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2019 (10) TMI 245 - AT - Income TaxRevision u/s 263 - suo-moto disallowance u/s 14A r.w. Rule 8D being expenses attributable to earning of exempt income after applying the Rule 8D - HELD THAT - As the stand of assessee during the assessment as well as in revision proceeding that no exempt income is earned by the assessee. We have perused the Balance-sheet and Profit Loss Account of the assessee wherein in Schedule-14 (other income) forming part of Balance-sheet shows Nil income. In Schedule-6 (investments), in Column-B assessee has shown investment in units of mutual fund (growth scheme) and the income of such investment is not exempted. Thus, as per the decision of Hon ble Delhi High Court in Cheminvest Investment Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT , Redington (India) Ltd. 2017 (1) TMI 318 - MADRAS HIGH COURT that when there is no exempt income in the relevant period, there cannot be disallowance of expenditure under section 14A. Accordingly, the assessment order under section 143(3) is not erroneous. The Assessing Officer has adopted a possible view for not making any disallowance under section 14A. Though, there is no discussion about the acceptance of contention of the assessee in its reply dated 11.02.2013, filed during the assessment proceeding. We are of the considered view that the order passed by Assessing Officer was not erroneous and thus the twin condition as laid down by Hon ble Apex Court in Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT the recourse of section 263 cannot be invoked against the assessment order. Therefore, the assessee succeeds on legal ground. Since, the assessee succeeded on legal ground, therefore, adjudication on other contentions and issues raised by assessee have become academic.
Issues Involved:
1. Invocation of Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT). 2. Direction by PCIT to modify the assessment order considering investments directly out of borrowed funds. 3. Direction by PCIT to make proportionate disallowance on account of interest expenditure on borrowed funds used for mutual fund investments. Issue-wise Detailed Analysis: 1. Invocation of Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT): - The assessee challenged the invocation of Section 263 by the PCIT, arguing that both pre-requisites (assessment order being erroneous and prejudicial to the interest of the revenue) must be satisfied for Section 263 to be invoked. - The assessee contended that it had furnished the requisite information and the Assessing Officer (AO) had completed the assessment after considering all the facts, hence the assessment order was not erroneous. - The Tribunal noted that during the assessment, the AO had examined the issue of disallowance under Section 14A and after receiving a detailed reply from the assessee, made no disallowance. - The Tribunal referred to various judicial precedents, including the Hon’ble Supreme Court's decision in Malabar Industrial Co. Ltd. vs. CIT, which held that both conditions (erroneous and prejudicial to revenue) must co-exist for Section 263 to be invoked. - It was concluded that the AO had adopted a possible view, and the order was not erroneous. Therefore, the invocation of Section 263 was not justified. 2. Direction by PCIT to modify the assessment order considering investments directly out of borrowed funds: - The PCIT directed the AO to modify the assessment order to consider investments worth ?560.85 crores directly out of borrowed funds for computing average investments under Rule 8D(2)(ii) of the Income Tax Rules. - The assessee argued that considering these investments for computing average investments would result in double disallowance of proportionate interest attributable to the said investments. - The Tribunal noted that the assessee had already made a suo-moto disallowance of ?23.40 crores under Section 14A r.w. Rule 8D and that the AO had accepted this computation. - It was observed that the assessee had not received any exempt income during the year, and as per judicial precedents, no disallowance under Section 14A should be made in such cases. - The Tribunal held that the AO’s order was not erroneous or prejudicial to the interest of revenue as the AO had considered the material and adopted a possible view. 3. Direction by PCIT to make proportionate disallowance on account of interest expenditure on borrowed funds used for mutual fund investments: - The PCIT directed the AO to make proportionate disallowance on account of interest expenditure on borrowed funds utilized for making investments in mutual funds, which resulted in capital gains. - The assessee contended that the investments in mutual funds were made from funds from day-to-day operations and not from borrowed funds. - The Tribunal noted that the AO had examined the issue during the assessment and had not made any disallowance under Section 14A, considering the assessee’s detailed reply. - The Tribunal referred to the decision of the Hon’ble Delhi High Court in Cheminvest Ltd. vs. CIT, which held that Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. - It was concluded that the AO had adopted a possible view, and the order was not erroneous. Therefore, the direction by the PCIT was not justified. Conclusion: - The Tribunal allowed the appeal of the assessee, holding that the order passed by the AO was not erroneous and the invocation of Section 263 by the PCIT was not justified. - The Tribunal emphasized that the AO had adopted a possible view, and the twin conditions for invoking Section 263 were not satisfied. - As a result, the assessment order was not erroneous or prejudicial to the interest of revenue, and the appeal was allowed in favor of the assessee.
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