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Facts
The assessee filed its return declaring a loss. The assessment order accepted the returned income. The PCIT initiated proceedings under Section 263, holding the assessment order erroneous and prejudicial to revenue regarding interest income on FDRs and disallowance under Section 14A.
Held
The Tribunal held that the AO had rightly taxed the interest income on FDRs in the original assessment. Regarding Section 14A, the Tribunal found that the issue was examined during the original assessment and the PCIT failed to establish that the assessment order was erroneous or prejudicial to revenue.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise an assessment order when the issues were adequately examined by the AO, and whether the assessment order was erroneous and prejudicial to the interest of revenue.
Sections Cited
143(3), 263, 14A, 147, 144, 144B, 142(1), 8D
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Income Tax Appellate Tribunal, DELHI BENCH ‘E’: NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI AVDHESH KUMAR MISHRA
A.Y. 2018-19 Micromax Informatics Ltd. Vs. Pr. Commissioner of Plot No.21/14 Block-A, Income Tax, Delhi-4, Phase-II, C. R. Building, I. P Estate, Naraina Industrial Area, New Delhi. New Delhi-110028 PAN: AABCR8863N (Appellant) (Respondent) Appellant by Sh. Sandeep Jain, CA Respondent by MS. Monika Dhami, CIT DR Date of Hearing 09/04/2025 Date of Pronouncement 06/06/2025 ORDER
PER AVDHESH KUMAR MISHRA, AM
The appeal of the assessee for the Assessment Year (AY) 2018-19 is directed against the order dated 30.03.2024 of the Principal Commissioner of Income Tax, New Delhi [hereinafter, the ‘PCIT’].
The assessee has raised following grounds of appeal: -
1. The order u/s 263 of Income Tax Act by the Learned Commissioner of Income tax is bad in law and on facts, weight of evidence and probabilities of the case.
2. The learned Commissioner of Income Tax erred in holding the assessment order passed u/s 143(3) of the Income-tax Act, 1961 as erroneous and prejudicial to the interests of revenue.
The learned Commissioner of Income Tax erred in setting aside the AO order on account of FD interest Rs. 16,18,16,439.00 received during year despite of the fact that same has been already offered for taxation on accrual basis.
4. The learned Commissioner of Income Tax erred in setting aside the AO order on account of Rs. 1,39,57,619.00 u/s 14A despite of the fact that assessee has suo motu disallowed expense u/s 14A & same has been verified & accepted by the assessing officer. 5. The appellant craves leave to add, amend, delete or alter any of the grounds of appeal
3. The relevant facts giving rise to this appeal are that the assessee, a trader of mobile phones, LED TV, air conditioners, washing machines, etc., filed its Income Tax Return (ITR) on 30.11.2018 declaring loss of Rs.1,58,55,19,587/-. The case was scrutinized and the consequential assessment order accepting the returned income was passed on 30.09.2021. Later, the Principal Commissioner of Income Tax (PCIT), vide impugned order under section 263 of the Income Tax Act, 1961 (Act) has held that the AO has not only failed to tax interest income of Rs.16,18,16,439/- on FDRs as evident from 26AS of the assessee but also failed to disallow expenditure of Rs.1,39,57,619/- under section 14A of the Act. Consequentially, the PCIT concluded that the assessment order was not only erroneous but also prejudicial to the interest of revenue. Accordingly, he directed the Assessing Officer (AO) to pass assessment order afresh after examining the issues of taxability of interest income on FDRs and disallowance under section 14A of the Act.
At the outset, the Ld. Authorized Representative (AR) submitted that the AO, in pursuance of the impugned order passed under section 263 of the Act, had passed the assessment order afresh on 20.03.2025 under section 147 r.w.s. 144 and 144B of the Act, wherein the issue of taxability of interest income of Rs.16,18,16,439/- on FDRs had been decided in favour of the assessee as under: - “3. Interest Income: The issue set aside as per Order u/s 263 Dt. 30/3/2024 was that, the assessee had received interest Income of Rs. as per 26AS but has offered to tax only Rs. 38,14,71,085/- i.e. there is a shortfall of Rs. 16,18,16,16,149/- and assessee has claimed full credit of TDS in 26AS. The same has been verified after examination of documents/details the contention of the assessee is found acceptable. Hence, No variation on this issue.”
4.1 In view of the above, the Ld. AR further submitted that the AO had not found any interest income on FDRs remined left out of the taxable income disclosed in the ITR. Therefore, he contended that the Ld. PCIT’s finding that the assessment order was erroneous and prejudicial to the interest of revenue on the issue of taxability of interest income of Rs.16,18,16,439/- on FDRs was not justified.
