THE LAKE PALACE HOTELS & MOTELSPRIVATE LIMITED,UDAIPUR vs. PCIT,CIRCLE-2, UDAIPUR

Assessee By Shri Amit Kothari-C.A. Revenue By Shri S.M. Joshi, JCIT-DR Date of hearing 03/07/2023 Date of 27 /09/2023 Pronouncement O R D E R PER: RATHOD KAMLESH JAYANTBHAI, AM

This appeal is filed by assessee and is arising out of the order of the Principal Commissioner of Income Tax, Udaipur dated 29.03.2022 [here in after (ld. PCIT)] for assessment year 2017-18 which in turn arise from the order dated 28.12.2019 passed under section 143(3) of the Income Tax Act, by the ACIT/DCIT, Circle- 01, Udaipur.

The Lake Palace Hotels & Motels Pvt. Ltd. 2. The assessee has marched this appeal on the following grounds:- “

1. That on the facts and in the circumstances of the case the order u/s 263 of the IT Act passed by the honourable PCIT, Udaipur on 29.03.2022 setting aside the order u/s 143(3) dated. 28.12.2019 passed by the ld. ACIT, Circle-02, Udaipur without giving any reasonable opportunity of being heard is bad in law and bad on facts.

2. That the order u/s 263 passed by the Honorable PCIT, Udaipur directing the AO to reconsider the applicability of provisions u/s 14A read with Rule 8D of the IT Rules is bad in law since the said issue has already been considered while finalizing the original assessment u/s 143(3) of the IT Act and reconsidering the same is nothing but review of order passed by the AO which is not permissible under the provisions of the IT Act.

3. That the Honorable PCIT Udaipur was also not justified to direct the Ld. AO to disallow a sum of Rs. 978046/- being employees contribution to PF/ ESI paid after due date under the said Act but deposited prior to filing of return u/s 139(1) and when the same has been held allowable by the honorable jurisdictional High Court of Rajasthan and honorable ITAT. Jodhpur Bench and the amendments made by the Finance Act, 2021 making amendments U/s 36(1)(va) and section 43(b) of The Income Tax Act for such disallowances are applicable from the Assessment Year 2021- 22 and onwards.

4. That on the facts and in the circumstances of the case the order passed u/s 263 of the IT Act is bad in law and, void ab-initio and deserves to be annulled as the same is based on assumptions, conjectures surmises having no material against the assessee or on material /findings not having any bearing in the case of the assessee and also relying on the material without providing the opportunity to assessee of confrontation.

5. That the Honorable PCIT Udaipur is erred in by not granting sufficient time to submit the explanations with evidences while passing order u/s 263 of the I.T. Act

6. That the appellant craves to add, amend, alter or substitute any of the grounds of appeal on or before hearing.

7. That the appellant prays that the appeal be allowed as per grounds of appeal.”

The Lake Palace Hotels & Motels Pvt. Ltd.

The Lake Palace Hotels & Motels Pvt. Ltd. 3.1 In response to the notice U/s 143(2) & 142(1), the assessee's Authorized Representative attended and submitted the requisite details, information's, documents and clarifications sought for vide notices u/s 143(2), 142(1) mainly as E Proceeding Responses Replies and as per order sheet entries. Reply given by AR online (e responses) on dated 23.12.2019 was considered and duly examined. The AR produced the books of accounts, bills/vouchers in support of the return of income and E- Proceeding Responses which were verified on test check basis and returned to AR of the assessee. During the assessment proceeding the ld. AO noted that the loan payment of Rs. 3,70,40,305/- is treated as deemed dividend and addition to the total income was made. The ld. AO also disallowed a sum of Rs. 1,18,44,224/- on its borrowed capital as the same was considered as not incurred for the purpose of business of the assessee and the claim was thus disallowed. The ld. AO also disallowed a sum of Rs. 8,99,002/- out of the repairs and maintenance expenditure incurred for Aircraft Running & Maintenance.

The Lake Palace Hotels & Motels Pvt. Ltd.

