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Facts
The assessee's case was completed under Section 143(3) read with Section 144C(3). The PCIT invoked Section 263, treating the assessment order as erroneous and prejudicial to revenue regarding catalyst expenses (revenue vs. capital expenditure) and disallowance under Section 14A. The assessee argued catalyst expenses are revenue expenditure and there was no exempt income to warrant Section 14A disallowance.
Held
The Tribunal held that catalyst expenses are allowable as revenue expenditure, and accounting treatment does not determine their nature. It also held that no disallowance under Section 14A can be made in the absence of exempt income. The PCIT's order under Section 263 was set aside as the AO had made proper inquiries and applied their mind.
Key Issues
Whether catalyst expenses are revenue or capital in nature and whether disallowance under Section 14A is warranted when no exempt income is earned.
Sections Cited
143(3), 144C(3), 263, 142(1), 143(2), 14A
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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, ACCOUNT MEMBER & SHRI ANIKESH BANERJEE
O R D E R Per Anikesh Banerjee (JM):
Instant appeal of the assesse was filed against the order of the Learned Principal Commissioner of Income-tax, Central, Mumbai-1, [in short, ‘Ld. PCIT] passed under section 263 of the Income-tax Act, 1961 (in short, ‘the Act’), for the Assessment Year 2019-20, date of order 27/03/2025. The impugned order emanated from the order of the Learned Assistant Commissioner of Income tax,
2 ITA 3504/Mum /2025 Nayara Energy Limited (formerly known as Essar Oil limited) Central Circl-1, Mumbai [in short, ‘Ld. PCIT], passed under section 143(3) read with section 144C(3) of the Act, date of order 24/05/2022.
The brief facts of the case are that the assessee’s case was completed under section 143(3) read with section 144C (3) of the Act. During the assessment proceedings, the notice under section 142(1) of the Act was issued and the assesse complied with the same accordingly. The draft assessment order was issued on 30/03/2022 under section 144C of the Act. The Ld. PCIT, by invoking provisions of section 263 of the Act, treated this assessment order as erroneous and prejudicial to the interest of the revenue in regard to the nature of income of capital expenditure, which was treated by the assesse was revenue expenditure, but the Ld. PCIT has considered it as a capital expenditure. Further, the Ld. CIT(A) had taken a view that the Ld.AO has not taken any action for disallowance under section 14A of the Act. Taken both the issue together, the Ld. PCIT, issued the notice to the assessee and the assessee complied with the said notice issued under section 263 of the Act. Finally, the Ld. PCIT treated this assessment order as erroneous and prejudicial to the interest of the revenue and set aside the said assessment order. Being aggrieved, the assesse filed an appeal before us.
The Ld.AR argued and filed a paper book containing pages 1 to 150, which is kept on record. The Ld.AR stated that during the assessment proceedings, the assessee complied with the notice issued by the Ld.AO. The Ld.AO in notice under section 143(2) issued on 04/03/2022 raised query on point Nos. 4 & 11 related to details of capitalized expenditure and its nature and also the details related to expenses incurred for earning exempt income and has issued a show cause related
3 ITA 3504/Mum /2025 Nayara Energy Limited (formerly known as Essar Oil limited) to disallowance under section 14A of the Act. The relevant notice is annexed at APB pages 43 to 45. In pursuance of the said notice, the assesse replied on 11/03/2022 and on points No.3 and 10 and explained the same. Related to capitalized expenditure, the assesse made a detailed submission in the reply. But, in case of disallowance under section 14A, the assesse submitted that the assessee has no exempted income and during the impugned assessment year, the assessee has not received any dividend which is claimed as exempt. So, there is no expenses for the company, which is directly incurred to earn exempted income. A further compliance was made on 25/03/2022 by the assesse in relation to the notice under section 142(1) of the Act. Considering the draft assessment order, we find that the Ld.AO had taken cognizance of the submission of the assesse.
The Ld. AR argued that in response to the Notice, the assessee vide its letters dated 11/03/2022 and 25/03/2022 submitted the information and explanation as requested in the notice. Copies of the said letters are annexed at Appendix - D and E, APB pages 67 to 82. Summary of assessee's response is as follows - “With respect to deductibility of Catalyst expenses amounting to Rs. 3,887.55 million o Assessee is primarily engaged in refining of crude oil and marketing of petroleum products. In refinery, to produce valuable products, various catalyst are required to perform different reactions. Catalyst is substance, which increases reaction rate without being immediately consumed in reaction. Catalyst are basically consumable items, that enable savings in consumption of fuel. Life cycle of catalyst depends upon type of feed processed and its operating parameters (i.e, temperature and pressure). At the end of Catalyst life cycle, catalyst will be in deactivated condition and required to replace:
4 ITA 3504/Mum /2025 Nayara Energy Limited (formerly known as Essar Oil limited) o In the books of accounts, the catalyst expenses are capitalised and added to fixed assets and amortised upon its useful life. o In the return of income, the Company claims such Catalyst cost as a revenue expenditure. The Company in the computation of total income for previous years had also claimed such catalyst expenses as revenue expenditure and the same has accepted in past assessment. o Further, reliance can be placed on the decision of the Mumbai Tribunal in the case of Aditya Birla Nuvo Ltd (ITA No. 3178/3033/ Mumbai/2012) and National Organic Chemical Industries Ltd vs. ACIT (ITA No. 2131/Mum/2005) wherein it has been held that expenditure incurred on catalyst shall be allowed as a revenue expenditure.
