2024 (12) TMI 459 - AT - Income Tax

Revision u/s 263 - under-assessment of income on account of non-disallowance of expenses u/s 14A - HELD THAT - We find that the factual matrix of the instant case shows that there is no dispute that during the year the assessee did not earn any exempt income from tax. Since there is no exempt income earned by the assessee during the year, there cannot be any disallowance u/s 14A r.w.r 8D. Delhi High Court in the case of Era Infrastructure India Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT as held the explanation to section 14A to be applicable from AY 2022-23, no addition u/s 14A can be made where the assessee has not earned any exempt income. We therefore hold the PCIT invocation of section 263 was invalid. Accordingly, the Ground raised by the assessee is allowed.

Summary

Issues:
1. Validity of initiation of proceedings u/s. 263 of the Income Tax Act, 1961.
2. Revision Order u/s. 263 for assessment order u/s. 143(3) without considering facts and circumstances.
3. Consideration of the order passed u/s. 143(3) as erroneous and prejudicial to the interest of revenue.
4. Direction to enhance income by disallowance of expenses u/s. 14A without proper consideration.
5. Applicability of section 14A r.w.r 8D in the absence of exempt income.

Analysis:
1. The appeal challenged the initiation of proceedings u/s. 263, arguing that the PCIT erred in not considering the facts and circumstances of the case. The PCIT invoked section 263 due to under-assessment of income regarding expenses u/s. 14A. The assessee contended that no exempt income was earned, hence no disallowance was necessary. The PCIT directed the AO to compute disallowance at Rs. 14,76,036, leading to the appeal.

2. The PCIT's revision order under section 263 was contested for not considering the facts and circumstances adequately. The assessee argued that the AO's assessment order u/s. 143(3) was made after proper inquiries and application of mind. The PCIT's direction to enhance income without due consideration was a point of contention.

3. The PCIT's consideration of the order u/s. 143(3) as erroneous and prejudicial to revenue was disputed. The assessee maintained that the assessment was done diligently, and the PCIT's decision was not justified given the circumstances of the case.

4. The direction by the PCIT to enhance income by disallowing expenses u/s. 14A without proper consideration of facts and law was a key issue. The assessee argued against this enhancement, emphasizing that no exempt income was earned during the relevant period.

5. The crucial issue revolved around the applicability of section 14A r.w.r 8D in the absence of exempt income. The assessee contended that no disallowance should be made under section 14A since there was no exempt income earned during the year. The Tribunal held that the PCIT's invocation of section 263 was invalid based on the Delhi High Court's decision regarding the applicability of the explanation to section 14A from AY 2022-23 onwards. Consequently, the appeal was allowed, and no addition u/s. 14A was warranted.