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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI AMARJIT SINGH & SHRI O.P.MEENA
आदेश /O R D E R PER O.P.MEENA, AM: 1. This appeal by the Assessee is directed against the order of Ld.Principle Commissioner of Income Tax-2, Surat (In short ‘the Pr.CIT’) dated 27.03.2019 passed under section 263 of Income Tax Act,1961 (the ‘Act’) for assessment year 2014-15.
The grounds of appeal raised by the assessee are as under: 1. On the facts and in the circumstances of the case as well as law on the subject, the learned Pr. CIT has erred in passing the order u/s. 263 by invoking Explanation-2 of Section 263 of the Act, although the assessment order passed u/s. 143(3) of the I.T. Act, 1961 was neither erroneous nor prejudicial to the interest of the revenue.
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 2 of 16 2. On the facts and in the circumstances of the case as well as law on the subject, the learned Pr. CIT has erred in setting aside the assessment with the direction to frame the assessment by making disallowance of interest expenditure u/s. 14A read with rule 8D. [ 3. It is therefore prayed that above order passed by the Pr. CIT u/s. 263 may please be quashed or modified as your honour deem it proper. 3. Succinctly, facts of the case are that the assessee filed his return of income on 09.10.2014 declaring total income at Rs.59,42,080/-. The assessee is engaged in the business of trading and earned income from salary, profits and gains from business and profession, income from other sources and profit from partnership firms. The case was selected under scrutiny, and accordingly order under section 143 (3) of the Act was passed on 28.10.2016 by assessing total income of Rs.59,42,080/-. On examination of profit and loss account, balance sheet and computation of income, it was noticed that the assessee is claimed exempt income of Rs.26,77,189/- on account of profit from partnership firm and Rs.1,20,43,503/- on account of interest expenses. On perusal of balance sheet, it was seen that assessee has invested a total sum of Rs.1,92,42,285/- as on 31.03.2013 and Rs.2,43,38,418/- as on 31.03.2014. Therefore, in view of provisions of section 14A with Rule 8D, the expenses pertaining to earning exempt income was required to be disallowed and added to the total income of the assessee. Accordingly, a show-cause notice was issued which was replied by the assessee vide letter dated 08.01.2019, which has been reproduced by the Pr.CIT in his order passed under section 263 of the Act.On the issue of disallowance u/s.14A read with Section 8D, the assessee has stated that there is negative income (loss) from the partnership firm, however the
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 3 of 16 Pr.CIT was of the view that CBDT Circular No.05/2014 dated 11.02.2014 clarifies that Rule 8D in Section 14A of the Act provides for disallowance of expenditure even where tax-payer in a particular year has not earned any exempt income. On the issue of claim of deduction of interest expenses u/s. 57(iii) of the Act, the assessee has stated that section 57(iii) has been wrongly interpreted for which the assessee has placed reliance on the decision of Hon’ble Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 579 (SC). However, the Pr. CIT observed that case laws are clearly distinguishable on the fact that in the case of shares of public limited companies were purchased with the intention of earning dividend, which is not the case in respect of assessee as the investment is in a private limited company. Further, in the case of assessee investment is providing funds to the company for its operation in the form of purchase of shares. The total fund comes from the family and management is also one of the family which controls the affairs. The case laws cited by the assessee of Satyasai Properties and Investment Pvt. Ltd v. CIT (2014) 361 ITR 641 (Cal.) (HC), as also distinguishable as the judgment regarding investment shares of other companies were the investment fund prospect of growth in the case of assessee. The facts are completely different when the family control group initiating a new and its shares have been purchased by the assessee whose also director by taking loan on interest. Therefore, deduction claim u/s. 57(iii) of the Act was as not allowable.
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 4 of 16 4. The Pr. CIT has also invoke Explanation 2 to section 263 of the Act and accordingly held that the assessment order passed u/s.143(3) by the AO is erroneous and so far it justifiable interest of the revenue, hence, the assessment was set-aside with the direction to frame the same after taking into account, the observation made by this Pr. CIT for disallowance u/s.14A read with Rule 8D and the claim u/s.57(iii) of the Act which is to be proper verified.
