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

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.

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: “2.4 Variations proposed on the basis of inference drawn (specify the basis of inference and quantify the variation proposed, if possible). The explanation offered by the assessee has been considered and it is found that the assessee has submitted two types of working of rule 8D. As per Ist computation of rule BD, the net disallowance shown by the assessee was Rs. 7,95,360/- and when the query was raised vide notice u/s 142(1) dated 14.01.2022 on the working of Rule 8D, the assessee has submitted without prejudice its revised working which shows the net disallowance as per rule 8D amounting to Rs. 9,95,976/-. Assessee has made investment in shares and Bharat Bijlee Ltd. mutual funds on which it had earned exempt income which clearly attract the provisions of section14A. In the case of M/s. Maxopp Investment Ltd 91 Taxmann.com.154, the Hon'ble Apex Court held that dominant (or) main object would not be a relevant consideration for disallowance u/s.14A of the Act. If the expense is incurred for earning the dividend income, then such expenses which are attributable to the dividend income has to be disallowed. It is further held in para 40 of the order of the above said case, the Hon'ble Supreme Court has held that, "Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and when such dividend income is generated that would be earned by the assessee." It is decided that the provisions of Sec. 14A are applicable, the disallowance should be worked out as per Rule 8D which prescribes the method for computation of amount to be disallowed u/s.14A of the Act. It is to mention that as per the IT(Fourteenth Amendment) Rules, 2016 applicable w.e.f 02.06.2016, the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts, namely. provided such expenditure should not exceeded the total expenditure claimed by the assessee. The amount of expenditure directly relating to income which does not form part of total income and (ii) an amount equal to one percent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of the total income. Since the assessee has not considered all the investments which yield exempt income, the disallowance u/s.14A as per Rule 8D computed based on the details available on record as under: Working of expenses attributable to exempt income as per Rule 8D of the Income tax Rules 1962: (i) The Amount of Expenditure directly relating to 0 income which does not form part of total income; (ii) An amount equal to one percent of the annual 10,63,42,467/- average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income (iii) 1% of annual average of monthly averages @ 10,63,424/- Bharat Bijlee Ltd. 1% of Rs 10,63,42,467/- (iv) Total Disallowance u/s.14A (shall not exceed the 10,63,424/- total expenditure claimed by the assessee) From the above working, the attributable expenses for investment as per Rule 8D of the Income-tax Rules 1962 is at Rs. 10,63,424/- which needs to be disallowed as per section 14A of the I. T. Act. Since, the assessee has already disallowed an amount of Rs. 67,448/-, a difference of Rs. 9,95,976/- (Rs. 10,63,424/- Rs. 67,448/-) is hereby disallowed u/s 14A r.w.t. 8D and same is being added back to the total income of the assessee. Penalty proceedings u/s 270A is being initiated separately for underreporting of income as a consequence of misreporting. (Addition of Rs.9,95,976/-)”

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.

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 :-

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 jurisdiction 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.