2025 (3) TMI 1043 - AT - Income Tax

Revision u/s 263 - excess deduction @50% has been allowed under section 35CCC leading to under-assessment of income 1% of the investments capable of fetching exempt dividend income was not disallowed u/s 14A r/w rule 8D and AO has allowed depreciation claimed on the value of land leading to excess allowance of depreciation Excess deduction @50% has been allowed under section 35CCC - HELD THAT - From the perusal of the impugned order we further find that the assessee filed an application under section 154 requesting the AO to rectify the mistake apparent from the record and restrict the deduction u/s 35CCC to the actual expenditure claimed in its return of income. Since the revision proceedings were initiated the learned PCIT treated the rectification application filed by the assessee as redundant. During the hearing assessee submitted that the excess amount allowed as a deduction by the AO is only INR 8 03 76 735 (i.e. INR 32 04 33 197 claimed in the return of income minus INR 24 00 56 462 actual expenditure incurred by the assessee). Thus it was submitted that the disallowance should be restricted to only INR 8 03 76 735 instead of INR 10 68 11 066 directed by the learned PCIT. Having considered the submissions and perused the material available on record we are of the considered view that revision proceedings u/s 263 have been correctly initiated in respect of this issue. However the AO is directed to disallow an amount of INR 8 03 76 735 being the excess amount allowed to the assessee as a deduction under section 35CCC of the Act. Accordingly to this extent the impugned order passed under section 263 of the Act is upheld. Disallowance u/s 14A - From the multiple notices issued by the AO on this issue from time to time during the assessment proceedings it cannot be concluded that this aspect was not examined by the AO or there was no application of mind. We find that in Reliance Communication Ltd 2016 (4) TMI 173 - BOMBAY HIGH COURT held that the fact that the AO did not make any reference in the assessment order cannot make the order erroneous when the issues were indeed looked into. As regards the non-compliance with the CBDT s Circular No. 5 of 2014 we find that the said Circular was issued in the backdrop of controversy as to whether disallowance can be made by invoking the provisions of section 14A even in those cases where no income has been earned by the assessee which has been claimed as exempt during the financial year. Accordingly the CBDT clarified that Rule 8D r.w.s.14A of the Act provides for disallowance of the expenditure even where a taxpayer in a particular year has not earned any exempt income. However in the present case there is no dispute regarding the fact that the assessee received dividend income during the year under consideration which was claimed as exempt. Thus the aforesaid Circular relied upon by the learned PCIT has no relevance to the facts of the present case and therefore we find no merits in the findings of the PCIT that the assessment order has not been made in accordance with the aforementioned CBDT s Circular. Thus we are of the considered view that the provisions of clause (c) of Explanation-2 to section 263 of the Act are not applicable to the present case. Depreciation claimed on the value of land leading to excess allowance of depreciation - Assessee made specific reference to the findings in the assessment orders for the earlier years and the AO was completely apprised of the litigation history as well as the relevant facts pertaining to this issue. Thus once the AO after considering the submissions filed by the assessee has allowed the claim of depreciation it cannot be said that the assessment order was passed without proper enquiry and application of mind rendering the same to be erroneous insofar as it is prejudicial to the interest of the Revenue. Therefore this issue was duly examined by the AO during the scrutiny assessment proceedings. Appeal by the assessee is partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the Principal Commissioner of Income Tax (PCIT) correctly assumed jurisdiction under section 263 of the Income Tax Act, 1961, when the jurisdictional conditions were allegedly not satisfied.
• Whether the PCIT erred in revising the assessment order on issues that were already inquired into by the Assessing Officer (AO) during the assessment proceedings.
• Whether the PCIT was justified in passing an order under section 263 on issues where two views were possible, and the AO had taken a plausible view.
• Whether the PCIT was correct in directing the AO to compute disallowance under section 14A by invoking Rule 8D.
• Whether the PCIT correctly directed the AO to disallow depreciation under section 32 for office premises acquired in a preceding assessment year.
• Whether the PCIT was justified in denying the weighted deduction under section 35CCC.