The second issue is in respect of the disallowance under section 14A of the Act. The Ld. AR, drawing our attention to the question No. 09 to the notice issued under section 142(1) of the Act [ITBA/AST/F/142(1)/2021- 22/1035600625(1) dated 15/09/2021], submitted that the AO had specifically called the working of disallowance of expenditure in accordance with the Rule 8D as prescribed under section 14A of the Act. The Ld. AR submitted that a detailed submission in this regard was filed [page 40, 53 and 54 of the PB], which was accepted after in-depth investigation by the AO as evident from the assessment order dated 20.03.2025. The Ld. AR also drew our attention to the assessment orders dated 20.12.2018 and 23.12.2019 of AYs 2016-17 and 2017-18 to submit that the issue of disallowance under section 14A of the Act was examined in these years and the assessee’s submissions had been accepted after in-depth investigation by the AO. The Ld. AR specifically submitted that one of the reasons for selection of the case of AY 2016-17 for scrutiny was the disallowance under section 14A of the Act and the assessments of AYs 2016-17 and 2017-18 were never revised under section 263 of the Act. Thus, it was contended that the present case had germinated only due to change of opinion and nothing else. The issue of interest on FDRs dealt by the Ld. PCIT, in view of the AO’s order dated 20.03.2025, was contended to be a case of non-application of mind by the Ld. PCIT.
5.1 The Ld. AR further drew our attention on the following finding of the Ld. PCIT on the issue of disallowance under section 14A of the Act [page 21 of the impugned order] to submit that the Ld. PCIT had failed to demonstrate and establish that how the assessment order, on the issue of disallowance under section 14A of the Act, was prejudicial to the interest of revenue: “…..Perusal of the assessment order reveals that the AO has not computed deduction in respect of expenditure incurred by the assessee in relation to which such income which does not form part of the total income under this Act. Secondly, the AO has also not recorded any satisfaction on the correctness of the claim of the assessee in respect of such expenditure in relation to which income does not form part of the total income. Thirdly, the Assessing Officer has also accepted the suo moto disallowance made by the assessee without resorting to the provision of Rule 8D(2) of the Income Tax Rule. The Hon'ble Supreme Court has decided in the case of CIT Vs. Share & Stock Brokers (supra) that there must be approximate relationship of expenditure with exempt income, for the purposes of making disallowances of the same u/s 14A of the Act. The AO has also not established such relationship and has not applied Rule 8D correctly. In my considered view, non-application of Income Tax Rule renders the assessment order erroneous as it has been passed not in accordance with the rule and therefore, it is both erroneous and prejudicial to the interest of revenue….”
5.2 The Ld. AR further contended that the Ld. PCIT had simply highlighted three shortcomings in the AO’s order; non-working of the disallowance as per the Rule 8D (2) of the Income Tax Rule, non recording of satisfaction on the correctness of the claim of the disallowance of expenditure in relation to exempted income and the acceptance of the assessee’s suo-moto disallowance of Rs.7,90,061/- on this score. The objective of the impugned order, prima-facie, was to regularize the short comings, which could not be 5 done through the impugned order. For the proceedings under section 263 of the Act, twin conditions; erroneous and prejudicial to the interest of revenue, had to be factually established and demonstrated, which had not been done in this case, argued the Ld. AR. It was contended that the Ld. PCIT had also not pointed out relationship of any expenditure other than those considered by the assessee with exempt income for the purposes of making disallowances of the same under section 14A of the Act. Further, the Ld. AR argued that the Ld. PCIT had also not established and demonstrated that the disallowance of Rs.7,90,061/- worked out by the assessee and accepted by the AO was unjustified being erroneous and prejudicial to the interest of revenue. To buttress his arguments, the Ld. AR placed reliance on the decision of the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. Ltd. order dated 01.03.2024 and contended that the case of the assessee was squarely covered by the decision of the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. (supra).
5.3 The Ld. AR drew our attention to the fact that the assessee had earned only dividend income on investments made in mutual funds. Our attention was drawn to the fact that the assessee, on itself, had disallowed 25% of salary paid to Mrs. Aparna and Mr. Rahul Mathur, who was, besides other works also looked after the investment in mutual funds. The investment in mutual funds had been made out of surpluses only and it did not require any specific expenditure after making investments. 6
The Ld. CIT-DR defended the order of the PCIT and argued the case vehemently.
We have heard both the parties and have perused the material available on record.
As far as the first issue; i.e. the taxability of interest income of Rs.16,18,16,439/- on FDRs is concerned, we find merit in the arguments/submissions/contentions of the Ld. AR that the AO is justified in holding that interest income on FDRs has been rightly taxed in the original assessment and no interest income on FDRs remined left out of the taxable income. In view of the above, we do not find any merit in the finding of the PCIT in this regard; the taxability of interest income on FDRs.
