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TMI Blog2023 (9) TMI 739X X X X Extracts X X X X X X X X Extracts X X X X ..... on 14A therefore, clearly in accordance with law as interpreted by the Hon ble jurisdictional High Court. The finding of the ld. PCIT that the Assessing Officer was bound by CBDT Circulars including those contrary to the decision of the Hon ble jurisdictional High Court we cannot agree with the same. As rightly pointed out by the learned Counsel for the assessee, the circulars issued by the CBDT are binding on their officers only to the extent that they are not in contradiction to the judicial interpretation of provisions of law. Thus we hold that the view taken by the Assessing Officer in making no disallowance under Section 14A of the Act being in consonance with law as interpreted by the Courts; there is no error in the order of the Assessing Officer. Claim of depreciation on goodwill - It is an admitted fact that the assessee s case was selected for limited scrutiny and the reason was examining the disallowance of expenses pertaining to the earning of exempt income in terms of provisions of Section 14A of the Act. The Revenue does not dispute this fact before us. In the light of these facts, we fail to understand how the Assessing Officer could have travelled beyond the scope o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance of expenditure to the tune of Rs. 21,26,959/-. 3. The Learned Pr. Comm. of Income Tax - 3, Ahmedabad has erred in holding that the entire amount of depreciation of Rs. 34,48,97,336/- claimed on goodwill of Rs. 1,83,94,52,457/- need to be disallowed in view of the proposition that as per AS-14 no goodwill is generated in case of pooling of interest method ignoring the fact that no amalgamation or other merger has taken place in the year under consideration. 4. The Learned Pr. Comm. of Income Tax - 3, Ahmedabad has erred in treating the order as erroneous only on account of the fact that the assessment has not been converted into Complete Scrutiny as against Limited Scrutiny by the Assessing Officer." 3. The learned Counsel for the assessee, during the course of hearing before us, pointed out that the learned PCIT found the assessment order passed by the Assessing Officer in the present case under Section 143(3) of the Act to be erroneous so as to cause prejudice to the interest of the revenue, on the following two grounds:- i) that the Assessing Officer made no disallowance of expenses incurred by the assessee for earning exempt income in terms of provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether any such income has been earned during the year or not. It is settled legal position that Circulars are binding on Revenue Authorities as held in the case of K.P Varghese v/s ITO 131 ITR 597 SC. Thus not following the binding instruction is an error as provided in clause (c) of Explanation to Sec 263 of the Act. Besides this, it is evident from notice u/s 263 of the Act. Besides this, it is evident from notice u/s 142(1) and reply filed by the assessee thereto inter alia assessment order (where no discussion has been made about this point) that ld. AO accepted the claim of the assessee without application of mind. Hence, there remains no doubt in my mind that impugned assessment order was erroneous as well as prejudicial to the interest of revenue. [B] It is observed from the Balance Sheet, that, value of investment in Mutual Funds is shown as on 31.03.2017 at Rs. 42,53,91,884. As on 31.03.2016, there was NIL investment that can fetch exempt income. This is true that during the current year, the assessee has not shown any "exempt income" in statement of income. However, one should not lose sight of clear-cut instruction of CBDT vide circular No. 05/2014 which provides f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey cannot overrule the decision of the High Courts on the issue. That therefore the AO could not be bound by CBDT instructions interpreting law in contradiction to that as laid down by courts He referred to the decisions of the Hon'ble Delhi High Court in the following cases for the said proposition:- i) PCIT Vs. IL & FS Energy Development Company Ltd., [2017] 399 ITR 483 (Delhi); ii) Cargo Motors (P.) Ltd. Vs. DCIT, [2023] 453 ITR 554 (Delhi). 6. With respect to the issue of assessee's claim of depreciation on goodwill which, as per the ld. PCIT, the Assessing Officer had not examined and which otherwise was not allowable to the assessee resulting in the ld. PCIT holding that the assessment order was erroneous causing prejudice to the interest of the revenue, the learned Counsel for the assessee contended that the assessee's case was taken up for 'limited scrutiny' for the purpose of examining only the issue of expenses disallowable having been incurred for the purpose of exempt income in terms of Section 14A of the Act. The issue of claim of depreciation on goodwill was not one of the reasons for limited scrutiny and the Assessing Officer having not examined this aspect was, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that where the Assessing Officer comes across any issue beyond the scope of limited scrutiny, he ought to seek approval of the ld. PCIT and expand the scope of the assessment and in the present case the Assessing Officer having not done so in regard to the issue of claim of depreciation on goodwill, clause (c) of Explanation (2) to Section 263 had become applicable referring the assessment order erroneous. 9. We have heard the contentions of both the parties and gone through the order of the ld. PCIT. With regard to the finding of the ld. PCIT of the assessment order being erroneous on account of issue of disallowance of expenses under Section 14A of the Act not having been examined by the Assessing Officer in the light of the circular issued by the CBDT in this regard, i.e. Circular No.5/2014, we are not in agreement with ld. PCIT. It is not disputed that the assessee had not earned any exempt income during the year. It is also not in dispute that the jurisdictional High Court has laid down that where no exempt income is earned by the assessee there is no case for making any disallowance under Section 14A of the Act. In the light of these facts, undoubtedly, the view taken by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration. 20. In Redington (India) Ltd. v. Addl. CIT [2017] 392 ITR 633/77 taxmann.com 257 (Mad.), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the actual income and not notional income or anticipated income." It was further explained that, "The computation of total income in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe thus would be carrying the artifice too far." 21. The decisions in CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure." 21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is "for the purpose of making or earning such income." Section 14A of the Act on the other hand contains the expression "in relation to income which does not form part of the total income." The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.' 23. The decisions of the ITAT in Ratan Housing Development Ltd. (supra) and Relaxo Footwears Ltd. (supra), to the extent that they are inconsistent with what has been held hereinbefore do not merit acceptance. Further, the mere fact that in the audit report for the AY in question, the auditors may have suggested that there shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26th September, 2014 and Instruction No. 20/15 dated 19th December, 2015. The Hon'ble High Court observed, therefore, that the Assessing Officer could not have suo moto examined issues which were beyond the scope of limited scrutiny and, therefore, the ld. PCIT could not have found fault in the order of the Assessing Officer for not having done what the Assessing Officer was not permitted to do as per its own instructions and rules. The relevant findings of the Hon'ble Orissa High Court in the case of Shark Mines and Minerals (P.) Ltd. (supra) in this regard at paragraph no. 10 of the order is as under:- "10. What persuades this Court to reach this conclusion is the requirement in law that if the AO has to go beyond the scope of the issues for which 'limited scrutiny' has to be undertaken by him, he has to seek prior permission of the superior officer in terms of the CBDT Instruction No. 7/14 dated 26th September, 2014 and Instruction No. 20/15 dated 19th December, 2015. Consequently, it was not open to the Pr. CIT while exercising suo motu revisional power under section 263 of the Act to find fault with the assessment order of the AO on the ground of its being erroneous ..... X X X X Extracts X X X X X X X X Extracts X X X X
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