2024 (8) TMI 292 - HC - Income Tax

Validity of order of the ITAT regarding low tax effect - Reopening of assessment u/s 147 - AO accepted the audit objection and case was reopened - assessee has earned exempt income and claimed interest expenses however the assessee did not show any expenditure separately which was incurred for earning exempt income - AO passed order u/s 143(3) r.w.s.147 making proportionate disallowance u/s 14A r.w.r. 8D of the Rules - Tribunal dismissed the appeal by order on the ground of low tax effect as per CBDT Circular No.3/2018 dated 11th July, 2018, with liberty to the Revenue to recall of dismissal of appeal if the matter is covered by the permissible exceptions mentioned in the said Circular. Assessee submitted that the petitioner, at no point of time, has placed on record the audit objections or drawn attention of the Tribunal with regard to the audit objections which was accepted and which was the basis of the re-opening of the assessment and Tribunal has rightly relied on the Circular No.5/2017 to dismiss the Miscellaneous Application filed by the Revenue as well as in light of the decision of Principal CIT v Nawany Construction Co. (P.) Ltd. 2018 (9) TMI 800 - BOMBAY HIGH COURT wherein it is held that mere raising of the audit objection is not sufficient for recall of the order. HELD THAT - As it appears that the coordinate Bench of this Court, by judgment and order 2022 (7) TMI 1530 - GUJARAT HIGH COURT in similar facts where appeals have been dismissed by the Tribunal, allowed the Special Civil Applications filed by the Revenue by quashing and setting aside the order passed by the Tribunal and remanding the matter back to the Tribunal as held Circular issued by the CBDT under Section 268A of the Act of 1961 is held binding on the Department thus appeal cannot be filed, if it is barred. It is, however, with a clarification that if the issue decided by the CIT (Appeals) or Tribunal is contrary to the judgments of the Supreme Court, the Department can prefer an appeal, however, care would be taken to file it only in those cases where the order passed by the CIT (Appeals) or the Tribunal is contrary to the ratio propounded by the Supreme Court on the same issue. In doing so, sanctity of Article 141 of the Constitution of India would be maintained, thereby, serious consequences of taking different view would also be avoided. In view of the above, this petition also succeeds and is accordingly allowed. The impugned order 2019 (1) TMI 1865 - ITAT, AHMEDABAD is hereby quashed and set aside and the matter is remanded back to the Tribunal so as to enable the Revenue to point out the fact about the audit objection which was accepted by the Revenue. Rule is made absolute to the aforesaid extent.

Issues Involved:
1. Challenge to the order dated 06th January 2020 by the Income Tax Appellate Tribunal.
2. Proportionate disallowance under Section 14A of the Income Tax Act, 1961.
3. Reopening of assessment under Section 147 of the Income Tax Act.
4. Application of CBDT Circulars regarding low tax effect.
5. Acceptance of Revenue Audit Objection.
6. Tribunal's reliance on CBDT Circular No. 5/2017.
7. Precedent from Principal Commissioner of Income Tax, Vadodara v. M/s Emtici Engineering Ltd.
8. Tribunal's dismissal of Miscellaneous Application based on audit objection.

Detailed Analysis:

1. Challenge to the Order Dated 06th January 2020 by the Income Tax Appellate Tribunal:
The petition challenges the order dated 06th January 2020 passed by the Income Tax Appellate Tribunal, "A" Bench, Ahmedabad, in MA No.220/Ahd/2019 for the Assessment Year 2010-11. The Tribunal dismissed the appeal based on low tax effect as per CBDT Circular No.3/2018 dated 11th July 2018.

2. Proportionate Disallowance under Section 14A of the Income Tax Act, 1961:
The original assessment order under Section 143(3) of the Income Tax Act determined the total income at Rs.87,10,080/- against the returned income of Rs.83,40,540/-. The Revenue Audit raised an objection regarding the disallowance of proportionate expenditure under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The Assessing Officer accepted the audit objection and reopened the case under Section 147, resulting in a proportionate disallowance of Rs.44,35,176/-.

3. Reopening of Assessment under Section 147 of the Income Tax Act:
The Assessing Officer reopened the assessment under Section 147 of the Act, observing that the assessee had earned exempt income and claimed interest expenses of Rs.69,60,614/- without showing any expenditure incurred for earning exempt income. This led to a reassessment order making a proportionate disallowance under Section 14A read with Rule 8D.

4. Application of CBDT Circulars Regarding Low Tax Effect:
The Tribunal dismissed the Revenue's appeal based on low tax effect as per CBDT Circular No.3/2018, with liberty to recall the dismissal if the matter was covered by permissible exceptions. The Revenue contended that the Tribunal should have considered the appeal on merits due to the audit objection's acceptance, as per Para-10 of the Circular amended by CBDT directive dated 20th August 2018.

5. Acceptance of Revenue Audit Objection:
The Revenue argued that the audit objection was accepted by the department, which should have allowed the appeal to be heard on merits despite the low tax effect. The Tribunal, however, dismissed the Miscellaneous Application, stating that the appeal was filed merely on the basis of an audit objection without substantial material on record.

6. Tribunal's Reliance on CBDT Circular No. 5/2017:
The Tribunal relied on CBDT Circular No.5/2017 and a decision by the Bombay High Court, concluding that the audit objection alone was insufficient to recall the Tribunal's order. The Tribunal found no error in its previous order and rejected the Miscellaneous Application.

7. Precedent from Principal Commissioner of Income Tax, Vadodara v. M/s Emtici Engineering Ltd.:
The petitioner referred to a coordinate Bench decision in Principal Commissioner of Income Tax, Vadodara v. M/s Emtici Engineering Ltd., where the Court quashed the Tribunal's order of dismissal based on low tax effect and remanded the matter back to the Tribunal to consider the audit objections.

8. Tribunal's Dismissal of Miscellaneous Application Based on Audit Objection:
The Tribunal dismissed the Miscellaneous Application, stating that the Department did not present substantial material to show that the appeal was filed after evaluating the merits of the issues involved. The Tribunal emphasized that an audit objection alone was not sufficient to recall its order.

Conclusion:
The High Court allowed the petition, quashing the Tribunal's order dated 29th January 2019, and remanded the matter back to the Tribunal. The Tribunal was directed to consider the audit objections accepted by the Revenue, thereby enabling the Revenue to present its case on merits. The Court emphasized the need for the Tribunal to examine each case individually, considering the acceptance of audit objections as an exception to the low tax effect rule. The Rule was made absolute to this extent, with no order as to costs.

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