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PER B.R. BASKARAN, A.M : The assessee has filed this appeal challenging the order dt.23-03- 2024 passed by the Ld.Principal Commissioner of Income Tax,Mumbai- 8 (Ld. PCIT) u/s. 263 of the Income Tax Act 1961 („the Act) for the assessment year (AY.) 2018-19. The assessee is challenging the validity of the revision order passed by the Ld.PCIT.
The facts relating to the issue are discussed in brief. The assessee is engaged in the business of making investment in shares. The assessee filed its return of income for the year under consideration declaring a loss of Rs. 235.27 crores. It was taken up for scrutiny by the AO. During the course of assessment proceedings, the AO, inter alia, raised a query relating to disallowance of expenses to be made u/s 14A of the Actin relation to exempt income earned by the assessee. In reply thereto, the assessee submitted that that it has not earned any exempt income during the year under consideration and hence no disallowance u/s 14A is required to be made. The assessee also submitted that the Demat charges relating to investments has already been disallowed voluntarily by the assessee while computing. The AO accepted the above said explanation from the assessee and accordingly did not make any addition u/s. 14A of the Act.
The Ld.PCIT, upon examination of the assessment record, took a view that the AO should have computed the disallowance u/s. 14A of the Act since the assessee was having huge investments in shares. Accordingly, he held that the assessment order passed by the AO is erroneous and prejudicial to the interests of revenue. Accordingly, he initiated the revision proceedings u/s. 263 of the Act.
In revision proceedings, the Ld PCIT noticed that the average value of the investments made in shares by the assessee was around as Rs. 407.53 crores. The Ld PCIT referred to the Circular No. 5/2014, dt. 11- 02-2014 issued by the CBDT and also the amendment made to Section 14A of the Act by the Finance Act, 2022,wherein it has been mentioned that the disallowance u/s. 14A of the Act has to be made irrespective of the fact whether any exempt income has been earned during the financial year or not. Accordingly, the Ld.PCIT took the view that the disallowance u/s 14A should have been made by the AO. Since the AO did not make any disallowance u/s 14A, he held that the assessment order passed by the AO is erroneous and prejudicial to the interest of the Revenue. Accordingly, he set aside the assessment order with a direction to pass the order afresh, after providing adequate opportunity of hearing. The assessee is aggrieved.
The Ld.AR submitted that it is now settled proposition of law that the disallowance u/s. 14A of the Act is not required to be made when the assessee has not earned any exempt income. In support of the above said proposition, the Ld.AR placed reliance on the decision rendered by the Hon‟ble Delhi High Court in the case of PCIT Vs. Era Infrastructure (India) Ltd., [2022] 448 ITR 674. The Ld.AR submitted that the circular of CBDT relied upon by the PCIT is against the judicial pronouncement and hence, the same is not binding on the AO. With regard to the reliance placed on the amendment to section 14A of the Act brought out by the Finance Act, 2022, the Ld.AR submitted that the Hon‟ble Delhi High Court in the above said case as well as the Hon‟ble Gauhati High Court in the case of Williamson Financial Services Ltd. vs. CIT [2024] 166 taxmann.com 607 (Gauhati) has held that the amendment made by the Finance Act, 2022will have prospective operation. Hence, the Ld PCIT could not take support of the same for the year under consideration. The Ld.AR further submitted that the AO has raised a specific query on the matter of disallowance to be made u/s. 14A of the Act and assessee has replied to the same. The AO was convinced with the explanations given by the assessee. Accordingly, the Ld.AR submitted that the AO has accepted the explanation of the assessee after due application of his mind. In any case, the view so taken by the AO is one of the possible views, since it is supported by the various judicial pronouncements of Tribunal and High Courts. Accordingly, the Ld.AR submitted that the Ld.PCIT was not justified in revising the assessment order so passed by the AO.
The Ld.DR, on the contrary, supported the order passed by the Ld.PCIT.
We heard the parties and perused the record. We notice thatthe Ld.PCIT has considered the impugned assessment order passed by the AO with regard to the disallowance made u/s. 14A of the Act as erroneous and prejudicial to the interest of the Revenue by placing reliance on the circular issued by the CBDT and also the amendment brought in by the Finance Act, 2022 in Section 14A of the Act. We notice that the proposition that no disallowance is required to be made u/s. 14A of the Act when the assessee has not earned any exempt income, is now settled by various decisions of Hon‟ble High Courts and Tribunals. One of the decisions rendered by the Hon‟ble Delhi High Court was discussed in the earlier paragraphs. Hence, the view taken by the AO is required to be considered as a possible view, since it is in line with the decision rendered by the Hon‟ble Delhi High Court. Further, it has been held by the Hon‟ble Delhi and Gauhati High Courts that the amendment brought by the Finance Act, 2022 shall have prospective application. Hence, both the reasonings given by the Ld.PCIT to hold the assessment order erroneous and prejudicial to the interest of the Revenue would fail. In any case, we notice that the AO has raised a specific query on the issue and the assessee has also duly replied to the same. Accordingly, the AO has accepted the explanations of the assessee, meaning thereby, the AO has taken a conscious decision after due application of mind, which is also a possible view.
The scope of revision proceedings initiated under section 263 of the Act was examined by Hon'ble Bombay High Court, in the case of Grasim Industries Ltd. V CIT (321 ITR 92) andfollowing the law laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Company (243 ITR 83)(SC), it was held as under:- Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous in so far as it is prejudicial to the interests of the Revenue”. This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer” and “it is only when an order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interests of the Revenue”, the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court (headnote) : “The phrase „prejudicial to the interests of the Revenue‟ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view 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 Income-tax Officer is unsustainable in law.” The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.” The principles laid down by the courts are that the Learned CIT cannot invoke his powers of revision under section 263 if the Assessing Officer has conducted enquiries and applied his mind and has taken a possible view of the matter. The consideration of the Commissioner as to whether an order is erroneous in so far it is prejudicial to the interests of Revenue must be based on materials on record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to start fishing and roving enquiries in matters or orders which are already concluded.
In view of the foregoing discussions and as per the law laid down by Hon‟ble Supreme Court and Hon‟ble Bombay High Court in the cases discussed supra, we are of the view that the impugned assessment order cannot be considered as erroneous and prejudicial to the interest of the Revenue. Accordingly, we set aside the order of the Ld.PCIT.
In the result, the appeal of the assessee is allowed.