SBL PRIVATE LIMITED,HARIDWAR , UTTRAKHAND vs. PCIT (CENTRAL), DELHI-2, NEW DELHI

PER SATBEER SINGH GODARA, J.M:

This assessee’s appeal for assessment year 2018-19 arises against DIN and order no. ITBA/REV/F/REV5/2023-24/1062520567(1), dated 13.03.2024, passed by the PCIT(Central), Delhi-2, in proceedings u/s 263 of the Income-tax Act,
1961, hereinafter referred to as the “Act”.

Heard both the parties. Case file perused.
2. A perusal of the case file indicates at the outset that this PCIT’s impugned revision directions have termed the Assessing Officer’s Section 143(3) assessment

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dated 24.08.2021 as erroneous one causing prejudice to the interest of the Revenue as under:
“4.2 Comments of this Office:-
The submission of the assessee has been carefully examined and found without merit.

(i) The first objection raised regarding invoking of section 263 as the AO has carried out detailed enquiries. In this regard it is submitted that in the case of Malabar Industrial Co. Ltd Hon'ble Supreme Court held that "an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous". The Suo moto disallowance made by the assessee doesn't fulfill the requirement of the law as per the letter dated 18.06.2021 addressed to AO. Perusal of the assessment order reflects that there is no discussion on the aspect of disallowance u/s 14A of the Act r.w. Rule 8D of IT Rules. It is apparent that the AO failed to correctly apply the provisions of section 14A r.w. rule 8D. The law should have been applied in the correct way by adopting correct procedure. The said procedure has been laid in Rule 8D r.w.s. 14A of the Act. In this case the AO has applied law incorrectly, therefore, provision of Sec. 263 can be invoked rightly.

(ii) Further, as discussed in the SCN that Section 14A is amended by inserting a non obstante clause and an explanation after the proviso, therefore a change in law has been brought about and consequently, the judgements relied upon by the assessee are no longer good law. The amendment to Section 14A of the Act is reproduced hereinbelow: -

In Section 14A of the Income Tax Act,-
(a) In sub section (1), for the words "For the purposes of, the words
"Notwithstanding anything to the contrary contained in this Act, for the purposes of shall be substituted;
(b) After the proviso, the following Explanation shall be inserted, namely -
:-"Explanation. For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have 3
always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income".

(iii) The assessee quoted case law wherein it is held that when one view possible view has been taken by the AO the same can't be treated as erroneous and prejudicial to the interest of revenue. The assessee also quoted case laws regarding limitation of applicability of Rule 8D rws 14A of the IT Act, 1961. In this regard it is to be noted that the quoted case laws are not applicable in the facts and circumstances of the present case. This is not a case where one possible view has been taken by the AO but it is the case where the AO has not applied the law correctly. Further, in this case the assessee earned income that is not includible in the total income therefore, expenditure to be disallowed as per correct procedure of law as given in Rule 8D.

(iv) Simply saying that the assessee has made disallowance as per its own calculation is not sufficient to discharge the onus laid down as per Sec. 14A read with rule 8D of the Income Tax Rules 1962. The assessee failed to comply with the provisions of IT Act & Rules. Therefore, the provisions of the section 14A of the Act are proposed to be invoked and as per the provisions of the section 14A of the Act, disallowance in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act is calculated by applying Rule
8D of the Income-tax Rules, 1962. (v) In Rule 8D, specific method for determining amount of expenditure in relation to income not includible in total income as under: -

8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with-
(a) the correctness of the claim of expenditure made by the assessee, or (b) the claim made by the assessee that no expenditure has been incurred,

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in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

[(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely: -
(i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment income from which does not or shall not form part of total income

Provided that the amount referred to in clause (1) and clause (ii) shall not exceed the total expenditure claimed by the assessee.]

