ASSOCIATED SOAPSTONE DISTRIBUTING CO PRIVATE LIMITED,JAIPUR vs. PRINCIPAL COMMISSIONER OF INCOME TAX -2, JAIPUR, JAIPUR

fu/kZkfjrh dh vksj ls@Assessee by : Shri Rohan Sogani, CA jktLo dh vksj ls@Revenue by: Shri Arvind Kumar, CIT-DR lquokbZ dh rkjh[k@Date of Hearing : 05/12/2023 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 04 /03/2024 vkns'k@ORDER PER: SANDEEP GOSAIN, JM This appeal filed by the assessee is directed against order of the ld. PCIT-2, , Jaipur, dated 30-03-2023 for the assessment year 2018-19 wherein the assessee has raised the solitary ground as under:-. ‘’In the facts and circumstances of the case and in law, the ld. PCIT has erred in assuming jurisdiction u/s 263 when the order of the AO is neither erroneous nor prejudicial to the interest of the Revenue. The action of the ld. PCIT is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the order passed u/s 263.’’

2 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 2.1 Brief facts of the case are that the M/s. Associated Soapstone Distributing Company Private Limited (“assessee company”), for the relevant previous year, filed its return of income, at a total income of Rs. 13,51,08,500, on 24.11.2018. Subsequently, the case of the assessee company was selected for complete scrutiny by issuance of notice, dated 22.09.2019, under Section 143(2) of Income Tax Act, 1961. Thereafter, order, dated 17.03.2021, was passed by the ld. AO/National Faceless Assessment Center (“NFAC”) Delhi, under Section 143(3) of ITA, in a Faceless Manner. Against the said order passed by NFAC, jurisdiction was assumed by the ld. Principal Commissioner of Income Tax (“PCIT”), under Section 263, and Show Cause Notice (“SCN”), dated 15.02.2023, was issued to the assessee company. Pursuant to SCN issued, assessee company filed Written Submissions along with relevant evidences before ld. PCIT. Thereafter, ld. PCIT passed order dated 30.03.2023, under Section 263, by raking up the following issues and assuming jurisdiction under Section 263: -  Disallowance under Section 14A, read with Rule 8D, of Rs. 23,31,312[“Issue No. 1”].  Interest of Rs. 55,810 on delayed payment of TDS not eligible for deduction under Section 36(1)(ii) or Section 37 [“Issue No. 2”].  Excess MAT Credit, pertaining to AY 2016-17, Rs. 96,13,814 erroneously allowed. [“Issue No. 3”]

3 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 2.2 On examination of the assessment order dated 17-03-2021, the ld. PCIT invoked the provisions of Section 263 of the Act by observing as under:- ‘’2. On perusal of the assessment records, it was noticed that:- 2.1 The assessee has made substantial investments in equities of domestic companies, income of which in the form of dividend would not form part of total income and hence provisions of section 14A are applicable. The investment in equities of domestic companies as on 31.3.2018 was Rs.5,80,00,377/- which was at the same figure as on 31.3.2017. Though the assessee has not received any exempt income during the year but as per the clarification issued vide CBDT Circular No. 5/2014 dated 11.02.2014, the receipt of any exempt income in any year is not a relevant factor for applicability of section 14A of the Act. The only relevant factor is the investments in such assets which have resulted or would result in to earning of such income which would not form part of total income. The assessee has claimed total finance cost of Rs. 10,00,82,481/- in the P &L a/c which in the absence of any specific details available on record, is to be considered for making disallowance under Rule 8D(2)(i) on proportionate basis i.e. at Rs.17,51,059/- (10,00,82,481 x 5,80,25,377/ 331,64,63,555). The disallowance as per Rule 8D(2)(ii) is worked out to Rs. 5,80,253 (being 1% of average investment of Rs. 5,80,25,377). However, neither the company has offered any such disallowance suo moto nor the FAO has made any disallowance u/s 14A r.w. Rule 8D of the IT Rules. 2.2 As per note 25 to balance sheet, total interest expenses of Rs.9,64,52,690/- have been claimed of which TDS was made on the amount of Rs. 1,31,17,690/- only. Thus the balance interest payments of Rs.8,33,34,769/- pertained to the loans taken from scheduled banks. As per the provisions of section 43B(e) of the Act, such interest can be allowed only when it is paid before the due date for filing ITR u/s 139(1) of the Act. As per clause 26(i)(B) (a) the amount of interest on bank loans paid 4 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR before the due date of filing ITR u/s 139(1) of the Act is Rs. 42,83,506/- only and the balance bank interest of Rs.7,90,51,263/- appears to have not been paid upto the due date of filing of ITR. Therefore, the unpaid bank interest amounting to Rs.7,90,51,263/- was liable to be disallowed u/s 43B (e) of the IT Act. 2.3 As per clause 34(c) of tax audit report in form 3CD, an interest of Rs.55,810/-is paid on delayed payment of TDS which is not eligible for deduction either u/s 36(1)(iii) or u/s 37 of the Act but the same stands allowed. 2.4 As per note 35 to balance sheet, expenses of Rs 8,32,895/- and Rs.7,07,914/- was made in foreign currency to foreign parties. Both these amounts are prima facie liable to TDS u/s 195 of the Act but as per clause 34(a) of form 3CD, the auditors have reported that TDS u/s 195 was made only on Rs8,32,895/- and the other expenditure of R$7,07,914/ was paid/credited without TDS. Thus, this amount is liable to disallowance u/s 40(a)(i) of the Act. ‘’2.5 In the computation sheet enclosed with the assessment order the FAO has allowed MAT credit u/s 115AA of Rs.2,12,99,115/-. In the ITR claimed MAT credit of Rs.96,13,814/- relating to A.Y. 2016-17 and that of Rs.1.44,61,931/- relating to A.Y. 2017-18 has been claimed out of which credit of Rs.2,12,99,115/ has been allowed during the A.Y. 2018-19 and the balance of Rs. 27,76,629/- has been carried forward for adjustment. It is noticed that in the order u/s 143(3) passed for the A.Y. 2016-17. the tax liability computed under normal provisions of the Act was more than the taxi liability computed u/s 115JB of the Act. As such no brought forward MAT credit relating to A.Y. 2016-17 was available to be set off in A.Y. 2018-19. Hence, excess MAT credit of Rs.96,13,814/- has been erroneously allowed which needs to be revised.

3. Considering the above facts, a show cause notice u/s 263 of the I.T. Act, 1961 was issued to the assessee vide this office letter No. ITBA/REV/F/REV1/2022- 23/1049786424(1) dated 15.02.2023 5 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR to explain as to why the assessment order passed by NeAC on 17.03.2021may not be revised u/s 263 and may not be treated as erroneous and prejudicial to the interest of the revenue.

