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Facts
The assessee, Andhra Pradesh Power Development Company Limited, filed a NIL income return for AY 2020-21, which was accepted by the Assessing Officer (AO) under Section 143(3). The Principal Commissioner of Income Tax (PCIT) initiated revision proceedings under Section 263, alleging that the AO erred by not disallowing expenses under Section 14A read with Rule 8D, given the assessee's substantial investments capable of generating exempt income. The assessee contended that no exempt income was earned from these investments and that any interest income generated was offered to tax.
Held
The Tribunal held that the PCIT erred in invoking Section 263, as the AO had conducted detailed inquiries and correctly accepted the assessee's explanation that no exempt income was derived from the investments and that the related interest income was already offered to tax. Citing various precedents, the Tribunal reiterated that disallowance under Section 14A does not arise if no exempt income is earned. Consequently, the PCIT's order setting aside the assessment was quashed, and the original assessment order passed by the AO was restored.
Key Issues
Whether the PCIT can invoke Section 263 to revise an assessment when the AO has conducted inquiries and accepted the assessee's claim that no exempt income was earned, rendering Section 14A inapplicable for disallowance of expenditure.
Sections Cited
263, 143(3), 144B, 14A, 10(34)
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Income Tax Appellate Tribunal, HYDERABAD “B” BENCH: HYDERABAD
Before: SHRI VIJAY PAL RAO & SHRI MANJUNATHA G
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD “B” BENCH: HYDERABAD BEFORE SHRI VIJAY PAL RAO, VICE PRESIDENT AND SHRI MANJUNATHA G, ACCOUNTANT MEMBER ITA.No.677/Hyd./2025 Assessment Years 2020-2021 Andhra Pradesh Power Development Company The DCIT, Circle-1(1), Limited, Hyderabad. vs. Hyderabad. PIN – 500 004. PAN AAFCA6825R (Appellant) (Respondent) For Assessee : CA, Srinivas Rao For Revenue : Dr. Narendra Kumar Naik, CIT-DR Date of Hearing : 04.09.2025 Date of Pronouncement : 12.09.2025 ORDER PER MANJUNATHA G. :
The above appeal has been filed by the assessee against the Order dated 20.02.2025 of the learned Principal Commissioner of Income Tax, Hyderabad-1, Hyderabad, relating to the assessment year 2020-2021.
The assessee has raised the following grounds in the instant appeal :
2 ITA.No.677/Hyd./2025 “The proceedings of the authorities below are arbitrary, contrary to law, against weight of evidence and probabilities of the appellant's case i. The order of the learned Principal Commissioner of Income Tax, Hyderabad-1 ("Ld. PCIT) is erroneous both on facts and in law. ii. On the facts and in the circumstances of the case and in law, the Learned PCIT, has erred in invoking the provisions under section 263 of the Income Tax Act, 1961 (the Act), without considering the fact that the National Faceless Assessment Centre ("Ld. AO") had passed the assessment order u/s 143(3) on 22/09/2022 after making due enquiries and verification of records and the said order is not erroneous and/or pre-judicial to the interest of the revenue. iii. On the facts and in the circumstances of the case and in law, the Ld. PCTT has erred in setting aside the assessment order passed by the Ld.AO with a direction to fresh assessment without appreciating the fact that the Ld. AO has clearly mentioned that he has verified and confirmed that there is no deduction or exemption claimed by the appellant in the assessment order itself, hence assessment order is not erroneous and/or prejudicial to the interest of the revenue. iv. Ld. PCIT has erred in invoking the provisions u/s 263 of the Act without appreciating the facts and submissions made to Notice of hearing that Section 14A itself is not applicable, as appellant has not claimed any exempted income. Hence invoking provisions of Section 263 is bad-in-law and liable to be quashed.
