M/S ESAB INDIA LTD.,CHENNAI vs. PCIT, CHENNAI

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ITA 2325/CHNY/2026Status: DisposedITAT Chennai08 September 2026AY 2020-219 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the AO had conducted a proper inquiry and accepted the assessee's suo-moto disallowance after due consideration. The mere absence of a detailed discussion in the assessment order does not amount to a lack of inquiry or an erroneous order. Therefore, the PCIT's assumption of jurisdiction under Section 263 was unsustainable.

What were the facts?

The PCIT invoked Section 263 of the Income Tax Act, 1961, to revise an assessment order, citing lack of inquiry by the AO regarding disallowance of expenses related to exempt income. The assessee claimed exempt income from mutual funds and made a suo-moto disallowance of expenses. The PCIT found the suo-moto disallowance inadequate and the AO's assessment order erroneous and prejudicial to revenue.

What were the issues?

Whether the PCIT was justified in invoking Section 263 of the Act when the AO had conducted an inquiry and accepted the assessee's suo-moto disallowance, and whether the assessment order was erroneous and prejudicial to the revenue.

Which sections of the Income-tax Act were involved?

Section 263,Section 10(23C),Section 14A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI

Before: MS. PADMAVATHY.S & SHRI MANU KUMAR GIRI

For Respondent: Ms. Nayani Swapna, CIT

आदेश / O R D E R

PER PADMAVATHY.S, A.M:

This appeal by the assessee is against the order of the Principal Commissioner of Income Tax, Chennai-1 (in short "PCIT") passed u/s. 263 of the Income Tax Act, 1961 (in short "the Act") dated 23.02.2026 for Assessment Year (AY) 2020-21.

ITA No.2325/Chny/2026 M/s. ESAB India Ltd. :- 2 -: 2. The assessee is a company engaged in the business of manufacturing and trading of welding consumables. The assessee filed a return of income for AY 2020-21 on 27.01.2021 declaring total income of Rs.96,39,07,710/-. The case was selected for scrutiny, the A.O completed the assessment accepting the return filed by the assessee. On perusal of records, the PCIT noticed that the assessee has claimed income from mutual funds amounting to Rs. 1,73,30,581/- as exempt u/s. 10(23C) of the Act and in this connection has made a disallowance of direct expenses of Rs.8,55,812/- u/s. 14A of the Act r.w Rule 8D of the Income Tax Rules (in short “the Rules”). The PCIT further noticed that the AO while completing the assessment in AY 2017-18 & 2018-19 has made certain disallowances u/s. 14A of the Act r.w Rule 8D of the Rules. Considering that the AO has not made any disallowance for the year under consideration, the PCIT issued a show cause notice u/s. 263 of the Act. The assessee submitted that the AO during the course of assessment proceeding has carried out a detailed enquiry with respect to the applicability of disallowance u/s. 14A of the Act r.w Rule 8D of the Rules and the assessee has submitted the relevant details before the AO. The assessee also submitted before the PCIT that the assessee is a debt free company and therefore no disallowance towards interest is warranted under Rule 8D(2)(ii) of the Rules and also submitted the working with regard to the suo-moto disallowance made towards administrative cost under Rule 8D(2)(iii) of the Rules. The PCIT however did not accept the submissions of the assessee and held that the suo-moto disallowance is not commensurate with the volume of mutual funds held by the assessee and therefore the suo-moto disallowance does not reflect the true extent of the expenditure incurred towards earning exempt income. The PCIT further held that since the AO has not recorded any satisfaction u/s. 14A(2) of the Act and failed to examine the applicability of Rule 8D of the

ITA No.2325/Chny/2026 M/s. ESAB India Ltd. :- 3 -: Rules despite the assessee having exempt income, the assessment order is erroneous and prejudicial to the interest of revenue. The PCIT accordingly set aside the order u/s. 263 of the Act with a direction to the AO to examine the above aspect and pass fresh orders. The assessee is in appeal before the Tribunal against the order of the PCIT.

3.