4. In response, the assessee filed replies on various dates i.e 22.02.2023 & 28.03.2023 the gist of the reply is as under: (i) In regard para no.3.1 of show cause notice dated 15.02.2023 in respect of disallowance u/s 14A the assessee contented that to earn interest on tax free bonds, no expense has been incurred by the assessee during the year under consideration. The assessee company was having interest free fund available with it under the head "Reserve and surplus" details of such reserve and surplus have been furnished with effect from FY 2011-12 to 2017-18. The assessee further submitted that investment in equities of domestic companies was made from out of interest free funds available with assessee company and hence, no direct or indirect cost was incurred in making investment in equities of domestic companies. (ii) In regard to para3.2 of show cause notice dated 15.02.2023 the assessee submitted the details of unpaid bank interest amounting Rs. 7.90.51.263. The assessee contented that interest was paid during the FY and it was not outstanding as on 31.03.2018. In reply dated 28.03.2023 the assessee furnished the detail alongwith copy of ledger account of interest paid. (iii) In regard to para3.3 of show cause notice dated 15.02.2023 the assessee submitted that the interest on late payment of TDS is not penal in nature since it is compensatory. It is eligible for deduction u/s 37(1), He also relied upon judgement of Karnataka High Court in case of CIT/ANR VS Oriental Insurance Co Ltd. (iv) In regard to para 3.4 of show cause notice dated 15.02.2023 the assessee submitted that the payment of Rs. 7,07,914 in respect of foreign travel expenses of staff of the assessee company undertaken for business purposes. Details thereof have been furnished. This foreign currency was for ticket and expenses incurred on foreign travelling by the staff of the assessee and hence it was claimed the same are not liable for TDS u/s 195 of Income Tax Act.

6 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR (v) In regard to para 3.5 of show cause notice dated 15.02.2023 the assessee submitted that the assessee company is in appeal against the assessment order passed u/s 143(3) for AY 2016-17 and the appeal is still pending for disposal. The assessee company had claimed MAT credit on the basis of return filed.

5. As regards the issue relating to disallowance under section 14A, the assessee has made substantial investments in equities of domestic companies, income of which in the form of dividend would not form part of total income and hence provisions of section 14A are applicable. The investment in equities of domestic companies as on 31.3.2018 was Rs. 5,80,00,377/- which was at the same figure as on 31.3.2017. Though the assessee has not received any exempt income during the year but as per the clarification issued vide CBDT Circular No. 5/2014 dated 11.02.2014, the receipt of any exempt income in any year is not a relevant factor for applicability of section 14A of the Act. The only relevant factor is the investments in such assets which have resulted or would result in to earning of such income which would not form part of total income. However, neither the assessee offered any such disallowance suomoto in the computation of income nor the AO made any disallowance u/s 14A r.w. Rule 8D of the IT Rules. The assessee has claimed total finance cost of Rs. 10,00,82,481/- in the P&L a/c which in the absence of any specific details available on record, is to be considered for making disallowance under Rule 8D(2)(i) on proportionate basis i.e. at Rs. 17,51,059/- (10,00,82,481 x 5,80,25,377/ 331,64,63,555). The disallowance as per Rule 8D(2)(ii) is worked out to Rs. 5,80,253 (being 1% of average investment of Rs. 5,80,25,377). Thus, total disallowance u/s 14A r.w. Rule 8D is worked out to Rs.23,31,312/- In the reply dated 22.2.2023 filed during present proceedings, the assessee has submitted as under:- (i) The investment in equity shares of Jai Vadhman Khaniz Pvt. Ltd amounting to Rs. 5,60,80,877/- was made during the FY 2013-14 to 2015-16. The main purpose of investment in these shares was to acquire control over the company which was the competitor in the business of assessee company. That investment

7 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR in the shares of this company was not made to earn exempt dividend income but to mitigate competition as Jai Vadhman Khaniz Pvt. Lt deals in the same business in which the assessee company is engaged. ii) That no direct or indirect cost has been incurred by the assessee company in making investment in equities of domestic companies. The assessee was having interest free funds available with it under the head "Reserves and Surplus" which have been utilized in making investment in equities. The assessee was having own funds in Reserves and Surplus at Rs. 49,46,95.704/- as at 31.3.2012 before making investment in shares. iii) The finance cost of Rs. 10,00,82,481/- as mentioned in the notice dated 15.2.2023 has been taken as per Note -25 of the Audited Financial Statements which includes Rs. 2,99,209/- on account of delay in deposit of taxes, Bank charges of Rs. 33,30,813/- and Bank interest of Rs. 9,64,52,459/-. That interest expenses have been incurred on the loans taken for specific purposes and also utilized for those purposes. The details of such loans and interest expenses are given as under:-

S.N. Nature/purpose of loan Interest amount in Rs. 1. Interest on CC Limits 2,08,67,588.53 2. Interest on Equipment Finance 3,68,75,687.25 3. Interest on Term Loan 1,42,38,661.07 4. Interest paid to NBFC 1,31,17,681.00 5. Interest on LC and Hundies 1,13,52,841.24 6. Bank Charges 33,30,812.44 7. Interest on delayed payments 2,99,209.00

8 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR (iv) The assessee has also placed reliance on recent Bombay High Court decision given in the case of Pr. CIT 14 Vs. Godrej & Boyce Mfg. Co Ltd. [2023] Taxman (HC) 395 wherein disallowance u/s 14A out of interest expenses is deleted. I have considered the submissions of assessee in the light of the facts of the case and relevant legal provisions but found the same to be not acceptable. The averments made in the reply of assessee are discussed as under: (i) The assessee's plea regarding the purpose of making investment is not relevant for the purpose of making disallowance u/s 14A of the IT Act. It is worth mentioning that the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs CIT254 Taxman 325 (SC) [2018] has held-When the shares are held by the assessee not to earn exempt income but to retain controlling stake in the investee company, the dominant purpose test cannot be said to be relevant for the purpose of Sec 14A and disallowance u/s 14A can be made. It is not the dominant purpose test but the principle of apportionment which is ingrained in the provisions of Section 14A.

