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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
This appeal filed at the instance of the assessee is directed against the order of the CIT, Trivandrum dated 13/02/2019 passed u/s. 263 of the I.T. Act.
The relevant assessment year is 2014-15.
The concise grounds raised by the assessee read as follows:
Ground No.1
The learned Principal Commissioner of Income Tax, Thiruvananthapuram has erred in setting aside the assessment completed u/s. 143(3) of the Act dt.30.12.2016 relating to the A.Y.2014-15 as per the order framed u/s. 263 of the Act since the twin conditions to be fulfilled, i.e., there should be an error in the assessment order passed u/s. 143(3) of the Act and the order should also be prejudicial to the interests of revenue has not been fulfilled. The learned Commissioner of Income Tax failed to appreciate that there was no tax free income during the year and hence there is no case for disallowance eu/s. 14A as per the orders of the Hon Supreme Court of India.
Ground No.2
The learned Principal Commissioner of Income Tax has erred in giving a direction to assessing officer to disallow 0.5% of average value of investment made under the provisions of section 14A r.w. Rule 8D (2)(iii) of the Income Tax Rules. As per judicial pronouncements, the Commissioner of Income Tax is not empowered to give direction to complete the assessment in a particular manner.
Brief facts of the case are as follows:
The assessee is a private limited company engaged in the business of hotel industry. For the assessment year 2014-15, the return of income was filed on 29/11/2014 declaring total loss of Rs.10,11,51,562/-. The assessment was taken up for scrutiny under CASS. The assessment u/s. 143(3) of the I.T. Act was completed by making disallowance of Rs.96,044/-. Consequent to the disallowance, the total loss was determined at Rs.10,10,55,520/-.
The Pr. CIT issued show cause notice under section 263 of the I.T. Act proposing to revise the assessment order passed under section 143(3) of the I.T.
Act. The reason for the issuance of notice u/s. 263 of the I.T. Act was that the assessee made investment of Rs.499,99,95,005/- towards equity shares of subsidiary company (Kovalam Resorts (P) Ltd.) and the disallowance @ O.5% of the average value of investments should have been made under Rule 8D(2)(iii) of the I.T. Rules r.w.s. 14A of the I.T. Act. In response to the show cause notice issued u/s. 263 of the I.T. Act, the assessee’s CA appeared on 30/01/2019 and filed written submission. It was argued that there was no error in the assessment order passed since no disallowance u/s. 14A of the I.T. Act could have been made because the assessee did not earn any tax free income during the relevant assessment year out of the investments made with the subsidiary company. The Pr. CIT however, rejected the contentions raised by the assessee and set aside the assessment order dated 30/12/2016 directing the Assessing Officer to make disallowance u/s. 14A of the I.T. Act r.w. Rule 8D(2)(iii) of the I.T. Rules. The relevant portion of the impugned order of the Pr. CIT reads as follows:
“I have considered the arguments raised by the asssssee's authorized representative and the written submission filed. I have also examined the assessment records of the assessee. In this case, under Rule 8D(2)(iii), disallowance @ 0.5% of the average value of investments should have been made . Rule 8D r.w.s. 14A provides for disallowance of expenditure even where taxpayer in a particular year has not earned any exempt income (CBDT circular No.5/2014 dated 11/02/2014). As per asssessment records, opening value of non current investments as on 31.03.2013 was Rs.499,99,95,000/- and closing value of non current investments as on 31.03.2014 was also Rs.499,99,95,000/- . Hence, Average value of non- current investments was Rs.499,99,95,000/- and accordingly, amount to be disallowed u/s. 14A read with Rule 8D(2)(iii) was Rs.2,49,99,975/- (0.5% of Rs.499,99,95,000/-). Since no disallowance was made, I consider the assessment order u/s. 143(3) dated 30.12.2016 is erroneous and prejudicial to the revenue.
Moreover, the assessing officer also failed to examine this issue during assessment proceedings. I find that the assessment was completed by the Assessing Officer without due verification and application of mind in the manner it ought to be, resulting in an order erroneous and prejudicial to interests of revenue.
The following judicial decisions need to be considered in this context.- I. Assessment mad eon A. wrong assumption of facts or B. on incorrect application of law or C. without due application of mind or D. without following the principles of natural justice would be 'erroneous'
[CIT Vs. Jawahar Bhatacharjee (2012) 341 ITR 434 (Gau.)(FB)]
II. The Honorable High Court of Delhi in Toyoto Motor Corporation 306 ITR 49 had given a finding that "The order passed by the Assessing Officer should be a self-contained order giving the relevant facts and reasons for coming to the conclusion based on those facts and law."
