2021 (1) TMI 87 - AT - Income Tax

Revision u/s 263 - disallowance of expenditure u/s.14A - HELD THAT - AO has considered disallowance of expenditure u/s.14A of the Act and has computed total disallowance of ₹ 29,37,148/- under Rule 8D(2)(iii) at the rate of 0.5% on average investments. It is also an admitted fact that the assessee has challenged the additions made by the AO towards disallowance of expenditure u/s.14A of the Act before the first appellate authority and was unsuccessful because the ld.CIT(A) has upheld the disallowance computed by the ld.AO. The assessee has preferred further appeal before the ITAT on the same issue which was pending for disposal. Thus the issue of disallowance of expenditure u/s.14A of the Act is a subject matter of appeal before the appellate authority and further once an issue is before the appellate authority then the assessment order merged with the appellate order and the appellate authority shall have all powers including enhancement of income. Therefore, when the Appellate Commissioner is having power to examine the issue, then the PCIT cannot have parallel jurisdiction to examine the same issue u/s. 263 proceedings, because if we allow the PCIT to have jurisdiction on said issue then it leads to multiple proceedings which is not the intention of the Legislature. In this view of the matter and respectfully following the decision in the case of CIT vs. Sera Sera Productions Limited 2015 (5) TMI 937 - BOMBAY HIGH COURT we are of the considered view that the powers exercised by the PCIT u/s.263 of the Act on the issue of disallowance of expenditure u/s.14A of the Act is contrary to the provisions of Clause (c) to Explanation (1) of Section 263 of the Act and hence we are of the considered view that the PCIT has erred in revising the assessment order u/s.263 - Decided in favour of assessee.

Summary

Issues:
1. Revision of assessment order under Section 263 of the Income Tax Act, 1961.
2. Jurisdiction of Principal Commissioner of Income Tax (PCIT) to revise assessment orders subject to appeal.

Issue 1: Revision of assessment order under Section 263:

The appeal filed by the assessee was against the order of the Principal Commissioner of Income Tax - 1, Coimbatore passed under Section 263 of the Income Tax Act, 1961, for the assessment year 2013-14. The PCIT invoked revisional jurisdiction based on the disallowance of expenditure incurred in relation to exempt income under Section 14A of the Act. The PCIT contended that the Assessment Officer (AO) had not considered the disallowance of interest expenditure under Rule 8D(2)(ii) despite the assessee incurring substantial financial costs. The PCIT found the assessment order erroneous and prejudicial to the interest of the Revenue. The PCIT set aside the assessment order and directed the AO to redo the assessment. The assessee challenged this order before the ITAT.

Issue 2: Jurisdiction of PCIT to revise assessment orders subject to appeal:

The assessee argued that the PCIT erred in invoking revisional jurisdiction under Section 263 as the AO's order was not erroneous or prejudicial to the Revenue's interest. The assessee contended that the issue of disallowance of expenditure under Section 14A was already considered during assessment proceedings and appealed before the CIT(A). The assessee further highlighted that the issue was pending before the ITAT. The assessee relied on Clause (c) to Explanation 1 of Section 263(1) to assert that the PCIT lacked the power to revise an assessment order on issues subject to appeal. The PCIT's exercise of powers under Section 263 was challenged based on the principle that once an issue is considered by the appellate authority, the assessment order merges with the appellate order, limiting the PCIT's jurisdiction. The ITAT, after considering the arguments from both sides and relevant case law, concluded that the PCIT's exercise of powers under Section 263 on the issue of disallowance of expenditure under Section 14A was contrary to the statutory provisions. The ITAT quashed the PCIT's order and reinstated the assessment order passed by the AO under Section 143(3) of the Act.

In summary, the ITAT Chennai held that the PCIT's revision of the assessment order under Section 263 was not justified as the issue regarding disallowance of expenditure under Section 14A was already subject to appeal proceedings before the ITAT. The ITAT emphasized that once an issue is considered by the appellate authority, the PCIT cannot exercise parallel jurisdiction on the same issue. The decision was based on statutory provisions and relevant case law, ultimately leading to the quashing of the PCIT's order and the restoration of the AO's assessment order.