroneous nor prejudicial to the Revenue. Conclusion: The Tribunal examined whether the order of the AO was erroneous and prejudicial to the interest of the Revenue, referring to the judicial precedent set by the Hon’ble Supreme Court in Malabar Industries Ltd. vs. CIT. The Tribunal noted that the AO had thoroughly examined the issues related to disallowance under section 14A and the exemption under section 10(38) during the assessment proceedings. The Tribunal also acknowledged that the CIT(A) had already adjudicated and deleted the disallowance under section 14A, applying the doctrine of merger. The Tribunal concluded that the PCIT could not invoke jurisdiction under section 263 for issues already decided by the CIT(A). The Tribunal held that the order passed by the PCIT was without jurisdiction and invalid in law, thereby quashing the order dated 24.04.2020 passed by the PCIT. Result: The appeal of the assessee was allowed, and the order of the PCIT was quashed.
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