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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI KULDIP SINGH & SHRI OM PRAKASH KANT
Per : Kuldip Singh, Judicial Member: Appellant M/s. Adenium Ventures Pvt. Ltd. (hereinafter referred to as the ‘assessee’) by filing present appeal sought to set aside the impugned order dated 10.03.2022 passed by the Pr. Commissioner of Income Tax (the PCIT) invoking revisionary jurisdiction contained under section 263 of the Income Tax Act (hereinafter referred to as the ‘Act’) on the grounds inter alia that: “1. On the facts and circumstances of the case and in law, it is humbly submitted that it should be held that: 1.1 the order passed u/s. 263 of the Act be declared as bad in law. \Vithout_prejudicc to the a_bove_and in the alternate 2 M/s. Adenium Ventures Pvt. Ltd. 1.2 since the AO had passed the order of assessment after making specific inquiry in connection with the basis of quantification of suo motu disallowance u/s. 14A of Act and after due application of mind and on consideration of submissions made by the appellant, accepted the said basis of disallowance, the same does not amount to inadequate enquiry/ lack of enquiry and hence, order passed u/s. 263 of the Act be declared as bad in law. Without prejudice jo the above and in the alternate 1.3 the order under appeal does not satisfy pre requisite conditions for invoking revisionary proceedings i.e. the assessment order passed by the AO should not only be erroneous but also prejudicial to the interest of Revenue and hence, order passed u/s. 263 of the Act be declared as bad in law. Without prejudice to the above and in the alternate 1.4 once a query is raised during the assessment proceedings and responded to it by the appellant, the mere fact that it is not dealt with in assessment order would not lead to conclusion that the same is passed without application of mind and hence, order passed u/s. 263 of the Act be declared as bad in law. Without prejudice to the above and in the alternate 1.5 where AO has made detailed enquiry and after due application of mind and on consideration of material available on record, had adopted one of the possible views, then the order passed by the AO cannot be said to be erroneous or prejudicial to the interest of Revenue, even if the Hon. Commissioner has different view from that of AO and hence, order passed u/s. 263 of the Act be declared as bad in law.
On the facts and circumstances of the case and in law, the Ld. Prin. Commissioner of Income Tax ought to have held that: 2.1 Where AO having regard to the accounts of the appellant, was satisfied with the correctness of the claim of the appellant in respect of expenditure incurred in relation to income which does not form part of the total income, the provisions of Rule 8D cannot be invoked to disallow the said expenditure.
3. It is humbly prayed that the relies as prayed for hereinabove should be granted.
4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
2. Briefly stated facts necessary for adjudication of the controversy at hand are : assessee company is into the business of trading and merchants, buying and selling, trading, exchange, contract of all types of trade and investment instruments. 3 M/s. Adenium Ventures Pvt. Ltd. Assessee’s return of income of Rs.56,49,810/- has been accepted by the Assessing Officer (AO) while framing assessment under section 143(3) of the Income Tax Act, 1961 (for short ‘the Act’). However, the Ld. PCIT by invoking the revisionary jurisdiction issued a notice under section 263 of the Act by flagging the issue that scrutiny assessment was completed without making disallowance under section 14A read with Rule 8D and accepting the disallowance offered by the assessee of Rs.3,31,596/- by ignoring the fact that disallowance offered by the assessee was not as per the amended provisions of section 14A read with rule 8D applicable w.e.f. A.Y. 2017-18 and found the assessment order passed under section 143(3) of the Act erroneous in so far as prejudicial to the interest of the Revenue.
Feeling aggrieved from the impugned order passed by the Ld. PCIT under section 263 of the Act the assessee has come up before the Tribunal way of filing the present appeal.
We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.
5. Undisputedly, the Ld. PCIT invoked the revisionary jurisdiction under section 263 of the Act by flagging issue as to not making disallowance by the AO under section 14A read with rule 8D by issuing following notice: “On a perusal of the records, it is observed that the scrutiny assessment was completed without making any disallowance u/s 14A r.w. rule 8D and accepting the disallowance offered by the assessee of 4 M/s. Adenium Ventures Pvt. Ltd. Rs.3,31,596/- ignoring the fact that the disallowance offered by the assessee was not as per the amended provisions of sec 14 A r.w. rule 3D. However as per law, Rule 8D is to be applied mandatory.
Hence, the assessment order passed us. 143 (3) of the IT Act dated 17.12.2019, is erroneous in so far as it is prejudicial to the interest of revenue, within the meaning of Sec. 263 of the Act. Hence, it is proposed to revise the aforesaid order us.263 of the Act."
At the very outset, when we examine the operative part of impugned order passed by Ld. PCIT under section 263 of the Act, it is not only surprising but disappointing too that “despite flagging the issue as to not completing the assessment without making any disallowance under section 14A read with rule 8D and accepting the disallowance offered by the assessee of Rs.3,31,596/- ignoring the fact that the disallowance offered by the assessee was not as per the amended provisions of section 14A read with rule 8D, which are to be applied mandatorily” Ld. PCIT concluded by directing the AO to initiate the penalty under section 270A of the Act and decide the same on merits as per law.