• With respect to non-applicability of section 14A o As on 31st March 2019, the Company has total non-current investment of Rs. 10,287.71 crores in equity shares of multiple companies. These investments are old investments, i.e. investments were made prior to captioned year. o The investments have been made out of Company's own funds and no specific borrowings have been made for such investments. o During the captioned year, no dividend was received by the Company, which is claimed as exempt. Further, the Company submitted that there are no expenses directly incurred to earn exempt income. o During assessment proceedings for AY 2017-18 and AY 2018-19, the disallowance under section 14A was restricted to the extent of dividend income. For the captioned year, in absence of an exempt income, there should be no disallowance under section 14A. o In its return of income, the Company has not made any disallowance under section 14A of the Act in relating to investments placing reliance on the decision of the Hon'ble SC.
5 ITA 3504/Mum /2025 Nayara Energy Limited (formerly known as Essar Oil limited) Further, the Company placed reliance, inter alia, on the jurisdictional decisions (including SC decision), wherein it was held that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be made out of the interest free fund generated or available with the Company, if the interest free funds were sufficient to meet the investment. The Company also placed reliance on decisions wherein it was held that in absence of expenditure for earning exempt income no disallowance can be made under section 14A. o In relation to the investments in Petronet companies, the Commissioner of Income-tax (Appeals) ('CIT(A)') in Company's own case for AY 2010-11 has held that these are 'passive investments and made out of Company's own funds, and therefore, no disallowance is required under section 14A of the Act o With reference to the Explanation to section 14A, the Company submitted as follows -
• Said explanation was introduced by Finance Bill 2022, and in March 2022 the Finance Bill 2022 was not effective, as the legislative process for enactment of Finance Act 2022 was not complete.
• As per the memorandum to the Finance Bill 2022, the said explanation was made applicable from 1 April 2022. Accordingly, such explanation cannot apply to the captioned year, ie. AY 2019-20. In support of this proposition, the Company made reference to the decision of Hon'ble SC, amongst other things.”
The Ld.DR argued and fully relied on the order of the Ld.PCIT.
We heard the rival submission and considered the documents available in the record. The Ld. AR submitted that notices issued by the Ld. AO during
6 ITA 3504/Mum /2025 Nayara Energy Limited (formerly known as Essar Oil limited) assessment proceedings, and the assessee’s responses thereto. It was pointed out that:
The Ld. AO had specifically raised queries on both issues: nature of catalyst expenses and applicability of section 14A. These are evident from the notices dated 04/03/2022, under section 143(2) of the Act and responses dated 11/03/2022 and 25/03/2022. On Catalyst Expenses the assessee explained that catalysts used in the refinery are consumables which lose their utility after a certain operating cycle and are required to be replaced periodically. Though capitalized in books, these are claimed as revenue expenditure in the return of income in line with past practice accepted by the department. Reliance was placed on coordinate bench decisions in DCIT-LTU vs. Aditya Birla Nuvo Ltd. & 3033/Mum/2012 date of pronouncement 09/12/2015, allowing such expenditure as revenue in nature.
On Section 14A Disallowance: The assessee stated that no exempt income (e.g., dividend) was received during the relevant assessment year. Investments were made in earlier years from own funds, and no specific expenditure was incurred to earn exempt income. Following the decision of coordinate bench of ITAT-Mumbai in assessee’s own case bearing dated 10/10/2022 for AY 2016-17, no disallowance under section 14A can be made in absence of exempt income. Explanation to section 14A inserted by Finance Act, 2022 is prospective and inapplicable to AY 2019–20.
In our considered view we find that: - (i) On the issue of Catalyst Expenses:
7 ITA 3504/Mum /2025 Nayara Energy Limited (formerly known as Essar Oil limited) The issue was specifically raised during assessment. The assessee filed detailed replies justifying the allowability of catalyst expenses as revenue expenditure. The Ld. AO, after considering the submissions, accepted the claim. The judicial precedents relied upon by the assessee clearly support the view that catalyst expenses, being recurring in nature and forming part of the production process, are allowable as revenue expenditure. The treatment of the said expenses in the books as capital does not conclusively determine their allowability under the Act. It is well settled that accounting treatment is not decisive of the true nature of expenditure under the Act.
(ii) On the issue of Section 14A disallowance:
The assessee did not earn any exempt income during the year under consideration. It is now a settled position of law, as held by the Hon’ble Supreme Court in CIT v. Chettinad Logistics (P.) Ltd. [(2020) 114 taxmann.com 567 (SC)] and assessee’s own case (supra) that no disallowance under section 14A can be made in absence of exempt income. Further, reliance placed by the assessee on earlier orders passed in its own case by the CIT(A) and on other jurisdictional precedents is well-founded. The explanation to section 14A introduced by the Finance Act, 2022 is prospective and does not apply to AY 2019–20.
It is evident from the record that both issues were specifically raised and examined by the Ld. AO. The assessee made detailed submissions during assessment, which were duly considered. Hence, the assessment order cannot be termed as erroneous for want of enquiry or non-application of mind.
8 ITA 3504/Mum /2025 Nayara Energy Limited (formerly known as Essar Oil limited) It is trite law that for invoking jurisdiction under section 263, it must be shown that the order of the AO is not only erroneous but also prejudicial to the interest of the revenue. In the instant case, the Ld. AO made proper enquiries on both issues, and after due application of mind, accepted the assessee’s claim. Therefore, the twin conditions required under section 263 are not satisfied. Accordingly, the impugned revisionary order passed by the Ld. PCIT under section 263 of the Act is set aside.