The Lake Palace Hotels & Motels Pvt. Ltd. noted that the following contribution of the employees made towards the Provident Fund were deposited by the assessee in the relevant fund beyond the prescribed due dates under the relevant Acts and thus were disallowable u/s 36(1)(va) r.w.s 2(24)(x) of the Income Tax Act. In view of these facts, ld. PCIT noted that the assessment order passed u/s 143(3) of the IT Act, 1961 in the case of the assessee company for the assessment year 2017-18 on 28.12.2019 is erroneous and prejudicial to the interest of revenue. Considering the above facts, a show cause notice u/s 263 of the IT Act was issued on 03.03.2022 providing an opportunity to explain its case on the issues mentioned in the show cause. In compliance to the notice issued, written submission has been filed by the assessee on 10.03.2022 via online/ITBA portal. The ld. PCIT has considered the submission of the assessee, written submission filed by the assessee company and the material available on record. Based on the written submission filed by the assessee the ld. PCIT noted that contention of the assessee is not tenable and the relevant observation of the PCIT is reiterated here in below : “5. I have considered the facts of the case, written submission filed by the assessee company and the material available on record. The contention of the assessee is not tenable.

The Lake Palace Hotels & Motels Pvt. Ltd. As far as the issue of the disallowance to be made u/s 14A of the IT Act is concerned, the provisions of section 14A are very clear. The provisions of section 14A are reproduced as under: “Expenditure incurred in relation to income not includible in total income. 14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:" The contention of the assessee that as no exempt income was received out of the investment with the sister concerns, the provisions of section 14A are not applicable, is misplaced. The CBDT vide its circular No. 5/2014 dated 11.02.2014 has clarified that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. Provisions of section 14A are applicable where the assessee has invested its funds in such investments which may result in exempt income. For applying the provisions of section 14A of the Act, it is not necessary that any exempt income has been declared by the assessee in any particular year. The provisions are applicable even if no exempt income is earned in the year. The only requirement for application of provisions of section is the investment in such assets which would result in exempted income. The other contention of the assessee that its major investment is made with its sister concerns therefore, the provisions of section 14A are not applicable, is also of no help as it does not put bar on the applicability of the provisions of section 14A of the IT Act.As per details available on the record, total non-current investment of the assessee in the equities was of Rs.78,78,64,739/-. which is much more than the available share capital and Reserve & Surplus, shows that the interest bearing funds were surely used in investment in the shares of other concerns.In the query letter issued by the Assessing Officer the assessee wasshowcausedfor applying of the provisions of section 14A r.w.Rule 8D in its case. The assessee had made a very simple and general reply regarding The Lake Palace Hotels & Motels Pvt. Ltd. non applicability of the provisions of section 14A in its case. The AO accepted this argument at face value and has neither made any further query nor was the issue further examined/analyzed. Thus, the Assessing Officer failed to make proper verification about the disallowanceto be made u/s 14A On the issue of disallowance u/s 36(1)(va) of the IT Act, the provisions of section are clear that deduction under this section is restricted to the amount of employee's contribution which had been credited to the employees account in the relevant fund or funds on or before the "due date" In explanation to section 36(1)(va) of the IT Act, meaning of "due date is also clarified. In the case of the assessee, the details available on record clearly shows that certain amounts falling under section 36(1)(va) r.w.s. 2(24)(x) of the IT Act, were deposited beyond the prescribed due dates and were not allowable. The Assessing Officer failed to examine the facts of the case and apply the correct provisions of law.