2. ISSUE-WISE DETAILED ANALYSIS

Jurisdiction under Section 263

• Relevant Legal Framework and Precedents: Section 263 of the Income Tax Act allows the PCIT to revise an order if it is erroneous and prejudicial to the interests of the Revenue.
• Court's Interpretation and Reasoning: The Tribunal examined whether the conditions for invoking section 263 were met, particularly focusing on whether the AO's order was erroneous and prejudicial to the Revenue.
• Key Evidence and Findings: The Tribunal found that the AO had conducted inquiries and considered submissions from the assessee on the disputed issues.
• Application of Law to Facts: The Tribunal concluded that the AO's order was not erroneous as the issues were duly examined during the assessment proceedings.
• Treatment of Competing Arguments: The Tribunal considered the arguments from both the assessee and the Revenue, ultimately siding with the assessee on most issues.
• Conclusions: The Tribunal held that the PCIT incorrectly assumed jurisdiction under section 263 for most issues, as the AO had conducted proper inquiries.

Disallowance under Section 14A

• Relevant Legal Framework and Precedents: Section 14A read with Rule 8D pertains to the disallowance of expenditure incurred in relation to exempt income.
• Court's Interpretation and Reasoning: The Tribunal found that the AO had considered the assessee's suo moto disallowance and had conducted inquiries into the applicability of section 14A.
• Key Evidence and Findings: The assessee had provided detailed submissions and calculations during the assessment proceedings, which the AO had considered.
• Application of Law to Facts: The Tribunal concluded that the AO's acceptance of the assessee's disallowance was not erroneous, and the PCIT's reliance on past precedents was misplaced.
• Treatment of Competing Arguments: The Tribunal examined the PCIT's argument regarding the lack of inquiry and found it unsubstantiated.
• Conclusions: The Tribunal set aside the PCIT's order under section 263 on this issue.

Depreciation on Office Premises

• Relevant Legal Framework and Precedents: Section 32 of the Income Tax Act allows for depreciation on assets, including buildings.
• Court's Interpretation and Reasoning: The Tribunal found that the AO had considered the assessee's submissions regarding the depreciation claim on the office premises.
• Key Evidence and Findings: The assessee had provided detailed submissions, including references to agreements and legal provisions, during the assessment proceedings.
• Application of Law to Facts: The Tribunal concluded that the AO's decision to allow depreciation was not erroneous, as it was based on a thorough examination of the facts.
• Treatment of Competing Arguments: The Tribunal found that the PCIT's argument for consistency was not sufficient to render the AO's order erroneous.
• Conclusions: The Tribunal set aside the PCIT's order under section 263 on this issue.

Weighted Deduction under Section 35CCC

• Relevant Legal Framework and Precedents: Section 35CCC provides for weighted deduction on expenditure incurred on agricultural extension projects.
• Court's Interpretation and Reasoning: The Tribunal agreed with the PCIT's finding that the AO had allowed an excess deduction, which was erroneous.
• Key Evidence and Findings: The assessee had requested a restriction on the deduction to the actual expenditure, which the AO overlooked.
• Application of Law to Facts: The Tribunal upheld the PCIT's order to disallow the excess deduction, but corrected the amount to INR 8,03,76,735.
• Treatment of Competing Arguments: The Tribunal considered the assessee's argument regarding the correct amount of excess deduction.
• Conclusions: The Tribunal upheld the PCIT's order under section 263 on this issue, with a correction to the disallowed amount.

3. SIGNIFICANT HOLDINGS

• The Tribunal held that the PCIT incorrectly assumed jurisdiction under section 263 for most issues, as the AO had conducted proper inquiries and the assessment order was not erroneous or prejudicial to the Revenue.
• On the issue of weighted deduction under section 35CCC, the Tribunal upheld the PCIT's order but corrected the amount of excess deduction to be disallowed.
• The Tribunal emphasized the principle that an assessment order cannot be deemed erroneous merely because the AO did not make a specific reference to each inquiry in the order.
• The Tribunal set aside the PCIT's directions on disallowance under section 14A and depreciation on office premises, as these issues were duly examined by the AO.
• Final determination: The appeal by the assessee was partly allowed, with the Tribunal sustaining the PCIT's order only in respect of the corrected disallowance under section 35CCC.