M/S. OSCAR INVESTMENTS LTD.,NEW DELHI vs. PR. CIT- 7, NEW DELHI

PER SUDHANSHU SRIVASTAVA, JM:

This appeal is preferred by the assessee against order dated 7th March, 2016 passed by the Ld. Pr. Commissioner of Income Tax (PCIT), Delhi – 7 under section 263 of the Income tax Act, 1961 (hereinafter called ‘the Act’) and pertains to assessment year 2011-12.

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT 2.0 Facts in brief are that for the year under consideration the return of income declaring total income of Rs.66,00,44,440/- was filed by the assessee. Thereafter, the case was selected for scrutiny and vide order dated 17thJune, 2013 passed u/s 143(3) of the Act, the Assessing Officer (AO) assessed the total income of the assessee at Rs.70,93,22,040/-. In the order of assessment passed u/s 143(3) of the Act, the AO noted that during the year under consideration, the assessee had received dividend income of Rs.1,10,58,833/- which was claimed as exempt not chargeable to tax and that in its computation of income, the assessee had, suo moto, made a disallowance of Rs.2.13 crores as expenditure incurred by it on account of administrative and personal expenditure u/s 14A of the Act. The AO, was however, unconvinced and by invoking provisions of Rule 8D (2)(iii) he recomputed the disallowance u/s 14A at Rs.4,05,51,458/-.

2.1 Being aggrieved, the assessee filed an appeal before Ld. CIT (A) which was allowed vide. The Ld CIT (A) deleted the additional disallowance made by AO and in this regard, vide order dated 30th April, 2014 in Appeal No.182/13-14, it, was held by the Ld. CIT (A) as under:-

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT “4.1.1 I have carefully considered the submissions of the A/R of the appellant company, the facts of the case as well as the findings of the AO Ground no.3 of appeal is general in nature. Therefore, no adjudication is called for. In Ground no.1 of appeal the plea of the appellant is that the AO has erred in enhancing disallowance under clause (iii) of sub-rule (2) of Rule 8D from Rs.2,12,73,863/- (as returned by the appellant) to Rs.4,05,51,458/- (being 0.5% of average of value of investments) without appreciating that the appellant had actually incurred and claimed total expenditure of Rs.2,12,73,863/- only during the year under reference. 4.1.2 The appellant, a listed company and also an NBFC is engaged in the business of investment in shares / securities as well as in the business of granting loans and advances. During the year under reference the assessee company has erred income not forming part of total income of Rs.1,10,58,833/- on shares of various companies and units of mutual fund in the nature of dividend exempt u/s 10(34)/10(35) of the Act. The appellant in its return of income had made a suo moto disallowance u/s 14A of Rs.2,19,52,010/- in the form of Rs.6,78,146/- out of interest and Rs.2,12,73,864/- in accordance with clause (iii) of sub- rule (2) of Rule 8D. The AO has computed the disallowance under rule 8D (2)(iii) at Rs.4,05,51,458/- and added the excess disallowance of Rs.1,92,77,595/-. 4.1.3 From the P&L account it is seen that the total amount debited was Rs.3,36,56,041/-. From the computation of income it is evident that out of the above the appellant has suo moto added back the amounts debited in the P&L account of rs.1,24,87,347/- (out of interest on late deposit of TDS (Rs.320/-), Contingent Provisions against Standard Assets (Rs.20,13,436/-), depreciation as per accounts (Rs.20,15,945/-), out of amount written off (Rs.76,75,079), out of misc. expenses – subscription (Rs.30,000/-), leave encashment u/s 43B (Rs.22,778/-) gratuity u/s

