2023 (4) TMI 984 - AT - Income Tax

Revision u/s 263 by CIT - Disallowance u/s 14A - premise of the Ld. PCIT in his revisionary order is that Assessee has invested substantial amount which are investment which have yielded exempt income - HELD THAT - This investment constituted tax free bonds and also mutual funds investment. As undisputed fact that assessee has earned exempt income from tax free bond alone for sums and other investment have not yielded any exempt income and in fact were taxable investments. Once that is so the entire premise of the Ld. PCIT is incorrect and therefore the assessment order cannot held to be erroneous in so far as prejudicial to the interest of revenue. Now whether the disallowance made by the AO is correct or it is excessive the same is already subject matter of first appeal and therefore we are not going into this aspects. However in so far as observation and the finding of the Ld. PCIT in setting aside to the issue of disallowance to the AO is quashed and accordingly appeal of the Assessee is allowed.

Summary

Issues Involved:
The judgment involves issues related to the revisionary jurisdiction under section 263 of the Income Tax Act, 1961 for the assessment year 2017-18, specifically concerning the disallowance under section 14A read with rule 8D.

Revisionary Jurisdiction under Section 263:
The Assessee filed an appeal against the order passed by the Ld. CIT Mumbai-1 under section 263 for the assessment year 2017-18. The grounds of appeal raised by the Assessee included contentions that the assessment order was not erroneous or prejudicial to the interests of the Revenue as the Assessing Officer had completed the assessment in accordance with the law after due inquiries and examination of facts.

Disallowance under Section 14A read with Rule 8D:
The issue revolved around the disallowance under section 14A read with rule 8D concerning the Assessee, a mutual association earning interest on tax-free bonds. The Assessing Officer made a disallowance of Rs. 2,65,83,614/- under section 14A using rule 8D, which the Assessee contested. The contention was based on the principle of mutuality, arguing that no disallowance was necessary as no expenses were claimed for earning exempt income.

Calculation of Disallowance and Expenditure:
The Ld. PCIT observed that the Assessing Officer had considered only a portion of the total eligible investment for disallowance under section 14A read with rule 8D. The Assessee argued that the total expenditure debited in the books of account was Rs. 1,45,08,756/-, limiting the disallowance under section 14A. The Ld. PCIT, however, rejected this contention, emphasizing the substantial amount invested by the Assessee yielding exempt income.

Judgment and Decision:
The Tribunal found that the premise of the Ld. PCIT's revisionary order was incorrect as the Assessee had earned exempt income only from tax-free bonds, not from the entire investment. The Tribunal held that the assessment order was not erroneous or prejudicial to the interest of revenue. The matter of disallowance made by the AO was already under appeal, and the Tribunal quashed the setting aside of the issue of disallowance by the Ld. PCIT, thereby allowing the Assessee's appeal.