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Income Tax Appellate Tribunal, F Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep Gosain
This appeal by the assessee is directed against the order of the Principal CIT 9, Mumbai passed under section 263 of the Income Tax Act, 1961 (in short 'the Act') vide order dated 14.03.2016 for A.Y. 2011-12.
The facts of the case, briefly, are as under: - 2.1 The assessee, a company engaged in the business of media and advertisement agency, management consultancy services and pre-paid mobile services, filed its return of income for A.Y. 2011-12 on 29.09.2011 declaring total income of `3,43,65,050/-. The return of income was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 24.03.2014 wherein the assessee’s income under the normal provisions was determined at `6,79,93,050/-; in view of the disallowance of `3,36,28,000/- under section 14A of the Act r.w. Rule 8D(2) (iii) of the I.T. Rules 1962 (in short ‘the Rules’). On appeal, the learned CIT(A)
Futre Corporate Resources Ltd. upheld the disallowance made by the Assessing Officer (AO) under section 14A r.w. Rule 8D(2)(iii) of the Rules. While making the aforesaid disallowance under rule 8D(2)(iii), the AO at para 4.3 of the order of assessment, after considering the assessee’s detailed submission/ explanations also held that no disallowance of interest expenditure claimed is called for under section 14A r.w. rule 8D as strategic investment by the assessee in associate and subsidiary concerns account for approximately 96% of investments made; from which business income arises to the assessee and as the same have been utilised for business purposes of the assessee.
Subsequently, the Principal CIT -9, Mumbai initiated revisionary proceedings under section 263 of the Act by issue of show cause notice dated 16.12.2015 stating that while the AO had disallowed an amount of `3,36,28,000/- under section 14A r.w. Rule 8D(2)(iii) of the Rules, the AO had not worked out disallowance under Rule 8D(2)(ii) of the Rules though interest expenses were debited to the Profit & Loss account. In the said show cause notice it was further stated that disallowance under rule 8D(2)(ii) is to be made in the case on hand and that in view of the AO’s failure to do so, the order of assessment passed under section 143(3) of the Act vide order dated 24.03.2014 is erroneous and prejudicial to the interests of Revenue within the meaning of the provisions of section 263 of the Act. In response to the show cause notice dated 16.12.2015, the assessee filed written submission before the learned Principal CIT on 06.01.2016 and 22.02.2016 objecting to the revision proceedings initiated, putting forth arguments and citing various judicial pronouncements and requested the learned Principal CIT to drop the proceedings initiated under section 263 of the Act. The assessee’s arguments/submissions, however, did not find favour with the learned Principal CIT and he proceeded to pass the impugned order of revision under section 263 of the Act dated 14.03.2016 holding that the order of assessment passed by the AO under section 143(3) of the Act dated 24.03.2014 to be erroneous and prejudicial to the interests of Revenue and accordingly set aside/cancelled the same, directing the AO to frame a fresh assessment order, after determining in accordance with law and relevant judicial pronouncements, the head under Futre Corporate Resources Ltd. which the interest debited in the Profit & Loss account is allowable and/or considering the disallowance, if any, required to be made in determining the total income of the assessee under section 14A of the Act r.w. rule 8D(2)(ii) of the Rules. 4.1 Aggrieved by the order of the Principal CIT-9, Mumbai passed under section 263 of the Act, the assessee has preferred this appeal raising the following grounds: - “
1. BREACH OF THE PRINCIPLES OF NATURAL JUSTICE 1.1 The Learned Commissioner of Income - tax - 9, Mumbai ["Ld. CIT"], erred in framing the revision order u/s. 263 of the Income - tax Act, 1961 ["the Act"] by not giving proper, sufficient and effective opportunity of being heard to the Appellant. 1.2 It is submitted that in the facts and the circumstances of the case, and in law, the order is required to be held as bad and illegal in breach of the principles of natural justice, as well as non-application of mind to the facts and the contentions brought on record by the Appellant.
