M/S ARJUN TRANSPORT COMPANY,MUMBAI vs. ITO 12 (1)(2), MUMBAI

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-20, Mumbai [in short 'the CIT(A)’] dated 20/06/2016 for the assessment year 2016-17.

The assessee has assailed the order of CIT(A) by raising following grounds in appeal:

Shri Ravikant Pathak appearing on behalf of the assessee submitted that while making disallowance under section 14A of the Income Tax Act, 1961 (in short 'the Act') r.w. Rule 8D(2) made disallowance of interest expenditure Rs.31,95,254/- and disallowance on average value of investments Rs.5,87,421/-. The assessee in appeal before the CIT(A) inter alia assailed disallowance made by the Assessing Officer u/s.14A r.w.r.8D(2) of the Act. The CIT(A) directed the Assessing Officer to delete disallowance of interest made under Rule 8D(2)(ii). However, the CIT(A) did not give any finding on disallowance made under Rule 8D(2)(iii). The Assessing Officer erred in computing disallowance on entire investments of the assessee, irrespective of the fact whether the investments have yielded any tax free income or not. The issue raised by the assessee in ground No.1 is squarely covered by the decision of the Special Bench in the case of ACIT vs. Vireet Investments Pvt. Ltd., 58 ITR (Trib.) 313 (Del).

The ld. Authorized Representative for the assessee submitted that in ground No.2 of appeal, the assessee has assailed enhancement made by CIT(A) on new source of income. The ld. Authorised Representative for the assessee made two fold submissions. The first contention of the ld. Authorised Representative is that the CIT(A) after deleting disallowance of interest expenditure under Rule 8D(2)(ii) invoked the provisions of section 36(1)(iii) of the Act. It was a case of limited scrutiny to examine disallowance of interest expenditure u/s.14A of the Act, therefore, the CIT(A) could not have made disallowance u/s. 36(1)(iii) which was not subject of limited scrutiny. The second contention of the ld. Authorized Representative for the assessee is that the CIT(A) has no jurisdiction to enhance taxable income by discovering a new source of income. The Assessing officer in limited scrutiny assessment proceedings made addition/disallowance only under section 14A of the Act. The CIT(A) could not have enhanced taxable income of the assessee by making disallowance/addition from a source other than what was the subject matter of assessment. The ld. Authorized Representative for the assessee to support his contentions placed reliance on following decisions: i. CIT vs. Rai Bahadur Hardutroy Motilal Chamaria, 66 ITR 443(SC); ii. Lokenath Tolaram vs. CIT, 161 ITR 82 (Bom.); and iii. Hari Mohan Sharma vs. ACIT in for AY 2014-15 decided on 31/01/2019.

On the other hand, Ms. Smita Verma representing the Department vehemently defended the impugned order. The ld. Departmental Representative (DR) submitted that the Assessing Officer has made disallowance under section 14A r.w. Rule 8D in accordance with the provisions of the Act. As regards enhancement made by CIT(A) invoking provisions of section 36(1)(iii) of the Act, the ld. Departmental Representative submitted that the CIT(A) has not made disallowance on new source of income. The assessee in appeal had raised the issue of disallowance of interest u/s.14A made by the Assessing Officer. Therefore, the enhancement made by CIT(A) on the issue of interest expenditure is in accordance with law. The ld. DR contended that without prejudice to the first argument, the CIT(A) has inherent power u/s.251 of the Act to enhance an assessment. To support her submissions, the ld. DR placed reliance on following decisions: i. Jute Corporation of India Ltd. vs. CIT, 1991 taxmann.com 30 (SC); ii. HDFC Bank Ltd. vs. DCIT, 383 ITR 529 (Bom.); iii. S D Traders vs. CIT, 111 taxmann.com 93 (All.); iv. Gurinder Mohan Singh Nindrajog vs. CIT 18 taxmann.com 176 (Del.); and v. CIT vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom.)

Submissions made by rival sides heard, orders of authorities below examined and the decisions on which respective sides have placed reliance considered. In ground No.1 of appeal, the limited prayer of the assessee is that while computing disallowance under Rule 8D(2)(iii) only those investments should be considered on which the assessee has earned exempt income. The Assessing Officer while computing disallowance u/s. 14A rwr 8D(2)(iii) has included all investments without considering whether the assessee has earned any interest income on the investments or not. The CIT(A) while adjudicating ground No.2 raised in First Appellate proceedings has overlooked the contentions of the assessee on this aspect. The Special Bench of Tribunal in the case of Vireet Investments Pvt. Ltd. (supra) has held that only those investments that yield exempt income during the year are to be considered for computing average value of investments. I find merit in ground No.1 of the appeal raised by the assessee. The Assessing Officer is directed to re-compute disallowance under section 14A r.w. Rule 8D(2)(iii) only on those investments on which the assessee has earned exempt income during the relevant period. The Ground No.1 of appeal is allowed, accordingly.