Being aggrieved, the assessee filed this appeal before this Tribunal. The ld. counsel submitted that the borrowed loans were utilized for partnership firm for the purpose of business; hence claim of interest on the same is allowable and full. The ld. counsel referred paper book Para 5 and 6 which is the show cause notice issued by the Pr. CIT for propose disallowances. However, the ld. counsel contended that the assessee has not earned any exempt income in assessment year 2014-15, the proceedings u/s.263 of the Act are initiated on the basis of revenue’s audit objection. It was further submitted that similar disallowance u/s.57(iii) of the Act were also made during the assessment proceedings of year 2012-13, which has been allowed by the ld. CIT(A) against which file by the assessee dismissed due to low tax effect. The provisions u/s.263 is invoked because of audit objection hence; there is no independent application of mind by the Pr. CIT. Therefore, we are of the view that provision in view of proceedings u/s.263 are not justified as held by the Hon’ble Supreme Court in the case of CIT v. Max India Ltd. (2007) 295 ITR 0282 (SC) and Malabar Industrial Co.
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 5 of 16 Ltd v. CIT (2000) 243 ITR 0083. The ld. counsel submitted that in the case of the assessee, there is no exempt income, hence there can be no disallowance of expenses, there action to be disallowance u/s.14A of the Act has held by Hon’ble Gujarat High Court in the case of CIT v. Corretech Energy Pvt. Ltd (2014) 45 taxmann.com 116 (Gujarat).
The ld. counsel submitted that in the show cause notice exempt income of Rs.26,77,179/- is mentioned but the same appears to be wrong and field break-up of the shares of profit of the partnership firm was receivable at Rs.10,71,568/- being meagre sum. Furth investment as on 31.03.2013 is at Rs.12,74,389/- and Rs. 1071,568 as on 31.03.2014 only as against Rs.1,92,42,285/- and Rs.2,43,38,418/- considered by the Pr.CIT. Since, there the exempt income receivable from partnership firm was very less, the question of applying section 14A read with Rule 8D does not arise with regard to claim of deduction u/s. 57(iii) of the Act of intent expenditure of and Rs.1,20,43,503/-, It was submitted that there is nothing on record which shows that the interest expenses so claimed was wholly, and exclusively for the purpose of earning interest income from other sources. The provisions of section 57(iii) of the Act have been wrongly interpreted, as the said section laid down that the expenditure must be laid wholly and exclusively for earning income and not that such income must have been earned. The ld. counsel placing reliance in the case of CIT v. Rajendra Prasad Moody (1978) 115 ITR 579 (SC) submitted that where the interest paid on money borrowed for investment in shares is deductible
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 6 of 16 u/s.57(iii) even though these shares did not yield any dividend. Similarly, in the case of Sri Satyasai Properties and Investment Pvt. Ltd v. CIT (2014) 361 ITR 641 (Cal.). It was decided by the Hon’ble High Court that expenditure on account of interest was a proper expenditure allowable u/s.57. Therefore, there was no reason why a proper expenditure should have been disallowed only because the investment was not made for the purpose of earning dividend. Ld. counsel further place reliance on the decision of Hon’ble Supreme Court in the case of Pr.CIT v. GVK Project and Technical Services Ltd. (2019) 106 taxmann.com 181 (SC), where the AO proceeded to calculate disallowance u/s. 14A on the basis of investments made by assessee that Tribunal opined that in absence of any exempt income reported by assessee, disallowance could not be made u/s.14A. The Tribunal thus deleted the disallowance made by the AO which was upheld by the High Court and the Hon’ble Supreme Court has dismissed the SLP filed against the order of High Court. Similarly, on similar circumstances the SLP filed against the decision on Punjab and Haryana High Court in the case of PCIT v. State Bank of Patiala (2018) 99 taxmann.com 285, SLP was dismissed by the Hon’ble Supreme Court reported at 2018, 99 taxmann.com 286 (SC). The ld. counsel further placed reliance on the decision of Hon’ble Bombay High Court in the case of CIT v. Srishti Securities (P) Ltd. (2010) 321 ITR 0498 (Bombay) and also the decision of Hon’ble High Court in the case of Vodafone International Holdings B.V v. Union of India (2012) 341 ITR 1(SC) and submitted that dividend income was taxable income during year
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 7 of 16 under consideration, therefore any interest expenditure was allowable u/s.57(iii) of the Act.The ld. counsel further placing reliance in the decision of ITAT ‘C’ Bench, Bombay in ITA No.4649/MUM/2008 for the A.Y. 2003-04 in the case of Pistabai Rikhabchand Kothari v. ITO, 14(1)(3) dated 23.01.2013, wherein it was held that acquisition of shares may carry the acquisition of controlling interest which is purely commercial concept and tax is levied on the transaction, not on its effect. Controlling interest, which stood transferred to Vodafone from HTL accompanied the CGP share and cannot be dissected so as to be treated as transfer of controlling interest of Mauritian entities and then that of Indian entities and ultimately that of HEL. Thereafter, the Hon’ble Supreme Court has held that capital gain chargeable under section 45 and their computation is to be in accordance with the provisions that follow section 45 and there is no notion of indirect transfer in section 45. Meaning thereby, the Hon’ble Supreme Court has held that controlling interest cannot be said to be that any income offered explained is allowable or not allowable if they are not provided specifically on the statue. The ration of this decision can be easily imported on the facts of the present case as acquiring of controlling interest in the company does not bear any income or expenditure is to be assessed or not to be allowed. The interest has paid on borrowed for acquiring the shares of a company and the dividend income is taxable during the year under consideration. Therefore, in our considered view, the
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 8 of 16 interest income is allowable as deduction under section 57(iii) or under section 36(1)(iii) of the Act. We, order accordingly.