6. From the above facts and circumstances of the case and having regard to the material available on record, it is clear that the Assessing Officer failed to consider/apply his mind while framing / passing assessment order of the above named assessee company. Thus, the order passed on 28.12.2019 is made without making necessary verification cum examination about the disallowance to be made u/s 14A of the IT Act and amount to be disallowed 36(1)(va) and as such the assessment was made without application of mind on the given facts on record. This in turn has resulted in passing of an erroneous order by the Assessing Officer in the case due to non application of mind to relevant material, incorrect assumption of facts and an incorrect application of mind to law, which is also prejudicial to the interest of the revenue. Thus, the order passed u/s 143(3) of the Income-tax Act. 1961 on 28.12.2019 is held erroneous and prejudicial to the interest of revenue. In reaching such conclusion, I rely on the following judicial rulings: 1. The Hon'ble Supreme Court in the case of Malabar Industrial Limited V/S CIT2431TR has held that "An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. (ii) In case of TTK LIG Ltd., vis. ACIT(Mad) 51 DTR 228 it has been held that Order would be erroneous if it is based on an incorrect assumption of facts or an incorrect application of law or non-application of mind or based on no or insufficient materials. (iii) In the case of Arvee international vis, Addl. CIT (ITAT, Mum) 101 ITD 495, it has been held that Unlike the Civil Court which is neutral to give a decision on the basis of evidence produced before it. an Assessing Officer is not only an adjudicator but also an investigator. He cannot remain passive on The Lake Palace Hotels & Motels Pvt. Ltd. the face of a return which is apparently in order but calls for further enquiry- It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke inquiry - If there is failure to make such enquiry, order is erroneous and prejudicial to revenue - CIT need not prove that it is erroneous and he can revise it u/s 263. (iv) CIT vis. Raisons Industries Ltd., 288 ITR 322 (SC): The Hon'ble Supreme Court held as under:-" The power of revision under section 263 is exercised by a higher authority. It is a special provision. The revisional jurisdiction is vested in the Commissioner. An order there under can be passed if it is found that the order of assessment is prejudicial to the Revenue. In such a proceeding, he may not only pass an appropriate order in exercise of the said jurisdiction but in order to enable him to do it, he may make such inquiry as he deems necessary in this behalf." (v) Madras High Court in the case of Seshasayee Paper & Boards Ltd. [2000] 242 ITR 490 (Mad.) has held that the powers of the Commissioner are very wide in exercising the powers of revision u/s 263. It is no doubt true that for making a valid order u/s 263, it is essential for the Commissioner to record an express finding that the order sought to be revised was erroneous as well as prejudicial to the interest of the revenue. However, there is nothing in section 263 to show that the Commissioner should in all cases record his final conclusion on the points in controversy before him. The legislative intent to bring the amendment was to make clear the provisions of Explanation to section 263 and to reduce the litigations in this regard which is well supported in view of the clear words used in clause (a) of the Explanation 2 to section 263 (1) wherein it is mentioned that the order passed by the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of revenue, if in the opinion of the PCIT the order is passed without making inquiries or verification which should have been made. If the order is passed without application of mind, such order will fall under the category of erroneous order".

7. Accordingly, by virtue of powers conferred on the undersigned under the provisions of section 263 of the Income-tax Act, 1961, I hold that the order passed by the Assessing Officer u/s 143 (3) of the IT Act, 1961 dated 28.12.2019 for AY 2017-18, is erroneous in so far it is prejudicial to the interest of revenue as the said order has been passed by the Assessing Officer in a routine and perfunctory manner without verifying the amount of disallowance u/s 14A of the IT Act and not verifying the quantum of the allowance to be made u/s 36(1)(va). The order of the Assessing Officer is therefore, liable to revision under the Explanation-2 clause (b) and clause (a) of Section 263 of the Income-tax Act, 1961. Hence, the assessment order is set aside for doing it de-novo in the light of the observation made in this order and with direction to the Assessing Officer to verify and examine and finalize the assessment in accordance with the prevailing law; quantify the correct income of the assessee liable to tax for AY 2017-18 after according reasonable opportunity to the assessee.

The Lake Palace Hotels & Motels Pvt. Ltd.

The order of the AO is, accordingly, set aside on the issues as discussed above.”

Sub: Regarding Proceeding u/s 263 of the I.T. Act 1961 in the case of The Lake Palace Hotels & Motels Pvt. Ltd., City Palace, Udaipur for Asst Year 2017-18 (PAN AAACT7743M) DIN: ITBA/REV/F/REV1/2021-22/1040307465(1) Dt. 03.03.2022 Respected Madam, With regard to the Notice u/s 263 of the I.T. Act , requiring us to show cause as to why the order u/s. 143(3) dt. 28-12-2019 may not be revised u/s. 263 of the I.T. Act, 1961 in a suitable manner and proposing to disallow the following deductions/expenses, viz: (i) a part of the finance costs considered as directly attributable to the investment in shares, as calculated by you at Rs. 7,16,95,349/- and (ii) the employees’ contribution to Provident Fund not made within the prescribed time under the Provident Fund Act, u/s. 36(1)(va) r/w. s. 2(24)(x), In reply, under the instructions of the assesse, we have to make the following submissions, as under. Our submissions are without prejudice to one another.

The Lake Palace Hotels & Motels Pvt. Ltd. The Assessee company is engaged in the Hotel business and has been regularly filing it’s returns of income (RoI) . The accounts of the company are duly audited as per provisions under The Companies Act and also u/s 44AB of the I.T. Act 1961. ROI was filed on 30/10/2017 declaring Nil income after adjusting B/f unabsorbed depreciation/ B/f business losses & paid taxes on MAT. ROI was revised on 12/01/2019 declaring Nil income after adjusting B/f unabsorbed depreciation / B/f business losses & paid taxes on MAT.

