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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
This appeal by the assessee is arising out of the revision order of Pr. Commissioner of Income Tax-1, Mumbai, [in short PCIT] dated 27.12.2017. The Assessment was framed by the ACIT, Circle-1(2)(1), Mumbai (in short ACIT/ AO) for the assessment year 2013-14 order dated 31.03.2016 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The only issue in this appeal of assessee is against the revision order passed by CIT under section 263 of the Act setting aside the assessment framed by the AO and directing the AO to make fresh assessment in respect of disallowance of expenses relatable to exempt of income under section 14A read with Rule 8D of the Income Tax Rules, 1962 (hereinafter ‘the Rules’) For this assessee has raised the following two grounds: - “1(a) On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income Tax erred in passing an order u/s.263 of the Income Tax Act, 1961 being void ab-initio and bad in law and thereby erred in setting aside the assessment and directing the Id. Assessing Officer to make fresh assessment.
1(b) The Id. Pr. Commissioner of Income Tax erred in invoking the revisionary power under section 263(1) of the Income Tax Act, 1961 without appreciating the fact that the Id. Assessing officer after making all possible enquiries, examining the facts and proper application of mind, completed the assessment of the assessee u/s 143(3) of the Income Tax Act, 1961, which was in accordance with the provisions of law.
2(a) The Ld. Principal Commissioner of Income Tax erred in invoking revisionary power u/s 263, in respect of disallowance u/s 14A despite the fact that appellant's claim for exempt income was subsequently disallowed by the Ld. AO by suo-moto passing an order u/s 154 of the Act..
2(b) On the facts and in the circumstances of the case and in law the Id. Pr. Commissioner of Income Tax erred in directing the Id. AO to re-examine the issue of disallowance u/s 14A r.w.r. 8D and thereby erred in directing the Id. AO to pass a fresh order. The Ld. Principal Commissioner of Income Tax can give specific direction on items which are found to be erroneous and prejudicial to the interest of revenue, if any. which in this case were none.
2(c) On the facts and in the circumstances of the case and in law the Id. Pr. Commissioner of Income Tax erred in not appreciating the position in law that the suo- moto revisional authority is not empowered to substitute his own judgement for that of the subordinate officer unless the decision of the subordinate officer held to be erroneous, perverse or contrary to law. "
Briefly stated facts are that the assessee is a company incorporated under the companies Act 1963, a company limited by guarantee having no share capital. The assessee is mutual association formed for the benefit of its members and it does not carry out any activities in the nature of trade or business. For the relevant AY 2013-14, the assessee filed its return of income and regular assessment was completed under section 143(3) vide order dated 31.03.2016. The assessee has claimed exemption of interest on tax fee bonds of ₹ 5,63,02,492/- under section 10(15) of the Act and this exemption was allowed by the AO in his assessment order framed under section 143(3) dated 31.03.2017. The AO in his assessment order under section 143(3) of the Act dated 31.03.2016 has considered the issue of disallowance of expenses relatable to exempt income under section 14A of the Act read with rule 8D of the Rules and by following the Tribunal’s decision in earlier years and also the AO’s order for AY 2006-07 disallowed the expenditure relatable to exempt income at 2% of the exempt income by observing at Para 10 as under : - “10. In addition to the above, it is seen from the audited books of accounts of the assessee company that during the year the assessee has earned tax free income of Rs. 5,63,02,492/-. But the assessee has not made any disallowance u/s 14A for earning this exempt income. In this case for AN 2006- 07 the AO had made disallowance of expenditure u/s 14 A @2 2% of the dividend income earned and was confirmed by the Hon'ble Tribunal vide order dated 29.11.2011. Therefore the expenditure disallowed u/s 14A ® 2% of exempt income (5,63,02,492)=11,26,049/-."
Subsequently, the Principal CIT (1) vide show cause notice No. Pr. CIT-1/263/Show cause notice/2017-18 dated 27.12.2017 required the assessee as to why the expenses relatable to exempt income be not disallowed by invoking the provisions of section 14A of the Act read with Rule 8D of the Rules. The PCIT computed the disallowance at ₹ 1,43,98,016/-. According to Principal CIT(1) Mumbai, the disallowance under section 14A of the Act is to be carried out with reference to Rule 8D of the Rules for the relevant AY 2013-14 and the disallowance restricted @ 2% by following the Tribunal’s decision for AY 2006-07, the provisions of Rule 8D of the Rules were not applicable. The PCIT directed the AO to reframe the assessment after apply the Rule 8D of the Rules as non-applying of Rule 8D, the assessment is both erroneous and prejudicial to the interest of the Revenue. For this he observed at Para 11 and 12 as under: - “11. I have carefully considered the submission made by the assessee and have also gone through the facts of the case. The fact remains that the restriction on using Rule SD is limited only for years proceeding A.Y. 20082009 and not the succeeding years the Hon'ble Bombay High Court held that "Whether provision of Rule SD which have been notified with effect from 24/03/2008 are not retrospective in nature & shall Apply with effect to A.Y. 2008-2009 -Yes- HELD"
The order of assessment is therefore erroneous & prejudicial to the interest of revenue on this issue. The AO failed to examine these aspects.