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT 40A(7)(Rs.80,248), out of Deb. Issue exp. (Rs.5,54,858/-) and security transaction taxd (Rs.94,683/-) in the computation of income as inadmissible expenses. Besides the above, expenditures of Rs.2,19,52,010/- being related to exempt income was also disallowed and added back suo moto u/s 14A by the appellant in the computation of income. Thus, the entire amounts of Rs.3,36,56,041/- debited in the P&L account was suo moto added back by the appellant in the computation of income. The disallowance u/s 14A made by the AO by any stretch of imagination, cannot exceed the amount of total expenditure incurred by the appellant. AO has computed the disallowance of expenditure u/s 14A at Rs.4,05,51,458/- under Rule 8D(2)(iii) being 0.5% of average value of investments of Rs.811,02,91,535/- and disallowed the excess of Rs.1,92,77,595/- over and above the disallowance made suo moto by the appellant. The AO has grossly erred in making the additional disallowance of Rs.1,92,77,595/- as the entire expenditure debited in the P&L account have already been added back suo moto by the appellant in the computation of income. Disallowance by the AO cannot exceed the total expenditure debited in the P&L account. In view of the above, the additional disallowance of Rs. 1,92,77,595/- made by the AO being not justified, is deleted. The appeal is allowed in this ground.” 2.2 The Revenue, however, was aggrieved by the relief granted by Ld. CIT (A) and it filed an appeal before this Tribunal in Appeal No.4088/Del/2014. The said appeal was dismissed vide order dated 9th February, 2017 by observing as under:-

“We have carefully considered the rival contentions and also produced the orders of the lower authorities. In the present case the assessee has earned exempt dividend income of Rs.11058833/- and assessee on its own has disallowed a

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT sum of Rs.21952010/- in the form of Rs.678146/- out of interest and Rs.21273864/- in accordance with the clause (iii) of sub rule 2 of rule 8D under section 14A of the income tax act. Recently, the Delhi High Court in the case of Joint Investments vs. ACIT [ TS-92-HC-2015(DEL)-O] held that disallowance under section 14A of the Act must not be made to the extent that it is almost equal to or more than the actual dividend income received by the assessee. Similar view has also been taken recently by the Punjab & Haryana High court in the case of Pr. CIT vs. Empire Package Pvt. Ltd.: ITA No.415 of 2015. As in the present case disallowance under section 14A read with rule 8D has already exceeded by the suo moto disallowance made of the assessee amounting to Rs.21952020/- against the exempt income of Rs.11058833/- therefore no further disallowance can be imputed. In view of this, we dismiss ground No.1 to 3 of the appeal of the revenue.”

2.3 In the interregnum i.e., when the revenue’s appeal was pending disposal before this Tribunal, a show cause notice u/s 263 of the Act was issued by the Ld. PCIT proposing to revise the order of assessment passed u/s 143(3) of the Act dated 17thJune, 2013. In the show cause notice it was alleged by the Ld. PCIT that the AO, while the passing order u/s 143(3) of the Act, had wrongly computed the disallowance u/s 14A at Rs.4,05,51,458/- whereas as per the Ld. PCIT, the correct disallowance u/s 14A worked out at Rs.14,45,00,128/-. In this

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT regard it will be relevant to reproduce the show cause notice of Ld. PCIT as under:-