2. REVISION ILLEGAL 2.1 The Ld. CIT erred in passing the order u/s. 263 of the Act, revising the assessment order passed by the A.O. u/s. 143 (3) of the Act. 2.2 It is submitted that in the facts and the circumstances of the case, and in law, the order is bad, illegal and void as necessary pre - conditions for initiating the revision proceeding as well as the completion thereof were not fulfilled. 2.3 Without prejudice to the generality of the above, the CIT failed to appreciate that: (i) The order which he was seeking to revise had already merged with the appellate order and, accordingly, was not the "record" within the meaning of section 263 of the Act; (ii) In any case, the assessment order framed was not "erroneous" within the meaning of section 263 of the Act; and (iii) The assessment order was not "prejudicial to the interest of the revenue" within the meaning of section 263 of the Act. 2.4 The Ld. CIT erred in holding that the A.O. had failed to make disallowance of interest u/s. 14A of the Act read with Rule 8D of the Rules and, therefore, the order of the A.O. was erroneous and judicial to the interest of the revenue.
Futre Corporate Resources Ltd. 2.5 The Ld. CIT erred in giving direction to the A.O. to consider the issue of the disallowable u/s. 14A of the Act read with Rule 8D (ii) of the Income – tax Rules, 1962 ["the Rules"]. 2.6 It is submitted that in the facts and the circumstances of the case, and in law, no revision u/s. 263 of the Act was called for. ON MERITS 3.1 The Ld. CIT failed to appreciate that: (i) The interest payment was fully allowable u/s. 36 (1) (iii) of the Act; and (ii) Even assuming and otherwise also, just because the interest expenses is allowable u/s. 57 (iii) of the Act, there is no automatic application of section 14A of the Act. 3.2 It is submitted that in the facts and the circumstances of the case, and in law, no such revision was called for even on merits also.
The Appellant craves leave to add, alter, delete or modify all or any the above ground at the time of hearing.” 4.2.1 The learned A.R. of the assessee argued and contended that the Learned Principal CIT had erroneously and illegally invoked the revisionary jurisdiction under section 263 of the Act. According to the learned A.R., a perusal of paras 4 to 4.2 of the order of assessment, to which he drew the attention of the Bench, would establish that the exercise of scrutiny proceedings was almost entirely and in detail devoted to the consideration of the issue of the disallowance under section 14A r.w. rule 8D to be made in the case on hand for the year under consideration. It was submitted that details called by the AO were filed by the assessee, inquiries thereon were made by the AO specifically with regard to the issue of disallowance under section 14A r.w. rule 8D and much of this finds mention in the order of assessment sought to be revised. It was further submitted that details of investment in associate and subsidiary concerns as promoters which amounted to almost 96% were examined alongwith reasons for such investment; as was the details of business transactions between these concerns and the assessee resulting in income to the assessee. This, it is contended, clearly established the fact that the investments in group/subsidiary concerns are strategic investments, made out of commercial expediency and not for earning of profits; were made solely for Futre Corporate Resources Ltd. the purpose of its business and therefore the AO held that the interest incurred is to be excluded from the ambit of disallowance under section 14 r.w. rule 8D(2)(ii). It is submitted that the above established beyond doubt that the AO has examined and verified in detail the aspect of disallowance under section 14A r.w. rule 8D(2)(ii) of the Rules, before reaching the conclusion and rendering the finding that no disallowance was called for from interest, as almost the entire investment was made in associate and subsidiary concerns for business purposes of the assessee. It is after complete examination of the above in detail that he rejected the assessee’s claim that it had not incurred any expenditure for earning of exempt income and made the disallowance of `3,36,28,000/- under section 14A of the Act r.w. rule 8D(2)(iii) of the Rules. Therefore, it is clear that the AO has duly applied his mind to the applicability of Rule 8D(2) and had arrived at definite conclusions that disallowance was not called for under rule 8D(2)(ii), but was called for under rule 8D(2)(iii) of the Rules. 4.2.2 According to the learned A.R. a perusal of the show cause notice indicates that proceedings under section 263 of the Act were initiated on the basis of the records of assessment and does not allege that the assessment records, details/explanations filed by the assessee were insufficient, inadequate or not existent for the purpose of considering the issue of disallowance under section 14A r.w. rule 8D of the Rules. There is not even a whisper in the impugned order about there being no inquiry or inadequate inquiry on the part of the AO or any lapse on his part, either in the show cause notice or in the impugned order passed under section 263 of the Act. In fact in the impugned order also, it appears that no further inquiry or verification was required by the learned Principal CIT and he proceeded directly to conclude on the basis of the very same records that disallowance under rule 8D(2)(ii) of the Rules was called for; without assigning any reasons why such disallowance was called for, as if it was to be applied automatically without having regard to the particular facts of the case.