Per contra, the Ld. CIT (DR) submitted that the invocation of section 263 is done on the basis of audit objection is not correct as the RTI application does not mention. The issue and only, the ld. CIT DR took us through the assessment order and submitted that he said assessment order is a half page order, which suggest that no enquiry was made by the AO and there is no discussion about the disallowance u/s.14A, therefore the invocation of the provision of 263 of the Act has been rightly made. Further, the Explanation-2 to 263 has been clearly invoked therefore the contentions of the assessee are not tenable.
We have heard the rival submissions of both the parties and 8. perused the material available on record. We have gone through all the judgements cited by the parties before us. We note that section 263 of the Act enables supervisory jurisdiction to the Pr. CIT over the AO. The Pr.CIT is empowered to act under section 263 of the Act when he considers that AO's order is erroneous in so far as it is prejudicial to the interest of Revenue. It is a settled position of law that the aforesaid twin condition i.e. AO's order is erroneous and prejudicial to the interest of revenue is sine qua non for assumption of revisionary jurisdiction by Pr.CIT. As per the scheme of the Act, AO has a dual role to discharge while assessing the income of an assessee.
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 9 of 16 He is both an investigator as well as an adjudicator. If the AO fails in discharging any of the two said duties i.e. as an investigator or that of an independent/impartial adjudicator, the Pr.CIT's supervisory jurisdiction is attracted because the order of the AO would be erroneous for lack of inquiry. Thus, if he does not investigate, it would be erroneous for failure of AO to adjudicate as an independent/impartial adjudicator, which means that if the AO passes assessment order in violation of natural justice, or there is bias or arbitrariness etc., then also the order of AO would be erroneous. When, we say that lack of inquiry makes an AO's order erroneous, one has to keep in mind the difference between lack of inquiry and inadequate inquiry. Lack of inquiry makes the AO's order erroneous, but inadequate inquiry does not make the order of AO erroneous. Thus, in order to exercise the powers under section 263(1) of the Act, the Pr.CIT must be satisfied that the assessment order made by the AO was (a) erroneous; and (b) prejudicial to the interests of the Revenue.
The perusal of facts of the present case reveals that the 9. assessee has taken unsecured loans, which have been utilized for the purpose of investment in shares of private limited companies controlled by the family members and investment in partnership firm. Such investment was at Rs.26.55 crores as on 31.03.2013 and Rs.27.17
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 10 of 16 crores as on 31.03.2014. The assessee has paid interest of Rs.2,91,18,343/- on unsecured loans and claimed deduction out of income, which has been during allowed by the AO. The Pr. CIT viewed that such interest is not allowable under section 14A and under section 57(iii) as investment made was related to exempt income and interest expenses were incurred for earning income from other source. However, it is noticed that there was negative income from partnership firm and no dividend income has been earned during the year under consideration, therefore, no expenditure has been incurred for earning exempt income, hence, disallowance under section 14A read with Rule 8D cannot be made as held by the Hon’ble Gujarat High Court in the case of CIT v. Corrtech Energy Pvt. Ltd. [2015] 372 ITR 97 (Guj): [2014] 45 taxmann.com 116 ; 223 Taxman 130 (Guj.) wherein it was held that : Section 14A (1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act. In the instant case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on that basis the Tribunal held that disallowance under section 14A could not be made. In the process tribunal relied on the decision of Division Bench of Punjab And Haryana High Court in the case of CIT v. Winsome
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 11 of 16 Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had had observed that where the assessee did not make any claim for exemption, section 14A could have no application. Similar findings was given by the Hon`ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154(SC) holding that only expenses proportionate to earning exempt income could be disallowed. We are of the view that the provisions of Section 57(iii) lays down that the expenditure must be laid wholly and exclusively for the purpose of earning income and not that such income must have been earned. The plain requirement of section is that the purpose for which the expenditure is incurred should fructify into any benefit by way of return in the shape of income. This view is further, supported by the decision of Hon`ble Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 579 (SC) wherein it was held that interest paid on money borrowed for investment in shares is deductible under section 57(iii) even though the shares did not yield any dividend. Similar views were also expressed by the Hon’ble Calcutta High Court in the case of Shri Saytsai Properties & Investment (P) Ltd. vs. CIT [2014] 45 taxmann.com 120 (Cal.) In view of these facts and circumstances, where the AO has taken a plausible view which is sustainable in law, invocation of provisions of section 263 are not justified. We further observe that similar disallowance made by the AO in assessment year 2012-13 in the case of the assessee, were
