2023 (8) TMI 1111 - AT - Income Tax

Revision u/s 263 - pre-requisites to exercise of jurisdiction by the ld. Pr.CIT u/s 263 - disallowance u/s 14A r.w.r. 8D - HELD THAT - Section 263 provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous as also prejudicial to revenue s interest, that the provision will be attracted. An incorrect assumption of the fact or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase 'prejudicial to the interest of the revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of Revenue as a consequence of the order of the AO cannot be treated as prejudicial to the interest of the Revenue. In the present case assessee has explained source of investment by submitting that it has total investment in equities and mutual funds against which its share capital and reserves stands for Rs. 38508.89 lacs. As assessee had not used borrowed funds for making investments. Entire investments were made out of owned funds. Consequently, borrowing cost incurred in investment is NIL. When mixed funds (interest bearing and interest free) are available, the right of appropriation is vested with the assessee. In the case of the assessee interest income earned outweigh the interest expenditure. It clearly shows that no interest cost has been incurred to make any investment which shall result in exempt income. As decided in the case of Adani Infrastructure Developers (P.) Ltd. 2021 (2) TMI 486 - GUJARAT HIGH COURT held that Rule 8D(2)(ii) shall have no application where interest income earned outweigh interest expenditure. AO has considered the information filed by the assessee and arrived at conclusion that no disallowance is warranted under section 14A - The view of the AO is duly supported by the decisions of Hon ble High Courts and Tribunals relied upon by the assessee. SLP filed by the revenue in this regard against the decisions of Hon ble High Courts have been dismissed in the cases PCIT vs. Oil Industry Development Board 2019 (3) TMI 1571 - SC ORDER and CIT vs. Chettinad Logistics Pvt. Ltd. 2018 (7) TMI 567 - SC ORDER as relied upon by the A/R of the assessee in the detailed submission. This position was duly taken into consideration by the AO while passing the assessment order, which is evidently clear from the assessment order itself, as reproduced herein above and the order passed by the AO is not warranted revision. In our considered opinion, the assessment order cannot be regarded as erroneous, or being prejudicial to the interests of the Revenue more so the assessee has non- interest bearing funds in the shape of share capital and reserves are much more than the investment which may result exempt income. the assessee has not incurred any indirect expenses to earn the exempt income and ld. PCIT has not brought any material to show that the assessee has incurred indirect expenses to earn the exempt income. PCIT has erred in invoking the provisions of Section 263 of the IT Act and in passing the impugned order. Accordingly, we find merit in the grievance raised by the assessee.

Issues Involved:
1. Legality of the order under section 263 of the IT Act.
2. Erroneous and prejudicial nature of the AO's order under section 143(3).
3. Application of section 14A read with Rule 8D on investments.
4. Retrospective application of the explanation to section 14A inserted by Finance Act 2022.
5. Expenses incurred for making investments.
6. Assumption of incorrect facts by PCIT.

Summary:

1. Legality of the order under section 263 of the IT Act:
The assessee argued that the order under section 263 passed by the PCIT is illegal, void ab initio, and not justifiable, thus deserving annulment. The Tribunal noted that the AO had conducted a detailed inquiry under the E-Assessment Scheme and accepted the returned income after verifying the details provided by the assessee.

2. Erroneous and prejudicial nature of the AO's order under section 143(3):
The Tribunal observed that the AO's order was not erroneous or prejudicial to the interest of the revenue. The AO had made inquiries and verified the details regarding the expenses incurred for earning exempt income, and the assessee had sufficient own funds to cover the investments, thus no disallowance under section 14A was warranted.

3. Application of section 14A read with Rule 8D on investments:
The Tribunal found that the assessee's own funds (equity and reserves) were more than the value of the investments, and no interest was paid on funds utilized for these investments. The AO had accepted this contention based on various case laws and past history of the assessee, which was upheld by the Tribunal.

4. Retrospective application of the explanation to section 14A inserted by Finance Act 2022:
The Tribunal agreed with the assessee that the explanation to section 14A inserted by Finance Act 2022 is applicable prospectively from 01.04.2022 and cannot be applied retrospectively. Therefore, no disallowance under section 14A could be made for the assessment year 2018-19.

5. Expenses incurred for making investments:
The Tribunal noted that the assessee had not incurred any expenses for making the investments, as these were made out of its own funds. The AO had verified and accepted this explanation, and the Tribunal found no reason to interfere with this finding.

6. Assumption of incorrect facts by PCIT:
The Tribunal found that the PCIT had assumed incorrect facts and relied on decisions with different facts. The PCIT had failed to consider the past history of the assessee and the fact that no expenses were incurred for earning exempt income. The Tribunal held that the revisionary order under section 263 was arbitrary and without any concrete basis.

Conclusion:
The Tribunal quashed the order passed by the PCIT under section 263 of the IT Act, holding that the AO's order was not erroneous or prejudicial to the interest of the revenue. The appeal of the assessee was allowed.

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