The Ld. Authorized Representative (AR) of the assessee submitted that the ground on which the PCIT has exercised the jurisdiction u/s. 263 of the Act is lack of enquiry on the part of the AO which is not the case in the present appeal. The Ld. AR further submitted that the AO has called for details specifically with regard to the expenditure incurred towards earning exempt income and the assessee has furnished the details. The Ld. AR also submitted that the AO after verifying the details called for some additional information pertaining to the impugned issue and after considering the response from the assessee has taken the conscious decision to accept the suo- moto disallowance made by the assessee. The Ld. AR in this regard submitted the following table with regard to the details furnished before the AO:

ITA No.2325/Chny/2026 M/s. ESAB India Ltd. :- 4 -:

4.

The Ld. AR accordingly submitted that the AO has done enquiry into the disallowance u/s. 14A of the Act and has taken a plausible view by accepting the suo-moto disallowance made by the assessee. Therefore, it is argued that the enquiry conducted by the A.O can at best be held as “inadequate enquiry” and not “lack of enquiry”. The Ld. AR also argued that if the AO in the assessment order has not given a detailed finding with regard to the disallowance u/s. 14A of the Act, the assessee cannot be held liable for the same. The Ld. AR further argued that the PCIT while holding the order as erroneous has not given any specific finding with regard to the error on the suo-moto disallowance made by the assessee but has merely stated that it is not adequate as compared to the volume of investment which is not tenable. The Ld. AR therefore argues that the error identified by the PCIT in the order

ITA No.2325/Chny/2026 M/s. ESAB India Ltd. :- 5 -: of assessment cannot be sustained. The ld. AR in this regard relied on various judicial pronouncements.

5.

The Ld. Departmental Representative (DR), on the other hand, submitted that the AO has not recorded any finding with regard to the disallowance u/s. 14A of the Act like the details submitted verification carried out etc. The Ld. DR further submitted that submission of details before the AO alone is not enough unless it is established that the AO has carried out proper enquiry and has taken a conscious decision to allow the claim of the assessee which is not coming out in the present case. The Ld. DR also argued that the PCIT has given a clear finding on merits with regard to the inadequate suo-moto disallowance thereby identifying the error in the order of the AO. Accordingly, the Ld. DR supported the order of the PCIT.

6.

We have heard the parties and perused the material available on record. The revisional jurisdiction under Section 263 of the Act has been invoked by the. PCIT on the ground that the AO failed to record any satisfaction u/s. 14A(2) of the Act and failed to examine the applicability of Rule 8D of the Rules, despite the assessee having earned exempt income, and that the suo moto disallowance made by the assessee is not commensurate with the volume of investment held. The question that arises for our consideration is whether this renders the assessment order both erroneous and prejudicial to the interests of the Revenue so as to justify the assumption of jurisdiction u/s. 263 of the Act. We notice, on a perusal of the assessment record, that the case of the assessee was taken up for scrutiny and that the AO had specifically called for details with regard to the expenditure incurred towards earning of the exempt income. We further notice that the assessee, in response, furnished the requisite particulars, including the working of the suo moto disallowance

ITA No.2325/Chny/2026 M/s. ESAB India Ltd. :- 6 -: made under Rule 8D(2)(iii) of the Rules towards administrative expenses, and explained that no disallowance was warranted under Rule 8D(2)(ii) of the Rules since the assessee is a debt free company. We also notice that the AO, after verifying the details so furnished, called for further information on the very same issue, and it was only after considering the assessee's response thereto that the return of income was accepted. We are therefore of the view that this is not a case where the AO has accepted the claim of the assessee mechanically or without conducting any enquiry into the issue for which the PCIT has invoked revisionary jurisdiction. It is well settled that an AO is not expected to record his findings on every issue examined in the course of assessment, and that the assessment order has to be read along with the assessment record. We are of the view that where the record discloses that the AO had called for the relevant details, the assessee had furnished the requisite explanation, and the same had been accepted upon consideration and after a further round of verification, the mere absence of an elaborate discussion in the assessment order cannot lead to the conclusion that there was non application of mind. In our view the assessee cannot be prejudiced merely because the AO has chosen not to record detailed reasons while accepting the explanation.