Futre Corporate Resources Ltd. 4.2.3 It has been contended that the impugned order under section 263 of the Act is bad in law, as the learned Principal CIT has travelled beyond the issue on the basis of which the show cause notice was issued. As can be seen from the impugned order, the learned Principal CIT has taken a totally new ground, i.e. the applicability of the provisions of section 36(i)(iii)/section 57(iii) of the Act; of which there was not even a direct or indirect mention in the show cause notice dated 16.12.2015 or in the course of revision proceedings. This, the learned A.R. argues, is clearly contrary to the settled legal position that a revision order cannot be passed on an issue different from the issue mentioned in the show cause notice. In support of this proposition, the learned A.R., inter alia, placed reliance on the following judicial pronouncements: - (i) CIT vs. Smt. R.G. Umaranee (2003) 265 ITR 507 (Mad) (ii) CIT vs. Contimeters Electricals P. Ltd. (2009) 317 ITR 249 (Del) (iii) Colorcraft vs. Income Tax Officer (2007) 105 ITD 599 (Mum) (iv) CIT vs. G.K. Kabra Cooperative Industrial Estate (1995) 211 ITR 336 (AP) 4.2.4 The learned A.R. submitted that the reliance placed by the learned Principal CIT on the decision of the Hon'ble Madras High Court in the case of CIT vs. Sujani Textiles P. Ltd. (1985) 151 ITR 653 (Mad) is not tenable as it is clearly distinguishable on facts from the facts on hand. It was a case where the assessee therein had advanced some amount to a broker, who in turn loaned it to a Director of the assessee company. The assessee stopped receiving interest income on such amount. It was in that factual circumstances that the claim of the assessee for deduction of the interest expenses on the amount borrowed to give such loan was held to be disallowable both under the head ‘business income’ as well as under the alternate claim under section 57(ii) of the Act. It is submitted that the facts and issues of the assessee in the case on hand are totally different. 4.2.5 The learned A.R. of the assessee further submits that no revision under section 263 of the Act is permissible by CIT if enquiry has already been conducted by the AO in the course of assessment proceedings; as has Futre Corporate Resources Ltd. been carried out by the AO in the case on hand. In the case on hand it is evident from the order of assessment that the AO conducted enquiries in respect of disallowance to be made under section 14A r.w. rule 8D of the Rules and has applied his mind to this issue. It is well settled position that if some inquiry has been made by the AO in the assessment proceedings, even if inadequate, that cannot clothe the CIT with jurisdiction under section 263 of the Act merely because he can form a different opinion in the matter. In support of the proposition that, since the AO has made inquiries in the course of assessment proceedings in respect of the disallowance to be made under section 14A r.w. rule 8D of the Rules and applied his mind to render findings that no disallowance was called for in respect of interest expenditure on investments with group/subsidiary concerns which was for business purposes, but disallowance was called for under rule 8D(2)(iii) of the Rules, the learned CIT could not assume jurisdiction under section 263 of the Act merely because he had a different opinion in the matter. Reliance was, inter alia, placed on: - (i) Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del) (ii) CIT vs. Anil Kumar Sharma (2011) 335 ITR 83 (Del) (iii) CIT vs. New Delhi Television Ltd. (2014) 360 ITR 44 (Del) 4.26 It was further argued that without prejudice to the main objections, the provisions of section 14A and section 36(i)(iii) of the Act are mutually exclusive. In as much as, to the extent interest expenditure is found to be incurred not for the purpose of business, but incurred for the purpose of earning tax free income, to that extent section 14A of the Act gets attracted. Conversely, to the extent the interest expenditure is found to be related not to the earning of exempt income, the same would be allowable under section 36(i)(iii) of the Act if the same is incurred for the purposes of assessee’s business. It is contended that there is no scope for invoking both the sections 14A and 36(i)(iii) of the Act simultaneously as this would amount to making double disallowance. In the case on hand, the order of assessment clearly establishes that the AO after considering and verifying the assessee’s submissions in this regard, at para 4.2 of the order of Futre Corporate Resources Ltd. assessment had arrived at a