NF FORGINGS PVT. LTD.,HOWRAH vs. PR.CIT - 1, KOLKATA, KOLKATA

The assessee in the present case is a Company, which is engaged in the business of manufacturing of Engineering Goods. The return of income for the year under consideration was filed by the assessee on 06.09.2013 declaring total income of Rs.2,12,47,020/- and Book Profit of Rs.3,47,52,445/- under section 115JB of the Act. In the assessment completed under section 143(3) vide an order dated 25.01.2016, the total Assessment Year: 2013-2014 NF Forgingo Pvt. Limited income of the assessee was determined by the Assessing Officer at Rs.2,14,81,149/- after making disallowance of donation amounting to Rs.27,250/- and disallowance on account of delayed payment of employees contribution towards Provident Fund and ESI amounting to Rs.2,06,879/-. The record of the assessment made by the Assessing Officer under section 143(3) came to be examined by the concerned ld. Principal CIT and on such examination, he found that the assessee- company was having a total investment of Rs.3,19,89,000/- as non- current investment. He also noted that interest expenses of Rs.6,37,63,000/- were debited by the assessee to the Profit & Loss Account but no disallowance on account of any expenses attributable to earning of exempt income under section 14A read with Rule 8D was either offered by the assessee or made by the Assessing Officer in the assessment completed under section 143(3). He, therefore, issued a notice under section 263 requiring the assessee to show-cause as to why the assessment made by the Assessing Officer under section 143(3) should not be revised on this issue by treating the same as erroneous as well as prejudicial to the interest of the revenue.

In reply to the show-cause notice issued by the ld. Principal CIT under section 263, the following explanation was offered by the assessee in writing:- “The grounds raised for issue of show cause notice u/s 263(1) being that the Assessing Officer did not disallow the expenditure attributable to earning of exempt income u/s 14A r.w. Rule 8D of the IT Act, 1961 and thus the assessment was passed without making enquiries/ verification. On perusal of the above show cause notice following submissions made:- Assessment taken up under CASS as per guidelines of CBDT Instruction No. 7/2014. The assessment completed after verification of CASS details & others as called for by the Assessing Officer and filed by assessee. During the course of assessment proceedings, the Assessing Officer seeked details of non- current investment" amounting to Rs.3,19,89,000/- as reflected in Audited Balance Sheet The Assessee Company in response duly submitted the respective Assessment Year: 2013-2014 NF Forgingo Pvt. Limited

details of such non-current investment being Bank FDRs (DBD) issued by Bank and Allahabad Bank. The detailed breakup of such bank FDRs amounting of Rs. 3,19,89,000/- were submitted before the Assessing Officer and the said detail is already on record & again reproduced. Further specific query was raised by the Assessing Officer as far as applicability of sec. 14A r.w. Rule 8D is concerned and it was duly explained to the Assessing Officer that the assessee company did not earn any tax-free income and further the interest income earned from such non-current investments (being bank FDRs) were taxable in nature and same reflected at note no. 15 of the audited P&L account and same also verified by the Assessing Officer while reconciling 26AS Statement wherein the interest income from Allahabad bank and Bank of India amounting to Rs.19,85,192/- duly assessed to income tax. Thus the Assessing Officer after detailed enquiry considered the fact that there were no earning of any exempt income besides the non-current investments also yielded taxable interest income and considering the explanation of the Assessee Company no disallowance u/s 14A was made in the assessment order. Moreover the interest expenditure debited in the P&L account, the entire details of finance costs incurred with respective ledgers in support duly filed before the Assessing Officer, the applicability of the TDS provisions were duly verified along with the books of accounts produced before the Assessing Officer and here again after considering the various provisions of Law no disallowances were made by the Assessing Officer. The case selected for IT Scrutiny through CASS on the basis of AIR information.

The ld. Principal CIT did not find merit in the explanation offered by the assessee. According to him, the Assessing Officer as per the CBDT Circular No. 5/2014 dated 11.02.2014 should have made a disallowance under section 14A even though no exempt income was actually earned by the assessee during the year under consideration. He, therefore, held the order passed by the Assessing Officer under section 143(3) as erroneous and prejudicial to the interest of the revenue and setting aside the same vide his order dated 16.03.2018 passed under section 263, he directed the Assessing Officer to frame the assessment on the issue of disallowance under section 14A after giving the assessee proper and sufficient opportunity of being heard. Aggrieved by the order of the ld. Principal CIT passed under section 263, the assessee has preferred this appeal before the Tribunal.

The ld. Counsel for the assessee submitted that explanation of the assessee was called for by the Assessing Officer during the course of assessment proceedings as regards the applicability of section 14A and it was duly explained by the assessee that the non-current investment amounting to Rs.3,19,89,000/- related to Bank investment in FDRs and there was no investment in the equity of any third party. It was also explained that no investment in any tax-free item was made by the assessee and as such section 14A was not applicable in its case. He contended that the issue relating to applicability of section 14A thus was examined by the Assessing Officer during the course of assessment proceedings and after having found that there was no investment made by the assessee in shares on which any exempt dividend income could be earned, no disallowance under section 14A was made by the Assessing Assessment Year: 2013-2014 NF Forgingo Pvt. Limited Officer in the assessment completed under section 143(3). He contended that there was thus no mistake in the order of the Assessing Officer as alleged by the ld. Principal CIT calling for any revision under section 263. The ld. CIT (D.R.), on the other hand, relied on the impugned order passed by the ld. Principal CIT under section 263 in support of the revenue’s case on the issue.

We have considered the rival submissions and also perused the relevant material available on record. It is observed that the applicability of section 14A in assessee’s case was presumed by the ld. Principal CIT on the basis of total investment of Rs.3,19,89,000/- found to be made by the assessee as non-current investment. As pointed out by the ld. Counsel for the assessee, the details of such non-current investment were furnished by the assessee during the course of assessment proceedings before the Assessing Officer to show that the said investment was entirely made in Bank FDs and there was no investment made in shares, the income of which in the form of dividend was exempt from tax. As pointed out by the ld. Counsel for the assessee, the issue of applicability of section 14A in assessee’s case was examined by the Assessing Officer during the course of assessment proceedings and after having found that the entire non- current investment was made in Bank FDs and interest earned thereon was offered to tax, the Assessing Officer accepted the assessee’s claim that section 14A was not applicable. Even the ld. Principal CIT has not disputed this position in his impugned order but still treated the order of the Assessing Officer to be erroneous on the ground that the Assessing Officer as per CBDT Circular No. 5/2014 (supra) should have made a disallowance under section 14A even if there was no corresponding exempt income earned by the assessee during the year under consideration. He, however, appears to have overlooked the fact that no investment was made by the assessee in shares, etc. which was capable of earning any exempt income. He also failed to appreciate that when no exempt income was actually earned by the assessee, disallowance under Assessment Year: 2013-2014 NF Forgingo Pvt. Limited section 14A was not warranted as held in the various judicial pronouncements and, therefore, the view taken by the Assessing Officer while not making any disallowance under section 14A was certainly a possible view and it was not permissible to the ld. Principal CIT to substitute his own view under section 263 in place of possible view taken by the Assessing Officer. As such considering all such facts of the case, we are of the view that there was no error in the order of the Assessing Officer passed under section 143(3) as allegedly pointed out by the ld. Principal CIT calling for revision under section 263. In that view of the matter, we set aside the impugned order passed by the ld. Principal CIT under section 263 and restore that of the Assessing Officer passed under section 143(3).

In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on February 15, 2019.