ANKUR GOYAL,GHAZIABAD vs. ITO, WARD 1(1), GHAZIABAD

, A.Y. 2018-19 Micromax Informatics Ltd. Vs. Pr. Commissioner of Plot No.21/14 Block-A, Income Tax, Delhi-4, Phase-II, C. R. Building, I. P Estate, Naraina Industrial Area, New Delhi. New Delhi-110028 PAN: AABCR8863N (Appellant) (Respondent) Appellant by Sh. Sandeep Jain, CA Respondent by MS. Monika Dhami, CIT DR Date of Hearing 09/04/2025 Date of Pronouncement 06/06/2025 ORDER

PER AVDHESH KUMAR MISHRA, AM

1. The order u/s 263 of Income Tax Act by the Learned Commissioner of Income tax is bad in law and on facts, weight of evidence and probabilities of the case.

2. The learned Commissioner of Income Tax erred in holding the assessment order passed u/s 143(3) of the Income-tax Act, 1961 as erroneous and prejudicial to the interests of revenue.

4. The learned Commissioner of Income Tax erred in setting aside the AO order on account of Rs. 1,39,57,619.00 u/s 14A despite of the fact that assessee has suo motu disallowed expense u/s 14A & same has been verified & accepted by the assessing officer. 5. The appellant craves leave to add, amend, delete or alter any of the grounds of appeal

3. The relevant facts giving rise to this appeal are that the assessee, a trader of mobile phones, LED TV, air conditioners, washing machines, etc., filed its Income Tax Return (ITR) on 30.11.2018 declaring loss of Rs.1,58,55,19,587/-. The case was scrutinized and the consequential assessment order accepting the returned income was passed on 30.09.2021. Later, the Principal Commissioner of Income Tax (PCIT), vide impugned order under section 263 of the Income Tax Act, 1961 (Act) has held that the AO has not only failed to tax interest income of Rs.16,18,16,439/- on FDRs as evident from 26AS of the assessee but also failed to disallow expenditure of Rs.1,39,57,619/- under section 14A of the Act. Consequentially, the PCIT concluded that the assessment order was not only erroneous but also prejudicial to the interest of revenue. Accordingly, he directed the Assessing Officer (AO) to pass assessment Micromax Informatics Ltd. order afresh after examining the issues of taxability of interest income on FDRs and disallowance under section 14A of the Act.

4.1 In view of the above, the Ld. AR further submitted that the AO had not found any interest income on FDRs remined left out of the taxable income disclosed in the ITR. Therefore, he contended that the Ld. PCIT’s finding that the assessment order was erroneous and prejudicial to the interest of revenue on the issue of taxability of interest income of Rs.16,18,16,439/- on FDRs was not justified.

5.1 The Ld. AR further drew our attention on the following finding of the Ld. PCIT on the issue of disallowance under section 14A of the Act [page 21 of the impugned order] to submit that the Ld. PCIT had failed to demonstrate and establish that how the assessment order, on the issue of disallowance under section 14A of the Act, was prejudicial to the interest of revenue: “…..Perusal of the assessment order reveals that the AO has not computed deduction in respect of expenditure incurred by the assessee in relation to which such income which does not form part of the total income under this Act. Secondly, the AO has also not recorded any satisfaction on the correctness of the claim of the assessee in respect of such expenditure in relation to which income does not form part of the total income. Thirdly, the Assessing Officer has also accepted the suo moto disallowance made by the assessee without resorting to the provision of Rule 8D(2) of the Income Tax Rule. The Hon'ble Supreme Court has decided in the case of CIT Vs. Share & Stock Brokers (supra) that there must be approximate relationship of expenditure with exempt income, for the purposes of making disallowances of the same u/s 14A of the Act. The AO has also not established such relationship and has not applied Rule 8D correctly. In my considered view, non-application of Income Tax Rule renders the assessment order erroneous as it has been passed not in accordance with the rule and therefore, it is both erroneous and prejudicial to the interest of revenue….”

5.2 The Ld. AR further contended that the Ld. PCIT had simply highlighted three shortcomings in the AO’s order; non-working of the disallowance as per the Rule 8D (2) of the Income Tax Rule, non recording of satisfaction on the correctness of the claim of the disallowance of expenditure in relation to exempted income and the acceptance of the assessee’s suo-moto disallowance of Rs.7,90,061/- on this score. The objective of the impugned order, prima-facie, was to regularize the short comings, which could not be 5 Micromax Informatics Ltd. done through the impugned order. For the proceedings under section 263 of the Act, twin conditions; erroneous and prejudicial to the interest of revenue, had to be factually established and demonstrated, which had not been done in this case, argued the Ld. AR. It was contended that the Ld. PCIT had also not pointed out relationship of any expenditure other than those considered by the assessee with exempt income for the purposes of making disallowances of the same under section 14A of the Act. Further, the Ld. AR argued that the Ld. PCIT had also not established and demonstrated that the disallowance of Rs.7,90,061/- worked out by the assessee and accepted by the AO was unjustified being erroneous and prejudicial to the interest of revenue. To buttress his arguments, the Ld. AR placed reliance on the decision of the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. Ltd. order dated 01.03.2024 and contended that the case of the assessee was squarely covered by the decision of the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. (supra).

5.3 The Ld. AR drew our attention to the fact that the assessee had earned only dividend income on investments made in mutual funds. Our attention was drawn to the fact that the assessee, on itself, had disallowed 25% of salary paid to Mrs. Aparna and Mr. Rahul Mathur, who was, besides other works also looked after the investment in mutual funds. The investment in mutual funds had been made out of surpluses only and it did not require any specific expenditure after making investments. 6 Micromax Informatics Ltd.