definite conclusion that the interest expense was incurred for the assessee’s business purposes. It is contended that as decided in the case of PHIL Corporation Ltd. (2011 – TIOL-432-HC-MUM-IT) this is in consonance with settled legal position that the strategic investments made by an assessee in group concerns for the purpose of business does not attract any disallowance under section 14A of the Act. According to the learned A.R. of the assessee, it is also settled legal position that interest expenditure incurred in respect of loans used for the purpose of making strategic investments in group concerns is allowable as business expenditure under section 36(i)(iii) of the Act. In support of this contention, reliance was, inter alia, placed on the decisions of the Hon'ble Madras High Court in the case of CIT vs. Spencers & Co. Ltd. (2013) 359 ITR 644 (Mad) and CIT vs. RPG Transmission Ltd. (2013) 359 ITR 673 (Mad). 4.2.7 The learned A.R. of the assessee further contended that without prejudice to the above submissions, no revision is permissible under section 263 of the Act, if the AO adopts one of the possible methods/ courses of action/conclusions permissible in law. The mere fact that the CIT is not in agreement with the view taken/conclusion reached by the AO, which is permissible in law, would not render the order of assessment erroneous and prejudicial to the interests of Revenue. Even otherwise, where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot render the order of assessment erroneous or prejudicial to the interests of Revenue, unless the view taken by the AO is unsustainable in law. In support of this proportion reliance was, inter alia, placed on the following judicial pronouncements: - (i) Malabar Industrial Co. Ltd. (2000) 243 ITR 83 (SC) (ii) CIT vs. Max India Ltd. (2007) 295 ITR 282 (SC) (iii) CIT vs. Design and Automation Engineers (Bombay) P. Ltd. (2010) 323 ITR 632 (Bom) (iv) Grasim Industry Ltd. (2010) 221 ITR 92 (Bom) 4.2.8 The learned A.R. of the assessee submitted that it is well settled that if any enquiry is conducted by the AO in assessment proceedings, it will Futre Corporate Resources Ltd. not give jurisdiction to the CIT to pass revisionary orders merely because he has a different view or opinion in the matter. He has to demonstrate that a patent error has been committed in assessment proceedings resulting in prejudice to Revenue, otherwise it will tantamount to giving the AO a second innings to re-examine and re-adjudicate concluded issues. The learned A.R. submits that the Hon'ble Bombay High Court in the case of Gabriel India Ltd. (1993) 203 ITR 108 (Bom) has observed that where it is found that the AO had examined and considered the relevant issue and material in the course of assessment proceedings, as has been evidently done by the AO in the case on hand, it would not be open to the CIT to invoke revisionary powers just to re-examine issues on the ground that the AO had not inquired into the matter properly. 4.2.9 The learned A.R. submitted that identical issue of revision under section 263 of the Act was considered by a Coordinate Bench of this Tribunal in one of the assessee’s group companies, i.e. M/s. Future Corporate Resources Ltd. regarding disallowance under section 14A r.w. rule 8D in the very same assessment year and the Coordinate Bench in its order in for A.Y. 2011-12 dated 26.10.2016 held that the order under section 263 of the Act was unsustainable and was set aside as the learned CIT had exceeded his jurisdiction while invoking the provisions under section 263 of the Act. 4.3.1 Per contra, the learned D.R. submitted that the learned Principal CIT has exercised his revisionary powers under section 263 of the Act correctly and in accordance with law. It was submitted that as per the provisions of section 263 of the Act and Explanation 2 thereof, the CIT was empowered to call for and examine the record of any proceedings under the Act and the order can be held to be erroneous and prejudicial to the interest of Revenue if in the opinion of the CIT, the order has been passed without making inquiries or verifications which should have been made or that in the order the AO has allowed any relief without inquiring into the claim. It was contended that Explanation 2 is clarificatory in nature and can be Futre Corporate Resources Ltd. applied retrospectively. It was prayed that the impugned order of the learned Principal CIT be upheld. 4.