BAN LABS PRIVATE LIMITED,RAJKOT vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX-1, RAJKOT, RAJKOT

In response to the notice of the Ld. PCIT, the assessee submitted it’s reply on 11.03.2024. The assessee stated in his reply that the assessee has earned exempt income by way of share of profit in partnership firm. For the purpose of earning income assessee has not incurred any expenditure. The assessee has merely made investment by way of share capital in the firm. In order to establish any actual expenditure incurred or not for earning above exempt income, the only possibility is use of borrowed fund and claim of interest expenditure incurred on such borrowed fund. However, in assessee`s case there is no any common borrowed funds. The assessee has made investment in the above firms out of his own funds. The assessee have share capital of Rs. 8,17,87,000.00 and reserves and surplus of Rs. 14,44,15,3717.00 i.e. total own fund of Rs. 1525940717.00. The extract of share capital and reserves were submitted before the learned PCIT.

Aggrieved by the order of the Ld. PCIT, the assessee is in appeal before us.

Shri D.M. Rindani, Ld. Counsel for the assessee argued that Ld. PCIT has exercised his jurisdiction mainly on the fact that Assessing Officer has not conducted proper inquiry, so far, the disallowance of expenses under /AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT Section 14A r.w.r.8D of the Act, is concerned. However, during the assessment proceedings, the Assessing Officer has issued the notice under Section 142(1) of the Act dated 22.12.2020, which is placed at Paper Book Page No. 19-23, wherein the Assessing Officer has specifically asked the question from the assessee, regarding expenses, incurred for earning exempt income. The Assessing Officer has again issued, the show-cause notice dated 08.04.2021, which placed at Paper book Page No. 29, and the relevant question was asked by the assessing officer, and in response to these notices of the assessing officer, the assessee submitted detailed reply before the assessing officer along with evidence and documents. Therefore, assessing officer has conducted enough enquiry during the assessment proceedings and applied his mind and thereafter framed the assessment order, which is neither erroneous nor prejudicial to the interest of the revenue. Hence, order of the ld. PCIT may be quashed.

The Ld. Counsel further contended that during the assessment proceedings, the Assessing Officer has conducted enough inquiry and the case of the Ld. PCIT is that proper inquiry was not conducted in relation to expenses incurred for earning exempt income under Section 14A of the Act. The Ld. Counsel also submitted that assessee has its own free funds to make the investment and assessee has not any borrowed funds, in its balance sheet, therefore, addition under Rule 8D in third limb @1% cannot be made by the Assessing Officer. Moreover, the assessee does not have any exempt income during the assessment year under consideration, therefore, no disallowance would be made.

On the other hand, Ld. D.R. for the Revenue submitted that the main plea of the Ld. PCIT was that opening and closing balance of investment were not submitted by the assessee, during the assessment proceedings. The assessee, is not maintaining separate accounts for expenses incurred /AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT for exempt income and the Assessing Officer failed to conduct proper inquiry in respect of this aspect, therefore, assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue.

We have heard both sides in detail and also perused the records of the case including the paper book filed by the assessee- company. We note that main grievance of the learned PCIT, in his revision order, under section 263 of the Act, is that assessing officer has not conducted proper enquiry, in respect of exempt income of the assessee and did not make the disallowance under section 14A read with rule 8D of the Rules. Therefore, first of all, we should examine that what type of enquiry was conducted by the assessing officer, during the assessment proceedings, in respect of the issue raised by the learned PCIT. We note that the Assessing Officer has issued the notice under Section 142(1) of the Act, dated 22.12.2020, which is placed at Paper Book Page No. 19-23, wherein the Assessing Officer has specifically asked the question from the assessee, regarding expenses, incurred for earning exempt income. The relevant portion of the show- cause notice is reproduced below:

In response to the notice under section 142(1) of the Act, the assessee submitted its reply, dated 06.01.2021 which is placed at Paper Book Page No.