7.

We notice that the distinction between "lack of enquiry" and "inadequate enquiry" is well settled, and that while the former may justify assumption of jurisdiction u/s. 263 of the Act, the latter does not. Accordingly where an enquiry has in fact been conducted and the AO has adopted a view on the basis of the material available before him, the PCIT cannot invoke Section 263 of the Act merely because he is of the opinion that a more thorough enquiry ought to have been undertaken, or that the quantum of

ITA No.2325/Chny/2026 M/s. ESAB India Ltd. :- 7 -: disallowance accepted is inadequate. We find that the principles laid down by the Hon'ble Bombay High Court in CIT vs. Gabriel India Ltd. 203 ITR 108 (Bom) and the Hon'ble Delhi High Court in CIT vs. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Delhi) fully support this proposition. We further notice that the sole basis on which the PCIT has held the suo moto disallowance to be inadequate is that it is not commensurate with the volume of mutual funds held by the assessee. We notice that the PCIT has not recorded any specific finding as to what in the assessee's working under Rule 8D(2)(iii) is factually or legally incorrect, nor has he recorded any finding as to how the assessee's claim of being debt free was examined and found wanting. We are of the view that a bare observation regarding the quantum of disallowance being low, without identifying the error in the AO's view or in the material on the basis of which such view was formed, does not by itself demonstrate that the order is erroneous. At best, in our considered view, it reflects that the PCIT would have arrived at a different quantum of disallowance, and this is not the test u/s. 263 of the Act.

8.

We notice that the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83 (SC) has held that the assumption of jurisdiction u/s. 263 is subject to the fulfilment of twin conditions, namely, that the order of the AO must be erroneous, and that such error must be prejudicial to the interests of the Revenue. The Hon'ble Court further held that where the AO has adopted one of the courses permissible in law, or where two views are possible and the AO has taken one view with which the Commissioner does not agree, the order cannot be treated as erroneous. We notice that this principle was reiterated by the Hon'ble Supreme Court in CIT vs. Max India Ltd. [2007] 295 ITR 282 (SC). Applying the above principles

ITA No.2325/Chny/2026 M/s. ESAB India Ltd. :- 8 -: to the facts of the present case, we are of the considered view that the AO had, in fact, examined the very issue for which the PCIT has invoked Section 263, called for the relevant particulars, sought further clarification, and accepted the suo moto disallowance made by the assessee after due consideration. We hold that the mere fact that the assessment order does not contain a detailed discussion on this aspect cannot be treated as a fault attributable to the assessee, nor can it be equated with lack of enquiry so as to attract Explanation 2 to Section 263 of the Act, which applies only where the order is passed without making enquiries or verification which should have been made. We are of the view that Explanation 2 cannot be invoked in the facts of the present case, since the enquiry that ought to have been made was in fact made, and evidences on record establish the same. Therefore, we hold that the twin conditions stipulated u/s. 263 of the Act, namely, that the order should be both erroneous and prejudicial to the interests of the Revenue, are not satisfied in the present case and that the assumption of jurisdiction by the PCIT u/s. 263 of the Act is unsustainable in law. We accordingly quash the impugned revisional order passed by the PCIT u/s.263 of the Act.

9.

In the result, the appeal of the assessee is allowed. Order pronounced on 08th day of September, 2026 at Chennai.

Sd/- Sd/- (मनु कुमार िग!र) (पदमावती यस) (Manu Kumar Giri) (Padmavathy.S) �या�यक सद�य / Judicial Member लेखा सद�य /Accountant Member चे�नई/Chennai, �दनांक/Dated: 08th September, 2026. EDN, Sr. P.S Digitally signed by EJTADA DURGA EJTADA DURGA NARESH NARESH Date: 2026.09.15 11:57:13 +05'30'

ITA No.2325/Chny/2026 M/s. ESAB India Ltd. :- 9 -: आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु!/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF

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