In the light of the discussion in the preceding paragraphs, I am of opinion that order u/s.143(3) dated 30/03/2016 for the assessment year 2013-2014 is both erroneous and prejudicial to the interests of the revenue. Hence the order u/s. 143(3) dated 30/03/2016 for A.Y. 2013-2014 is set aside to be done afresh de novo. The AO will examine the decisions relied upon by the assessee as also other decisions on the said issue and decide the issue in accordance with law. The AO shall give the assessee sufficient opportunity of being heard before passing his order."
Aggrieved, assessee preferred the appeal before Tribunal.
Before us, the learned Counsel for the assessee R Murlidhar, first of all took us through the assessee’s paper book at page 31, wherein, notice under section 142(1) of the Act, is enclosed. The notice No. DCIT 1(2)(1)/ Notice Under section 142(1)/2015-16/69 dated 22.07.2015 vide questionnaire No. 10 enquired about the investment and claim of income and applicability of section 14A of the Act Read with Rule 8D of the Rules as under:
10. Details of investments and claim of exempt income and applicability of section 14A r.w.r 8D.
In reply, the assessee vide letter dated 12.08.2015, has explained vide note item No. 12, the applicability of Rule as under: - “12) During the year assessee has received interest on tax free bonds of Rs. 5,63,02,492/- which is claimed as exempt income.
Note on disallowance u/s 14A The assessee is a members' club incorporated for the benefit of members. The club was established in 1933 and it does not carry any trade or business. It is mutual association and principal of mutuality will apply. In the assessee's own case, ITAT in orders for assessment years 1974-75, 1976- 77, 1980-81, 1988-89, 1991-92 2000-01, 2001-02, 2002-03 and 2003-04 has confirmed that assessee is social club existing to provide recreational and other refreshments facilities exclusively to its members and occasionally to their guests.
Most of the receipts of assessee are not chargeable to tax on the grounds of mutuality which is settled and accepted consistently in all the earlier years. Certain receipts earned by assessee are taxable under the provisions of the Act. Brief details along with the nature of expenses claimed against the said receipts are as under – Particulars of income Head of income Expenses claimed Relevant Section Of The Act Rent of office and Income from House Property Municipal taxes, S.23& S.24 shops Standard Deduction @30% of NAV Capital Gains Capital Gains Cost of S. 48 Acquisition/Indexed Cost of Acquisition Rent from Income from Other Sources Municipal taxes, S. 57 Leasehold plots and Ground Rent Licensed plots Hire charges of Micro Income from Other Sources Nil S. 57 Amplifier Charges, Furniture, sale of scrap Interest Income from Other Sources Nil S.57 From the above your table, your goodself will appreciate that the assessee has claimed deductions only in respect of those expenses which are related to earning of income offered for tax. All other expenses incurred during the year have not been claimed against the income offered for tax. Thus the assessee has not claimed any expenditure relating to exempt income while computing the taxable income. The expenditure claimed are wholly and exclusively to earn respective table income as stated above i.e. u/s. 23 and 24 against House Property Income, u/s.48 under the head Capital Gains and u/s. 57 being wholly and exclusively incurred for earning income from other sources. There is no other income which is taxable under the head "Business income” and also no expenses related thereto have been claimed.
As per Section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Thus, for the purpose of disallowance u/s.14A there should be firstly some claim made by the assessee for allowance, of expenditure as deduction and then only the question of disallowance would arise. However, since in the instant case no deduction has been claimed in respect of any expenditure debited to Profit & Loss A/c which may have some nexus with earning of exempt income, the question of disallowance of such expenditure uls. 14A does not arise.
Therefore, disallowance u/s. 14A read with Rule 8D is not warranted in the case of assessee.
Further, we would like to state - I) that the assessee's case is not that it has not incurred any expenditure in relation to earning of exempt income but its ground is that no additional disallowance/addition can be made u/s. 144 in the absence of any claim for deduction of such expenditure in relation to exempt income in its total income; ii) that the assessee club is governed by the principle of mutuality. Only income received from outsiders has been offered for tax under the head 'Income from House Property' and 'Income from Other sources'. While computing income under the head 'House Property' only statutory deductions u/s. 24 have been claimed as deduction and while computing income chargeable under the head 'Income from Other Sources', only those expenses which have been incurred wholly and exclusively in relation to earning of income in terms of S. 57(u) and S. 57(iii) have been claimed as deduction. Thus, the assessee-club has claimed deduction only in respect of those expenses which are incurred for earning income that have been offered for tax under the head 'Income from Other Sources.' All other expenses incurred during the year have not been claimed against such income. Accordingly, no deduction has been claimed in respect of any expenditure incurred in relation to earning of tax free income and hence there cannot be any disallowance/addition u/s. 14A to the total income. iii) That for invoking provisions of S.14A there should be some claim for deduction in respect of any expenditure incurred in relation to exempt income and since the assessee-club has not claimed any deduction in respect of expenditure incurred for earning exempt income while computing its taxable income, the question of disallowance under section 14A does not arise.
