2022 (1) TMI 529 - AT - Income Tax

Revision u/s 263 by CIT - case of the assessee was selected for limited scrutiny for examination of entire expenditure incurred by the assessee - AO has looked into the expenditure incurred by the assessee limiting to earning of dividend income - HELD THAT - It is a fact that the case of the assessee was selected for limited scrutiny for examination of entire expenditure incurred by the assessee - AO has looked into the expenditure incurred by the assessee limiting to earning of dividend income. Therefore, in our opinion, the order passed by the AO is erroneous and prejudicial to the interest of the Revenue. So far as merits of the case are concerned, we are of the opinion that the Assessing Officer has to examine the expenditure incurred by the assessee with reference to the dividend income without influencing the observations made by the ld. PCIT with respect to the amended Rule w.e.f. 02.06.2016. Accordingly, we modify the order passed by the ld. PCIT to the extent as indicated above. Disallowance u/s 14A r..w r. 8D - HELD THAT - After considering the revision order passed under section 263 of the Act as well as assessment order, it is amply clear that the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue and the ld. PCIT has rightly directed the AO to re-do the assessment in accordance with law. One of the arguments raised by assessee is that while passing the order under section 263 PCIT has given a finding that 1% of the annual average of the monthly averages of the opening and closing balances of the value of investment has to be disallowed is contrary to the statute. We find from the revision order that the ld. PCIT has not given any finding and it is only his observation and explaining the legal position and directed the AO to re-do the assessment. PCIT has expressed his opinion on the issue and there is every possibility that the Assessing Officer obviously influenced by the opinion expressed by the ld. PCIT. Accordingly, we modify the order passed by the ld. PCIT and direct the Assessing Officer to pass fresh assessment order in accordance with law without influencing the observations made by the ld. PCIT. Accordingly, the appeal filed by the assessee is dismissed.

Summary

Issues:
1. Delay in filing appeals under section 263 of the Income Tax Act, 1961 due to COVID-19.
2. Correctness of invoking provisions of section 263 by the Principal Commissioner of Income Tax.
3. Examination of entire expenditure incurred by the assessee, including dividend income.
4. Disallowance of expenses under section 14A r.w.s. Rule 8D.

Issue 1 - Delay in filing appeals under section 263:
The appeals filed by the assessee against the orders of the Principal Commissioner of Income Tax were delayed by 41 days. The assessee attributed the delay to the COVID-19 situation and cited the directions of the Hon'ble Supreme Court to justify the delay. The delay was condoned, and the appeals were admitted for adjudication.

Issue 2 - Correctness of invoking provisions of section 263:
The Principal Commissioner of Income Tax had invoked the provisions of section 263 of the Income Tax Act, 1961, based on limited scrutiny of the assessee's case. The assessee contended that the assessment order was erroneous and prejudicial to the Revenue's interest. The Appellate Tribunal found the assessment order to be erroneous and prejudicial to the Revenue, modifying the Principal Commissioner's order accordingly.

Issue 3 - Examination of entire expenditure incurred by the assessee:
The Assessing Officer had failed to examine all the expenditure incurred by the assessee, particularly relating to dividend income. The Principal Commissioner directed the Assessing Officer to re-do the assessment, considering the expenditure with reference to dividend income. The Appellate Tribunal upheld the Principal Commissioner's decision, emphasizing the need for a thorough examination of all relevant expenditures.

Issue 4 - Disallowance of expenses under section 14A r.w.s. Rule 8D:
Regarding the disallowance of expenses under section 14A r.w.s. Rule 8D, the Principal Commissioner directed the Assessing Officer to re-do the assessment, citing specific provisions applicable from June 2, 2016. The Appellate Tribunal found the assessment order lacking in considering the disallowance of expenses related to exempt income, leading to a modification of the Principal Commissioner's order for a fresh assessment in accordance with the law.

In conclusion, the Appellate Tribunal dismissed both appeals filed by the assessee, affirming the modifications made to the Principal Commissioner's orders and emphasizing the importance of a comprehensive examination of expenditures and adherence to legal provisions in income tax assessments.