2023 (9) TMI 739 - AT - Income Tax

Revision u/s 263 - assessment order as erroneous on account of issue of disallowance of expenses u/s 14A as not having been examined by the AO - AO power to go beyond the scope of limited scrutiny - contention of assessee that his case had been selected for limited scrutiny for the purpose of scrutinizing the expenses debited to the Profit and Loss account for earning exempt income and the issue had been thoroughly examined by the AO and noting that no exempt income had been earned by the assessee, he had made no further disallowance of expenses - HELD THAT - It is not disputed that the assessee had not earned any exempt income during the year. It is also not in dispute that the jurisdictional High Court has laid down that where no exempt income is earned by the assessee there is no case for making any disallowance under Section 14A of the Act. In the light of these facts, undoubtedly, the view taken by the Assessing Officer in making no disallowance under Section 14A therefore, clearly in accordance with law as interpreted by the Hon ble jurisdictional High Court. The finding of the ld. PCIT that the Assessing Officer was bound by CBDT Circulars including those contrary to the decision of the Hon ble jurisdictional High Court we cannot agree with the same. As rightly pointed out by the learned Counsel for the assessee, the circulars issued by the CBDT are binding on their officers only to the extent that they are not in contradiction to the judicial interpretation of provisions of law. Thus we hold that the view taken by the Assessing Officer in making no disallowance under Section 14A of the Act being in consonance with law as interpreted by the Courts; there is no error in the order of the Assessing Officer. Claim of depreciation on goodwill - It is an admitted fact that the assessee s case was selected for limited scrutiny and the reason was examining the disallowance of expenses pertaining to the earning of exempt income in terms of provisions of Section 14A of the Act. The Revenue does not dispute this fact before us. In the light of these facts, we fail to understand how the Assessing Officer could have travelled beyond the scope of assessment and how the assessment order could have been held to be erroneous for not having travelled beyond the scope of assessment which was directed to the Assessing Officer. The Assessing Officer had acted in accordance with the scope which was delineated to him. The assessment order cannot be held erroneous for the Assessing Officer having not crossed the boundary for scrutiny which was set out before him. Assessing Officer in the present case, by not expanding the scope of assessment, had acted contradictory to the CBDT Circular is an incorrect understanding of the said circular. Even otherwise, we have noted that the ld. PCIT had invoked clause (a) of Explanation (2) to Section 263 in the said case, that the Assessing Officer had not conducted proper inquiry relating to the issue of claim of depreciation on goodwill, and not clause (c) of Explanation (2) as contended by the learned DR before us. The Revenue cannot improve upon the case made out by the authorities below in any case. Therefore, for this reason also, we dismiss this contention of the learned DR. Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of expenses under Section 14A of the Income-tax Act, 1961.
2. Claim of depreciation on goodwill.
3. Scope of limited scrutiny versus complete scrutiny.

Summary:

Issue 1: Disallowance of Expenses Under Section 14A

The assessee challenged the order passed by the Principal Commissioner of Income-Tax (PCIT) under Section 263 of the Income-tax Act, 1961, which directed the Assessing Officer (AO) to make a fresh assessment. The PCIT found the AO's assessment erroneous for not disallowing expenses related to exempt income under Section 14A. The assessee argued that no exempt income was earned during the year, and the AO's decision was based on the jurisdictional High Court's ruling in CIT vs. Corrtech Energy (P.) Ltd. The Tribunal agreed with the assessee, stating that the AO's view was in accordance with the law as interpreted by the High Court, and CBDT circulars cannot override judicial decisions. Therefore, the Tribunal set aside the PCIT's order on this issue.

Issue 2: Claim of Depreciation on Goodwill

The PCIT also found the AO's order erroneous for not examining the assessee's claim of depreciation on goodwill, which was not allowable. The assessee contended that the issue of depreciation on goodwill was beyond the scope of the limited scrutiny, which was only for examining expenses related to exempt income under Section 14A. The Tribunal noted that the AO acted within the scope of limited scrutiny and could not be faulted for not examining issues beyond it. The Tribunal cited the Hon'ble Orissa High Court's ruling in PCIT vs. Shark Mines and Minerals (P.) Ltd., which held that the AO could not examine issues beyond the scope of limited scrutiny without prior approval. Therefore, the Tribunal set aside the PCIT's order on this issue as well.

Issue 3: Scope of Limited Scrutiny

The Tribunal addressed the PCIT's argument that the AO could have expanded the scope of scrutiny with prior approval. It held that the AO's adherence to the limited scrutiny scope was in line with CBDT instructions and did not constitute an error. The Tribunal dismissed the contention that the AO's failure to expand the scope of scrutiny made the assessment order erroneous.

Conclusion:

The Tribunal concluded that neither of the reasons provided by the PCIT for holding the assessment order erroneous was sustainable in law. Therefore, it set aside the PCIT's order and allowed the appeal of the assessee. The appeal was pronounced in the open Court on 26/07/2023 at Ahmedabad.