The relevant portion of the reply is reproduced below:

We note that Assessing Officer has again issued the show-cause notice dated 08.04.2021, which is placed at Paper Book Page No. 29, and the relevant question asked by the assessing officer, is reproduced below:

It would be pertinent to mention here that in the case of CIT v. Deepak Mittal, the High Court has laid down that when consistent case / version of the assessee was that he had not incurred any expenditure for earning exempt income, the Assessing Officer, in terms of section 14A(2) of the Act, was to proceed further to collect the relevant material or evidence, to determine the expenditure relating to such exempt income. It was also held that application of rule 8D by the Assessing Officer as a substitute for section 14A(2), is not permissible in law. As per the aforesaid judgement, in the case of Deepak Mittal, the High Court has held that in a case where no expenditure has been incurred by the assessee in earning the exempt income, there cannot be any disallowance of expenditure under section 14A, r.w.r. 8D of the Income-Tax Rules, 1962 (the Rules). [CIT v. Deepak Mittal (2014) 361ITR131 (2013) 219 Taxman 314 (P&H)]. Reliance is placed in the case of Commissioner of Income-tax, Ahmedabad -IV v. Torrent Power Ltd. [2014] 44 taxmann.com 441 (Gujarat) wherein it is held that - ''Where it was apparent from records that assessee had sufficient funds for making investments in shares and interest free bonds and it had not used borrowed funds for such purpose, Assessing Officer was not justified in invoking provisions of section 14A in order to disallow one per cent of interest expenses incurred for earning exempt income"

As submitted vide earlier reply dated 06.01.2021 and at the cost of repetition, it is submitted that the assessee has not incurred direct or indirect expense to earn the income and not paid any interest expenses on borrowed sum for investment and hence the question of disallowance u/s. 14A r.w.r 8D does not arise.”

We also find that the allegation of learned PCIT was that the assessee- company may have made certain expenditure for tax-free investments. However, this allegation by ld. PCIT is based on surmise, as the ld. PCIT has no record, as to which expenditure was incurred. The second allegation of learned PCIT was that assessing officer (AO) has not properly verified/examined the facts of the case and issue under consideration. However, it is not so, as we have noted above that during the assessment proceedings, the assessing officer issued two notices to the assessee to conduct the enquiry, and in response to these notices, the assessee submitted its reply along with documentary evidence. Therefore, detailed inquiries were made by the assessing officer and specific replies were filed by the assessee. Therefore, we find that order u/s 143(3) of the Act, was passed by assessing officer after making inquiries on very same issue and after examining documents filed and consciously, the disallowance u/s 14A r/w Rule 8D was not made by the assessing officer hence the allegation of PCIT is unfounded. Besides, the disallowance of 1% as per section 14A r/w Rule 8D is also unwarranted, as interest free funds of the Appellant are far in excess of tax-free investments, hence on merits too, addition could not have survived, for that reliance is placed on the judgement of the Hon`ble /AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT jurisdictional High Court of Gujarat in the case of Torrent Power Ltd, (2014) 44 taxmann.com 441 (Gujarat HC). The Hon`ble jurisdictional High Court of Gujarat in the case of Shree Siddhi Infrabuild (P.) Ltd, [2025] 172 taxmann.com 232 (Gujarat), held that where Assessing Officer had made inquiries with regard to disallowance under section 14A read with rule 8D during the course of regular assessments and had not made any disallowance for same, revision order passed by Pr. Commissioner under section 263 of the Act, holding that assessment order was erroneous and prejudicial to interest of revenue was liable to be quashed and set-aside.

Therefore, according to us, the present order of assessing officer passed u/s 143(3) of the Act, dated 01.09.2021, cannot be termed as erroneous since enquiry was, in fact, carried out by him on the issue on which the ld PCIT has found fault with and has taken a plausible view. Thus, we note that the AO enquired during assessment proceedings and the assessee had filed details before him. So, we find that the AO’s action cannot be termed “erroneous”. Since not only enquiry was carried out by the AO on the issue under consideration and based on the evidence gathered he has taken a plausible view, which at any rate cannot be called as an un-sustainable view. The Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions needs, to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the PCIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without /AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT application of mind; (v) if the AO has not investigated the issue before him; then the order passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”. Therefore, we are of the considered opinion that AO’s order cannot be termed as erroneous as well as prejudicial to the interest of the revenue and therefore, jurisdictional condition precedent as prescribed by statute for invoking revisional jurisdiction is absent and therefore, we are inclined to quash the impugned order dated 31-03-2024 of the ld. PCIT.

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