The case of the assessee was selected for complete scrutiny and after issue of notice u/s 143(2)/ 142(1) the assessment was completed u/s 143(3) vide order dated 28/12/2019 after thoroughly considering the reply furnished by the assessee at a total income of Rs.10,85,93,969/- by making following disallowances:

(i) U/s 2(22)(e) Rs.3,70,40,305/- (ii) U/s 36(1)(iii) Rs.1,18,44,224/- (iii) Aircraft expenses Rs. 8,99,000/- Grounds for proposed revision u/s 263 are as under 1. Applicability of provisions of section 14A of the I T Act for disallowance of expenses related to investments which may be in the form of dividend on shares.

Submissions (1) Disallowance under section 14A of the I T Act:

(i) With regard to your honor’s invoking revisionary jurisdiction u/s 263 of the I.T. Act, we humbly submit that your honor has duly accepted and stated that AO has made a query with reference to section 14A r.w.r 8D during assessment u/s 143(3). The assessee have received a notice u/s 142(1) of the I. T. Act dated 24/11/2019 (Copy enclosed as Annexure-1) vide which a specific query was raised in para 7 of the annexure attached to the said notice as under. “7. Submit the details of exempt income and investments. Show cause why sec. 14A r.w.r 8D is not applicable in your case.” The assessee company has replied to the above query as under in para 6&7 of the reply e-furnished on 24/11/2019 vide ack no 2312192877982 (Enclosed as Annexure -2) which is reproduced for your kind consideration “6. Investments in shares by the assessee company is mainly in its subsidiary companies and during the year under assessment no dividend

The Lake Palace Hotels & Motels Pvt. Ltd. was declared by the said companies. Income from investments in outside companies please refer para 7 below. “7. The assessee has a receipt of dividend for Rs. 4,20,000/- from Indi Travels Pvt. Ltd. These shares were purchased by the company way back in 1983. thereafter or during the year under assessment no further expenditure was incurred in this respect and therefore no expenditure were claimed against the exempt income by the assessee company and the applicability of rule 8D r.w.s 14A regarding disallowance of expenditure incurred to earn exempt income does not arise.” Thus the assesse has satisfactorily replied the query in the questionnaire during the course of assessment proceedings and the ld. AO passed the assessment order considering the prevailing legal position, allowed the expenditure in question.

In this connection we also rely on the decision of Honourable Mumbai Bench of ITAT in the case of M/s Bank of India Vs ACIT Mumbai in ITA 3473/Mum/2019 (enclosed as Annexure-3) wherein it has been held that if the assessee has filed submissions before the AO and AO has considered the submissions, even though he has not elaborately discussed it in his order u/s 143 (3) of the Act, it is presumed that the assessing officer has satisfied himself and under such circumstances provisions of section 263 of the I T Act cannot be invoked.

Your honour’s observation to the effect that the learned A.O. has not carried out a detailed enquiry and has merely accepted the assessee’s explanation without applying his mind and the order is erroneous in nature, it is submitted, is un- charitable. It needs to be appreciated that the ld. A.O., in view of the facts and legal position on the point being crystal clear and assessee’s case being squarely ‘on all the fours’, has rightly, and in right earnest, not made further probe in the matter, as it was wholly un-necessary. The mere quantum of the amount should not alter the ld. AO’s decision, as the principle involved in the issue, as also the legal position, is clear.

We submit that the case of the assessee was selected for complete scrutiny and the assessment has been completed u/s 143(3) of the I T Act and as such the proceedings u/s 263 of the I T Act are bad in law.

(ii) Without prejudice to above regarding disallowance of expenditure as per provisions u/s 14A of the I. T. Act, we submit that the assessee company has not incurred any expenditure for earning the dividend income claimed as exempt. Re: the disallowance of expenses u/s 14A of the I T Act as in the circular no. 5/2014 dated 11th February 2014 that the expenses which are relatable to earning of exempt income have also to be considered for disallowance, irrespective of the The Lake Palace Hotels & Motels Pvt. Ltd. fact whether any such income has been earned during the FY or not, we submit that the assessee company has not incurred any expenses on earning the dividend income since the dividends are either duly transferred in the bank account or the cheque issued for dividend is deposited into bank account and as such no expenses is incurred which are relatable to earning of exempt income and therefore no disallowance can be made by applying provisions of rule 8D of the I T Rules. We further submit that the total investment in shares/securities of various companies as on 31/03/2017 is Rs.78,78,64,739/- ( details attached as Annexure 4). We are enclosing herewith the year wise break-ups of investments made by the assessee company in its subsidiary & other companies as Annexure 5. Your honour shall please observe that the substantial investment of Rs.78,71,65,939/- is in the subsidiary companies of the assessee company, all of which are in the same business/industry, and only a sum of Rs.6,98,800/- which is negligible as compared to the total investment are invested otherwise. The said investments were prior to the existing loans’ sanctioned dates. It is settled law that the provisions of sec 14A are not applicable in the case of investment in subsidiary companies. Which carry on the same business/industry, being a strategic investment made with business motive. (Underlined for emphasis)