(ii) The plea that no exempt income has been earned on such investments is not relevant as the investments on which no exempt income has been earned during the year are also capable of generating exempt income. As regards to non-disclosure of any exempted income and disallowance of expenses us 14A of the Act the CBDT vide Circular No 5/2014 dated 11.2.2014 has specifically clarified that irrespective of the fact of non-earning or less earning of exempted income in any year, provisions of section 14A read with rule 8D are applicable in case the assessee has made investments in such assets which would result in exempted income. In order to make the intention of the legislation clear the clarification issued vide Circular No 5/2014 has also been brought in the statute vide Finance Act 2022 with an explanation to section 14A that notwithstanding anything to the contrary contained in this Act, the provisions of section 14A shall apply and shall deemed to have always applied in a case

9 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR where exempted income has not accrued or arisen or has not been received during the previous year relevant to assessment year and expenditure has been incurred during the said previous year in relation to such exempted income. (iii) The assessee's claim that no direct or indirect cost is incurred in making such investments is not correct because such investment decisions are complex and need day to day management/monitoring, hence, the assessee cannot say that no expenses have been incurred by it for the same. (iv) Under sub-section (2) of section 14A the Assessing Officer is required to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act, in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. Sub-section (3) of section 14A provides that the provisions of sub- section (2) shall apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. (v) Coming to assessee's plea that no interest bearing funds have been utilized in making investment in shares, it is stated by assessee that the investments in shares was made during the FY 2013-14 to 2015-16. The financials of assessee as noticed from the Balance Sheets as on 31.03.2012 and 31.3.2018 are given as under:- As on 31-03-2012 As on 31-03-2018 Rs. Rs. Shareholder’s funds 59.37 crore 115.94 crore Long term/ secured loans 42.70 crore 94.09 crore Fixed Assets 86.33 crore 150 crore 10 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR Investments 5.47 Lakh 9.14 crore From the above figures, it is seen that investment in fixed assets was more than the shareholder's funds consisting Share Capital, Reserves & Surplus not only prior to making investment in shares but also after making such investment. Hence, it is misconceived to say that investment in equity shares of Jai Vadhman Khaniz Pvt. Ltd made during FY 2013-14 to 2016-17 was out of Reserves and surplus and no interest bearing funds have been utilized in making such investments. However, I agree with the assessee to the extent that the expenses on account of bank charges and interest on delayed payments should not be considered while computing the disallowance u/s 14A as the expenses under these heads are not related to investment in shares. (vi) As regards the legal position on the subject, in the case of Lally Motors India (P) Ltd. Vs PCIT [2018] 170 ITD 370 (Amritsar - Trib) where Hon'ble ITAT Amritsar held that Section 14A would apply even if no dividend was earned by assessee from investments in shares. InPunjab Tractors Ltd Vs CIT [2017] 393 ITR 223 (P &H) where Hon'ble Punjab & Haryana High Court held that AO is bound to apply provisions of Rule 8D where he is not satisfied with the correctness of the claim of assessee in respect of expenditures incurred to earn exempt income. In Avon Cycles Ltd Vs CIT [2015] 228 Taxman 368 (P&H) (MAG.) where Hon'ble Punjab & Haryana High Court held that where funds utilized by assessee was mixed funds and, hence, interest paid on borrowed fund was also relatable to interest on investment made in tax free funds, interest expenditure relatable to investment in tax free funds was to be computed under provisions of Rule 8D(2)(ii).In Nahar Spinning Mills Ltd. Vs CIT [2017] 395 ITR 12 (P & H) where Hon'ble Punjab & Haryana High Court held that disallowance of proportionate administrative expenditure made for eaming exempted dividend. income computed on reasonable basis would be just (A.Y 2006-07).In Vipin Malik Vs.ACIT 11 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR [2017] 88 taxmann.com 415 (Delhi Trib.)/[2016] 45 ITR(T) 589 (Delhi Trib.)Where Hon'ble ITAT Delhi held that disallowance of expenditure Exempt income-No disallowance was made by the assessee- Invoking the provision read with rule 8D(2)(ii) was held to be justified (R.8D] (AY 2009-10) (vii) Accordingly the disallowance u/s 14A r.w. Rule 8D(2) of the Act should have been added in the income of the assessee. Since the AO has not considered this issue while completing the assessment in this case, the assessment order passed under section 143(3) dated 17.03.2021 is held to be erroneous and prejudicial to the interest of the revenue.

7.2 The reply of assessee is not acceptable. Sub-section-(1) to section 201 defines that where any person who is required to 12 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR deduct tax, does not deduct or after so deducting fails to pay the whole or any part of the tax, shall be deemed to be an assessee in default in respect of such tax. Sub-section-(1A) prescribes that if any person as referred in sub-section (1) does not deduct or after deducting fails to pay the tax shall be liable to pay interest for such default. 7.3 In view of the provisions of sub-section (1) and (1A) it is clear that the interest us 201(1A) is charged in case of a default committed under these provisions. Hence, the interest charged for such default is penal in nature, In view of the proviso to section 37 of the Act, such penal interest cannot be allowed as a deduction while computing income from business of the assessee. Since the AO has not considered this issue while completing the assessment in this case, the assessment order passed under section 143(3) dated 17.03.2021 is held to be erroneous and prejudicial to the interest of the revenue. 8 In regard to para no 3.4 relating to foreign travel expenditure on which TDS was not deducted, of show cause dated 15.02.2023 the assessee has claimed that it relates to travel expenses of staff and furnished the relevant details and the same has been duly examined. Hence, no adverse inference is required to be drawn 9. In regard to para no 3.5 of show cause dated 15.02.2023 the assessee has furnished the relevant details. As regards to the issue of MAT credit in the computation sheet enclosed with the assessment order the AO has allowed MAT credit u/s 115JAA of Rs. 2,12,99,115/- which include MAT credit of Rs. 98,13,814/- pertaining to A.Y. 2016-17. On perusal of records it is revealed that in the order u/s 143(3) passed for the A.Y. 2010-17, the tax liability computed under normal provisions of the Act was more than the tax liability computed u/s 115JB of the Act. As such no brought forward MAT credit relating to A.Y. 2016-17 was available to be set off in A.Y. 2018-19 which needs to be withdrawn by revising the order u/s 263 of the IT Act.

13 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR In the reply dated 22.02.2023, it is pleaded that the assessee company is in appeal against the assessment order for the A.Y. 2016-17 passed u/s 143(3) of the I T Act. 1961 which is pending for disposal. The assessee has claimed MAT credit on the basis of Return of income filed by it. The reply of assessee is considered but not found acceptable. The factual position regarding available MAT credit has not been disputed. As regards pendency of appeal for the AY, 2016-17, the figures of available AMT credit can be revised on receipt of appeal order, if need arises. The assessment is held erroneous on this issue and hence the excess MAT credit of Rs. 96,13,814/- pertaining to A.Y. 2016-17 requires to be withdrawn. Since the AO has not considered this issue while completing the assessment in this case, the assessment order passed under section 143(3) dated 17.03.2021 is held to be erroneous and prejudicial to the interest of the revenue.