“An addition of Rs.1,92,77,595/- was made by the AO on account of disallowance u/s 14A of the Act computed as per clause (iii) of sub rule 2 of rule 8D by holding that the assessee has not correctly computed disallowance in terms of provisions of rule 8D(2)(iii). The assessee had contended in the assessment proceedings that the disallowance as per rule 8D(2)(iii) cannot exceed the total expenditure incurred and claimed by it during the year. However, it has been observed that the disallowance u/s 14A should have been worked out as per rule 8D (2) as under :- Clause (i) - 2,12,73,863/- [The same is as per disallowance made by the assessee in the return as per rule 8D (2)(iii)]. Clause (ii) - 11,51,01,265/- [The same pertains to interest expenditure which has been alleged to have been incurred for investments] Clause (iii) - 4,86,76,458/- Total : 18,50,51,586/- Less : Computed by AO: 4,05,51,458/- Balance : 14,45,00,128/- In this regard, it is important to note that the disallowance u/s 14A (2) is a mandatory provision. The section is reproduced below for ready reference: “The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT with such method as may be prescribed (see Rule 8D, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.” Thus, once the provisions of section 14A (2) are invoked, the Assessing Officer has no option, but to apply Rule 8D to compute the disallowance. Now by following rule 8D (2), the position in the case of the assessee would be as under: Under rule 8D(2)(iii), though the Assessing Officer has worked out the disallowance at Rs.4,05,51,458/- from this he reduced the amount of Rs.2,12,73,863/- offered by the assessee which does not appear to be correct. The matter will have to be examined as to out of the disallowance made by the assessee at Rs.2,12,73,863/-, what portion is relatable to direct expenses under rule 8D(2)(i) for earning dividend income and only the balance amount can be reduced from the disallowance worked out by the Assessing Officer under rule 8D(2)(iii). To this extent, therefore the order passed by the Assessing Officer is erroneous and prejudicial to revenue. Accordingly proposal u/s 263 is being moved in this respect. In view of the above, the order passed by the AO on 17.06.2013 u/s 14393) of the Act is erroneous in so far as it is prejudicial to the interest of the revenue.”

2.4 In reply, vide letter dated 2ndFebruary, 2016, the assessee filed detailed objections to the assumption of jurisdiction u/s 263 of the Act. The Ld. PCIT, however, was unconvinced and in the impugned order he has set aside the

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT order of assessment dated 17th June, 2013 for a fresh examination of disallowance u/s 14A by observing as under :-

“The arguments of the assessee cannot be accepted because of the following:- 1. The assessee has strongly argued that the entire interest costs are directly related to investments from which income is earned. However, there are investments from which exempt income is earned such as dividend from mutual funds. Thus, the claim of the Assessee cannot be accepted. This aspect of the case has not been examined by the Assessing Officer. 2. The Assessing Officer has not properly conducted detailed enquiries on the submissions made by the assessee during the course of assessment proceedings. 3. It is erroneous for the assessee to claim that there is no interest expenditure incurred towards making investments. An element of interest is always inherent and involved as investments entail capital costs. Moreover, the amount have been invested by the assessee towards the business of mutual funds, from which exempt income is also earned by the assessee in the shape of dividend. 4. The assessee has been claiming that it has voluntarily disallowed Personnel, Administrative and other expenses debited to the profit and loss account in terms of Rule 8D(2)(iii), while Rule 8D(2)(iii). The assessee is trying to cover up various voluntary disallowances made by it under various heads, and asking to set them off against disallowance made under section 14A read with Rule 8D, which is not permissible. 5. The Assessing Officer should have calculated the disallowance under each limb of Rule 8D separately and given credit of the specific disallowance u/s 14A made by the

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT assessee in its computation of income. The AO cannot give credit for disallowance made under other heads by the assesseein the computation of income. 6. Once the disallowance made by the assessee is not accepted by the Assessing Officer, the Assessing Officer has but no choice, other than to follow of the disallowance as provided in Rule 8D. 7. The assessment order has been passed without making necessary and proper verification of the claims u/s 14A made by the assessee and no proper enquiries have been conducted by the Assessing Officer. 8. The Assessing Officer has failed to examine the element of direct expenses incurred relatable to earning of exempt income. Further, proper computing of disallowance under various limbs of Rule 8D has not been done. Thus the contention of the assessee that the Assessing Officer has fully examined the matter is not correct and hence not acceptable. Thus from the above there is no doubt that the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue. The Assessing Officer is therefore directed to work out and examine various details and evidences relating to the disallowance u/s 14A as per Rule 8D and pass an appropriate order after providing opportunity of being heard to the assessee, in the light of observations made above.”

