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2022 (8) TMI 578 - AT - Income TaxRevision u/s 263 by CIT - Disallowance u/s 14A r.w.r.8D not made by AO - whether the assessment order has been passed by Ld. AO without making inquiries or verification with respect to the disallowance u/s 14A read with Rule 8D hence the assessment is erroneous insofar prejudicial to the interest of the Revenue? - HELD THAT - It is not the case that the AO has not made any enquiry. Indeed the Pr. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of disallowance u/s 14A read with rule 8D of the Act. It is not the case of the Pr. CIT that the AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the AO had made enquiries and after consideration of material placed on record accepted the genuineness of the claim of the assessee. We make our observation that the learned PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice dated 17 January 2022 about the same. Therefore, the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus, on this count the learned PCIT erred in taking the course of such provisions while deciding the issue against the assessee. Secondly, the learned PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 of the Act. We hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue. Thus, the revisional order passed by the learned PCIT is not sustainable and therefore we quash the same. Hence the ground of appeal of the assessee is allowed.
Issues Involved:
1. Whether the assessment order framed under section 143(3) of the Income Tax Act was erroneous and prejudicial to the interest of the Revenue under section 263 of the Act. Detailed Analysis: Issue 1: Erroneous and Prejudicial Assessment Order under Section 263 of the Act The assessee, a Private Limited Company engaged in the business of Clearing, Forwarding, Handling & Storage of Liquid Cargo, filed its return of income declaring Rs. 7,14,60,410/-. The assessment was completed by the AO on 25-12-2019, disallowing a deduction claimed under section 80IA(4)(i) of the Act for Rs. 4,85,50,551/-. The Principal Commissioner of Income Tax (PCIT) examined the case records and found that the assessee had investments in shares and mutual funds, which could earn exempt income. The PCIT noted that the AO failed to disallow expenses under section 14A read with Rule 8D. Consequently, the PCIT initiated proceedings under section 263 of the Act, issuing a show cause notice. The assessee contended that the issue was already covered in its favor in preceding years and no new investments or expenses were incurred for earning exempt income during the year under consideration. However, the PCIT held that the AO had completed the assessment without proper inquiry or verification, rendering the order erroneous and prejudicial to the interest of the Revenue. Thus, the PCIT invoked section 263 read with Explanation 2 of the Act. The assessee appealed against the PCIT's order, arguing that the AO had considered necessary details, conducted verification, and applied his mind before framing the assessment. The assessee provided copies of notices under section 142(1) and their replies to support this claim. The Tribunal observed that an inquiry deemed inadequate by the Commissioner does not make the AO's order erroneous. The AO's prerogative is to decide the extent of inquiry. The Tribunal cited various judgments, including CIT Vs. Sunbeam Auto, Gabriel India Ltd., and Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates, to emphasize that an order cannot be deemed erroneous if the AO has applied the law correctly and conducted inquiries, even if considered inadequate by the Commissioner. The Tribunal noted that the AO had made inquiries regarding the disallowance under section 14A during the assessment proceedings, as evidenced by the notices and replies exchanged. The PCIT's initiation of section 263 proceedings was based on the belief that the AO did not conduct adequate inquiries, but the Tribunal found that the AO had indeed made necessary inquiries and applied his mind to the issue. The Tribunal further noted that the PCIT did not specify the nature of inquiries that should have been conducted by the AO. Additionally, the PCIT's reference to Explanation 2 of section 263 was not included in the show cause notice, denying the assessee an opportunity to respond. In conclusion, the Tribunal held that the AO's assessment was not erroneous or prejudicial to the interest of the Revenue. Therefore, the revisional order passed by the PCIT was quashed, and the appeal filed by the assessee was allowed. Conclusion: The Tribunal quashed the PCIT's order under section 263, holding that the AO's assessment was neither erroneous nor prejudicial to the interest of the Revenue, thus allowing the assessee's appeal.
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