Absence of examination of records by the Assessing Officer in conjunction with the issues discussed above renders the impugned order erroneous and prejudicial to revenue, the revision proceedings initiated is hereby disposed of by setting aside the assessment made u/s 143(3) dated 30.12.2016 with the direction to the Assessing Officer to disallow @ 0.5% of the average value of investments made under section 14A read with Rule 8D(2)(iii) and to add the same with the income of the assessee but after giving appropriate opportunity of being heard and thorough verification of the issues involved. The same is to be done after examining all relevant facts as per provisions of the Income Tax Act, 1961 within three months from the end of month in which order under Section 263 is passed. The Assessing Officer is so directed.”
Aggrieved by the order of the Pr. CIT, the assessee has preferred this appeal before the Tribunal. The Ld. AR has filed a paper book comprising of 116 pages, enclosing copies of judicial pronouncements relied on, copies of audited accounts for the year ending 31/03/2012, 31/03/2013 and 31/03/2014. The assessee has also enclosed in the paper book, copy of the notice issued u/s. 263 of the Act, the reply filed by the assessee to the show cause notice issued u/s. 263 of the Act, copy of the notice issued by the Assessing Officer and reply of the assessee to the notice issued by the Assessing Officer. The assessee has filed brief written submission. The contentions raised in the written submission are two- fold, namely, (1) the assessee has not earned any exempted income during the relevant assessment year and hence, disallowance u/s. 14A of the I.T. Act is uncalled for, (2) the Assessing Officer in the course of assessment proceedings had called for details of investment made by the assessee with the subsidiary company and show caused as to why disallowance u/s. 14A of the I.T. Act should not be made during the relevant assessment year. Therefore, it was submitted that since the Assessing Officer in the course of assessment proceedings had examined the issue of disallowance u/s. 14A of the I.T. Act, and having taken one of the possible views, the assessment order was not erroneous and prejudicial to the interests of the Revenue, calling for invocation of revisionary proceedings u/s. 263 of the I.T. Act.
The Ld. DR strongly supported the impugned order passed u/s. 263 of the Act.
We have heard rival submissions and perused the material on record. The solitary issue for our consideration is whether the Pr. CIT is justified in invoking the powers under section 263 of the I.T. Act, and directing the Assessing Officer to disallow Rs.2,4,99,975/- under section 14A of the I.T. Act, being 0.5% of the investments of Rs.499,99,95,000/- made in the subsidiary company. The admitted facts are that the assessee in the instant case was never in receipt of any exempted income during the relevant assessment year. This is evident from the audited accounts of the assessee for year ending 31-03-2014. The following judicial pronouncements have clearly held that when the assessee was not in receipt of any exempted income, disallowance u/s. 14A of the I.T. Act is impermissible:
i) Hon’ble Supreme Court in the case of Pr. CIT vs. GVK Project and Technical Services Ltd. reported in (2019) 106 taxman. com 181 (SC) had dismissed the SLP filed by the Department against the judgment of the High Court of Delhi wherein it was held that in the absence of exempt income, disallowance u/s. 14A was impermissible. The Hon. Delhi High Court had relied on its earlier judgment in the case of Cheminvest Ltd. vs. CIT reported in (2015) 378 ITR 33 (Delhi). ii) Hon’ble Apex Court in the case of Maxoop Investment Ltd. vs. CIT (2018) 91 taxmann. com 154 (SC) had concurred with the view taken by the Hon’ble Delhi High Court that if no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s. 14A of the I.T. Act. (Para 40 of the judgment) iii) The Hon’ble Apex Court dismissed the SLP filed by the Revenue against the order of the Punjab & Haryana High Court in the case of Pr. CIT, Patiala vs. State Bank of Patiala reported in (2018) 99 taxmann.com 286 (SC). In this case, the Hon’ble Punjab and Haryana High Court took a view that amount of disallowance under section 14A of the I.T. Act is to be restricted to amount of exempt income only. iv) In the case of Pr. CIT vs. Oil Development Board (2019) 03 taxmann.com 326 (SC) , the Hon‘ble Supreme Court had dismissed the SLP filed by the department against the order of the Delhi High Court holding that there is no case of disallowance u/s. 14A in case there is no exempt income. v) ITAT, Cochin Bench in the case of HLL Life Care Limited vs. ACIT, Trivandrum in to 32/Coch/2016 (order dated 23/11/2017) had held that there could no disallowance u/s. 14A when there was no exempt income claimed by the assessee. The Cochin Bench relied on the judgment of the Hon’ble Delhi High Court in the case of Pr. CIT v. IL&FS Energy Development Corporation Ltd. (297 CTR 452) and that of the Hon’ble Madras High Court in the case of Redington (India) Pvt. Ltd. vs. CIT (2016) 97 CCH 219.
In view of the above judicial pronouncements, it is settled law that if no exempted income is received by the assessee in the concerned assessment year, there could be no disallowance u/s. 14A of the I.T. Act. Therefore, the CIT(A) is not justified in invoking jurisdiction u/s. 263 of the I.T. Act. It is ordered accordingly.