14 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR In the case of JR Industries Vs PCIT (2021) 132 taxmann.com 302 where in Hon'ble Tribunal, Jaipur held that "After having considered the entire facts and circumstances of the case, it is viewed that the Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return. The order passed by the Assessing Officer becomes erroneous when an enquiry has not been made before accepting the genuineness of the claim which resulted in loss of revenue’’ It was further held in the same case that "Having considered the entirety of facts and circumstances of the present case, it is further found that here the question is not filing the documents by the assessee with the Assessing Officer during the assessment proceedings, however, here the question is with respect to carrying out necessary verifications on the information of the department and that of the documents submitted by the assessee. Unfortunately, there has not been any sort of verification carried out by the Assessing Officer. It is viewed that the Assessing Officer has proceeded only on the basis that 'modus operand of providing bogus sales cannot be relied upon in the light of the concrete information available on the record. Thus, in this way, only on this basis, the Assessing Officer treated the sales as bogus and charged 25 per cent as income derived out in lieu of accommodation entries without any basis, enquiry or verification. Even, throughout the assessment proceedings, there is not even any whisper from the side of the Assessing Officer that he had camed out any sort of investigation or verification or recorded his satisfaction. Thus, the findings of the Commissioner are agreed with and the order passed by the Commissioner is upheld, wherein he has pointed out the discrepancies in the order of Assessing Officer. Thus, considering the entirety of facts and circumstances as discussed above and also taking into consideration the judgments relied upon by the respective parties, this ground of appeal raised by 15. ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR the assessee is dismissed and the order passed by the Commissioner under section 263 is upheld"

11. Accordingly, by virtue of powers conferred on the undersigned under the provisions of section 263 of the Income Tax Act 1961, I hold that the order under Section 143 (3) of the IT Act dated 17.03.2021 for AY 2018-19 passed by the Assessing Officer is erroneous in so far as it prejudicial to the interest of revenue as the said order has been passed by the Assessing Officer in a routine and perfunctory manner without examining the issues of disallowance under section 14A,delayed interest payment and incorrect MAT credit. The order of the Assessing Officer is therefore liable to revision under the clause (a), (b) & (c)of Explanation (2) to section 263 of the Income Tax Act. Hence, the assessment order is set aside on the issues as discussed above and the AO is directed to examine the issues and pass suitable order after according opportunity of being heard to the assessee.’’ 2.3 During the course of hearing the ld.AR of the assessee regarding Issue No. 1 to Issue No. 3, has forwarded the following submissions for consideration with the prayer that the order passed by the ld. PCIT u/s 263 of the Act is not justified and the proceedings initiated by the ld. PCIT deserves to be quashed.

‘’GROUND NO. LD. PCIT ERRED IN ASSUMING JURISDICTION UNDER SECTION 263 SUBMISSIONS 1. Disallowance under Section 14A, read with Rule 8D, of Rs. 23,31,312[“Issue No. 1”].

16 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 2, JAIPUR 1.1. Following factual position was observed by the ld. PCIT, which is Following factual position was observed by the ld. PCIT, which is Following factual position was observed by the ld. PCIT, which is undisputed: - 1.1.i No new investment, in Equity Shares, was made by the assessee No new investment, in Equity Shares, was made by the assessee No new investment, in Equity Shares, was made by the assessee company, during the year under consideration. Investment in Equities of company, during the year under consideration. Investment in Equities of company, during the year under consideration. Investment in Equities of Domestic Companies as on 31.03.2018 was Rs. 5.80 Cr., which was Domestic Companies as on 31.03.2018 was Rs. 5.80 Cr., which was Domestic Companies as on 31.03.2018 was Rs. 5.80 Cr., which was the same as on 31.03.2017. the same as on 31.03.2017. [PCIT Order Page 2] 1.1.ii Assessee co Assessee company did not receive any exempt income during the year mpany did not receive any exempt income during the year under consideration. under consideration. [PCIT Order Page 2] 1.1.iii Financial position of the assessee company, as noticed from the Financial position of the assessee company, as noticed from the Financial position of the assessee company, as noticed from the Balance Sheets as on Balance Sheets as on 31.03.2012 and 31.03.2018 was as under: 31.03.2018 was as under: - [Screenshot from the PCIT [Screenshot from the PCIT Order Page 7] 1.2. Ld. PCIT assumed jurisdiction under Section 263, on the issue of invocation of Ld. PCIT assumed jurisdiction under Section 263, on the issue of invocation of Ld. PCIT assumed jurisdiction under Section 263, on the issue of invocation of Section 14A, read with Rule 8D, on the following premise: Section 14A, read with Rule 8D, on the following premise:- - 1.2.i CBDT Circular No. 5/2014, dated 11.02.2014 clarifies that receipt of CBDT Circular No. 5/2014, dated 11.02.2014 clarifies that receipt of CBDT Circular No. 5/2014, dated 11.02.2014 clarifies that receipt of exempt income, in any year, is not exempt income, in any year, is not a relevant factor for applicability of a relevant factor for applicability of Section 14A. Section 14A. 1.2.ii Explanation Explanation has been added to Section 14A, vide videFinance Act, 2022, clarifying that even if no exempt income is received, then also clarifying that even if no exempt income is received, then also clarifying that even if no exempt income is received, then also provisions of such section would be applicable. provisions of such section would be applicable. 1.2.iii Assessee company has claimed Total Finance Cost of Rs. Assessee company has claimed Total Finance Cost of Rs. Assessee company has claimed Total Finance Cost of Rs. 10,00,82,481 in the Profit and Loss Account. Further, assessee 10,00,82,481 in the Profit and Loss Account. Further, assessee 10,00,82,481 in the Profit and Loss Account. Further, assessee company’s plea that no interest bearing funds have been utilized in company’s plea that no interest bearing funds have been utilized in company’s plea that no interest bearing funds have been utilized in making investment is incorrect. making investment is incorrect. 1.2.iv Assessee company’s claim was incorre Assessee company’s claim was incorrect that no direct or indirect ct that no direct or indirect investment was made, in relation to the investment, as such investment investment was made, in relation to the investment, as such investment investment was made, in relation to the investment, as such investment decisions are complex and needs day to day monitoring. decisions are complex and needs day to day monitoring. decisions are complex and needs day to day monitoring. Each of the above contentions raised by the ld. PCI Each of the above contentions raised by the ld. PCIT are rebutted in the T are rebutted in the ensuing paras.

1.3. No Exempt Income No Exempt Income – No Disallowance under Section 14A; No Disallowance under Section 14A; CBDT Circular No. 5/2014, dated 11.02.2014 No. 5/2014, dated 11.02.2014 –cannot override Section 14A. cannot override Section 14A.

17 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 1.3.i In the below mentioned decision, rendered by Hon’ble Supreme Court, it has been held that when the assessee hasnot earned any exempt income, there cannot be any disallowance under Section 14A.  Oil Industry Development Board [2019] 103 taxmann.com 326 (SC) [CLC - Pages 1 to 2] “Head Notes…Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income (Applicability of) - In course of appellate proceedings, Tribunal held that in absence of any exempt income, disallowance under section 14-A of any amount was not permissible - High Court upheld order passed by Tribunal - Whether, on facts, SLP filed against decision of High Court was to be dismissed - Held, yes [Para 3] [In favour of assessee]…” 1.3.ii In the below mentioned decisions, rendered by three different High Courts, it is held that Circular No. 5/2014, dated 11.02.2014, cannot override Section 14A read with Rule 8D and, accordingly, if there is no exempt income, there cannot be any disallowance under Section 14A.  IL & FS Energy Development Company Ltd. [2017] 84 taxmann.com 186 (Delhi) [CLC - Pages 7 to 9] “Head Notes :Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (CBDT Circular v. rule 8D) - Assessment year 2011-12 - Whether CBDT Circular No. 5/2014 dated 11-2-2014 cannot override express provisions of section 14A, read with rule 8D - Held, yes - Whether where no exempt income was earned in relevant assessment year, merely because tax auditor had suggested in tax audit report that there ought to be such disallowance, it could not be a ground to make disallowance in terms of section 14A, read with rule 8D - Held, yes [Para 23] [In favour of assessee]..”  Redington (India) Ltd. [2017] 77 taxmann.com 257 (Madras) [CLC - Pages 13 and 15] “…7. Per contra, Sri. T. Ravikumar appearing on behalf of the revenue drew our attention to the marginal notes of s.14A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income.