3 ITA.No.677/Hyd./2025 v. The appellant craves leave to urge, add, amend, alter, enlarge, modify, substitute, delete or withdraw any of the ground or ground and to adduce fresh evidence at the time of hearing of the appeal. For the grounds mentioned above, it is prayed that the Hon'ble ITAT may be pleased to quash the orders of the Ld PCIT and allow the appeal and pass such other order or orders, as the Hon'ble ITAT may deem fit and proper in the circumstances of the case.”
Brief facts of the case are that, the assessee viz., M/s. Andhra Pradesh Power Development Corporation Limited is owned by Government of Andhra Pradesh which has established for supply of electricity. The assessee- company filed it’s return of income for the assessment year 2020-2021 on 21.10.2020 declaring Rs.NIL income. The case was selected for scrutiny under CASS. The assessment was completed by Faceless Assessment Unit [in short “FAU”] u/sec.143(3) r.w.sec.144B of the Income Tax Act, 1961 [in short “the Act”] on 22.09.2022 accepting the NIL income returned by the assessee.
Subsequently, the case has been taken-up for revision proceedings by Pr. CIT, Hyderabad-1 and a show
4 ITA.No.677/Hyd./2025 cause notice under section 263 of the Income Tax Act, 1961 [in short “the Act”] dated 17.12.2024 was issued to the assessee-company. In the said show cause notice, the learned PCIT observed that, the assessee-company has substantial investments in the nature of equity in debenture bonds, which is capable of generating the income, which would be exempt from taxation. However, the assessee- company has not disallowed the associated expenses against these investments. No separate accounts for expenses related to these investments was found to be maintained by the assessee-company. Since the assessee- company has made substantial investments, from which, it will derive exempt income in future and also considering that, it maintains a common pool of funds for it’s regular business as well as for investment, from which, it will derive exempt income, appropriate disallowance was required to be made as per the provisions of section 14A read with Rule 8D of I.T. Rules, 1962. Further, the Assessing Officer has not verified the issue in right perspective of law and has completed the assessment by accepting the returned income
5 ITA.No.677/Hyd./2025 which resulted in an erroneous order passed by the Assessing Officer in so far as it is prejudicial to the interests of Revenue. Therefore, called-upon the assessee-company to file it's objections, if any, for the proposed revision of assessment order.
In response, the assessee-company vide letter dated 26.12.2024 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 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
6 ITA.No.677/Hyd./2025 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.
The learned PCIT after considering the relevant submissions of the assessee-company and also taking note of provisions of section 263 of the Act observed that, the assessee-company company received Rs.2000 crore APPFC bonds from APDICOMs against sale of power on 24.04.2019, out of which, it has disbursed Rs.1670.90 crores against the liability. The remaining amount of Rs.329.10 crore has been invested, on which, it has earned interest income of Rs.92.09 crores. The assessee-company has not furnished
7 ITA.No.677/Hyd./2025 relevant information of interest income earned from bonds before the Assessing Officer, so as to examine whether sec.14A read with Rule 8D of I.T. Rules, 1962 applies in the case of the assessee-company or not ? Since the Assessing Officer has not examined the issue, the learned PCIT observed that, order passed by the Assessing Officer under section 143(3) read with section 144B dated 22.09.2022 is erroneous in so far as it is prejudicial to the interests of Revenue. Therefore, the learned PCIT has set 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.
Aggrieved by the Order of the learned PCIT, the assessee is, now in appeal before the Tribunal.
CA, Srinivas Rao, Learned Counsel for the Assessee submitted that, the learned PCIT was erred in invoking jurisdiction under section 263 of the Act and set
8 ITA.No.677/Hyd./2025 aside the assessment order dated 22.09.2022 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 exempt income. Further, the assessee-company has received Rs.2000 crore APPFC bonds from APDISCOMs against the outstanding receivables and the same has been utilised against the liabilities of the company. Although, part of bond amount has been invested and earned interest income amounting to Rs.92.09 crores, but, the said interest income has been offered to tax and no exemption has been claimed. In absence of any exempt income, the question of disallowance of expenses relatable to exempt income does not arise. The Assessing Officer after considering the relevant facts, has rightly accepted the claim of the 9 ITA.No.677/Hyd./2025 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.
Dr. Narendra Kumar Naik, 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
10 ITA.No.677/Hyd./2025 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 Assessing Officer on this issue. Therefore, he submitted that, there is no error in the reasons given by the learned PCIT. Thus, the order of the learned PCIT should be upheld.
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 22.09.2022 on the ground that, the 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 11 ITA.No.677/Hyd./2025 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 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
12 ITA.No.677/Hyd./2025 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.
In the present case, going by the reasons given by the learned PCIT in the order passed under section 263 of the Act, nowhere, the learned PCIT has made out a case that, assessee-company has earned exempt income and resultant expenditure relatable to exempt income has not been disallowed. On the contrary, the learned PCIT observed that, investment made by the assessee-company are capable 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 13 ITA.No.677/Hyd./2025 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 received Rs.2000 crores from APDISOMs against sale of power and out of which, Rs.1670.90 crores was disbursed against the liabilities of the assessee-company and the remaining amount of Rs.329.10 crores were shown as investment in balance sheet as on 31.03.2020, on which, it has earned interest of Rs.92.09 crores which is taxable under law. Further, the assessee-company has also filed relevant evidences to prove that, interest income of Rs.92.10 crores has been offered to tax. 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. Rules, 1962. The learned PCIT without appreciating the relevant facts and also without bringing on record any reasons as to 14 ITA.No.677/Hyd./2025 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.
Further, the view taken by the Assessing Officer is fully covered by the decision of Hon’ble Supreme Court in the case of CIT vs., Cheminvest Ltd., where the Hon’ble Supreme Court dismissed the SLP filed by the Revenue against the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd., vs., CIT (supra) where it has been clearly held that, “where there is no exempt income, question of disallowance of expenses relatable to exempt income does not arise.” Similar view has been taken by the Hon’ble Madras High Court in the case of CIT vs., Chettinad Logistics Pvt. Ltd., where it has been clearly held that, “if no exempt income, no disallowance u/sec.14A of the Act. Similar view has been taken by the Co-ordinate Bench of ITAT, Hyderabad in the case of DCIT, Circle-1(1), Hyderabad vs., M/s. AP Power Generation Corporation Ltd., Hyderabad
15 ITA.No.677/Hyd./2025 in ITA.Nos.1606 to 1608/Hyd./2016 and ITA.No.1656/ Hyd./2016 for assessment years 2011-2012 to 2013-2014. The sum and substance of the ratio laid down by the Hon’ble Supreme Court and Hon’ble Delhi High Court and the Coordinate Bench of ITAT Hyderabad is that, “in case there is no exempt income, then, disallowance u/sec.14A cannot be made. In the present case, the assessee-company has filed relevant evidences and proved that, the assessee- company has not earned any exempt income from the investment shown in the balance sheet as on 31.03.2020 and, therefore, in our considered view, the findings given by the learned PCIT that, the order passed by the Assessing Officer under section 143(3) r.w.s.144B of the Income Tax Act, 1961 dated 22.09.2022 is erroneous in so far as it is prejudicial to the interests of Revenue on the issue of disallowance u/sec.14A read with Rule 8D of I.T. Rules, 1962, is devoid of merit and cannot be accepted.
In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that, the learned PCIT was erred in invoking
16 ITA.No.677/Hyd./2025 jurisdiction under section 263 of the Income Tax Act, 1961 and set-aside the assessment order passed by the Assessing Officer under section 143(3) r.w.s.144B of the Income Tax Act, 1961. We, thus, set-aside the order of the learned PCIT passed under section 263 of the Act and restore the order of the Assessing Officer.
In the result appeal of the assessee is allowed.
Order pronounced in the open Court on 12.09.2025.