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The mandate of the provisions of section 263 of the Act is that the CIT may call for and examine the record of any proceedings under the Act and if he considers that any order passed therein by the AO is erroneous, in so far as it is prejudicial to the interests of Revenue, he may then, after affording the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the facts and circumstances of the case so warrant; including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. It is trite law that the powers under section 263 of the Act can be exercised by the CIT only on satisfaction of the twin condition, viz., the assessment order should be (i) erroneous and (ii) prejudicial to the interest of Revenue. It is, therefore, amply clear that the CIT cannot exercise the revisionary power under section 263 of the Act unless he is able to establish that the order of the AO is both erroneous and prejudicial to the interest of Revenue. If, however, there are two possible views on an issue and the AO has taken one of the possible views, then there is no occasion for the CIT to exercise the powers of revision. Further, the revisionary powers under section 263 of the Act cannot be exercised by the CIT for directing a full inquiry to find out if the view taken by the AO is erroneous, when a view has already been taken in the matter after an inquiry has been undertaken. The power of revision can be exercises only when no inquiry, as required under law, is carried out. However, even in case of inadequate inquiry by the AO, the order of the AO cannot be reviewed. 4.4.2 We have carefully perused the order of assessment passed under section 143(3) of the Act vide order dated 24.03.2014 for A.Y. 2011-12. On perusal thereof, we find that the issue of disallowance under section 14A r.w rule 8D of the Rules has certainly been the subject matter of inquiry Futre Corporate Resources Ltd. and was taken up in detail by the AO in assessment proceedings as can be seen at paras 4 to 4.2 of the order. In fact, it appears to us that the scrutiny proceedings was entirely devoted to the consideration of the issue of the disallowance to be made under section 14A r.w. rule 8D of the Rules. We find that details called for by the AO, while inquiring into this issue, were filed by the assessee; inquiries and examination thereof were made by the AO and much of this finds mention at paras 4 to 4.2 of the order of assessment that is sought to be revised. After noting the facts of the case, the details called for, submissions of the assessee and an examination and consideration thereof, the AO proceeded to render his decision for making disallowance under section 14A r.w. rule 8D of the Rules as under at paras 4.2 and 4.3 thereof: - “4.2 The submission filed by the AR of the assessee has been carefully considered but the same was not accepted A company cannot earn dividend without its existence and management Investment decisions are very complex in nature They require substantial market research, day- to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time From the detail submitted by the assessee and explanation given by him, it is observed that assessee has regular business connection with the companies in which investments has been made and also there are business incomes to assessee from them Therefore, interest expense debited by assessee has not been considered for the purpose of calculation of disallowance u/s 14A because same has been incurred for the purpose of business. But it is not correct to say that no any personal cost, administrative cost has been incurred for maintaining the investments, therefore disallowance of 0.5% of average value of investment has been made, considering the fact that there was day to day administrative cost, personal cost has been incurred by the assessee for maintaining the investments. 4.3 Accordingly, disallowance of Rs. 3,36,28,000/- (0.5% of [(2465.47+ 132046.19)/2] being average value of opening investment and cost value of closing investment is hereby disallowed u/s 14A and added back to the total income of the assessee company. The amount of Rs.3,36,28,000/- Lac is also added to the book profit as per clause (f) to Explanation 1 below section 115JB(2) of the Act.” 4.4.3 A perusal of paras 4.2 and 4.3 of the order of assessment for A.Y. 2011-12 (extracted supra) clearly establishes that after consideration of the assessee’s explanations the AO has not accepted the assessee’s contention that no disallowance under section 14A r.w. rule 8D of the Futre Corporate Resources Ltd. Rules is called for. The AO observes that from the details filed and explanations put forth by the assessee, that there were substantial investments made in its group/subsidiary concerns (i.e. upto