9. Now, the second issue i.e. disallowance under section 14A of the Act is concerned, we have noticed that the AO has conducted inquiries in this regard during the course of original assessment and has not made any further disallowance on this score. Similar enquiries have also been made in the assessment proceedings in AYs 2016-17 and 2017-18 also. No adverse inference has ever been drawn in this regard in the assessment orders AYs 2016-17, 2017-18 and 2018-19. Only in the present case, the original assessment order has been set aside under section 263 of the Act to be made a fresh. There is no satisfaction recorded, in the original assessment order, on the genuineness and veracity of working of the assessee for making suo- 7 moto disallowance under section 14A of the Act. Further, the Ld. PCIT has not make out a case by establishing and demonstrating that the disallowance of Rs.7,90,061/- worked out by the assessee and accepted by the AO is erroneous and prejudicial to the interest of revenue and there are other expenses incurred by the assessee which have approximate relationship with exempt income, for the purposes of making disallowances of the same under section 14A of the Act. The relevant part of the decision of the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. (supra) reads as under: 19. A bare reading of sub-Section (1) of Section 263 of the Act makes it abundantly clear that the said provision lays down a two- pronged test to exercise the revisional authority i.e., firstly, the 17:06:54 assessment order must be erroneous and secondly, it must be prejudicial to the interests of the Revenue. Further, Explanation 2 to Section 263 of the Act delineates certain conditions and circumstances when the order passed by the AO can be said to be erroneous and prejudicial to the Revenue.
Clause (a) of Explanation 2 to Section 263 of the Act further stipulates that if an order is passed without making an enquiry or verification which should have been made, the same would bestow a revisional power upon the Commissioner. However, the said Clause or any other condition laid down in Explanation 2 does not warrant recording of the said enquiry or verification in its entirety in the assessment order.
Admittedly, in the instant case, the questionnaire dated 02.11.2004, which has been annexed and brought on record in the present appeal, 8 would manifest that the AO had asked for the allowability of the claims with respect to the issues in question. Consequently, the respondent- assessee duly furnished explanations thereof vide replies dated 09.12.2004, 20.12.2004 and 06.01.2005. Thus, it is not a case where no enquiry whatsoever has been conducted by the AO with respect to the claims under consideration. However, this leads us to an ancillary question whether the mandate of law for invoking the powers under Section 263 of the Act includes the cases where either an adequate enquiry has not been made and the same has not been recorded in the order of assessment or the said authority is circumscribed to only consider the cases where no enquiry has been conducted at all.
Reliance can be placed on the decision of this Court in the case of CIT v. Sunbeam Auto Ltd. [2009 SCC OnLine Del 4237], wherein, it was held that if the AO has not provided detailed reasons with respect to each and every item of deduction etc. in the assessment order, that by itself would not reflect a non-application of mind by the AO. It was further held that merely inadequacy of enquiry would not confer the power of revision under Section 263 of the Act on the Commissioner. The relevant paragraph of the said decision reads as under: -
"17. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in 9 question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabriel India Ltd. (1993) 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113) ***"
A similar view was taken by this Court in the case of CIT v. Anil Kumar Sharma [2010 SCC OnLine Del 838], wherein, it was held that 17:06:54 once it is inferred from the record of assessment that AO has applied its mind, the proceedings under Section 263 of the Act would fall in the category of Commissioner having a different opinion. Paragraph 8 of the said decision reads as under: -
"8. In view of the above discussion, it is apparent that the Tribunal arrived at a conclusive finding that, though the assessment order 10 does not patently indicate that the issue in question had been considered by the Assessing Officer, the record showed that the Assessing Officer had applied his mind. Once such application of mind is discernible from the record, the proceedings under section 263 would fall into the area of the Commissioner having a different opinion. We are of the view that the findings of facts arrived at by the Tribunal do not warrant interference of this court. That being the position, the present case would not be one of "lack of inquiry" and, even if the inquiry was termed inadequate, following the decision in Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) (page 180) : "that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter."
No substantial question of law arises for our consideration."
In Ashish Rajpal as well, this Court was of the view that the fact that a query was raised during the course of scrutiny which was satisfactorily answered by the assessee but did not get reflected in the assessment order, would not by itself lead to a conclusion that there was no enquiry with respect to transactions carried out by the assessee.
Further, the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd., enunciates the meaning and intent of the phrase "prejudicial to the interests of the Revenue", in the following words: - "8. The phrase "prejudicial to the interests of the Revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain [(1957) 31 ITR 872 (Cal)], the High Court of Karnataka in CIT v. 11
T. Narayana Pai [(1975) 98 ITR 422 (Kant)], the High Court of Bombay in CIT v. Gabriel India Ltd. [(1993) 203 ITR 17:06:54 108(Bom)] and the High Court of Gujarat in CIT v. Minalben S. Parikh [(1995) 215 ITR 81 (Guj)] treated loss of tax as prejudicial to the interests of the Revenue.
