SHRI ANKUR PODDAR ,KOLKATA vs. PRINCIPAL CIT - 15 , KOLKATA

The main grievance raised by the assessee is against the invocation of revisional jurisdictional u/s. 263 of the Act by the ld. PCIT without satisfying the condition precedent as laid down in the statute.

The main reason of the ld. PCIT to exercise his revisional jurisdiction u/s. 263 of the Act is that the AO has not disallowed the interest expenses for earning exempt income u/s. 14A read with Rule 8D of the Income Tax Rules, 1962 ( in short, the ‘ Rules’). Since the AO has not disallowed the interest expenses to earn exempt income by applying the provisions of section 14A r.w.r 8D of the Rules, according to the ld. PCIT the assessment order of the AO dt. 30-06-2016 passed u/s. 143(3) of the Act is erroneous in so far as prejudicial to the interest of the revenue. Therefore, he invoked revisional jurisdiction u/s. 263 of the Act and was pleased to set aside the said assessment order passed u/s. 143(3) of the Act dt. 30-06-2016 and directed him to make fresh assessment. Aggrieved, by the action of ld. PCIT the assessee is before us.

Having heard both the parties and on perusal of the records, we note that the AO in the assessment order framed u/s. 143(3) of the Act has observed that the reasons for scrutiny is because of “Large interest expenses relatable to exempt income u/s. 14A.” So we note that the AO has taken the case of the assessee for scrutiny because of “large interest expenses relatable to exempt income u/s. 14A.” Therefore, during assessment proceedings the AO called for the details of expenses claimed to earn exempt income along with evidences to substantiate it. The AO in his order on this issue noted that pursuant to his direction the assessee brought to his notice that the assessee had earned Rs. 33,311/- as dividend from equity shares from the listed company, which the he/assessee has claimed exempt income u/s. 10(34) of the Act and since there was no expenditure incurred, he did not disallow the same. Since neither any interest nor any management expenditure has been incurred by the assessee for earning the dividend income no disallowance was made. The AO noted that the assessee had also filed the bank statements and other necessary details. Thereafter, he noted the assessee’s nature of business transaction and after perusal of the details/evidences filed by the assessee accepted the income of the assessee as per return of income. However, this order of the AO has been interfered by the ld. PCIT (Pr. CIT) on the ground that the AO has not made any verification on the issue of interest expenses relatable to exempt income for disallowance. Therefore, he set aside the assessment order of the AO passed u/s. 143(3) of the Act dt. 30-08-2016 and directed the AO to make fresh assessment on this specific issue by making proper enquiries with regard to expenses incurred against the exempt income and whether the interest expenses unclaimed was more than the disallowance under section 14A read with Rule 8D of Rules.

It was brought to our notice by the ld.AR that during the revisional proceedings u/s. 263 of the Act before the ld. Pr. CIT the assessee has brought to the notice that the assessee was maintaining two separate P & L accounts one for Ankur Poddar derivatives and the other for his business. It was brought to our notice that in respect of derivatives trading, interest expenses incurred has been separately debited in the P & L account of Derivatives Business for the year ended 31st March,2014 and drew our attention to page-2 of the P/B, which we find is correct. Thereafter, he drew our attention to the Income & Expenditure for all other business (for the year ended 31st March, 2014, page-3 of the P/B), a) Salary income, b) Rent received, c) Dividend income, d) Interest income & e) Other income. Interest expended/incurred on earning derivative business are clearly depicted in page-2 of the P/B and the interest expenditure incurred for home loan is specifically seen from page-3 of the P/B. We also note from page-3 of the P/B- Interest & other charges incurred but not claimed as expenses or adjusted with any head of income comes to [ Rs. 7,97,353.00 + Rs. 1,52,456.76 ] total comes to Rs.9,49,809.76. We find that the assessee has not claimed this interest & other expenditure, which is discernible from page-1 of the P/B i.e Computation of total income of the assessee. Therefore, it can be safely assumed that the assessee has not incurred any interest expenditure for earning the exempt income. Therefore, the AO has not disallowed any disallowance in this respect u/s.14Ar.w.r 8D of the Rules. Since the AO observed that the assessee’s case was selected for scrutiny for verification of large interest expenses relatable to exempt income and during the assessment proceedings when the assessee explained the aforesaid facts, the AO agreed with the assessee that it had not incurred any interest expenditure for earning the exempt income. In the light of the discussion (supra therefore, we are of the view that the AO has rightly not disallowed/made any disallowance/expenses especially the interest expenditure for earning any exempt income which is a plausible view. The order of the AO passed u/s. 143(3) of the Act cannot be faulted with for non-invocation of section 14A/r.w.r 8D for such disallowance. Moreover the conditions precedent for invoking Rule 8D is that if the AO is not satisfied with the explanation of assessee in respect of expenditure incurred for earning exempt income, then only the AO need to resort to Rule 8D, which is not the case here. Since the order of AO is not erroneous as well as prejudicial to interest of Revenue, the conditions precedent for invoking revisional jurisdiction u/s. 263 of the Act is absent. Therefore, the ld. PCIT lacks jurisdiction u/s. 263 of the Act to interfere with the assessment order passed by AO. Therefore, we quash the impugned order u/s. 263 of the Act by the ld. PCIT.

In the result, the appeal of assessee is allowed.