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2016 (7) TMI 374 - AT - Income TaxRevision u/s. 263 - disallowance u/s. 14A - whether CIT had erroneously held that invoking the provisions of Rule 8D of the Rules is mandatory and automatic for making disallowance u/s. 14A? - Held that - We are in complete agreement with the arguments of Ld. AR that adoption of Rule 8D of the Rules for disallowance u/s. 14A of the Act is not automatic and cannot be mechanically applied by the AO. The AO in the instant case was satisfied with the manner of assessee making disallowance u/s. 14A of the Act which specifically refers to each and every item of expenditure debited in the P&L Account and accordingly, thought it fit not to resort to Rule 8D of the Rules. He had in fact made disallowance u/s. 14A(2) of the Act. We find from the bare reading of section 14A of the Act that Rule 8D of the Rules should be applied only as a last resort in the event of AO not able to work out the disallowance of expenses incurred for earning income which does not form part of the total income especially in the case of a composite business having both taxable as well as non-taxable income. We find in the instant case that the Ld. CIT in 263 proceedings had only tried to substitute his own opinion in lieu of decision already taken by the Ld. AO. We find that the Ld. DR had only tried to argue on flimsy ground that the Ld. AR had not furnished the covering letter before the AO while replying to section 142(1) questionnaire dated 18.01.2010. It is not in dispute that the Ld. AO disallowed a sum of ₹ 22,584/- being the disallowance offered by the assessee based on workings given above. Under these circumstances, the claim of the assessee requires to be accepted and that of revenue deserves to be rejected. In view of the aforesaid findings and judicial precedents relied on hereinabove, we quash the revisionary proceedings u/s. 263 of the Act by the Ld. CIT - Decided in favour of assessee.
Issues Involved:
1. Justification of CIT invoking revisionary jurisdiction under section 263 of the Income Tax Act. 2. Examination of disallowance under section 14A by the Assessing Officer (AO). 3. Application of Rule 8D of the Income Tax Rules for disallowance under section 14A. 4. Adequacy of AO's enquiry and assessment process. Issue-wise Detailed Analysis: 1. Justification of CIT Invoking Revisionary Jurisdiction under Section 263: The main issue in this appeal is whether the CIT was justified in invoking the revisionary jurisdiction under section 263 of the Income Tax Act. The CIT issued a show cause notice and revised the assessment order passed by the AO, arguing that the AO did not apply Rule 8D while making the disallowance under section 14A, which led to under-assessment and undercharge of tax. The assessee contended that the CIT’s order was arbitrary, erroneous, and without proper reasons. The Tribunal concluded that the CIT merely substituted his own opinion for that of the AO, which is prohibited under section 263, as established in the case of CIT Vs. Gabriel India Ltd. 2. Examination of Disallowance under Section 14A by the AO: The assessee company, engaged in the business of operating cold storage, earned dividend income and offered a disallowance of ?22,584 under section 14A in its return. The AO scrutinized the detailed calculations provided by the assessee and was satisfied with the reasonableness of the disallowance. The Tribunal agreed that the AO had examined the issue in detail and made a considered decision, thus fulfilling the requirements of section 14A(2). 3. Application of Rule 8D of the Income Tax Rules for Disallowance under Section 14A: The CIT held that the AO was mandated to apply Rule 8D for making the disallowance under section 14A. However, the Tribunal clarified that Rule 8D should be applied only as a last resort if the AO is not satisfied with the assessee’s method of disallowance. Since the AO was satisfied with the assessee’s detailed workings and rationale, he did not resort to Rule 8D. This approach was supported by the Tribunal, which emphasized that the automatic application of Rule 8D is not warranted. 4. Adequacy of AO's Enquiry and Assessment Process: The Tribunal found that the AO had conducted extensive enquiries and had logically concluded the matter by invoking section 14A(2). The AO’s acceptance of the assessee’s disallowance was based on detailed scrutiny and satisfaction, not on a lack of enquiry. The Tribunal referenced the case of CIT Vs. Sunbeam Auto Ltd., which distinguished between ‘lack of inquiry’ and ‘inadequate inquiry,’ and supported the AO’s decision as a plausible view. The Tribunal concluded that the AO’s order was neither erroneous nor prejudicial to the revenue, and thus the CIT’s revisionary jurisdiction under section 263 was not justified. Conclusion: The Tribunal quashed the revisionary proceedings under section 263 initiated by the CIT, upheld the AO’s original assessment, and allowed the appeal of the assessee. The Tribunal emphasized that the AO had made a detailed and reasonable enquiry, and the CIT’s attempt to substitute his opinion was not permissible. The order was pronounced on 01.06.2016.
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