Mr. Abraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Co. v. CIT [(1987) 163 ITR 129 (Mad)] interpreting "prejudicial to the interests of the Revenue". The High Court held:
"In this context, (it must) be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration."
In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue.
The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of 12
the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. (See Rampyari Devi Saraogi v. CIT [(1968) 67 ITR 84 (SC)] and in Tara Devi Aggarwal v. CIT [(1973) 3 SCC 482 : 1973 SCC (Tax) 318 : (1973) 88 ITR 323].)" [Emphasis supplied]
Recently, the Hon'ble Supreme Court in the case of CIT v. Paville Projects (P) Ltd. [2023 SCC OnLine SC 371], while relying 17:06:54 upon Malabar Industrial Co. Ltd., has discussed the sanctity of two- fold conditions for the purpose of invoking jurisdiction under Section 263 of the Act. The relevant paragraph of the said decision reads as under: -
"27. Learned counsel appearing on behalf of the assessee has heavily relied upon the decision of this Court in the case of Malabar Industrial Co. Ltd. (supra). It is true that in the said decision and on interpretation of Section 263 of the Income Tax Act, it is observed and held that in order to exercise the jurisdiction under Section 263(1) of the Income tax Act, the Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the 13
Revenue. It is further observed that if one of them is absent, recourse cannot be had to Section 263(1) of the Act. ***"
Considering the aforesaid judicial pronouncements, it can be safely concluded that inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act. The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. Rather, in our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit.
Notably, the ITAT, while making a categorical finding that the CIT had failed to point out any definite or specific error in the assessment order, has satisfactorily explained both the claims in question in Paragraph 8.2 of its order, which reads as under: -
"8.2 In the Impugned Order, the Ld. Commissioner of Income Tax-IV, Delhi held that the AO had not examined the aforesaid two issues properly and, therefore, set aside the issues for further inquiries to be conducted by the AO. As regards the first issue is concerned, we note that out of total provision of Rs. 1114.68 lacs, a sum of Rs.7,60,76,105/- was suo moto added back in the computation of income and a further sum of Rs.73,46,160- was disallowed by the AO in the original assessment order dated 30.3.2005. Therefore, out of Rs.1114.68 lacs, Rs. 834.22 lacs already stood disallowed in the original assessment order. The balance amount represented actual write off which was palpably clear from page 2 of the impugned order itself. No deduction on account of any such provision was, therefore, 14 allowed to the assessee. Hence, there is no error or prejudice to the interest of revenue. As regards second issue it was noted that interest rate swap was an actual loss and only the net loss of Rs. 114.05 lacs after setting of gain of interest rate swap was claimed as deduction. However, we find that both these issues were duly examined by the AO vide Questionnaire dated 2.11.2004 (Page 1-2 of the Paper Book) to which replies dated 9.12.2004, 20.12.2004 and 6.1.2005 (Page No. 3-39 of Paper Book-1) were furnished and, therefore, the finding of the Ld. CIT that the issues were not examined properly was not correct. Even the Ld. CIT has not pointed out the definite and specific error in the original assessment order and observed that the inquiry made by the AO was inadequate or improper without first pointing out the error in the original assessment order passed by the AO, particularly because both the aforesaid issues were duly examined at the stage of the original assessment proceedings, hence, the impugned order is beyond jurisdiction, bad in law and void- ab-initio."
It is discernible from the aforenoted findings of the ITAT that both the claims were duly examined during the original assessment proceedings itself and neither there was any error nor the same was prejudicial to the interests of the Revenue. Thus, the findings of fact arrived at by the ITAT do not warrant any interference of this Court.
So far as the reliance placed by the CIT on Umashankar Rice Mill is concerned, the same is misplaced, particularly in light of the insertion of Explanation 2 to Section 263 of the Act, brought in place by the Finance Act, 2015. The said amendment markedly specifies various conditions to exercise the authority vested in the Commissioner under Section 15 263 of the Act, leaving no ambiguity in the interpretation of the said provision.
In view of the aforesaid, the appeal preferred by the Revenue is dismissed alongwith the pending application(s), if any.”
10. Keeping into past history on the issue of disallowance under section 14A of the Act in original assessment orders, we also hold that this issue has germinated from the change of the opinion. We find merit in the argument of the Ld. AR that the assessee’s case gets squarely covered by the decision of the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. Ltd. (supra). We therefore, following the reasoning given by the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. Ltd. (supra) hold that the Ld. PCIT is not justified in holding the assessment order erroneous and prejudice to the interest of the revenue. We, therefore, set aside the impugned order.
In the result, the appeal of the assessee is allowed.
Order pronounced in open Court on 6th June, 2025.