2023 (4) TMI 230 - AT - Income Tax

Revision u/s 263 - As per CIT AO had failed to make inquiries with regard to the expenses to be disallowed incurred for earning exempt income, as per the provisions of section 14A - HELD THAT - Where the assessee had pointed out to the Ld.PCIT that his calculation of disallowable expenses was based on incorrect facts, the ld.Pr.CIT was duty bound to consider this contention of the assessee, and thereafter give his finding on the same, that despite the said contentions and taking note of the same also, expenses were still liable to be disallowed under section 14A of the Act, and the AO having made no inquiry, the assessment order therefore ought be held to be erroneous so as to cause prejudice to the interest of the Revenue. No such exercise having been done by the ld.Pr.CIT in the present case; his finding of the error, merely on the ground that no inquiry was made by the AO on the issue of 14A, without dealing with the contentions made by the ld.counsel for the assessee before him, is not tenable in law. Explanation 2 to section 263 is clearly not applicable in the present case. For this reason, order of the CIT, we hold, is to be set aside. Revisionary power u/s 263 of the Act has been invoked for an inconsequential and immaterial issue; as per the Ld.PCIT s calculation a disallowance of barely 10% of the income returned by the assessee, the exercise of revisionary power for a trivial issue, that too on the basis of assuming incorrect facts ,is nothing but an arbitrary exercise of the extraordinary power of revision as per section 263 of the Act. Appeal of the assessee is allowed.

Summary

Issues:
1. Revisionary power under section 263 of the Income Tax Act, 1961 - Disallowance of expenses under section 14A.

Analysis:

The appeal was filed against the order passed by the ld.Pr.Commissioner of Income-Tax-3, Ahmedabad, exercising revisionary power under section 263 of the Income Tax Act, 1961. The ld.Pr.CIT held the assessment order passed by the AO as erroneous for failing to inquire about expenses to be disallowed for earning exempt income under section 14A. The ld.Pr.CIT computed disallowable expenses at Rs.36,17,305, different from the Rs.70,519 suo moto disallowed by the assessee, causing prejudice to the Revenue. However, during the hearing, it was revealed that the facts noted by the ld.Pr.CIT were incorrect. The exempt income earned by the assessee was on current investments, not non-current, and the interest expenditure was wrongly calculated. The ld.Pr.CIT's calculation was based on incorrect assumptions, leading to an erroneous disallowance under section 14A. The ld.Pr.CIT failed to re-calculate despite the correct information provided by the assessee, making the assessment order erroneous without proper inquiry by the AO, invoking Explanation 2(a) to section 263.

The ld.Pr.CIT's finding of error was based on incorrect facts and arbitrary assumptions. The disallowance was calculated without considering the actual interest expenditure attributable to exempt income. The ld.Pr.CIT did not re-evaluate the calculation despite being informed of the correct figures by the assessee. The order under section 263 was set aside as the ld.Pr.CIT failed to address the contentions raised by the assessee and did not conduct a proper inquiry as required by law. The revisionary power was deemed to be invoked for an inconsequential issue, making the exercise arbitrary and unwarranted. The order of the ld.Pr.CIT was not upheld, and the appeal of the assessee was allowed, emphasizing the importance of correct factual assessment and due diligence in invoking revisionary powers under section 263 of the Act.

The Tribunal held that the ld.Pr.CIT's order was to be set aside as it was based on incorrect assumptions and failed to address the contentions raised by the assessee regarding the disallowance under section 14A. The ld.Pr.CIT did not conduct a proper inquiry and invoked revisionary power for an inconsequential issue, making the exercise arbitrary. The appeal of the assessee was allowed, emphasizing the need for a thorough assessment based on correct facts and adherence to legal requirements in invoking revisionary powers under section 263 of the Act.