8. He relied upon a Circular issued by the Central Board of Direct Taxes in Circular No. 5 of 2014 dated 11.2.2014 to the effect that s. 14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at 18 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub-section (1) thereof to income 'under the act' and not 'of the year' and a disallowance under s.14A r.w. Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year.

19 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 1.3.iv Accordingly, no error has been committed by NFAC in not making any disallowance under Section 14A in the case of the assessee company.

20 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR Explanation to Section 14A, inserted vide Finance Act, 2022, to have “Prospective Effect”

1.3.v In the below mentioned cases, Explanation inserted to Section 14A, videFinance Act, 2022, is held to have a prospective effect.  ERA Infrastructure (India) Ltd. [2022] 448 ITR 674 (Delhi) [CLC - Pages 18,19 and 22] “..4. Learned counsel for the petitioner also submits that in view of the amendment made by the Finance Act, 2022 to Section 14A of the Act by inserting a non obstante clause and an explanation after the proviso, a change in law has been brought about and consequently, the judgments relied upon by the authorities below including PCIT vs. IL & FS Energy Development Company Ltd. (supra) are no longer good law….” “….5 . However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to Section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years…” “…6 . Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT, MANU/SC/2079/2005 : (2005) 12 SCC 717 has held that a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood….” “…8. Consequently, this Court is of the view that the amendment of Section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood…”[Emphasis Supplied]  Lodha Developers Ltd., and 1594/Mum/2019[ITAT Mumbai Bench] [CLC - Page 36] “…16 . We have carefully considered the rival contention and perused the orders of the lower authorities. Undisputed fact shows that there is no exempt income and during the year by the assessee. If there is no exempt, income naturally there cannot be any disallowance u/s. 14A of the act because no expenditure has been incurred on any exempt income during the year. Further the reliance placed by the learned departmental representative on the amendment made by the finance act 2022 applies prospectively as held by the honorable Delhi High Court in PCIT vs. Era infrastructure private limited MANU/DE/2541/2022 : [2022] 141 21 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 2, JAIPUR taxmann.com 289 (Delhi. In view of this we do not find any infirmity taxmann.com 289 (Delhi. In view of this we do not find any infirmity taxmann.com 289 (Delhi. In view of this we do not find any infirmity in the order of the learned CIT in the order of the learned CIT-A in deleting the disallowance u/s. A in deleting the disallowance u/s. 14A of 14A of the act. Accordingly, ground number 3 of the appeal of the the act. Accordingly, ground number 3 of the appeal of the learned AO is dismissed learned AO is dismissed….”

1.3.vi Even otherwise Even otherwise order, in the present case, by NFAC NFAC was passed on 17.03.2021 .03.2021, whereas, Explanation was inserted in , whereas, Explanation was inserted in Section 14A in the year 2022, 2022, videFinance Act, 2022. Thus, at the time of passing of the Thus, at the time of passing of the order by NFAC NFAC, clarification,in terms of Explanation to Section in terms of Explanation to Section 14A, was not on the statute. not on the statute. 1.3.vii Therefore, no error has been committed by NFAC in not invoking Therefore, no error has been committed by NFAC in not invoking Therefore, no error has been committed by NFAC in not invoking the provisions of Section 14A. the provisions of Section 14A.

1.4. Own funds of the assessee Own funds of the assessee company, much more than investment made , much more than investment made in Equity Shares. in Equity Shares. 1.4.i As has been observed by As has been observed by ld. PCIT, at page 7 of the the order, own funds of the assessee company, as at the end of the relevant previous year, in the assessee company, as at the end of the relevant previous year, in the assessee company, as at the end of the relevant previous year, in the form of Shareholder Funds the form of Shareholder Funds was Rs. 115.94 115.94 Cr. Whereas, investments investments, which were made in shares, as has been considered by which were made in shares, as has been considered by ld.PCITwere Rs. ld.PCITwere Rs. 5.80 Cr, out of total investment total investmentsof Rs. 9.14 Cr.Screenshot from the order of PCIT of the said factual position is as Screenshot from the order of PCIT of the said factual position is as Screenshot from the order of PCIT of the said factual position is as under:-

[Screenshot from the PCIT Order Page 7] [Screenshot from the PCIT Order Page 7] 1.4.ii Accordingly, Accordingly, assessee company’s own funds were much more than t s own funds were much more than the investments which were made investments which were made in the equity shares.

22 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 1.4.iii However, ld. PCIT at Page 7observed that investment of the assessee company in Fixed Assets was more than the Shareholder’s Funds consisting of the Share Capital. 1.4.iv It is a settled proposition that in a situation where the assessee has mixed funds, consisting of Own Funds/Interest Free Refunds and Interest Bearing Funds and payment is made out of the Mixed Funds, then the investment must be considered to have been made out of the interest free funds only. 1.4.v The “right of apportionment” and also the “right to assert” from what part of the fund a particular investment is made is of the assessee only. 1.4.vi In this regard, attention is drawn towards the decision of Hon’ble Supreme Court in the case of South Indian Bank Ltd. [2021] 130 taxmann.com 178 (SC)[CLC - Page 43]wherein, it has been held as under:- “…17. In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. For accepting such a proposition, it would be helpful to refer to the decision of the Bombay High Court in Pr. CIT v. Bombay Dyeing & Mfg. Co. Ltd. [IT Appeal No. 1225 of 2015, dated 28- 11-2017], where the answer was in favour of the assessee on the question, whether the Tribunal was justified in deleting the disallowance under section 80M of the Act on the presumption that when the funds available to the assessee were both interest free and loans, the investments made would be out of the interest free funds available with the assessee, provided the interest free funds were sufficient to meet the investments. The resultant SLP of the Revenue challenging the Bombay High Court judgment was dismissed both on merit and on delay by this Court. The merit of the above proposition of law of the Bombay High Court would now be appreciated in the following discussion.

1.5.ix Accordingly, the various avenues for which the interest expenses were incurred by the assessee company was submitted to the ld. PCIT. Thus, assessee company had clearly established before ld. PCIT that no part of the interest expense, incurred during the year under consideration, was utilized for earning exempt income or for making investment which had the potential of generating exempt income.However, this aspect was totally ignored by ld. PCIT.