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 12 of 16 deleted by the Ld. CIT (A) and appeal against which has been dismissed by the tribunal on account of low tax effect. We further, observe that the Pr. CIT has not discussed as to how the assessment order passed by the AO is prejudicial to the interest of the Revenue. The Hon`ble Rajasthan High Court in the case of CIT vs. Jain Construction [2013] 257 ITR 336 (Raj.) of which head notes reads as: Held, that safeguard provided to assessee in section 263 is that mere erroneous orders are not revisable but revisional authority has to further establish with material on record that such erroneous order is also prejudicial to the interest of revenue-twin conditions of assessment order being erroneous and it also being prejudicial to the interest of revenue, keeps initial burden on Commissioner, who invokes such jurisdiction- Premises for invoking the revisional jurisdiction on the ground that the Assessing Authority made insufficient inquiry or improper enquiry and paid to verify closing the stock in record of the assessee, before passing assessment order, falls flat by a bare perusal of assessment order itself-Thus, Tribunal was justified in holding that Commissioner was in error invoking revisional jurisdiction u/s. 263 – Mere alleged insufficiency of inquiry in of opinion of Commissioner By Assessing Authority, would not permit him to in walk revisional jurisdiction u/s. 263 – Therefore, essential twin condition for invoking revisional jurisdiction, were not satisfied –
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 13 of 16 Order of tribunal upheld Revenue `s appeal dismissed. The Pr. CIT has not given any finding as to how the order in prejudicial to the interest of the Revenue. We also note that the Pr. CIT has though invoked explanation 2 to section 263 but not divulge as to how it is applicable, when legal position is in favour of the assessee. Further, such claim was found acceptable by the ld. CIT (A) in preceding assessment year. Where two views are possible, even then revision jurisdiction cannot be invoked as held by the Hon`ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) 109 Taxman 66 (SC) had interpreted the provisions of section 263(1) in the following words :"A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo-moto-moto under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. 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 Revenue. If one of them is absent— if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue—recourse cannot be had to section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 14 of 16 is erroneous that the section will be attracted. 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. 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 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."
Following the aforesaid judgment, the Hon`ble Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282(SC) reiterated that the phrase "prejudicial to the interests of the Revenue" as used in section 263(1) of the Act must be read in conjunction with the expression "erroneous" and unless the view taken by the Assessing Officer is found to be unsustainable in law, the powers under section 263 of the Act cannot be invoked.
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 15 of 16
In view of legal position discussed in above pars of this order, the order passed by the AO, in our opinion, shall be deemed to be erroneous in so far as it prejudicial to the interest of the Revenue, if the Pr. CIT would have specifically pointed out which of inquiries or verification should have been carried out by the AO in this regard and the AO failed to carry out those inquiries and verification as desired by the Pr. Commissioner of Income-tax. Since the Pr. CIT has not suggested the basis of inquiry or verification to be carried out by the AO, the order passed by the AO cannot be deemed to be erroneous in so as far as it is prejudicial to the interest of the Revenue. In the light of the above mentioned judicial precedents and facts of the present case, we are of the opinion that the AO has adopted one possible legal view sustainable in law on the issue and mere invoking proviso based on revenue audit objection amounts non application of mind. Merely just because the view taken by the AO was not found acceptable does not mean that the AO has failed to make requisite enquiries. Thus, the view taken by the AO was plausible view, which cannot be disturbed by the Ld. Pr.CIT. Therefore, we find that twin condition were not satisfied for invoking the jurisdiction under section 263 of the Act. Therefore, in absence of the same the ld. Pr.CIT was not correct in exercise the jurisdiction under section 263 of the Act. In view of these facts and circumstances, wequash the impugned order
Kavita Dipesh Shah v. Pr. CIT-2 Surat /ITA No.219/SRT/2019 for A.Y. 2014-15 Page 16 of 16 passed under section 263 of the Act and allow the appeal of the assessee.
In the result, the appeal of the assessee is allowed.
The order is pronounced by listing the case on the Notice Board under Rule 34(4) of Income Tax Appellate Tribunal Rules 1963.
Sd/- Sd/- (AMARJIT SINGH) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat: Dated: 10th December, 2019/opm Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Surat