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2022 (9) TMI 1090 - AT - Income Tax


Issues Involved:
1. Invocation of Section 263 of the Income Tax Act, 1961.
2. Adequacy of the Assessing Officer's (AO) inquiry regarding Section 14A disallowance.
3. Applicability of Explanation 2 to Section 263 of the Income Tax Act, 1961.
4. Legality of the revision order under Section 263.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act, 1961:
The Principal Commissioner of Income Tax (PCIT) invoked Section 263, claiming the AO's order was erroneous and prejudicial to the interests of the Revenue. The PCIT observed that the AO did not adequately inquire into the assessee's investments in unquoted shares, which could earn exempt income. Specifically, the PCIT noted that the AO failed to disallow Rs. 38,31,044 under Rule 8D read with Section 14A, despite the assessee's significant interest expenses and investments in unquoted shares. The PCIT cited several judicial precedents to support the invocation of Section 263, emphasizing the necessity of proper inquiries by the AO.

2. Adequacy of the Assessing Officer's (AO) Inquiry Regarding Section 14A Disallowance:
The assessee argued that the AO made specific inquiries about the Section 14A claim during the assessment proceedings, as evidenced by the notice under Section 143(2) and the assessee's detailed responses. The assessee contended that the AO's acceptance of their explanation regarding the use of interest-free funds for investments was a plausible view, supported by judicial precedents. The assessee further argued that no new investments were made during the impugned year, and the AO had sufficient grounds to accept the assessee's claim without additional disallowance under Section 14A.

3. Applicability of Explanation 2 to Section 263 of the Income Tax Act, 1961:
The PCIT relied on Explanation 2 to Section 263(1), which deems an order erroneous and prejudicial to the interests of the Revenue if it is passed without necessary inquiries or verification. The PCIT argued that the AO failed to conduct proper inquiries into the assessee's use of interest-bearing funds for investments generating exempt income. The PCIT emphasized that the AO's lack of inquiry and verification warranted the invocation of Section 263.

4. Legality of the Revision Order Under Section 263:
The Tribunal examined whether the AO made adequate inquiries and whether the view taken by the AO was legally plausible. The Tribunal noted that the AO had made specific inquiries about the Section 14A claim and that the assessee provided detailed explanations and evidence supporting their claim. The Tribunal referenced several Supreme Court decisions, including Principal Commissioner of Income-tax v. Shreeji Prints (P.) Ltd. and Principal Commissioner of Income-tax v. Shree Gayatri Associates, which upheld that a plausible view taken by the AO after due inquiry cannot be deemed erroneous or prejudicial to the interests of the Revenue. The Tribunal concluded that the AO's order was not erroneous and prejudicial to the interests of the Revenue, as the AO had made due inquiries and the assessee's claim was substantiated with adequate evidence.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the AO conducted proper inquiries and took a plausible view regarding the Section 14A disallowance. The Tribunal found no error in the AO's order to justify the initiation of Section 263 proceedings by the PCIT. The appeal of the assessee was thus allowed, and the revision order under Section 263 was set aside.

 

 

 

 

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