1.5. Investments in Equity Shares made in the preceding years and not during the year under consideration. 1.5.i Ld. PCIT atPage 2 of the order observed the fact that no new investment in the Equity Shares of the domestic company was made during the year under consideration. 1.5.ii It was submitted before the ld. PCIT that investment was made in the Equity Shares during the period from Financial Year 2013-14 to Financial Year 2015-16. The fact is undisputed.[PCIT Order Page 5] 1.5.iii It was submitted before ld. PCIT that since the investments were made by the assessee company, not in the year under consideration, but in the preceding years, no expenses, direct or indirect were incurred in relation to such investments. However, ld. PCIT at Page 6 of the order stated that the decision of making the investmentis complex and needs date-to-day management/monitoring, hence it cannot be said that the assesse company did not incur expenseson the same. 1.5.iv Even if the contention of the ld. PCIT is accepted that the decision making, as regards investment to be made, is a complex process is 24 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR accepted,then also, since the investments were not made during the year under consideration, no disallowance can be made for the year under consideration. Also, once the investments are made, unless dividend or any other income is received, there is no requirement for carrying out any date today management or monitoring of these investments. It is submitted that the investment, as has been considered by the ld. PCIT, was in the Associate Company of the assessee company, which doesn’t require day to day monitoring. 1.5.v Accordingly, no disallowance could be made under Section 14A. 1.5.vi Even otherwise, during the course of assessment proceedings, before NFAC, entire Financial Statement, was submitted. From such details,NFAC could deduce the expenses which were incurred by the assessee company. NFAC was aware of the fact that since no fresh investmentshad been made during the year under consideration, no expenses had been incurred. Accordingly, NFAC took a conscious decision of not making any disallowance under Section 14A, which cannot be said to be erroneous.

1.6. Case laws replied upon by ld. PCIT at Page 8 of the order distinguished as under:- Case Law and Distinguishing Factor/Ratio Ratio Relied upon by ld. PCIT subsequently laid down Lally Motors Subsequently, Hon’ble Supreme Court in Section 14A would apply even India (P.) Ltd. Vs the case of Oil Industry Development if no dividend was earned by PCIT [2018] Board (Supra)held thatif there is no exempt assessee from investments in 170 ITD 370 income, no disallowance can be made shares. (Amritsar - Trib) under Section 14A. AO is bound to apply In the said case, assessee had earned provisions of Rule 8D where Punjab Tractors exempt income, whereas, in the case at he is not satisfied with the Ltd Vs CIT hand, as also observed by ld. PCIT, no correctness of the claim of [2017] 393 ITR exempt income was earned by the assessee in respect of 223 (P &H assessee company, during the year under expenditures incurred to earn consideration. exempt income. Where funds utilized by Subsequently, Hon’ble Supreme Court in assessee was mixed funds the case ofSouth Indian Bank Ltd. Avon Cycles Ltd (Supra)held thatwhere interest free own and, hence, interest paid on Vs CIT [2015] borrowed fund was also funds available with assessee-banks 228 Taxman 368 relatable to interest on exceeded their investments in tax-free (P&H)(MAG.) investment made in tax free securities; investments would be presumed funds, interest expenditure to be made out of assessee's own funds 25 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR relatable to investment in tax and proportionate disallowance was not free funds was to be computed warranted under section 14A on ground that under provisions of Rule separate accounts were not maintained by 8D(2)(ii) assessee for investments and other expenditure incurred for earning tax-free income In the said case, assessee had earned Disallowance of proportionate Nahar Spinning exempt income, whereas, in the case at administrative expenditure Mills Ltd. Vs CIT hand, as also observed by ld. PCIT, no made for earning exempted [2017] 395 ITR exempt income was earned by the dividend income computed on 12 (P & H) assessee company, during the year under reasonable basis would be just consideration. Vipin Malik disallowance of expenditure - In the said case, assessee had earned Vs.ACIT [2017] Exempt income – No exempt income, whereas, in the case at 88 taxmann.com disallowance was made by the hand, as also observed by ld. PCIT, no 415 (Delhi - assessee- Invoking the exempt income was earned by the Trib.)/[2016] 45 provision read with rule assessee company, during the year under ITR(T) 589 (Delhi 8D(2)(iii) was held to be consideration. - Trib. justified 1.7. In view of the above, ld. PCIT was not correct in assuming jurisdiction under Section 263 in relation to Issue No. 2.

26 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 2.4. In the below mentioned cases, interest paid on delayed payment of TDS, under Section 201(1A), was held to be compensatory in nature and thus, was held to be allowed as deduction:- 2.4.i Delhi Cargo Service Center [2023] 151 taxmann.com 322 (Delhi - Trib.)[CLC - Page 51] “Head Notes…Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Inteust) - Assessment year 2015-16 - Assessee-company was engaged in cargo handling services - For assessment year 2015-16, it e-filed its return - Assessing Officer made disallowance on account of interest payment on late deposit of TDS on ground that same was penal in nature - Whether since interest paid on late payment of TDS being compensatory in nature was an allowable deduction under section 37(1) and therefore, impugned disallowance was to be deleted - Held, yes [Paras 8 and 9] [In favour of assessee]…” 2.4.ii Resolve Salvage & Fire India (P.) Ltd. [2022] 139 taxmann.com 196 (Mumbai - Trib.)[CLC - Page 56] “….Section 37(1), read with section 201, of the Income-tax Act, 1961 - Business expenditure - Allowability of (Interest on delayed payment of TDS) - Assessment year 2015-16 - Assessee paid interest on late submission of TDS and claimed said interest as deduction - Assessing Officer disallowed said claim on ground that interest paid under section 201(1A) would be penal in nature - Whether since tax was deducted by assessee on behalf of third party, interest charged on failure to remit same within due date to government would be compensatory in nature and interest paid on delayed payment of TDS under section 201(1A) was to be allowed as deduction - Held, yes [Paras 5 and 6] [In favour of assessee]…”

2.5. Thus, in view of the decisions set out hereinbefore, allowability of such interest expense was one of the plausible views which was adopted by NFAC. 2.6. It is a settled proposition that once a plausible view is adopted by the Assessing Officer, there cannot be any assumption of jurisdiction under Section 263. This is for the reason that considering a plausible view, although in favor of the assessee, cannot lead to the conclusion of the order of the Assessing Officer being erroneous. 2.7. Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC), at Para 10 of its order held that “…The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a 27 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR consequence of an order of assessing officer cannot be treated as prejudicial to the interests of 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…” [Emphasis Supplied] 2.8. In view of the above, ld. PCIT was not correct in assuming jurisdiction under Section 263 in relation to Issue No. 2.

