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2024 (9) TMI 532 - AT - Income TaxRevision u/s 263 - disallowance u/s 14A - Retrospective effect of amendments to Section 14A - HELD THAT - The Hon'ble Supreme Court in Chettinad Logistics (P.) Ltd 2018 (7) TMI 567 - SC ORDER has categorically held that when no exempt income is earned, no disallowance u/s 14A can be made. AO, in the original assessment proceedings, had duly examined the issue by issuing a notice u/s 142(1) to which the assessee had responded. AO, after being satisfied with the submissions, passed the order u/s 143(3) r.w.s. 144B of the Act. PCIT has invoked Section 263, claiming that the AO did not properly examine the applicability of Section 14A resulting in an erroneous order prejudicial to the revenue. As argued by the assessee, the AO had duly inquired into the relevant facts and legal provisions during the original assessment proceedings. Considering the above, it is apparent that the twin conditions required for invoking Section 263 of the Act are not satisfied in this case as the AO had made inquiries and followed the law as interpreted by Courts, including the Hon ble Supreme Court. The fact that the PCIT has a different view does not make the order erroneous. The non-application of Section 14A of the Act was based on a judicially accepted position that no disallowance can be made, when no exempt income is earned. The amendment to Section 14A of the Act introduced by the Finance Act, 2022, cannot be applied retrospectively to the assessment year under consideration. The revisionary order u/s 263 of the Act, based on the assumption of retrospective applicability, is thus unsustainable. We hold that the PCIT was not justified in invoking jurisdiction under section 263 of the Act. The revisionary order is hereby quashed, and the appeal of the assessee is allowed.
Issues:
1. Jurisdiction under section 263 of the Income Tax Act, 1961. 2. Applicability of Section 14A of the Act. 3. Retrospective effect of amendments to Section 14A. 4. Judicial interpretation of the law regarding disallowance when no exempt income is earned. Analysis: Issue 1: Jurisdiction under section 263 of the Income Tax Act, 1961 The appeal was against the order passed by the Ld.Principal Commissioner of Income Tax under section 263 of the Act. The Ld.PCIT set aside the assessment order passed by the AO and directed a fresh assessment. The assessee challenged the jurisdiction of the Ld.PCIT under section 263. The Ld.PCIT's order was based on the argument that the AO did not examine the applicability of Section 14A properly, leading to an erroneous order prejudicial to revenue. However, the AO had conducted a thorough examination during the original assessment proceedings, satisfying the conditions required for invoking section 263. The Ld.PCIT's differing view did not render the AO's order erroneous. Issue 2: Applicability of Section 14A of the Act The assessee did not earn any exempt income during the relevant year. The AO had examined the issue by issuing a notice under section 142(1) and passed an order under section 143(3) after being satisfied with the submissions. The Hon'ble Supreme Court's decision in Chettinad Logistics (P.) Ltd. established that when no exempt income is earned, no disallowance under section 14A can be made. The Ld.PCIT's invocation of section 263 was based on this aspect, but the AO had already addressed it adequately during the assessment proceedings. Issue 3: Retrospective effect of amendments to Section 14A The Ld.DR argued that the amendment to Section 14A introduced by the Finance Act, 2022, had retrospective applicability. However, the judicial position, including the Supreme Court's decision in Chettinad Logistics (P.) Ltd., emphasized that no disallowance can be made when no exempt income is earned. The retrospective application of the amendment was contested, with the Co-ordinate Bench decision in N.K. Proteins Ltd. supporting a prospective application. Issue 4: Judicial interpretation of the law regarding disallowance when no exempt income is earned The decision in Chettinad Logistics (P.) Ltd. and subsequent judicial authorities highlighted that disallowance under section 14A cannot exceed the amount of exempt income earned. The Ld.PCIT's reliance on the retrospective applicability of the amendment was refuted, emphasizing the consistent judicial stance on the matter. The revisionary order under section 263 was deemed unjustified, and the appeal of the assessee was allowed, quashing the revisionary order. In conclusion, the Appellate Tribunal held that the Ld.PCIT was not justified in invoking jurisdiction under section 263, and the revisionary order was quashed, allowing the appeal filed by the assessee.
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