For this proposition, we rely on the judgement of the Delhi High Court in the case of Oriental Structure Engineers Pvt. Ltd.(216 Taxmann 92) in which it is held that where the assesse had made investments in share of Subsidiaries on the principal of commercial expediency and with a view to achieve business objective and not for the purpose of earning dividend simplicitor then no disallowance u/s 14A is warranted.

Your honour has, indeed, been satisfied that no dividend has been received during the financial year, from the companies in the shares of which the assesse company has invested funds during the year. The issue, therefore, is limited to the future possibility of earning exempted income in subseqent year. It will be appreciated that the provisions of Sec. 80(M) is clear that the dividend income liable to tax and is exempt only to the extent of the dividend distributed by the assesse company. Thus, if the assesse company’s distribution is exempt under sec. 80M, the provisions of Sec. 14A are not applicable at all, as Sec. 14A applies only to “expenses incurred for earning the income”, which are distinct from the provisions of Sec. 80M.

(iii) Your honour may please observe that during the FY 2016-17 (i.e. AY 2017- 18), the assessee company has made investment of only a sum of Rs.

The Lake Palace Hotels & Motels Pvt. Ltd. 2,82,19,101/- (As per Annexure -6)and the same has also been invested out of current year’s internal accretion of operating profit of Rs.14,78,17,117/- (as per statement of P & L of the assessee company for the FY 2016-17 attached as Annexure 7). Since the investment directly attributable to current year’s profit and that too in its own wholly owned subsidiary , no expenses in the nature of interest etc. can be said to have been incurred for the investment made during the year under assessment and, further more, since during the year under assessment the assessee company has not received any fresh loan, the provision of section 14A is not applicable.

It is also relevant and pertinent to point out that the assesse that he internal resources accretion out of the operating profit of the assesse as at the beginning of the financial year, as brought forward from the immediately preceding year, were, by itself, more than adequate and sufficient to have provided for the investments in respect of which your honour has resorted to your revisionary powers.

We further submit that the investment in shares has not been made out of interest bearing funds and as such there is no justification to proposed addition of Rs 7,16,95,349/- against dividend income of Rs 4,20,000/-. The loan Funds are taken for specific purposes and were utilised accordingly and no part of loan fund is used for investment in shares.

We here rely on the decision of Honourable Supreme Court in the case of The South India Bank Ltd v/s The Commissioner of Income Tax (9606 of 2011 attached as Annexure -8) wherein it has been held that for the purpose of disallowance u/s 14A the assessing authority is required to prove and establish the nexus between the expenditure disallowed and earning of exempt income . Without proving the nexus no disallowance of expenditure can be made.

We also request that while passing the assessment order u/s 143(3), an amount of Rs. 1,18,44,224 is disallowed from interest expenses u/s 36(i)(iii) so the calculation of disallowance of interest for the purpose of 14A must be restricted in a manner that there should no double disallowances . (2) Regarding disallowance of employee’s contributions to provident fund u/s 36(1)(va) r.w.s. 2(24)(x) ,we submit that the honourable Rajasthan High Court (jurisdictional High Court) in the case of Principal Commissioner of Income Tax v/s Rajasthan State Beverages Corporation Ltd has held that the employees contribution to the PF/ESIC if paid after the due dates specified under the relevant Acts is not disallowable if the same is deposited before due date of filing return.