7. For ready perusal operative part of the impugned order passed under section 263 is extracted as under: “4.1 A careful study of the above Rule 8D(2) clearly reveal that the amount of expenditure disallowable under Rule 8D includes; 1. Direct expenditure in relation to exempt income; and, 2. Indirect expenditure computed as 1% of annual monthly averages of opening and closing balances of investments, yielding exempt income. 4.2 Hence, application of amended Rule 8D is mandatory and therefore, the method of disallowance followed by the assessee company and accepted by AO, has made the assessment order bad in law. In such factual background, I am of the considered view that the impugned assessment was made by the AO without proper application of law and without making proper inquiries and verifications which should have been made that has rendered the assessment erroneous in so far as it is prejudicial to the interests of the revenue. 5 M/s. Adenium Ventures Pvt. Ltd.
As per amended law, Explanation 2 clause (a) below section 263(1) of the Act, any assessment made without conducting requisite enquiry and verification by the AO is erroneous in so far as it is prejudicial to the interests of revenue. Even under pre-amended law, SC in the case of Smt. Tara Devi Agarwal [88 ITR 0323] and also Rampyari Devi Saraogi [67 ITR 0084] have held that any assessment completed without necessary enquiries as warranted on facts of the case is erroneous in so far as it is prejudicial to the interests of revenue. 5.1 Hence, considering the facts in totality, I am of the considered opinion that the AO in the instant case has failed to conduct all necessary enquiries as warranted on facts of the case and as discussed in this order supra. Hence, the assessing officer is directed to initiate penalty u/s.270A of the Act and decide the same on merits as per law. The assessment order is erroneous in so far as it is prejudicial to the interests of the revenue in respect of non-initiation of penalty proceedings as per law as warranted on facts of the case. Accordingly, the same is hereby set aside. 5.2 The AO is hereby directed to initiate penalty proceedings as per law and decide the same on merits after conducting all necessary enquiries and verifications as warranted on facts of the case and also after giving due opportunity of being heard to the assessee before passing the assessment order.”
We are of the considered view that issuance of notice under section 263of the Act by the Ld. PCIT flagging issue of not making disallowance under section 14A read with rule 8D but concluding the order by completely ignoring the notice issued under section 263 of the Act rather directing the AO to initiate the penalty under section 270A of the Act and decide the same on merits as per law, itself vitiate the initiation of proceedings under section 263 of the Act and impugned order is liable to be set aside on this core only.
Even otherwise on merits it is brought to the notice of Bench by the Ld. A.R. for the assessee that he has filed extensive reply to the notice issued under section 263 which is extracted in para 3 of the impugned order wherein it is duly explained as to how the disallowance under section 14A of the Act has been computed by 6 M/s. Adenium Ventures Pvt. Ltd. applying the law laid down by the Hon’ble Supreme Court in case of Maxopp Investment Ltd. vs. CIT (2018) 402 ITR 640 (SC). Assessee’s reply to the notice under section 263 of the Act extracted in para 3 of the impugned order has not been considered by the Ld. PCIT wherein it is explained threadbare as to how the disallowance in this case has been made by the assessee rather put under the carpet the issue flagged in the notice under section 263 of the Act by directing the AO to initiate the penalty under section 270A of the Act, which is misuse of the revisionary jurisdiction conferred under section 263 of the Act.
The Ld. A.R. for the assessee also drew our attention to the notice issued by the AO under section 142(1) of the Act along with annexure available at page 12 & 13 wherein AO has called the detail of exempt income claimed by the assessee along with computation of disallowance under section 14A read with rule 8D. AO has also called upon the assessee to explain as to why the disallowance under section 14A read with rule 8D should not be made to the total income.
Assessee filed extensive reply available at page 15 to 19 along with annexure-A wherein assessee has duly explained the suo-moto disallowance made to the tune of Rs.3,31,596/- under section 14A. AO after accepting the explanation made by the assessee taken the plausible view and framed the assessment under section 143(3) of the Act. When the AO has duly applied his mind on the issue section 263 of the Act cannot be invoked. More particularly the AO has made specific inquiry as to the 7 M/s. Adenium Ventures Pvt. Ltd. quantification of suo-moto disallowance under 14A of the Act by the AO.
Even invoking of the revisionary jurisdiction by the Ld. PCIT is not sustainable in the eyes of law because assessment has been framed by the AO by duly applying his mind on the issue flagged by taking one of the plausible views and as such the order passed by the AO cannot be said to be erroneous or prejudicial to the interest of the Revenue. Even the amended provisions contained under section 14A read with rule 8D are applicable only when assessment is made by the AO without applying his mind, but here it is a case of not applying the mind by the Ld. PCIT while invoking the revisionary jurisdiction under section 263 of the Act.
In view of what has been discussed above, we are of the considered view that impugned order passed by Ld. PCIT under section 263 is not sustainable in the eyes of law hence hereby quashed. Consequently, appeal filed by the assessee is hereby allowed.
Order pronounced in the open court on 25.08.2022.