BIOPHORE INDIA PHARMACEUTICALS PRIVATE LIMITED,HYDERABAD vs. DCIT., CIRCLE-1(1), HYDERABAD

The amendment to section14A in the Finance Act, 2022 is prospective in its operation, and cannot be made applicable to the Assessment year 2020-21, the subject appeal year.

6. The appellant holds substantial reserves, which is multiple times of the value of the investments made and hence Section 144 cannot be invoked. On the facts and in the circumstances of the case and in law the Assessing Officer (the Learned PCIT), erred in making the disallowance of expenditure without appreciating the facts and figures of the case.”

5. In response, the assessee-company vide letter dated 05.02.2025 and 14.02.2025 submitted that, the order passed by the Assessing Officer is neither erroneous nor prejudicial to the interests of Revenue on the issue of disallowance u/sec.14A read with Rule 8D of I.T. Rules, 1962 because, the assessee-company does not earn any exempt income and claimed exemption u/sec.10(34) of the Act. Further, the assessee-company has not incurred any expenditure in relation to exempt income and, therefore, the 5 ITA.No.729/Hyd./2025 question of disallowance of expenditure u/sec.14A read with Rule 8D of I.T. Rules, 1962 does not arise. The assessee further submitted that, during the course of assessment proceedings, the Assessing Officer called-for necessary information with regard to substantial amount of investments/advances/loans in the assets side of the balance-sheet and corresponding income including exempt income, for which, the assessee-company has filed complete details of nature of investments, source of investment and also explained that, the assessee-company does not earn any exempt income, which was claimed u/sec.10(34) of the Act. The Assessing Officer after considering the relevant facts and the explanation of assessee-company, completed the assessment without proposing any addition. Therefore, it cannot be said that, the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of Revenue.

7 ITA.No.729/Hyd./2025 aside the assessment order passed by the Assessing Officer and directed the Assessing Officer to pass fresh assessment order as per the provisions of law, after considering proper facts and submissions of the assessee-company on the issue, after providing sufficient opportunity of hearing to the assessee. 7. Aggrieved by the Order of the learned PCIT, the assessee is, now in appeal before the Tribunal.

8. Sri S K Gupta, Advocate-Learned Counsel for the Assessee submitted that, the learned PCIT was erred in invoking jurisdiction under section 263 of the Act and set aside the assessment order dated 09.09.2022 passed by the Assessing Officer under section 143(3) read with section 144B of the Act, even though, the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interests of Revenue on the issue of disallowance u/sec.14A read with Rule 8D of I.T. Rules, 1962. Learned Counsel for the Assessee further submitted that, the assessee-company has not received any exempt income and further, has not incurred any expenditure relatable to 8 ITA.No.729/Hyd./2025 exempt income. Further, the assessee-company has investments in unlisted equities amounting to Rs.32,51,28,088/-, out of which, it will derive exempt income in future. Learned Counsel for the Assessee submitted that, during the course of assessment proceedings, the Assessing Officer called-for necessary information with regard to substantial amount of investments/advances/loans in the assets side of the balance-sheet and corresponding income including exempt income, for which, the assessee-company has filed complete details of nature of investments, source of investment and also explained that, the assessee-company does not earn any exempt income, which was claimed u/sec.10(34) of the Act. The Assessing Officer after considering the relevant facts and the explanation of assessee-company, completed the assessment without proposing any addition. Therefore, it cannot be said that, the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of Revenue. He accordingly submitted that, in absence of any exempt income, the question of disallowance

9 ITA.No.729/Hyd./2025 of expenses relatable to exempt income does not arise. The Assessing Officer after considering the relevant facts, has rightly accepted the claim of the assessee-company and, therefore, it cannot be said that, the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of Revenue on this issue. In this regard, he relied on the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd., vs., CIT [2015] 378 ITR 33 (Del.) and submitted that, the same has been upheld by the Hon’ble Supreme Court and dismissed the SLP filed by the Revenue against the other of the Hon'ble Delhi High Court. The assessee-company had also relied upon the decision of ITAT, Hyderabad Bench, Hyderabad in assessee-company’s own case for earlier assessment years. Further, the Learned Counsel for the Assessee submitted that, the learned PCIT has invoked jurisdiction u/sec.263 by considering proviso inserted to sec.14A of the Act by the Finance Act, 2022 and the same has been considered by the Hon’ble Delhi High Court in the case of PCIT vs., Era Infrastructure (India) Ltd., [2022] 141 taxmann.com 289 (Del.) where it has been 10 ITA.No.729/Hyd./2025 clearly held that, proviso inserted is prospective in nature and cannot be applied retrospectively. This issue has been considered by the Coordinate Bench of ITAT, Hyderabad in the case of NCC Infrastructure Holdings Ltd., Hyderabad vs., The ACIT, Circle-16(1), Hyderabad, in ITA.No.144/Hyd./ 2023, Order dated 12.06.2023 holding that amendment is prospective in nature.