almost 96% of the investments made) for the purposes of its business and therefore proceeded to hold that the interest incurred/debited by the assessee against loans taken for the purpose of such strategic investments are not to be considered for the purpose of disallowance under section 14A r.w. rule 8D of the Rules. In our view, this establishes beyond doubt that the AO, in fact, called for, examined and verified the details/submissions filed by the assessee, before holding that no disallowance is to be made from out of interest debited by the on loans taken, ostensibly under rule 8D(2)(ii) of the Rules, as approximately 96% of the investment thereof has been strategically invested in its associate/subsidiary concerns for the purposes of the assessee’s business. We also find that after holding so, the AO proceeded to make a disallowance of `3,36,28,000/- under section 14A r.w. rule 8D(2)(iii) of the Rules as administrative costs incurred for maintaining the investments and earning exempt income @0.5% of the average value of opening investment and closing investment. 4.4.4 An important aspect that we observe in the case on hand, is that the learned CIT has not disputed the basic fact that the nature of investments being strategic investments, were made for the purpose and in the course of the assessee’s business. It is also seen that the learned CIT(A) has not disputed, controverted or found any discrepancy in the submissions, explanations and factual details brought on record by the assessee, which have been considered, examined and verified by the AO. We find that in revisonary proceedings, the learned CIT, apart from the facts already on record, has not found any fresh or different facts. The learned CIT has merely taken a different view on the same set of facts. In our considered view, if the actions/finding of the AO are evaluated in the factual matrix as laid out above and the settled legal position, it is clear that there is no infirmity in the order of the AO as it was in accordance with law in the given facts and circumstances of the case, rendered after due application of mind on the issue of disallowance under section 14A r.w. rule 8D.
Futre Corporate Resources Ltd. 4.4.5 For the purpose of revision under section 263 of the Act, what is relevant is to decide whether the view adopted by the AO in the order of assessment, while considering the issue of disallowance under section 14A r.w. rule 8D of the Rules, was a possible view, notwithstanding the fact that the learned CIT entertains a different view/opinion on the same set of facts. In the case on hand, as spelt out earlier in this order, and which we again reiterate, that the learned CIT has not controverted the factual aspects of the AO’s finding that no disallowance of interest on loans debited by the assessee is called for thereon (ostensibly under rule 8D(2)(ii) of the Rules) since almost the entire investment was made strategically in group concerns for the purposes of the assessee’s business, but proceeded beyond the show cause notice he issued to the assessee by directing inquiry to be carried out under section 57(ii) of the Act also alongwith the disallowance to be made under rule 8D(2)(ii) of the Rules. We also find that the learned CIT/learned D.R. for Revenue have also not controverted the judicial pronouncements cited by the assessee in support of its various contentions, on jurisdiction as well as on merits. In this factual and legal matrix of the case as laid out above, we are of the opinion that, since it is clear to us that inquiry in respect of the requirement of disallowance of interest under section 14A r.w. rule 8D of the Rules was conducted by the AO in the assessment proceedings, as is evident from the order of assessment for A.Y. 2011-12, and he took a possible view that no disallowance was called for on interest expenditure, ostensibly in respect of rule 8D(2)(ii) of the Rules and that disallowance was called for under rule 8D(2)(iii) of the Rules; the mere fact that the CIT is not in agreement with the view adopted by the AO, would not render the order of assessment erroneous and prejudicial to the interest of Revenue. In coming to this view, we draw support from, inter alia, the decisions of the Hon'ble Courts in the case of Malabar Industrial Co. Ltd. (243 ITR 83) (SC), CIT vs. Max India Ltd. (295 ITR 282) (SC) and Design and Automation Engineers (Bombay) P. Ltd. (323 ITR 632) (Bom). In this factual and legal matrix of the case and considering the aforesaid judicial pronouncements, we are of the view that since the AO has come to a finding and taken a possible