The Lake Palace Hotels & Motels Pvt. Ltd. The same view is also followed by various other High Courts. The SLP filed to the Honourable Supreme Court against the decision of the Honourable Rajasthan High Court has also been dismissed and as such the amount of ESIC/PF deposited after due date but before the due date of filing of the return cannot be disallowed. The same issue is also decided by the Jodhpur bench of the ITAT in the case of assessees own subsidiaries Historic Resorts Hotel Pvt. Ltd & Shikarbadi Hotel Pvt Ltd. and accordingly there is no basis/justification for disallowing the amount of Rs 9,78,046/-. We also further rely on following cases:  CIT vs. State Bank of Bikaner & Jaipur (2014) 99 DTR 131 (Raj.)  CIT v. Alom Extrusions Limited reported in 319 ITR 306(SC)  CIT v. Aimil Limited reported in (2010) 321 ITR 508(Del.)  CIT Vs. Vinay Cement Ltd.(SC)  DCIT Vs. Bengal Chemicals and Pharmaceutical Ltd. (2011) 11 taxmann 328 (Kol)  Kwality Milk Foods Ltd. v. Asstt. CIT (2006) 102 TTJ (Chennai)(SB)

We also submit that as per decision of Honourable Supreme Court in the case of Union Of India And Others vs Kamlakshi Finance Corporation it has been held that decision of Higher Appellate Authorities are binding on lower Authorities. particularly the decision of Honourable Jurisdictional High Court which is bindings on these.

We also wish to submit that an amendments is made by Finance Act, 2021 in Sec. 36(1)(va) of the I T Act and are prospective in nature and will take effect from 1st April, 2021 and accordingly apply in relation to the assessment year 2021-2022 and subsequent assessment years.Thus the intention of law is clear that employee’s contributions to provident fund u/s 36(1)(va) r.w.s. 2(24)(x) remains allowable if the same is deposited before due date of filing return upto A.Y. 20-21.

Since the time available is very short we seeks an opportunity to furnish additional submissions, if required. We further request that before making any negative inferences in the matter, the assessee may please be allowed an opportunity of personal hearing. In view of the above submission, we humbly request your honor to kindly drop the proceedings initiated u/s 263 of the IT Act and oblige.”

The Lake Palace Hotels & Motels Pvt. Ltd. 5.1 The ld. AR of the assessee also relied upon the following case laws :

S. No. Particulars Pages 1 CIT vs. Oriental Structural Engineers P. Ltd. (2013) 216 Taxman 92 (Del.) 58-59 2 Arumugam Olaganathan vs. CIT (2020) NYP CTR 662 (mad) 60-61 3 Pr. VIT PTC India Financial Services Ltd. (2022) 6 NYP CTR 1006 (Delhi) 62-64 4 Pr. CIT vs. Era Infrastructure India Ltd. (2022) 327 CTR (Del) 489 65-66 5 CIT vs. J. L. Morrison (India) Ltd. 270 CTR (Cal) 405 67-68 6 CIT vs. Honda Siel Power Products Ltd. 333 ITR 547 (Del) 69-71 7 CIT vs. Max India Ltd. 295 ITR 282 (SC) 72-74 5.2 The ld. AR of the assessee in addition to the written submission and case law so relied upon submitted that the issue that the PCIT is raising has already been raised by the ld. AO vide notice dated 24.11.1019 in Point no. 7 (APB-14) wherein ld. AO asked as under:

Referring to page 15 question no 20 & 21 of the paper book page where in the notice dated 24.11.2019 continued and ld. AO continued raised the following questions:

The Lake Palace Hotels & Motels Pvt. Ltd. The assessee has filed a detailed reply to these specific questions raised by the ld. AO vide letter dated 24.04.2018 and reply has been considered on the issue of 14A. The law does not permit to raise the same issue by the PCIT u/s. 263 and review the order of the ld. AO on the same very issue which has been examined by the ld. AO and he has taken a plausible view in the matter. To drive home to this contention the ld. AR of the assessee has relied upon the various case laws.

The Lake Palace Hotels & Motels Pvt. Ltd.

7. We have heard the rival contentions and perused the material placed on record. The case of the assessee company was selected for scrutiny and the assessment order was made by making three disallowance / addition in the returned income of the assessee. After the completion of the assessment proceeding the ld. PCIT called for the assessment records for inspection and noted that that issue of disallowance u/s. 14A and disallowance of late deposit of ESI /PF has not been considered by the ld. AO. On the issue of disallowance u/s. 14A is concerned we note that AO has made a query with reference to section 14A r.w.r. 8D during assessment proceeding u/s 143(3). The assessee was served with a notice u/s 142(1) of the I. T. Act dated 24/11/2019 vide which a specific query was raised in para 7 of the annexure attached to the said notice. The relevant extract showing the content is reiterated here in below: 7. Submit details of exempt income and investment. Show cause why section 14A r.w.r. 8D is not applicable in your case.

