2021 (8) TMI 516 - HC - Income Tax

Revision u/s 263 - Addition u/s 14A - HELD THAT - We find that what was intended to be said by the Tribunal is that Section 14A of the Act has been functionally made operative on introduction of Rule 8D and the said Rule was inserted by Income-tax (Fifth Amendment) Rules, 2008 with effect from 24.03.2008 and therefore, Section 14A read with Rule 8D is not applicable to the impugned assessment year 2002-03. In this background, it was held that Section 14A(1) itself has been brought into the statute book by Finance Act, 2006 with effect from 01.04.2007. In fact, there appears to have been typographical error, since it should be Section 14A(2) and not Section 14A(1) - on a reading of paragraph 7, it is seen that the Tribunal has reiterated that the functional operation of Section 14A is not applicable to the assessment year, which was impugned before it. Thus, we find that the finding rendered by the Tribunal in paragraph 7 sets out the correct legal position. The Tribunal, not stopping with that, examined the scope of enquiry made by the CIT to examine as to whether the revision order is sustainable or not. On taking into consideration the factual position, the Tribunal held that general observations are not sufficient to hold an assessment order erroneous and prejudicial to the interests of the Revenue. It noted the submission of the assessee that dividend income has been received from its hundred per cent subsidiary and the assessee has not incurred any expenditure whatsoever in earning that dividend income and therefore, there was no occasion for the assessee to claim any such expenditure in computing its taxable income. The Tribunal found fault with the CIT by observing that when such was the stand taken by the assessee, it is necessary for the CIT to at least record a prima facie finding that certain amount claimed by the assessee as deduction in its computation of income de facto related to earning of tax-free income. Thus, it was held that in the absence of any such prima facie finding, the reassessment was erroneous. Thus, we find that the Tribunal rightly held in favour of the assessee.

Summary

Issues Involved:
1. Validity of the Revision Order under Section 263 of the Income Tax Act, 1961.
2. Applicability of Section 14A for the Assessment Year 2002-03.

Detailed Analysis:

1. Validity of the Revision Order under Section 263 of the Income Tax Act, 1961:

The appeal by the Revenue contested the Tribunal's decision to set aside the revision order passed under Section 263. The Commissioner of Income Tax (CIT) had observed that the assessee received exempt dividend income but did not disallow any expenditure related to earning such income, which should have been done under Section 14A. The CIT issued a notice under Section 263, deeming the assessment erroneous and prejudicial to the Revenue's interest. The Tribunal, however, ruled that the CIT did not record any prima facie finding that the assessee claimed deductions related to tax-free income. The Tribunal found that general observations were insufficient to hold the assessment order erroneous and prejudicial. The High Court upheld the Tribunal's decision, noting that the CIT's failure to record a prima facie finding rendered the reassessment erroneous.

2. Applicability of Section 14A for the Assessment Year 2002-03:

The Revenue argued that the Tribunal erred in holding that Section 14A was not applicable to the Assessment Year 2002-03, asserting that Section 14A was inserted by the Finance Act, 2001 with retrospective effect from 01.04.1962. The Tribunal had ruled that Section 14A read with Rule 8D, introduced by the Income-tax (Fifth Amendment) Rules, 2008 effective from 24.03.2008, was not applicable to the assessment year 2002-03. The High Court affirmed this view, referencing the Supreme Court's decision in CIT vs. Essar Teleholdings Ltd., which clarified that Section 14A(2) and (3) and Rule 8D were intended to operate prospectively from the assessment year 2007-08. The High Court concluded that the Tribunal correctly interpreted the law, noting that the functional operation of Section 14A was not applicable to the assessment year in question.

Conclusion:

The High Court dismissed the Revenue's appeal, affirming that the Tribunal correctly set aside the revision order under Section 263 and held that Section 14A was not applicable to the Assessment Year 2002-03. The substantial questions of law were answered against the Revenue, and the appeal was dismissed with no costs.