2.5 Being aggrieved, the assessee is now in appeal before us and has raised the following grounds of appeal:

“1. That the Ld. Principal Commissioner of Income Tax (Ld.CIT) erred in passing the Order dated 7th March, 2016 u/s 263 of the Income Tax Act, 1961 directing the Assessing 9

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT Officer (AO) to examine determination of disallowance in terms of Rule 8D(2) of the Income Tax Rules, 1962 without properly appreciating the facts of the case and without considering the submissions made by the Appellant Company in reply to the show cause notice. 2. That the Order passed by the Ld.CIT dated 7th March, 2016 is bad in law and deserves to be quashed as the same has been passed without taking into consideration the correct facts in regard to case of the appellant and the legal position. 3. That the Ld.CIT failed to appreciate that the issue regarding disallowance u/s 14A of the Act r.w.r. 8D had been fully examined by the AO while passing the Order of Assessment u/s 143(3) of the Act and therefore, the aforesaid Order cannot be considered as erroneous and prejudicial to the interest of revenue in view of settled legal position by the Hon'ble Supreme Court vide decisions in the cases of Malabar Industrial Co. Ltd. vs. CIT - (2000) 243 ITR 83 (SC) and CIT vs. Max India Ltd. - (2007) 295 ITR 282 (SC), even if the Ld.CIT had different opinion in regard to the issue as compared to the view taken by the AO. 4. That the Ld.CIT also erred in observing that the Assessment Order was passed by the AO without making necessary and proper verification of claims u/s 14A made by the assessee and no proper enquiries have been conducted by the Assessing Officer without appreciating that the Appellant Company, in response to specific queries on Section 14A made by the AO, had submitted full details in regard to interest expenditure and it was duly shown that whole of the interest cost etc. reduced from Interest Income and income from Mutual Funds related to other business activities i.e. of giving loans and advances and purchase of units of Mutual Funds etc., the income(s) from which are chargeable to tax and that the said interest cost was not relatable to investments. The same had been duly examined by the AO

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT and factual position, as such, was accepted by her. Apart from the interest cost, the Appellant Company had offered disallowance of total administrative expenses incurred as per Rule 80(2)(iii) and therefore, no further disallowance under Clauses (i), (ii) & (iii) of Rule 80(2) was called for. 5. That the Ld. CIT also erred in passing the impugned Order without giving any holding to the effect that how the Order passed by the AO u/s 143(3) of the Income Tax Act was erroneous and prejudicial to the interest of revenue. He failed to appreciate that as per well-settled legal position, an order cannot be set-aside or revised u/s 263 of the Act just by making general observations to the effect that issue needs examination, without giving any specific holding. 6. That the Ld. CIT also failed to appreciate that no action u/s 263 of the Income Tax Act could be taken in the case of the Appellant as the order passed u/s 143(3) of the Act, so far as relating to the disallowance u/s 14A of the Act, had been subject matter of appeal before the CIT(A) and presently the appeal filed by the department in regard to the above matter is pending for adjudication before the Income Tax Appellate Tribunal and therefore, the Ld. CIT had no jurisdiction to invoke his power u/s 263 of the Act. That the Appellant craves leave to add, alter modify withdraw any of the grounds hereinabove at any time or hereinafter and at the time of hearing of the appeal.” 3.0 The Ld. Authorised Representative (AR), at the outset, raised an objection to the assumption of jurisdiction u/s 263 of the Act on a legal issue. In this regard it was submitted by the Ld. AR that the disallowance u/s 14A cannot exceed the amount of exempt income and, therefore, it was submitted that the

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT impugned order assuming jurisdiction u/s 263 is bad in law and void ab-initio. In support of his case, the Ld. AR relied upon following decisions:

 Joint Investments P. Ltd vs. CIT reported in 372 ITR 696 (Del.)  PCIT vs. Empire Package P. Ltd reported in 286 CTR 457 (P/H.)  CIT vs. Vision Finstock Ltd reported in 2017-TIOL- 2778-HC-AHM-IT  CIT vs. Vision Finstock Ltd reported in 2018-TIOL- 217-SC-IT  Vision Finstock Ltd vs. ACIT reported in 2016-TIOL- 2808-ITAT-AHM  Ranbaxy & Fern Healthcare P Ltd for A.Y. 2008-09 & 2009-10 in ITA No. 3108/Del/2011 & 3682/Del/2013.

