2022 (7) TMI 598 - HC - Income Tax

Revision u/s 263 by CIT - interest on unsecured loans and claimed deduction out of income, which has been during allowed by the AO - CIT viewed that such interest is not allowable u/s 14A and u/s 57(iii) as investment made was related to exempt income and interest expenses were incurred for earning income from other source - HELD THAT - The order passed by the AO, in our opinion, shall be deemed to be erroneous in so far as it prejudicial to the interest of the Revenue, if the Pr. CIT would have specifically pointed out which of inquiries or verification should have been carried out by the AO in this regard and the AO failed to carry out those inquiries and verification as desired by the Pr. Commissioner of Income-tax. Since the Pr. CIT has not suggested the basis of inquiry or verification to be carried out by the AO, the order passed by the AO cannot be deemed to be erroneous in so as far as it is prejudicial to the interest of the Revenue. Thus we are of the opinion that the AO has adopted one possible legal view sustainable in law on the issue and mere invoking proviso based on revenue audit objection amounts non application of mind. Merely just because the view taken by the AO was not found acceptable does not mean that the AO has failed to make requisite enquiries. Thus, the view taken by the AO was plausible view, which cannot be disturbed by the Ld. Pr.CIT. Therefore, we find that twin condition were not satisfied for invoking the jurisdiction under section 263 of the Act. Therefore, in absence of the same the Id. Pr.CIT was not correct in exercise the jurisdiction under section 263 of the Act. In view of these facts and circumstances, wequash the impugned order passed under section 263 of the Act and allow the appeal of the assessee. In view of above findings of fact arrived at by the Tribunal and in view of settled legal position considered in the aforesaid findings, we are of the opinion that there is no infirmity in the impugned order passed by the Tribunal so as to give rise to any substantial question of law.

Summary

Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961.
2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules, 1962.
3. Deduction of interest expenses under Section 57(iii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Jurisdiction of PCIT under Section 263:
The Revenue challenged the Tribunal's decision, arguing that the PCIT was correct in exercising jurisdiction under Section 263 of the Income Tax Act, 1961. The Tribunal held that for the PCIT to assume jurisdiction under Section 263, the order of the Assessing Officer (AO) must be both erroneous and prejudicial to the interests of the Revenue. The Tribunal emphasized that lack of inquiry by the AO makes an order erroneous, but inadequate inquiry does not. The Tribunal noted that the PCIT did not specify what inquiries or verifications the AO failed to conduct, thereby failing to establish the twin conditions required for invoking Section 263.

2. Disallowance under Section 14A read with Rule 8D:
The PCIT argued that the AO did not disallow expenses related to earning exempt income, as required under Section 14A read with Rule 8D. The assessee claimed no exempt income during the assessment year, citing a loss from the partnership firm. The Tribunal referred to the Gujarat High Court's decision in CIT v. Corrtech Energy Pvt. Ltd., which held that Section 14A does not apply if no exempt income is claimed. The Tribunal also cited the Supreme Court's ruling in Maxopp Investment Ltd. v. CIT, which stated that only expenses proportionate to earning exempt income could be disallowed. Therefore, the Tribunal concluded that disallowance under Section 14A was not applicable in this case.

3. Deduction of Interest Expenses under Section 57(iii):
The PCIT disallowed the deduction of interest expenses, arguing that the assessee's investments were in private limited companies controlled by family members, and not for earning dividend income. The Tribunal, however, referred to the Supreme Court's decision in CIT v. Rajendra Prasad Moody, which held that interest paid on money borrowed for investment in shares is deductible under Section 57(iii), even if no dividend is earned. The Tribunal found that the AO's decision to allow the deduction was a plausible view sustainable in law, and the PCIT's invocation of Section 263 was not justified.

Conclusion:
The Tribunal concluded that the AO had adopted a plausible legal view sustainable in law and that mere disagreement with the AO's view does not justify the invocation of Section 263 by the PCIT. The Tribunal quashed the PCIT's order under Section 263, allowing the assessee's appeal. The High Court upheld the Tribunal's decision, finding no substantial question of law in the Revenue's appeal, and dismissed the tax appeal.