BHARAT BIJLEE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX - 6(1)(2), MUMBAI

2 The Appellant prays that the revision order passed by the Id. PCIT u/s. 263 of the Act be quashed.

GROUND NO. 2: INCREMENTAL DISALLOWANCE U/S. 14A R.W.R. 8D AMOUNTING TO RS. 3,42,37,816/-:

1 On the facts and in the circumstances of the case and in law, the Ld. PCIT erred in making incremental disallowance of Rs. 3,42,37,816/- u/s. 14A r.w.r. 8D of the Act.

2 The Appellant prays that the disallowance u/s. 14A r.w.r. 8D be deleted.

The assessee is a company engaged in the business of manufacturing and marketing of electric motors, transformers, pumps, gearless machine for elevator industry, etc. The assessee filed a return of income for AY 2020-21 on 15.02.2021 declaring a total income of Rs. 62,85,01,170/-. The case was selected for scrutiny for the purpose of examining the issues pertaining to (i) Stock Valuation, (ii) Expenses incurred for earning exempt income, (iii) Refund claim (iv) ICDS Compliance and (v) ICDS Compliance and Adjustment. The assessment was completed under section 143(3) of the Act wherein the AO completed the assessment by making a disallowance under section 14A r.w.r. 8D to the tune of Rs. 9,95,976/-. Subsequently the PCIT invoked the provisions of section 263 holding that Bharat Bijlee Ltd. “2 With reference to the Revenue Audit observation reference No.1011979 in the case of the assessee, the assessment records of the assessee company for A.Y. 2020-21 have been carefully examined. On verification of the records, it was seen from the computation of income that the assessee has claimed exempt dividend income of Rs.2,41,16,635/- u/s.10(34) of the Act, against which an amount of Rs.67,448/- has been disallowed suo-moto. The AO in the assessment order worked out a disallowance of Rs. 10,63,424/- u/s.14A and added back an amount of Rs.9,95,976/- after reducing the suo-moto disallowance made by the assessee in its Computation of Income. On further perusal of the record, it was seen from Note -5(1) (Financial Assets - Investments - Non-current) and Note-10(i) (Financial assets Investments - current) to the Financial Statements as on 31st March 2020 that the investments stood at Rs.35301.24 Lakhs (Rs.32603.38 + Rs.2697.86), which were mainly investments in equity shares and Mutual Funds generating the exempt dividend income. However, Sec. 14A rwr 8D stipulates that 1% of the investments (annual average of monthly averages of the opening & closing value of investments) capable of fetching exempt dividend income requires to be disallowed u/s.14A Accordingly, an amount of Rs. 3,53,01,240/- ought to have been disallowed. Failure to do so has resulted in under assessment of income to the extent of Rs. 3,42,37,816/-(3,53,01,240-1063424/-).

1 Further, with reference to Revenue Audit observation reference No. 1011997. it has also been observed from the records that the assessee has claimed MAT credit of Rs. 10,50,90,516/- which has been allowed in the order passed u/s.143(3) rws 1448 dated 06.09.2022, although the assessee company was eligible was set-off of MAT credit only to the extent of Rs. 10,45,21,020/- as determined in the assessment order for A.Y. 2018-19. Thus, the assessee has been allowed excess credit to the extent of Rs. 5,69,496/-.

On examination of the assessment order and the questionnaires issued by the Assessing Officer, it is noted that the Assessing Officer did not make proper enquiry into the above claims made by the assessee in its Return of Income. Thus, there was prima facie an under assessment of income to the extent of Rs. 3,48,07,312/-(3,42,37,816 + 5,69,496) in the assessment order dated 06.09.2022 passed u/s 143(3) r.w.s. 144B of the Act.”

The PCIT held the order of the AO to be erroneous and prejudicial to the interest of the revenue by invoking explanation 2 to section 263 stating that the AO has not carried out proper enquiry with regard to the above mentioned issues. The assessee is in appeal before the Tribunal against the order of the PCIT. Bharat Bijlee Ltd.

The assessee raised an additional ground contending the invocation of revision under section 263 towards MAT Credit. However, during the course of hearing the ld. AR did not press for admission of the additional ground. Accordingly, the additional ground raised vide letter dated 07.04.2025 is not admitted for adjudication.

The ld. AR submitted that the PCIT held the order to be erroneous for the reason that the AO has conducted without making enquiries or verification which should have been made. The ld. AR further submitted that during the course of hearing the AO has made a through enquiry of expenses claimed against exempt income as per the provisions of section 14A r.w.r. 8D. The ld. AR in this regard took us through the various details filled before the AO during the course of assessment along with the Paper Book of 702 pages containing the various details called for by the AO during the course of assessment with regard to disallowance under section 14A and the details submitted by the assessee in response to the notices issued by the AO. The ld. AR further submitted that in the assessment order, the AO has made additional disallowance after examining the various details submitted by the assessee and in that regard drew our attention to the findings of the AO as extracted below:

Accordingly, the ld. AR submitted that the PCIT is not right in invoking the provisions of Explanation (2) to section 263 on the ground that the AO has not done proper enquiry.