4.0 On the other hand, the Ld. CIT (DR) supported the order passed by Ld. PCIT and it was submitted by her that for reasons recorded in impugned order the Ld. PCIT has validly assumed jurisdiction to revise the assessment u/s 263 of the Act.

5.0 We have heard the rival submissions and have also perused the material available on record. The undisputed facts are that for the year under consideration, dividend income of Rs.1,10,58,833/- was earned by the assessee which was claimed as exempt and not liable to tax. In the return of income, the assessee had, suo moto made a disallowance u/s 14A of the Act 12

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT to the tune of Rs.2.13 crores. The AO, in his order u/s 143(3), re- computed the disallowance u/s 14A by invoking provisions of Rule 8D to Rs.4,05,51,458/-. The Ld. CIT (A) deleted this disallowance and the appeal of the department against the order of the Ld. CIT (A) before this Tribunal was also dismissed vide order dated 9th February, 2017 in ITA No. 4088/Del/2014. It is our considered view that on the factual matrix of the case, the doctrine of merger will apply. The logic underlying the doctrine of merger is that there cannot be more than one decree or operative order governing the same subject-matter at a given point of time. In the case of CIT vs. Narpat Singh Malkhan Singh (1981) 128 ITR 77 (MP), the Hon’ble Madhya Pradesh High Court has very illustratively considered the doctrine of merger. In this case, the Income Tax Officer (ITO) had completed the assessment u/s 143(3) of the Act against which the assessee preferred an appeal before the AAC confining his objections to certain disallowances of expenses by the ITO. The AAC partly allowed the assessee’s appeal resulting in partial reduction in the total income of the assessee. The Ld. CIT, thereafter, served a notice u/s 263 of the Act on the assessee to show cause why the assessment order be not set aside as it was erroneous and prejudicial to the interest of

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT the Revenue in as much as the AO had not charged interest u/s 217 (1A) of the Act and had also not initiated penalty proceedings u/s 273(c) of the Act. The assessee’s objection to initiation of revisionary proceedings on the ground of doctrine of merger was rejected by the Ld. CIT. The Ld. CIT did not find any defect in any particular item decided by the ITO which was not the subject matter of appeal before the AAC but only in the omission to charge interest u/s 217(1A) and initiate penalty proceedings u/s 273(c). The assessee appealed successfully before the Tribunal. On department’s appeal, the question before the Hon’ble Madhya Pradesh High Court was whether the Ld. CIT, while exercising power u/s 263, could set aside the assessment order after the appellate order was made by the AAC. The Division Bench took the view that the Ld. CIT could not have invoked power u/s 263 as the ITO’s order had merged with the order of the AAC. In the present appeal before us, going by the doctrine of merger, since the Ld. CIT (A) had already decided the issue in favour of the assessee, the Ld. Pr. CIT could not have exercised his revisionary powers u/s 263 of the Act. If the department was aggrieved by the order of the Tribunal deleting the disallowance, proper recourse would have been to approach the higher forum.

ITA No. 2823/Del/2016 M/s. Oscar Investments Ltd. vs. Pr.CIT Therefore, we are of the considered opinion that the jurisdiction u/s 263 of the Act could not have been invoked by the Pr. CIT in this case. Accordingly we quash the assumption of jurisdiction u/s 263 of the Act by the Ld. Pr. CIT. We have not examined other merits of the matter.

6.0 In the final result, the appeal filed by the assessee is allowed.

Order pronounced in open court on 4th November, 2019.

sd/- sd/- (ANADEE NATH MISSHRA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 04 /11/2019

*dragon* Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi