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Facts
The assessee filed an appeal against an order passed by the PCIT under Section 263 of the Income-tax Act, 1961, revising the assessment order for AY 2018-19. The PCIT initiated proceedings based on alleged unverified issues, including disallowance under Section 14A and a compensation payment of Rs. 60,00,000.
Held
The Tribunal held that the PCIT's order was not sustainable. Regarding Section 14A, it was noted that the issue was already examined by the AO and deleted by the CIT(A), and disallowance cannot be made for investments in a partnership firm. For the compensation payment, it was considered a contractual payment for business purposes and not a penalty, thus not disallowable under Sections 28 to 44DA.
Key Issues
Whether the PCIT's assumption of revisionary jurisdiction under Section 263 was valid for disallowances under Section 14A and a compensation expense, when the AO had already examined these issues and no prejudice was caused to the revenue.
Sections Cited
14A, 28, 44DA, 143(3), 263, 37(1), 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: DR. B.R.R. KUMARSHRI T.R. SENTHIL KUMAR
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD BEFORE DR. B.R.R. KUMAR, VICE PRESIDENT SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER (Assessment Year: 2018-19) Adani Infrastructure and Vs. The Principal Developers Private Limited, Commissioner of Income 10th Floor Shikhar, Tax-1, Near Adani House, Ahmedabad. Mithakhali Six Roads Ahmedabad-380009. [PAN No.AAFCA9521J] (Appellant) .. (Respondent) Appellant by : Shri Vartik Chokshi, A.R. Respondent by: Shri AP Singh, CIT(DR) Date of Hearing 09.12.2024 Date of Pronouncement 20.02.2025 O R D E R PER: DR. BRR KUMAR, VICE PRESIDENT:
This appeal has been filed by the Assessee against the order passed by the Ld. Principal Commissioner of Income-tax, Ahmedabad-1 (hereinafter referred to as "PCIT" for short) dated 12.03.2024 in exercise of his revisionary powers under Section 263 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], for the Assessment Year 2018-19. 2. The Assessee has taken the following grounds of appeal:- “1. In law and in the facts and circumstances of the Appellant's case, impugned order u/s. 263 of the Act passed by PCIT-1, Ahmedabad is bad in law and deserves to be quashed.
2. In law and in the facts and circumstances of the Appellant's case, the PCIT-1, Ahmedabad has erred in setting aside the assessment order dated 16.04.2021 passed by the Assessing Officer without considering the fact that the Assessing officer during the course of Adani Infrastructure and Developers Pvt. Ltd. vs. PCIT-1 Asst.Year –2018-19 - 2– Assessment proceedings has already gone through issue regarding disallowance u/s 14A of the Act and after satisfying himself with respect to the details submitted by the appellant company, the Ld. Assessing officer has passed the order under section 143(3) of the Act.
3. In law and in the facts and circumstances of the Appellant's case, the PCIT-1, Ahmedabad has erred in invoking revision proceedings for compensation expenses incurred in the year under consideration without considering the fact that such expenditure was incurred as per contractual terms of Memorandum of Understanding and does not represent any penalty which attracts disallowance u/s 28 to 44DA of the Act.
4. In law and in the facts and circumstances of the Appellant's case, the PCIT-1, Ahmedabad has erred in arriving at a conclusion without any basis whatsoever to the effect that the assessment order passed u/s 143(3) of the Act by the Assessing Officer was erroneous as well as prejudicial to the interest of the revenue.
5. In law and in the facts and circumstances of the Appellant's case, the PCIT-1, Ahmedabad has failed to appreciate that the twin conditions for assuming jurisdiction u/s. 263 of the Act are not satisfied in the case of appellant company as issue which has been relied upon for passing the order u/s. 263 does not show any error or prejudice to the interest of the revenue.
6. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.”
The assessment order in this case has been passed by the Income- tax Department, National e-assessment Centre, Delhi u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act on 16.04.2021 determining the total loss of Rs.35,36,60,186/- against the returned income of Rs.(-) 35,46,83,225/-. Subsequently, the Ld. PCIT had assumed revisionary jurisdiction u/s 263 of the Act, based on following issues which were allegedly not verified by the Assessing Officer during the course of assessment proceedings: Adani Infrastructure and Developers Pvt. Ltd. vs. PCIT-1 Asst.Year –2018-19 - 3–
(i) Disallowance u/s 14A of the Act read with Rule 8D to tune of Rs.27,05,510/-, and (ii) Payment of compensation of Rs.60,00,000/- being allegedly not allowable as deduction u/s 28 to 44DA of the Act. 4. Aggrieved by the order of the Ld. PCIT, the assessee is now in appeal before the Tribunal.
Before us, Ld. AR submitted that assessment order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of the revenue.
5.1 With regard to disallowance u/s 14A of the Act, the Ld. AR contended that:- • The Assessing Officer had proposed to make disallowance u/s 14A of the Act in the year under consideration following the order of Assessing Officer for A.Y. 2017-18. In this regard, the assessee submitted that the assessment order passed in AY 2017-18 was challenged by the assessee before the Ld. CIT(A), who passed the order dated 02.09.2020 wherein disallowance made by the Assessing Officer u/s 14A was deleted. • Fresh investments made in the year under consideration were made out of its own fund as assessee had sufficient interest free fund available. • For calculation of disallowance u/s 14A of the IT Act, net balance of investments should be considered. In the present case, after considering net investments comprising of investment in shares and LLP comes to negative balance. Adani Infrastructure and Developers Pvt. Ltd. vs. PCIT-1 Asst.Year –2018-19 - 4– • The assessee-company had earned exempt income by way of income from share in profit of LLP. During the year under consideration the assessee company had not made any fresh investment in shares and LLP except share of profit from LLP and repayment of overdraft from LLP, but exempt income was received from LLP only. It is a well settled law that investments from which exempt income is earned should only be considered while calculating the annual average of the monthly average of the opening and closing balance of the value of investment. • The interest-bearing fund has been specifically utilized for the purpose of investing in trade & business assets. • Disallowance u/s 14A cannot be made for investment made in Partnership Firm. • The administrative expenses incurred during the current year is purely for the purpose of main business and hence no disallowance of any administrative expense should be made only on presumption of incurrence thereof for the purpose of earning tax free income.
The Ld. DR, on the other hand, supported the order of the Ld. PCIT and contended that the Assessing Officer had not considered Rule 8D(2)(iii) and had overruled the Board's Circular No. 05/2014 dated 11.02.2014 therefore, the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. Adani Infrastructure and Developers Pvt. Ltd. vs. PCIT-1 Asst.Year –2018-19 - 5–
Heard both the parties and perused the material available on record.
We find that, the Board's Circular No. 05/2014 dated 11.02.2014 has been dealt in a number of cases by various judicial authorities and held that no disallowance is warranted in the absence of any income claimed as exemption. Further, in this case, the Assessing Officer has made disallowance of Rs.43,03,145/- which stands deleted by the Ld. CIT(A). Since the issue has already been examined by the Assessing Officer, adjudicated by the Ld. CIT(A), the same issue cannot be again taken up the Ld. PCIT u/s 263. Further, disallowance u/s 14A cannot be made for investments made in partnership firm and the profit earned thereof. Even on merits, we find no prejudice is caused to the Revenue and hence the order of the Ld. PCIT on this issue cannot be upheld.
Compensation paid Rs. 60,00,000/-
The Ld. PCIT has also observed that the assessee has debited expenses of Rs.60,00,000/- as 'compensation'. The Ld. PCIT held that assessee had neither disallowed such expense nor the Assessing Officer had verified the expense as it is not allowable within the provisions of section 28 to 44DA of the Act. The assessee-company has filed a detailed written reply dated 01.02.2024 before the ld. PCIT wherein it was contended that the assessment order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of the revenue. In conclusion, Ld. PCIT and held as under:
(ii) On the issue of compensation of Rs.60,00,000/-, the Assessing Officer is directed to call for all the details of expenses and verify its Adani Infrastructure and Developers Pvt. Ltd. vs. PCIT-1 Asst.Year –2018-19 - 6– allowability considering the provisions of section 28 to 44DA and also in view of provisions of section 37(1) of the Act. The Assessing Officer may allow such expenditure if it is found to be incurred for the purpose of business.
After hearing the arguments of both the sides, we find that, in the year under consideration, the assessee has debited Rs. 60,00,000/- as compensation expenses in Profit and Loss Account separately in Annexure 27 being "other expenses of Audited annual accounts. During the course of revision proceedings, vide reply dated 01.02.2024 assessee has submitted it is engaged in the business of developing a residential project. The assessee-company has entered into a Memorandum of Understanding ('MoU) to purchase a property for a consideration of Rs. 60 crore from Madhu Rajiv Maheshwari for the purposes of its business and MOU contained terms & conditions for purchase of property along with forfeiture terms & conditions. The assessee company before Ld. PCIT has explained that said MoU was cancelled and as per terms & conditions of MOU, it paid compensation of Rs. 60 lakhs (i.e. 1% of total consideration of Rs. 60 crore). To substantiate such claim, the assessee has submitted letter dated 10.06.2017, received from Madhu Maheshwari and copy of ledger account of compensation to ld.PCIT. The assessee submitted that as it was actual "compensation" expense incurred by assessee for the purpose of its business, such expenditure cannot be considered as any disallowable expenditure u/s 28 to 44DA of the Act. The undisputable facts are that :-
(i) Assessee-company has incurred the compensation which is purely in nature of contractual compensation and such contractual Adani Infrastructure and Developers Pvt. Ltd. vs. PCIT-1 Asst.Year –2018-19 - 7– compensation is different than a penalty paid for infraction / violation of any law.
(ii) Such compensation was only as a result of breach of contractual terms and not any violation of any law, and hence, the provisions of section 37 of the Act does not get attracted at all in the instant case.
In view of above facts, it is clear that the compensation expenses of Rs. 60 lakhs paid in year under consideration is on account of contractual payment and not on account of any violation of any law and hence, no disallowance in this regard is warranted under the provisions of the Act. Since no disallowance is warranted as enumerated above, the assessment order passed u/s 143(3) of the Act by Assessing Officer can neither be held as 'erroneous' nor 'prejudicial or fatal to the interest of revenue'. We find that the Assessing Officer has also examined the issue during the assessment proceedings as found in the notice issued u/s 142(1) of the Act. Therefore, twin pre-conditions to assume revisionary jurisdiction u/s 263 of the Act are not satisfied in the issue on hand.
In the result, the appeal of the assessee is allowed.