(3) 52[***]]
(vi) In this case the closing balances of investment in shares as per the balance sheet filed by the assessee for AY 2008-09, have been as under:
Particulars Investment as on 31.03.2018
Investment as on 31.03.2017
Value of Investment
336,82,54,000/-
291,71,01,000/-

The value of average investment in respect of the value shown in the books of the assessee is Rs. 314,26,77,500/-, 1% of average value of investment comes to Rs. 3,14,26,755/-. Thus, total disallowance u/s14A required to be made comes to Rs. 3,14,26,755/-. Therefore, disallowance of Rs. 20,00,000/- made by the assessee is not correct and it should have been Rs.
3,14,26,775/-. This disallowance is also supported by Circular No. 05/2014
dated 11.02.2014 issued by CBDT.
(vii) The CBDT in Circular no. 5 of 2014 dated 11.02.2014 has also clarified the disallowance of expenses u/s 14A of the Act, as under:
"3. …… The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vides Circular No. 14 of 2001
as under:
"Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such 5
exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to eam the exempt income against taxable income.
This is against the basic principles of taxation whereby only the net income, ie.. gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income.
Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income"

Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial-year or not.
4. The above position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule 8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration."
Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income."
5. In view of the above discussion, it is clear that "for removal of doubts" is retrospective and it just clarified the law as it was always. In totality of facts, it is clear that the assessing officer failed to apply law correctly w.r.t.
disallowance u/s14A, therefore I find that the assessment order is erroneous and prejudicial to the interest of the revenue on this issue. Accordingly, the said order is set aside on this issue. I direct the assessing officer to make necessary enquiries and do verification on the issue of disallowances u/s14A of the Act r.w. rule 8D, and then apply the law as discussed above.”

This is what leaves the assessee aggrieved.

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3. Both the learned representatives vehemently reiterate their respective stand against and in support of the PCIT’s above revision directions. The Revenue’s first and foremost argument is that the assessee has admittedly been found not to have computed administrative expenses disallowance u/s 14A read with Rule 8D as it suo motu disallowed a sum of Rs. 20 lakhs only. That being the case the Revenue could hardly dispute that the PCIT’s revision directions have nowhere specifically rejected the assessee’s books of accounts u/s 14A(2) of the Act which has been held as mandatory in MAXOPP Investment Ltd. v. CIT (2018) 402 ITR 640 (SC).
We, thus, reject the revenue’s first and foremost argument in very terms.
4. The Revenue’s second argument raised during the course of hearing is that PCIT’s impugned revision directions have rightly invoked Section 14A
Explanation inserted in the Act vide Finance Act, 2022 w.e.f. 1.4.2022. We see no merit in the Revenue’s second substantive argument as well as not only the above
Explanation does not carry any retrospective effect since applicable from 1.4.2022
onwards as per PCIT v. ERA Infrastructure (India) Ltd. [2022] 448 ITR 674
(Delhi), but also it gets attracted even in case there is no exempt income derived by the tax payer concern. A perusal of the case record indicates that the assessee had indeed declared its exempt income representing dividend of Rs. 19,30,666/- and Rs. 181,54,175/- from share and securities etc. We, thus, reject the Revenue’s endeavour to invoke the foregoing Explanation to Section 14A in very terms.
5. The Revenue’s third substantive argument is that the Assessing Officer had not carried out any factual verification regarding the assessee’s suo motu section 14A disallowance computation in its books of account. The assessee on the other hand invites our attention to its paper book pages 1 to 19, Assessing Officer’s
Section 142(1) show cause dated 22.4.2021 and its reply thereto dated 18.6.2021
qua the specific issue of exempt income and Section 14A disallowance. The same

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could not be termed as a case of either no inquiry or that of inadequate inquiry as claimed at the Revenue’s behest. We conclude in these peculiar facts and in light of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) that the PCIT’s impugned revision directions are not sustainable in law. The same stand reversed therefore. Ordered accordingly.
6. Assessee’s appeal is allowed.

Order pronounced in open court on 17.07.2025. (S. RIFAUR RAHMAN)
JUDICIAL MEMBER

Dated: 17.07.2025. *MP*