9. MS. U Mini Chandran, learned CIT-DR for the Revenue, on the other hand, supporting the order of the learned PCIT submitted that, the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of Revenue because, the Assessing Officer has failed to carry out required enquiry, which he ought to have carried-out in respect of huge investments and relevant exempt income, if any, earned by the assessee-company during the relevant assessment year under consideration. Since, the Assessing Officer has failed to carry-out required enquiries on the issue of disallowance u/sec.14A read with Rule 8D of I.T. Rules, 1962, the learned PCIT has rightly invoked jurisdiction and set-aside the order passed by the 11 ITA.No.729/Hyd./2025 Assessing Officer on this issue. Therefore, he submitted that, there is no error in the reasons given by the learned PCIT. The Learned DR further submitted that, if we go by the amendment to sec.14A by insertion of proviso it has been stated that in the said amendment it has been clarified that, the above amendment shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year and, therefore, it means that the amendment is retrospective. The Learned CIT-DR accordingly submitted that the CPC has rightly invoked amended provisions and set-aside the assessment order and, therefore, the order of the learned PCIT should be upheld.

10. We have heard both the parties, perused the material on record and the orders of the authorities below. The learned PCIT invoked jurisdiction under section 263 of the Act and set-aside the assessment order passed by the Assessing Officer under section 143(3) read with section 144B of the Act dated 09.09.2022 on the ground that, the 12 ITA.No.729/Hyd./2025 order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of Revenue. The learned PCIT has discussed the issue of disallowance u/sec.14A read with Rule 8D of I.T. Rules, 1962 and observed that, the investment made by the assessee-company are capable of earning exempt income in future and this fact has not been examined by the Assessing Officer. Otherwise, there is no finding from the PCIT that, the assessee-company has earned exempt income for the year under consideration from the said investment and also incurred various expenditure relatable to exempt income and the same has not been disallowed either by the assessee-company on its own or by the Assessing Officer during the assessment proceedings, which renders the assessment order erroneous in so far as it is prejudicial to the interests of Revenue. In our considered view, the learned PCIT cannot assume jurisdiction and set-aside the assessment order passed by the Assessing Officer for making further enquiry to ascertain, whether the assessee-company has earned exempt income and incurred any expenditure relatable to 13 ITA.No.729/Hyd./2025 the said exempt income. In our considered view, once the learned PCIT has invoked jurisdiction under section 263 of the Act, he should give a specific finding that, the Assessing Officer has failed to carry-out required enquiry which he ought to have carried-out and because of this, lawful revenue payable to the Government has not been paid, which caused prejudicial to the interests of Revenue. Unless the learned PCIT makes-out a case that, the order passed by the Assessing Officer is erroneous which caused prejudicial to the interests of Revenue, simply he cannot set-aside the assessment order passed by the Assessing Officer by exercising powers conferred under section 263 of the Act for further verification.

14 ITA.No.729/Hyd./2025 of earning exempt income in future and further, the assessee-company has not maintained separate books of accounts for the investment activity. In our considered view, the said finding of the learned PCIT is not based on appraisal going by the assessment order passed by the Assessing Officer, where the Assessing Officer has caused detailed enquiry on the issue of large investment as on the end of the balance-sheet date and consequent exempt income, if any, earned by the assessee-company for the relevant assessment year. In response to a specific question, the assessee-company has explained that, the Company has Subscribed 9999 equity shares of M/s. Vivere Imaging Pvt. Ltd., at ther ate of Rs.10 each, totalling to Rs.99,990/- and no other investment was made apart from this for the impugned assessment year 2020-2021 and the sources of the same was from reserves/surplus funds and there was no interest cost. However, the learned PCIT noted in para- 7.11 of the order that as could be seen from the balance- sheet as on 31.03.2020 that, the assessee has huge investment in unlisted equities amounting to 15 ITA.No.729/Hyd./2025 Rs.32,51,28,088/- and these investments are capable of generating the income in future and since the assessee has not disallowed the associated expenses against these investments and no separate accounts for expenses related to these investments are maintained by the assessee and that, the assessee has maintained common pool of funds for it’s regular business, the learned PCIT has disallowed 1% of average investment i.e., Rs.32,50,783/- out of Rs.32,50,28,098/-. It was the argument of the Counsel for the Assessee that, the appellant holds substantial reserves, which is multiple times of the value of the investments made. This indicates that the investments were financed by internal resources rather than borrowed funds. As a result, the assessee possesses sufficient funds, comprising Share Capital and Reserves, to make investments. Therefore, Section 14A cannot be invoked to disallow expenditure attributable to exempt income. We find that, the Assessing Officer after considering the relevant facts, has rightly accepted the explanation of assessee-company and has not made any disallowance u/sec.14A read with Rule 8D of I.T.

16 ITA.No.729/Hyd./2025 Rules, 1962. The learned PCIT without appreciating the relevant facts and also without bringing on record any reasons as to how the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of Revenue, has simply with an assumption set-aside the assessment order passed by the Assessing Officer in terms of section 263 of the Act.

“6. We have gone through the record in the light of the submissions made on either side. There are no contrary findings of the authorities to the plea taken by the assessee that during the year under consideration, the assessee did not earn any exempt income. The basis for making the addition that the assessee incurred interest expenditure in respect of the amounts that were used for making investment also. In that process, learned CIT(A) relied upon the amendment to section 14A of the Act by insertion of explanation by Finance Act, 2022 and also to the decision of the Guwahati Bench of the Tribunal, referred above.

18 ITA.No.729/Hyd./2025 taxmann.com 145 and held that the amendment of section 14A of the Act which is ‘for removal of doubt’ cannot be presumed to be retrospective even where such language is used, if it alters or changes law as it earlier stood.

Order pronounced in the open Court on 26.09.2025.