The ld. DR on the other hand submitted that as per the provisions of section 14A r.w.r. 8D the disallowance should have been made at 1%of the average value of investments capable of earning exempt income. The ld. DR further submitted that the AO failed to apply Rule 8D and accordingly under assessed the income to the tune of Rs. 3,42,37,816/-. Accordingly, the ld. DR submitted that the PCIT has correctly invoked the provisions of Explanation (2) to section 263. 8. We heard the parties and perused the material on record. The PCIT has held the order of the AO to be erroneous and prejudicial to the interest of the revenue for the reason that the AO has not conducted proper enquiry towards disallowance made under section 14A r.w.r. 8D and also for the reason that the AO has given incorrect credit towards MAT. The PCIT while holding so, has invoked the provisions of explanation 2 to section 263. It is apposite now to take note of the Bharat Bijlee Ltd. relevant extract of section 263 and the Explanation (2) to section 263 of the Act, which read as under :- “Revision of orders prejudicial to revenue. 263. (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer 89[or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, 90[including,— **** Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 94[or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal 95[Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the juri ictional High Court or Supreme Court in the case of the assessee or any other person.” 9. Thus, from close scrutiny of the provisions of section 263, it is evident that twin conditions are required to be satisfied for exercise of revisional juri iction under section 263 of the Act i.e., firstly, the order of the Assessing Officer is erroneous; and secondly, it is prejudicial to the interests of the revenue on account of error in the order of assessment. Explanation 2 provides that when the AO fails to make the enquiry are verification that ought to have been then the order can be held Bharat Bijlee Ltd. to be erroneous and prejudicial to the interest of the revenue. In the light of the above provisions of the Act, we will now look at the facts in the present case. From the perusal of the details submitted by the assessee during the course of hearing and the order of the AO, it is obvious that the AO has raised specific queries with regard to the disallowance under section 14A r.w.r.8D. We further notice that the AO has made a disallowance based on the without prejudice workings submitted by the assessee towards disallowance under section 14A. We also notice that the assessee has submitted the said workings considering the average investments which are earning income and 1% of the same is submitted as proposed disallowance. The AO has after deducting the suo moto disallowance made a further disallowance of Rs.9.95,976. Considering these facts we see merit in the argument of the ld AR that the AO has conducted a thorough enquiry with regard to disallowance under section 14A and hence explanation 2 to section 263 should not have been invoked.

On perusal of the order under section 263, we notice that the reason for PCIT to hold the order of AO to be erroneous is that the average value of the investments as per the books of accounts is Rs.35301.24 lakhs whereas the AO has considered a much lesser amount while making the disallowance. We notice in this regard that in response to the show cause notice issued under section 263, the assessee has filed a detailed written submission wherein it is submitted that the book value of the investments should be considered for the purpose of Rule 8D and not the market value which is reflected in the books of accounts as per the Accounting Standards. The assessee has further submitted that for the purpose of disallowance only those investments which are yielding exempt income alone should be considered. The assessee relied on various judicial precedence in support of the said submissions. It is relevant to mention here that the workings submitted by the assessee before the AO is based on the above mentioned criteria and the AO has proceeded to make the Bharat Bijlee Ltd. disallowance based on the said workings. The PCIT, we notice has not given any contrary findings with regard to the submissions of the assessee but has simply held that the AO has simply accepted the workings of the assessee.

There is no dispute that u/s. 263 of the Act, the PCIT does have the power to set aside the assessment order and send the matter for a fresh assessment if he is satisfied that further enquiry is necessary and the assessment order is prejudicial to the interests of the Revenue. However, in doing so, the PCIT must have some material which would enable to form a prima facie opinion that the order passed by the AO is erroneous, insofar as it is prejudicial to the interests of the Revenue. In the present case of the assessee it is clear from the order of the Assessing Officer that he has conducted a detailed enquiry and considering the details submitted during the assessment proceedings has applied his mind to make a disallowance under section 263 of the Act. The PCIT has not given any adverse findings on merits while holding the order of the AO to be erroneous but has held that the fair value of the investments should have been considered. Even otherwise the value of investment to be considered for the purpose of disallowance under section 14A i.e. whether fair value or actual cost, whether entire investments or only those investments earning exempt income to be considered are debatable. Following the judgments of the Supreme Court in MalabarIndustrial Co. Ltd.'s case (supra) and CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188, it is now a settled principle that where the Assessing Officer has adopted one of the courses permissible in law or where two views are possible and the Assessing Officer has taken one of the views 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 Assessing Officer is unsustainable in law. In view of this discussion and facts and circumstances of the present case in our opinion the PCIT is not the right in Bharat Bijlee Ltd. exercising revisionary powers applying explanation 2 to section 263 of Act, as the error envisaged by Section 263 of the Act is not one that depends on possibility as a guess work, but it should be actually an error either of fact or of law.

Since the assessee has pressed the grounds pertaining to credit given towards MAT being incorrect by the PCIT, we modify the order under section 263 to the extent that order of the AO being erroneous and prejudicial on the issue of disallowance under section 14A r.w.r.8D is not sustainable.

In result, appeal of the assessee is partly allowed.