7.1 The issue raised by the ld. AO was replied by the assessee vide para 6 & 7 of the reply e-furnished on 24/11/2019 vide ack no 2312192877982. The content of the reply is also reiterated here in below:

The Lake Palace Hotels & Motels Pvt. Ltd. “6. Investments in shares by the assessee company is mainly in its subsidiary companies and during the year under assessment no dividend was declared by the said companies. Income from investments in outside companies please refer para 7 below. “7. The assessee has a receipt of dividend for Rs. 4,20,000/- from Indi Travels Pvt. Ltd. These shares were purchased by the company way back in 1983. thereafter or during the year under assessment no further expenditure was incurred in this respect and therefore no expenditure were claimed against the exempt income by the assessee company and the applicability of rule 8D r.w.s 14A regarding disallowance of expenditure incurred to earn exempt income does not arise.”

7.2 The records so produced by the assessee has not been disputed even by the PCIT and he has in his order noted that “Only a general query was made by the Assessing Officer, but verification of the facts with reference to the provision of section 14A of the Income Tax Act and Rule 8D has not been made by the assessing officer. The assessing officer failed to make any verification about the amount of disallowance to be made by the assessee u/s. 14A of the Act. As the assessee was having exempt income earning investments, provisions of section 14A were applicable and as per Rule 8D, the amount of disallowance comes to Rs. 7,16,95,349/-.”

7.3 Thus, it is not in dispute that the ld. AO has made enquiries and satisfied himself on the issue. We note from the observation of the ld. PCIT that he intends that the ld. AO failed to make verification and intent to impose his view on the matter. This remark is nothing but a The Lake Palace Hotels & Motels Pvt. Ltd. general remark of the PCIT and therefore, the twin condition required to be satisfied which is absent in this case. On the issue observed by the ld. PCIT the sufficient enquiry has already been done by the assessing officer and as regards the debatable issue the ld. AO has taken a plausible view of the matter and for that matter the ld. PCIT cannot invoke the provision of section 263 of the Act. Thus, on perusal of the records, it is clear that on the issue the ld. AO has raised the query the assessee has replied the same and the ld. AO has taken the plausible view of the matter and the ld. PCIT did not pin point any error and the only observation of the PCIT that ld. AO has raised general query but at the same time the ld. PCIT should have pointed out the error on the view taken by the ld. AO. The provision of section 263 of the Act nowhere allow to challenge the judicial wisdom of the ld. AO or to replace the wisdom of the PCIT in the guise of revision unless the view taken by the ld. AO is not at all sustainable in the law and to invoke the provision of section 263 the twin condition needs to be satisfied by the ld. PCIT which we note that is absent on the issues raised. The extent of the enquiry can be stretched to any level by forcing the AO to go through the assessment process again and again and that case there cannot be finality of the issue. The bench further

The Lake Palace Hotels & Motels Pvt. Ltd. note that the prerequisite exercise of jurisdiction by the learned PCIT under section 263 of the Act is that the order of the AO is established to be erroneous in so far as it is prejudicial to the interest of the Revenue. The ld. PCIT has to be satisfied of twin conditions, namely (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If any one of them is absent i.e., if the assessment order is not erroneous but it is prejudicial to the Revenue, provision of section 263 cannot be invoked. This provision cannot be invoked to correct each, and every type of mistake or error committed by the AO; it is only when an order is erroneous as also prejudicial to Revenue's interest, then the provision will be attracted. An incorrect assumption of the fact or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase 'prejudicial to the interest of the Revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of the order of the AO cannot be treated as prejudicial to the interest of the Revenue. It is pertinent to mention that if the AO has adopted one of the two or more courses permissible in law and it has resulted in loss of revenue, or where two views are possible and AO has taken one view with which the PCIT does not agree, it cannot be The Lake Palace Hotels & Motels Pvt. Ltd. treated as an erroneous order and it is prejudicial to the interest of the Revenue, unless the view taken by the AO is totally unsustainable in law. Thus, on the issue of 14A once we find that the issue has been raised and examined by the ld. AO and PCIT has not established that the view taken by the ld. AO how not correct or permissible. In this process even the AO has no power to review his own order. In this regard, we draw strength from the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1: (2000) 243 ITR 83 (SC). We also draw strength from the decision of the Hon'ble Supreme Court in the case of CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266: (2007) 295 ITR 282 (SC) wherein it was held that: "The phrase 'prejudicial to the interests of the Revenue' in s. 263 of the IT Act, 1961, has to be read in conjunction with the expression 'erroneous' order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when the AO adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the AO is unsustainable in law."