3.4. The fate of allowability of MAT Credit would depend upon the outcome in the appellate proceedings for AY 2016-17. If the assessee company‘s appeal is dismissed in the appellate proceedings, MAT credit would not be available. In such a scenario, Assessing Officer would have power to rectify the claim of MAT credit, by taking recourse to Section 154. 3.5. For such purposes, there cannot be any assumption of jurisdiction under Section 263. Each of the Sections 263 or 154 have their own scope. Section 263 jurisdictions is assumed in those cases, wherein, there is possibility of wrong application of law by the Assessing Officer.

28 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 3.6. ERRONEOUS V. MISTAKE:As per Black’s Law Dictionary the terms erroneous and mistake are defined as under: 3.6.i ERRONEOUS: Involving error; deviating from the law. This term is never used by courts or law-writers as designating a corrupt or evil act. “False" as a constituent of a fraud action may at times be said to be synonymous with "erroneous."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. 3.6.ii MISTAKE: Some unintentional act, omission, or error arising from ignorance, surprise, imposition, or misplaced confidence. A mistake exists when a person, under some erroneous conviction of law or fact, does, or omits to do, some act which, but for the erroneous conviction, he would not have done or omitted. It may arise either from unconsciousness, ignorance, forgetfulness, imposition, or misplaced confidence. 3.7. Rectification of mistakes which are apparent on record comes within the purview of Section 154. Assumption of jurisdiction under Section 263 even for those matters which can be rectified under Section 154, would render Section 154 otiose, which is against the principles of interpretation. 3.8. The principle of ut res magisvaleat quam pereat i.e. (interpretation to make a legal provision workable rather than redundant) must always be kept in mind while interpreting a statutory provision. Hon'ble Supreme Court, in the case of Hindustan Bulk Carriers (2003) 259 ITR 449 (SC) held that "A construction which reduces the statute to a futility has to be avoided. A statute or any enacting provision therein must be so construed as to make it effective and operative on principle expressed in maxim ut res magisvaleat quam pereat i.e., a liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect the intention of the parties. [See Broom's Legal Maxims (10th Edition), page 361, Craies on Statutes (7th Edition) page 95 and Maxwell on Statutes (11th Edition) page 221.]". Therefore, when an interpretation is such that it leads to a statutory provision being rendered futile and of no application, such an interpretation is best avoided. 3.9. In view of the above, ld. PCIT was not correct in assuming jurisdiction under Section 263 in relation to Issue No. 3.

4.3. It is submitted that It is submitted that jurisdiction under Section 263 cannot be assumed in those Section 263 cannot be assumed in those cases, wherein, the case i the case is pending for hearing before the first appellate before the first appellate authority. In this regard, the below mentioned legal position may please be authority. In this regard, the below mentioned legal position may please be authority. In this regard, the below mentioned legal position may please be considered. 4.4. Section 251 of the 1961 Act corresponds to section 31(3) of the 1922 Act. The Section 251 of the 1961 Act corresponds to section 31(3) of the 1922 Act. The Section 251 of the 1961 Act corresponds to section 31(3) of the 1922 Act. The power of enhancement as contained in sec power of enhancement as contained in section 251(1)(a) were similarly there tion 251(1)(a) were similarly there in section 31(3)(a). The relevant sections are enclosed, copied from Income in section 31(3)(a). The relevant sections are enclosed, copied from Income in section 31(3)(a). The relevant sections are enclosed, copied from Income- tax Commentary of Mr. SampathIyengar's, Volume 9, and Page 14047 (12th tax Commentary of Mr. SampathIyengar's, Volume 9, and Page 14047 (12th tax Commentary of Mr. SampathIyengar's, Volume 9, and Page 14047 (12th Edition) 4.5. Similarly, present powers of revision contained in section 263 Similarly, present powers of revision contained in section 263 Similarly, present powers of revision contained in section 263 of the 1961 Act correspond to section 33B of the 1922 Act. The relevant sections are correspond to section 33B of the 1922 Act. The relevant sections are correspond to section 33B of the 1922 Act. The relevant sections are enclosed, copied from Income enclosed, copied from Income-tax Commentary of Mr. Sampathlyengar's, tax Commentary of Mr. Sampathlyengar's, Volume 9, and Pages 14570 (12th Edition) Volume 9, and Pages 14570 (12th Edition) 4.6. Once an appeal is filed by the assesse Once an appeal is filed by the assessee against the order against the order of AO, he surrenders himself to the jurisdiction of CIT(A). This surrender is unconditional surrenders himself to the jurisdiction of CIT(A). This surrender is unconditional surrenders himself to the jurisdiction of CIT(A). This surrender is unconditional 30 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR and the assesse has no right to withdraw the appeal or to take the U-turn. Needless to submit that power of enhancement to CIT(A) are akin to powers of revision to CIT conferred u/s 263. 4.7. Reliance is placed on the following judicial pronouncements: 4.7.i Hon'ble Supreme Court in the case of CIT v. Rai Bahadur HardutroyMotilalChamaria [1967] 66 ITR 443. Relevant portion of the order is reproduced below: "It is also well-established that an assessee having once filed an appeal cannot withdraw it. In other words, the assessee having filed an appeal and brought the machinery of the Act into working cannot prevent the AAC from ascertaining and settling the real sum to be assessed, by intimation of his withdrawal of the appeal. Even if the assessee refuses to appear at the hearing, the AAC can proceed with the enquiry and if he finds that there has been an under- assessment, he can enhance the assessment [see CIT v. Nawab Shah Nawaz Khan [1938] 6 lTR 370 (SC) : TC7R.233]. In this context reference may be made to the decision of the Court of Appeal in King v. Income-tax Special Commissioners (1936) 1 KB 487 in which the taxpayer sought to withdraw a notice of appeal which had been given on his behalf against an additional assessment under Schedule D. The Commissioners of Inland Revenue were not satisfied that the assessment was adequate. The Special Commissioners then proposed to proceed with the hearing of the appeal in the ordinary way. At that stage the taxpayer sought a writ of prohibition to prohibit the Special Commissioners from hearing the appeal. It was held by the Court of Appeal that notice of appeal having once been given, the Commissioners were bound to proceed in accordance with the IT Acts and determine the true amount of the assessment. At page 493 of the report, Lord Wright observed as follows: "...in making the assessment and in dealing with the appeals, the Commissioners are exercising statutory authority and a statutory duty which they are bound to carry out. They are not in the position of judges deciding an issue between two particular parties. Their obligation is wider than that. It is to exercise their judgment on such material as comes before them and to obtain any material which they think is necessary and which they ought to have, and on that material to make the assessment or the estimate which the law requires them to make. They are not deciding a case inter parties; they are assessing or estimating the amount on which, in the interests of the country at large, the taxpayer ought to be taxed." 4.7.ii Hon'ble Supreme Court in the case of McMillan & Co. [1958] 33 ITR 182. Relevant portion of the order is reproduced below: "..Lastly, it seems to us clear that the answer to the question is provided 31 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR by the language of s.