Accordingly, Rule 8D cannot be applied in the instant case to work out the disallowance u/s. 14A of the Act, as there cannot he any disallowance u/s.14A in the absence of any claim for allowance. In other words, the exercise of determining the expenses in relation to earning of exempt income will have no impact to the taxable income. This is more important in the given case as expenses which have been wholly and exclusively incurred, and have direct nexus with the corresponding income that has been offered to tax. Thus, in absence of any nexus between expenditure claimed as deduction and earning of exempt income, no addition can be made u/s. 14A to the taxable income Without prejudice to above, in AY 2006-07, AY 2010-11 and AY 2012-13, assessing officer u/s 14A of the Act, has disallowed 2% of the exempt income. Accordingly, 2% of exempt income can be considered to be incurred in connection with earning dividend income. "
Similarly, the assessee also replied vide letter dated 27.08.2015 and further vide letter dated 23.02.2016 and filed the same explanation, which are enclosed at pages 36,39 and 44 of the assessee’s paper book. The AO after going through the enquiry and reply of the assessee framed assessment under section 143(3) of the Act after application of mind and restricted the disallowance at 2% of the exempt income. The learned Counsel for the assessee stated that the AO has applied his mind to the facts and circumstances of the case and then took as conscious decision. The learned Counsel for the assessee relied on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Gabriel India Ltd. (203 ITR 109) (Bom). The learned Counsel for the assessee also relied on the Hon’ble Supreme Court decision in the case of CIT vs. Max India Ltd (2007) 295 ITR 282(SC). The learned Counsel for the assessee also stated that even this exemption granted by order under section 143(3) of the Act while framing the assessment, the same was withdrawn vide rectification order passed by AO under section 154 of the Act dated 16.12.2016 and this exempt income was treated as taxable. No exemption under section 10(15) of the Act was allowed to the assessee.
On the other hand, the learned CIT, Shri R Manjunatha Swamy, relied on the revision order passed by Principal CIT under section 263 of the Act.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee also replied vide letter dated 27.08.2015 and further vide letter dated 23.02.2016 and filed the same explanation, which are enclosed at pages 36,39 and 44 of the assessee’s paper book. The AO after going through the enquiry and reply of the assessee framed assessment under section 143(3) of the Act, after application of mind and restricted the disallowance at 2% of the exempt income. The AO has invoked the provisions of section 14A of the Act and made disallowance and formed an opinion for the same. In such circumstances, whether the order can be treated as erroneous so as to prejudicial to the interest of the Revenue and warrants revision under section 263 of the Act or not. Hon’ble Bombay High Court in the case of Gabriel India Ltd. (supra), has considered this issue and held as under:-
“10. The power of suo motto revision under sub-section (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., ( i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions 'erroneous', 'erroneous assessment' and 'erroneous judgment' have been defined in Black's Law Dictionary. According to the definition/erroneous', means 'involving error; deviating from the law'. 'Erroneous assessment' refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, 'erroneous judgment' means 'one rendered according to course and practice of Court, but contrary to law upon mistaken view of law, or upon erroneous application of legal principles'.
From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner, he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi- judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject- matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.”
Similarly, Hon’ble Supreme Court in the case of Max India Ltd. (supra) has also considered this issue and held as under: - “2. At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase "prejudicial to the interest of the revenue" under section 263 has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when the 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 interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. According to the learned Additional Solicitor General on interpretation of the provision of section 80HHC(3) as it then stood the view taken by the Assessing Officer was unsustainable in law and therefore the Commissioner was right in invoking section 263 of the Income-tax Act. In this connection he has further submitted that in fact 2005 amendment which is clarificatory and retrospective in nature itself indicates that the view taken by the Assessing Officer at the relevant time was unsustainable in law. We find no merit in the said contentions. Firstly, it is not in dispute when the Order of the Commissioner was passed there were two views on the word 'profit' in that section. The problem with section 80HHC is that it has been amended eleven times. Different views existed on the day when the Commissioner passed the above order. Moreover the mechanics of the section have become so complicated over the years that two views were inherently possible. Therefore, subsequent amendment in 2005 even though retrospective will not attract the provision of section 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated 5-3- 1997 in purported exercise of his powers under section 263 of the Income-tax Act."
In view of the above given facts and circumstances, we are of the view that this is not a fit case for revision proceedings under section 263 Act, as the disallowance made by AO under section 14A of the Act, was after due application of mind to the facts of the case. The AO has conducted enquiry in regard to expenses relatable to exempt income and assessee has filed a complete note before the AO during the course of assessment proceedings and accordingly, the assessment was framed under section 143(3) of the Act. We are of the view that wherever, there are two possible views and the AO has taken one of the courses permissible, the PCIT cannot exercised his power under section 263 of the Act to differ with a view of the AO even if there has been loss of revenue. Because, the PCIT has nowhere held that as to how the assessment order is erroneous and how the computation made by AO regarding disallowance of expenses relatable to exempt income are more than what the AO has computed. Accordingly, we quash the revision order and allow the appeal of the assessee.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 03-08-2018.