Thus, based on this decision it is also noteworthy to mention that one of the pre-requisite before invoking S. 263 and the allegation of the Ld. PCIT is that there has been incorrect assumption of fact and law by The Lake Palace Hotels & Motels Pvt. Ltd. the Assessing Officer. However, despite our deep and careful consideration of the material on record including the finding recorded in the subjected Assessment order and in the findings recorded in the order under challenge, considering on all the issues flagged by the ld. PCIT we do not find any incorrectness and incompleteness in the appreciation of facts made by the AO. In the light of these observations, we do not agree in the finding recorded by the PCIT which is in general and we note that there is no error or prejudice caused to the revenue and does not attract the clause (a) or (b) to explanation 2 of section 263 of the Act and thus, it is nothing but a change of opinion and ld. PCIT intend that the enquiry should have been done in the light of the his view which is not permitted in the eyes of the law. In the light of the aforesaid discussion, we hold that the order of the PCIT is not in accordance with the provisions of section 263 of the Act and thus the same is quashed so far as on the issue of disallowance if any on account of section 14A of the Act.

7.4 So far as the issue of disallowance of employee’s contributions to provident fund u/s 36(1)(va) r.w.s. 2(24)(x), when the assessment made by the ld. AO the issue was in the favour as decided by the The Lake Palace Hotels & Motels Pvt. Ltd. Honourable Rajasthan High Court (jurisdictional High Court) in the case of Principal Commissioner of Income Tax v/s Rajasthan State Beverages Corporation Ltd where in it was held that the employees contribution to the PF/ESIC if paid after the due dates specified under the relevant Acts is not disallowable if the same is deposited before due date of filing return. The same view is also followed by various other High Courts. The SLP filed to the Honourable Supreme Court against the decision of the Honourable Rajasthan High Court has also been dismissed and as such the amount of ESIC/PF deposited after due date but before the due date of filing of the return cannot be disallowed and based on that fact there is not justification to invoke the provision of section 263 of the Act. Thus considering the judicial precedent cited the view taken by the ld. AO cannot be considered to be erroneous or prejudicial to the interest of the revenue as the twin condition needs to be satisfied by the ld. PCIT which we note, is absent on the issues raised as the issue was certainly in the favour of the assessee when the assessment was completed. The extent of the enquiry can be stretched to any level by forcing the AO to go through the assessment process again and again and that case there cannot be finality of the issue. The ld. PCIT has to be satisfied of twin

The Lake Palace Hotels & Motels Pvt. Ltd. conditions, namely (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If any one of them is absent i.e., if the assessment order is not erroneous but it is prejudicial to the Revenue, provision of section 263 cannot be invoked. This provision cannot be invoked to correct each, and every type of mistake or error committed by the AO; it is only when an order is erroneous as also prejudicial to Revenue's interest, then the provision will be attracted. An incorrect assumption of the fact or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase 'prejudicial to the interest of the Revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of the order of the AO cannot be treated as prejudicial to the interest of the Revenue. It is pertinent to mention that if the AO has adopted one of the two or more courses permissible in law and it has resulted in loss of revenue, or where two views are possible and AO has taken one view with which the PCIT does not agree, it cannot be treated as an erroneous order and it is prejudicial to the interest of the Revenue, unless the view taken by the AO is totally unsustainable in law. In this regard, we draw strength from the decision of the Hon'ble Supreme

The Lake Palace Hotels & Motels Pvt. Ltd. Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1: (2000) 243 ITR 83 (SC). We also draw strength from the decision of the Hon'ble Supreme Court in the case of CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266: (2007) 295 ITR 282 (SC). In the light of these observations, we do not agree in the finding recorded by the PCIT and does not attract the clause (a) or (b) to explanation 2 of section 263 of the Act and thus, it is nothing but a change of opinion In the light of the aforesaid discussion, we hold that the order of the PCIT is not in accordance with the provisions of section 263 of the Act and thus the same is quashed so far as on the issue of disallowance of employee’s contributions to provident fund.

The Lake Palace Hotels & Motels Pvt. Ltd. In the result, appeal of the assessee is allowed.