In ground No.2 of appeal, the assessee has assailed enhancement made by the CIT(A) by disallowing interest expenditure under section 36(1)(iii) of the Act. A perusal of the assessment order shows that the case of the assessee was selected under ‘limited scrutiny’ category on the basis of ITS information to examine interest expenses relatable to exempt income under section 14A of the Act. The Assessing Officer during assessment proceedings made limited enquiries in line with the mandate of ‘limited scrutiny’ and made addition accordingly. In First Appellate proceedings, the CIT(A) made disallowance of interest expenditure Rs.17,34,520/- under section 36(1)(iii) of the Act. The contention of the assessee is that the CIT(A) has enhanced assessment by invoking provisions of section 36(1)(iii) of the Act, not covered by ‘limited scrutiny’.

The provisions of Section 251(1)(a) of the Act empowers the CIT(A) in first appellate proceedings to confirm, reduce, enhance or annul the assessment or set aside the assessment and refer the case back to the Assessing Officer for making a fresh assessment. The Hon’ble Apex Court in the case of Jute Corporation of India Ltd. vs. CIT, [supra] has held: “5. ……….The declaration of law is clear that the power of the AAC is co-terminous with that of the ITO, if that be so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the ITO. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise an appellate authority while hearing appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter.”

In cases selected under ‘limited scrutiny’, the Assessing Officer cannot exceed the latitude of limited scrutiny unless the scope of scrutiny is expanded or the case is converted from ‘limited scrutiny’ to ‘complete scrutiny’ with the approval of authority, as specified by the CBDT in Instructions No.5 of 2016 dated 14/7/2016. The said Instructions in an explicit manner states that in assessment proceedings the Assessing officer shall confine his enquiries/investigations etc. only to the issue selected under ‘Limited Scrutiny’. It is only after conversion of case to complete scrutiny by following the due procedure, the Assessing Officer can travel beyond the scope of limited scrutiny. The same restrictions apply to the CIT(A) in respect of cases falling under ‘limited scrutiny category’. If the CIT(A) is allowed to make addition on any issue not covered under limited scrutiny, the very purpose of selecting the case under ‘limited scrutiny category’ will be defeated. In the present case, no document has been furnished by the Department/respondent to show that ‘limited security’ was converted to ‘complete scrutiny’. Ergo, the CIT(A) overstepped his jurisdiction in invoking the provisions of section 36(1)(iii) of the Act for making disallowance in First Appellate proceedings in a case selected for ‘limited scrutiny’ to examine disallowance of interest expenditure u/s 14A of the Act.

In the case of Amit Kumar Dey vs. DCIT in for AY 2015- 16 decided on 30/3/2021, the case was selected for limited scrutiny, the Assessing Officer completed the assessment by making enquiries etc. only on the issue covered by limited scrutiny, in First Appellate proceedings the CIT(A) made addition/adjustment on issue other than covered by limited scrutiny and at no point of time limited scrutiny was converted into complete scrutiny, the Division Bench of Tribunal after referring to CBDT Instructions (supra) held as under: “10. Now we come to the issue of the enhancement made by the CIT (Appeals). Firstly, on perusal of the above facts, we hold that when the case of the assessee was selected for limited scrutiny, the ld. CIT (Appeals) can make enhancement only with the aspect of issues that were part of the limited scrutiny. Otherwise, it may happen that the ld. Assessing Officer may pass an order on the issues related to limited

The argument of Revenue is that the CIT(A) has not enhanced assessment on a new source. The disallowance of interest expenditure was subject matter of dispute at assessment stage albite under section 14A of the Act. Reference was made to the decisions rendered in the case of HDFC Bank Ltd. (supra) to draw parity between Section 14A and Section 36(1)(iii) of the Act, for disallowance of interest expenditure. The ld. DR placed reliance on the case of HDFC Bank Ltd. wherein disallowance of interest expenditure u/s. 14A r.w.r. 8D(ii) was deleted by applying the same principle as was laid down in the case of Reliance Utilities & power Ltd. (supra) for deleting disallowance of interest expenditure u/s. 36(1)(iii) of the Act.

Taking into consideration the facts of the case and the decisions discussed above, I find that the CIT(A) has travelled beyond his jurisdiction to make disallowance on an issue not covered by ‘limited scrutiny’. Thus, the impugned order is liable to be set aside. I hold and direct, accordingly. The assessee succeeds on ground No.2 of the appeal.