9. Now, the second issue i.e. disallowance under section 14A of the Act is concerned, we have noticed that the AO has conducted inquiries in this regard during the course of original assessment and has not made any further disallowance on this score. Similar enquiries have also been made in the assessment proceedings in AYs 2016-17 and 2017-18 also. No adverse inference has ever been drawn in this regard in the assessment orders AYs 2016-17, 2017-18 and 2018-19. Only in the present case, the original assessment order has been set aside under section 263 of the Act to be made a fresh. There is no satisfaction recorded, in the original assessment order, on the genuineness and veracity of working of the assessee for making suo- 7 Micromax Informatics Ltd. moto disallowance under section 14A of the Act. Further, the Ld. PCIT has not make out a case by establishing and demonstrating that the disallowance of Rs.7,90,061/- worked out by the assessee and accepted by the AO is erroneous and prejudicial to the interest of revenue and there are other expenses incurred by the assessee which have approximate relationship with exempt income, for the purposes of making disallowances of the same under section 14A of the Act. The relevant part of the decision of the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. (supra) reads as under: 19. A bare reading of sub-Section (1) of Section 263 of the Act makes it abundantly clear that the said provision lays down a two- pronged test to exercise the revisional authority i.e., firstly, the 17:06:54 assessment order must be erroneous and secondly, it must be prejudicial to the interests of the Revenue. Further, Explanation 2 to Section 263 of the Act delineates certain conditions and circumstances when the order passed by the AO can be said to be erroneous and prejudicial to the Revenue.

"17. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in 9 Micromax Informatics Ltd. question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabriel India Ltd. (1993) 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113) ***"

"8. In view of the above discussion, it is apparent that the Tribunal arrived at a conclusive finding that, though the assessment order 10 Micromax Informatics Ltd. does not patently indicate that the issue in question had been considered by the Assessing Officer, the record showed that the Assessing Officer had applied his mind. Once such application of mind is discernible from the record, the proceedings under section 263 would fall into the area of the Commissioner having a different opinion. We are of the view that the findings of facts arrived at by the Tribunal do not warrant interference of this court. That being the position, the present case would not be one of "lack of inquiry" and, even if the inquiry was termed inadequate, following the decision in Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) (page 180) : "that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter."

No substantial question of law arises for our consideration."

T. Narayana Pai [(1975) 98 ITR 422 (Kant)], the High Court of Bombay in CIT v. Gabriel India Ltd. [(1993) 203 ITR 17:06:54 108(Bom)] and the High Court of Gujarat in CIT v. Minalben S. Parikh [(1995) 215 ITR 81 (Guj)] treated loss of tax as prejudicial to the interests of the Revenue.

"In this context, (it must) be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration."

In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue.

the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. (See Rampyari Devi Saraogi v. CIT [(1968) 67 ITR 84 (SC)] and in Tara Devi Aggarwal v. CIT [(1973) 3 SCC 482 : 1973 SCC (Tax) 318 : (1973) 88 ITR 323].)" [Emphasis supplied]

"27. Learned counsel appearing on behalf of the assessee has heavily relied upon the decision of this Court in the case of Malabar Industrial Co. Ltd. (supra). It is true that in the said decision and on interpretation of Section 263 of the Income Tax Act, it is observed and held that in order to exercise the jurisdiction under Section 263(1) of the Income tax Act, the Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the 13 Micromax Informatics Ltd.

Revenue. It is further observed that if one of them is absent, recourse cannot be had to Section 263(1) of the Act. ***"

"8.2 In the Impugned Order, the Ld. Commissioner of Income Tax-IV, Delhi held that the AO had not examined the aforesaid two issues properly and, therefore, set aside the issues for further inquiries to be conducted by the AO. As regards the first issue is concerned, we note that out of total provision of Rs. 1114.68 lacs, a sum of Rs.7,60,76,105/- was suo moto added back in the computation of income and a further sum of Rs.73,46,160- was disallowed by the AO in the original assessment order dated 30.3.2005. Therefore, out of Rs.1114.68 lacs, Rs. 834.22 lacs already stood disallowed in the original assessment order. The balance amount represented actual write off which was palpably clear from page 2 of the impugned order itself. No deduction on account of any such provision was, therefore, 14 Micromax Informatics Ltd. allowed to the assessee. Hence, there is no error or prejudice to the interest of revenue. As regards second issue it was noted that interest rate swap was an actual loss and only the net loss of Rs. 114.05 lacs after setting of gain of interest rate swap was claimed as deduction. However, we find that both these issues were duly examined by the AO vide Questionnaire dated 2.11.2004 (Page 1-2 of the Paper Book) to which replies dated 9.12.2004, 20.12.2004 and 6.1.2005 (Page No. 3-39 of Paper Book-1) were furnished and, therefore, the finding of the Ld. CIT that the issues were not examined properly was not correct. Even the Ld. CIT has not pointed out the definite and specific error in the original assessment order and observed that the inquiry made by the AO was inadequate or improper without first pointing out the error in the original assessment order passed by the AO, particularly because both the aforesaid issues were duly examined at the stage of the original assessment proceedings, hence, the impugned order is beyond jurisdiction, bad in law and void- ab-initio."

10. Keeping into past history on the issue of disallowance under section 14A of the Act in original assessment orders, we also hold that this issue has germinated from the change of the opinion. We find merit in the argument of the Ld. AR that the assessee’s case gets squarely covered by the decision of the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. Ltd. (supra). We therefore, following the reasoning given by the Hon’ble Delhi High Court in the case of Clix Finance India Pvt. Ltd. (supra) hold that the Ld. PCIT is not justified in holding the assessment order erroneous and prejudice to the interest of the revenue. We, therefore, set aside the impugned order.

Order pronounced in open Court on 6th June, 2025.