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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: Shri Sanjay Garg & Shri Makarand V. Mahadeokar
ORDER \nPer Sanjay Garg, Judicial Member:\nThe present appeal has been preferred by the assessee against the\nrevision order passed by the Principal Commissioner of Income Tax\n(hereinafter referred to as “PCIT”) dated 15/03/2024 passed u/s.263 of the\nIncome Tax Act, 1961 (hereinafter referred to as \"the Act\") for the\n Assessment Year (AY) 2018-19.\n2. The brief facts of the case are that on verification of assessment records,\nthe Ld.PCIT found that the Assessing Officer (AO) in the assessment order\nhad determined the amount of expenditure disallowable u/s.14A of the\nIncome Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962 at\nRs.38,22,268/-. He observed that while computing the aforesaid\ndisallowance of expenditure, the AO miscalculated the amount. That, while\ncomputing the disallowance, the AO applied 0.5% of the average value of\ninvestment, whereas, as per relevant Rule 8D(2)(ii) of the IT Rules, the AO\nwas supposed to compute the disallowance by applying 1% of the annual\naverage of the monthly averages of the opening and closing balances of the\nvalue of investment, income from which does not or shall not form part of\ntotal income. He, therefore, show-caused the assessee as to why the order of\nthe AO be not revised and the amount of Rs.38,22,268/- should not be\ndisallowed by passing revision order u/s.263 of the Act. In response to the\naforesaid show-cause notice, the assessee filed detailed submissions stating\ninter alia, that the AO had duly applied his mind while dealing with the issue\nand has taken a conscious decision; That the assessee has used interest-free\nfunds available with it for the purpose of investment, therefore, no\ndisallowance was warranted; That the AO had made thorough enquiries\nbefore passing the assessment order. It was, therefore, contended that the\nexercise of revision jurisdiction by the Ld.PCIT was not justified. It was inter\nalia stated that, in fact, no disallowance u/s.14A of the Act was attracted in\nthis case and that the assessee had already filed appeal before the CIT(A)\nagainst the disallowance made by the AO. The Ld.PCIT, however, did not\nagree with the submissions made by the assessee. He observed that the\nassessment order dated 10/04/2021 passed by the AO u/s.143(3) of the Act,\nwas erroneous and prejudicial to the interest of revenue on the issue of failure\nto make accurate disallowance u/s.14A of the Act. He, therefore, exercised\nhis revision jurisdiction and set aside the order passed u/s.143(3) of the Act\ndated 10/04/2021 on the aforesaid issue and directed the AO to pass a fresh\nassessment order and be compute the disallowance u/s.14A of the Act as per\nRule 8D of IT Rules, after giving adequate opportunity of being heard to the\nassessee.\n3. Being aggrieved by the said order of the Ld.PCIT, the assessee has\ncome in appeal before us.\n4. The Ld.AR of the assessee has vehemently submitted that the\nimpugned assessment order passed by the AO was neither erroneous nor\nprejudicial to the interest of revenue. That the assessment order in question\nwas passed by the AO after due application of mind and considering all the\nsubmissions made by the assessee. That, the view taken by the AO was the\nplausible view and that the Ld.PCIT cannot substitute his own view with\nthat of the AO. That, it was a mere case of change of opinion and hence, the\nassessment order under the circumstances cannot be said to be erroneous.\nShe has vehemently argued that computation of the disallowance u/s.14A of\nthe Act read with Rule 8D(2)(ii) of the IT Rules was not a debatable issue and,\ntherefore, the Ld.PCIT did not have jurisdiction u/s.263 of the Act to revise\nthe assessment order. She has further contended that the AO could have\ninvoked the provisions of section 154 of the Act, to rectify the mistake\napparent on record, however, the exercise of revision jurisdiction by the\nLd.PCIT u/s.263 of the Act was not justified in this case. She has submitted\nthat the scope and ambit of a proceeding for a rectification of an order u/s.154\nof the Act and a proceeding for a revision of an order u/s.263 of the Act are\ndistinct and different. That it, at the most, was a case rectification of\nassessment order u/s.154 of the Act and not a case of exercise of revision\njurisdiction u/s.263 of the Act. She, in this respect, has relied upon the\njudgement of the Hon'ble Supreme Court in the case of CIT, Bhopal vs.\nRalson Industries Ltd. Industries Ltd. [in case No. Appeal (Civil) 10 of 2007]\njudgement dated 04/01/2007. She has also relied upon the judgement of\nHon'ble Allahabad High Court in the case of CIT vs. Shiv Narain Karmendra\nNarain reported at (2005) 145 Taxmann 398 (Allahabad). She has also\nplaced reliance on the decision of Co-ordinate Bench in the case of\nDasrathsinh Ghanshyamsinh vs. PCIT in dated\n08/08/2024.\n5. The Ld.DR, on the other hand, has relied on the order of Ld.PCIT.\n6. We have heard the rival contentions and gone through the record. In\nthis case, during the course of assessment proceedings, though the case of the\nassessee was that no disallowance u/s.14A of the Act was attracted, however,\nthe AO held that the assessee had earned tax exempt income from the\ninvestments made out of interest-bearing funds. He, therefore, rejected the\ncontention of the assessee that the assessee has used its own/interest-free\nfunds available with it for the purpose of investments out of which tax\nexempt income was earned. He also observed that the assessee could not\nshow that no expenses were incurred to earn the tax exempt income. He,\ntherefore, held that the disallowance u/s.14A of the Act was attracted and he\nproceeded to determine the disallowance as per Rule 8D of the IT\nRules. However, while computing the disallowance, he applied 0.5% of the\naverage value of investments appearing in the balance-sheet instead of 1% of\nthe average value of investments as provided under the relevant Rule 8D. In\nthis regard, it will be relevant to reproduce, hereunder, the relevant Rule\n8D(2) of the IT Rules.\n“Rule 8D. [(2) The expenditure in relation to income which does not form part of\nthe total income shall be the aggregate of following amounts, namely:—\n(i) the amount of expenditure directly relating to income which does not form\npart of total income; and\n(ii) an amount equal to one per cent of the annual average of the monthly\naverages of the opening and closing balances of the value of investment,\nincome from which does not or shall not form part of total income:\nProvided that the amount referred to in clause (i) and clause (ii) shall not exceed\nthe total expenditure claimed by the assessee.]”\n6,.
A perusal of aforesaid Rule 8D(2)(ii) of the IT Rules would reveal that\nfor the purpose of computation of disallowance u/s.14A of the Act read with\nRule 8D(2)(ii) of the IT Rules, the disallowance at the rate of 1% of the average\nvalue of investments has to be made and not at the rate of 0.5%. The aforesaid\nRule was substituted with effect from 02/06/2016. Prior to that, there was a\nseparate formula for the purpose of computation of disallowance of interest\nexpenditure under Rule 8D(2)(ii) and disallowance of administrative\nexpenditure. Under Rule 8D(2)(iii) of IT Rules, an amount equal to 0.5% of\nthe average value of investments was disallowable on account of\nadministrative expenses. However, the said Rule 8D(2)(ii) and 8D(2)(iii) of\nthe IT Rules were substituted with the new Rule 8D(2)(ii), which prescribes\ndisallowance @ 1% of the average value of investments instead of calculating\nseparately the disallowance of interest expenditure and administrative\nexpenses.\nThe AO while calculating the disallowance has wrongly\ncalculated the disallowance @0.5% of the average value of investment under\nthe misconception and, therefore, made a lesser disallowance u/s.14A read\nwith Rule 8D of the IT Rules. The AO, thus, has made an error while\ncomputing the disallowance u/s.14A of the Act read with Rule 8D of the IT\nRules. The AO has not computed the same at the rate prescribed under the\nRules. This error in the assessment order has made the assessment order\nerroneous. Further, since error has financial implications in computing lesser\ndisallowance and thereby lesser chargeable tax as compared to that has been\nprescribed under the statutory rules, therefore, this order is also prejudicial\nto the interest of revenue. Therefore, both the conditions required to exercise\nthe jurisdiction by the Ld.PCIT u/s.263 of the Act, i.e. order must be\nerroneous and prejudicial to the interest of revenue, have been fulfilled in\nthis case.\n6.
Once the AO had rejected the plea of the assessee that no disallowance\nu/s.14A of the Act was attracted in this case and he had proceeded to\ndetermine the disallowance as per the formula prescribed under relevant\nIncome Tax Rules, and if an error has been committed in computing the\ndisallowance as per the said statutory provisions, that, in our view, cannot\nbe said to be a plausible view of the AO. In the facts and circumstances of the\ncase, so far as the question as to at what rate the disallowance under Rule\n8D(ii) has to be calculated, only one view was plausible, i.e. disallowance has\nto be computed at the rate of 1% of the average value of investment. In this\ncase, AO has erroneously calculated the disallowance by adopting 0.5% of the\naverage value of the investments, which is against the statutory provisions\nand hence, that cannot be said to be a legally plausible view and even the\nissue cannot be said to be an issue of difference of opinion. There is only one\nplausible view in these facts, which is that the AO has to apply at the rate of\n1% of the average value of investment for the purpose of computation of this\ndisallowance and none else. While holding so, we are not giving any finding\non the issue as to whether the disallowance u/s.14A of the Act was actually\nattracted in this case or not. The assessee has already agitated the issue about\nthe attraction of disallowance u/s.14A of the Act before the first appellate\nauthority and the said plea will be adjudicated by the Ld.CIT(A) in\naccordance with law. Any observation made in this order will not have any\nbearing on the order of the CIT(A) regarding the validity of invoking of the\nprovisions of section 14A of the Act by the A.O.. Our findings in this case are\nrestricted to the issue that the A.O. after having proceeded to calculate the\ndisallowance as per Rule 8D(2), if he has wrongly calculated it, the Ld.PCIT\ncan exercise his jurisdiction u/s.263 of the Act and direct the AO to compute\nit correctly as the rate prescribed under the said Rule 8D(2).\n6.
So far as the contention of the Ld.AR of the assessee that it is not a\nde batable issue, hence, the Ld.PCIT cannot exercise his jurisdiction u/s.263\nof the Act is concerned, we fail to understand that how this contention of the\nLd.AR will help her. The settled law is that if the issue is a debatable issue\nand the AO has taken one of the plausible views, but, the Ld.PCIT is of the\nother view, then the Ld.PCIT would not be justified in invoking the\nprovisions of section 263 of the Act, as it will be a case of change of opinion.\nHowever, in this case, since the issue is not debatable and the view taken by\nthe AO is apparently erroneous and, therefore, the provisions of section 263\nof the Act are squarely applicable in this case.\n6.
So far as reliance of the Ld.AR on the judgement of Hon'ble Supreme\nCourt in the case of CIT, Bhopal vs. Ralson Industries (supra) is concerned,\nwe note that in the said case, the Commissioner invoked the jurisdiction\nu/s.263 of the Act by setting aside the order of assessment excluding certain\namount towards transport receipts and interest from the assessee's total\nincome in the light of provisions of section 80HHC and 80-I of the Act. The\nplea of the assessee before the Hon'ble Supreme Court was that after the\norder u/s.143(3) of the Act was passed, the AO had issued notice u/s.154 of\nthe Act for rectification of mistake, wherein, he had considered the aforesaid\nissue of exclusion of transport receipts and interest, however, he did not make\nany modification/amendment in the order in regard to the purported\nexclusion of aforesaid income u/s.80HHC and 80-I of the Act. It was\ncontended before the Hon'ble Supreme Court that since the AO in the\nrectification order passed u/s.154 of the Act had not made any\nrectification/amendment on the aforesaid issue, therefore, the\nLd.Commissioner could not have exercised jurisdiction u/s.263 of the Act on\nthe same issue. The Hon'ble Supreme Court further held that only because\nan order of assessment has undergone rectification at the hands of the\nAssessing Officer, the same would not mean that the revisional authority\nshall be denuded of exercising its revisional jurisdiction. The Hon'ble\nSupreme Court observed that such an interpretation, in their view, would run\ncounter to the scheme of the Act. The Hon'ble Supreme Court further held\nthat an order of assessment is subject to exercise of an order of a revisional\njurisdiction u/s.263 of the Act. That the doctrine of merger, in such a case,\nwill have no application. The Hon'ble Supreme Court, however, observed\nthat initiation of a proceeding u/s.263 of the Act cannot be held to have\nbecome bad in law only because an order of rectification was passed.\nHowever, it will be open to an assessee to bring to the notice of the\nCommissioner regarding the fact of rectification order passed, if any, by the\nAO so as to enable him to take into consideration the subsequent events also.\nHowever, it would not be correct to contend that only because of a\nproceeding for a rectification was initiated, the revisional jurisdiction could\nnot have been invoked under the circumstances. The Hon'ble Supreme Court\nthus has categorically held that the powers of the AO u/s.154 of the Act are\nlimited and it does not confirm any power of Review, whereas, the\nassessment order as well as subsequent rectification order can be subjected to\nthe revision jurisdictional of the Commissioner u/s.263 of the Act. The case\nlaw cited by the Ld.Counsel for the assessee, in fact, squarely covered the case\nof the assessee in favour of Revenue and against the assessee. In view of\nthis, there is no merit in the contentions raised by the Ld.counsel for the\nassessee. The assessment order is not only erroneous but also prejudicial to\nthe interest of Revenue, therefore, we do not find any ambiguity or illegality\nin the order of the Commissioner in invoking jurisdiction u/s.263 of the Act.\nThere is no merit in the appeal of the assessee and the same is, accordingly,\ndismissed.\n7. In the result, the appeal of the assessee is dismissed.\nOrder pronounced in the Open Court on\n31/07/2025.\nSd/-\n(Makarand V. Mahadeokar)\nAccountant Member\nSd/-\n(Sanjay Garg )\nJudicial Member\nअहमदाबाद/Ahmedabad, दिनांक/Dated 31/07/2025\nटी. सी. नायर, व.नि.स. / T.C. NAIR, Sr. PS\nआदेश की प्रतिलिपि अग्रेषित/