31. No doubt, the two sections must be read harmoniously; but s. 13 and its proviso contain no words of limitation or qualification upon the power of the AAC in enhancing the assessment or setting aside the assessment and directing a fresh assessment to be made by the ITO. Dealing with the powers of the AAC, Chagla, C.J., in Narrondas's case (supra) said : "It is clear that the AAC has been constituted a revising authority against the decision of the ITO ; a revising authority not in the narrow sense of revising what is the subject-matter of the appeal, not in the sense of revising those matters about which the assessee makes a grievance, but a revising authority in the sense that once the appeal is before him he can revise not only the ultimate computation arrived at by the ITO but he can revise every process which led to the ultimate computation or assessment. In other words, what he can revise is not merely the ultimate amount which is liable to tax, but he is entitled to revise the various decisions given by the ITO in the course of the assessment and also the various incomes or deductions which came in for consideration of the ITO." We are in agreement with these observations." 4.7.iii Hon'ble ITAT Delhi Bench 'F' in the case of ACIT v. Pawan Kumar Singhal (2019) 183 DTR 0161 (Del.) (Trib.) Relevant portion of the order is reproduced below: "On cumulative consideration the provisions U/s 250(6) read with sections 250(4), 250(5), 251(1)(a), 251(1)(b) and Explanation of section 251(2) of I.T. Act, we come to the conclusion that the Ld. CIT(A) is not empowered to dismiss the appeal for non-prosecution of appeal and is obliged to dispose of the appeal on merits. Once the Assessee files an appeal U/s 246A of I. T. Act, the Assessee sets in motion the machinery designed for disposal of the appeal under sections 250 and 251 of 1.T. Act. If the appeal filed by the assessee fulfils the requirements of maintainability and admissibility prescribed under sections 246, 246A, 248 and 249 of I.T. Act; neither the Assessee can stop the further working of that machinery as a matter of right by withdrawing the appeal, or by not pressing the appeal, or by non-prosecution of the appeal; nor the first appellate authority, CIT(A) in this case, can halt this machinery by ignoring either the procedure in appeal prescribed U/s 250 ofl. T. Act or powers of Commissioner (Appeals) prescribed U/s 251 of I. T Act.

32 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR CIT(A), the first appellate authority, cannot dismiss assessee's appeal in limine for non- prosecution without deciding the appeal on merits through an order in writing, stating the points of determination in the appeal, the decision thereon and the reason for the decision. It is well-settled that powers of Ld. CIT(A) are co-terminus with powers of the Assessing Officer. Useful reference may be made to order of Apex Court decision in CIT v. Kanpur Coal Syndicate 53 ITR 225 (SC) in which it was held that AAC has plenary powers in disposing off an appeal; that the scope of his power is co-terminus with that of the ITO, that he can do what the ITO can do and also direct him to do what he failed to do. In this context, useful reference may also be made to Apex Court's decisions in the cases of CIT v. Rai Bahadur HardutroyMotilalChamaria 66 1TR 443 and CIT v. B.N. Bhattachargee [1979] 118 ITR 461 (SC) for the proposition that an assessee having once filed an appeal, cannot withdraw it and even if the assessee refuses to appear at the hearing, the first appellate authority can proceed with the enquiry and if he finds that there has been an under-assessment, he can enhance the assessment. Just as, once the assessment proceedings are set in motion, it is not open to the Assessing Officer to not complete the Assessment Proceedings by allowing the Assessee to withdraw Return of Income; it is similarly, by analogy, not open for Ld. CIT(A) to not pass order on merits on account of non-prosecution of appeal by the Assessee or if the Assessee seeks to withdraw the appeal or if the assessee does not press the appeal." 4.8. Explanation 1(c) to section 263(1) does not, in any case, explain that even if appeal is pending before CIT(A), revisional jurisdiction u/s 263 can be assumed. The Explanation 1(c) only explains the extent of merger of the order of AO with that of CIT(A) and explains that issues which have not so merged can be subjected to revisional jurisdiction u/s 263. This explanation had to be introduced to clarify the confusion which were prevailing about the section 263 jurisdiction when appellate order was passed. One view was that entire order of AO merges with CIT(A) and, therefore, revisional jurisdiction u/s 263 against such entire order cannot be assumed even if the specific issues were not decided in the appeal. 4.9. Under the scheme of the Act and otherwise also, no assessee can be subjected to multiple jurisdiction for the same aspect.

4.10. Reliance is also placed on the below mentioned judicial pronouncements, for the proposition that when an appeal is pending before CIT(A) the revisional jurisdiction under Section 263 cannot be exercised by ld. PCIT:- 4.10.i CIT v. Vam Resorts & Hotels (P.) Ltd. [2019] 111 taxmann.com 62/418 ITR 723 (All.) 4.10.ii Smt. Renuka Philip v. ITO [2019] 101 taxmann.com 119/[2018] 409 ITR 567 (Mad.)

33 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 4.10.iii ACC Ltd. v. CIT (LTU) [IT Appeal No. 3576 (Mum.) of 2019, dated 8- 7-2020.

6 Where the assessee firm has furnished the requisite information and the NFAC completed the assessment after considering all the facts, the order cannot be termed as erroneous. Reliance is placed on the following judicial pronouncements: 6.1 CIT v Ratlam Coal Ash Co (1988) 171 ITR 141 (MP) 6.2 Ashok Kumar Parasramka v ACIT (1998) 65 ITD 1 (Cal) 6.3 CIT v Mehrortra Brothers (2004) 270 ITR 157 (MP) 6.4 CIT v Parameshwar Bohra (2004) 267 ITR 698 (Raj) 6.5 Paul Mathews & Sons v CIT (2003) 263 ITR 101 (Ker) 6.6 CIT v Arvind Jewellers (2003) 259 ITR 502 (Guj) 6.7 CIT v Hastings Properties (2002) 253 ITR 124 (Cal) 6.8 CIT v Goal (JP) (HUF) (2001) 247 ITR 555 (Cal) 6.9 CIT v Amalgamations Ltd. (1999) 238 ITR 963 (Mad) 6.10 CIT v MacneillMagore Ltd. (1998) 232 ITR 945 (Cal)

7 Where NFAC has exercised the quasi-judicial power vested in it in accordance with law and arrived at a conclusion and such a conclusion cannot be considered erroneous simply because the Commissioner does not feel satisfied with the conclusion.

34 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR "Jurisdiction under section 263 cannot be invoked for making short enquiries or to go into the process of assessment again and again merely on the basis that more enquiry ought to have been conducted to find something." In view of the above factual and legal position, ld. PCIT has grossly erred in assuming jurisdiction under Section 263. Thus, the entire such proceedings initiated by the ld. PCIT deserves to the quashed.’’ 2.4 On the other hand, the ld. DR strongly supported the order of the ld.PCIT. 2.5 We have heard the rival contentions and perused the facts as well as materials on record and also the related legal position. It is noted that case of the assessee company was selected for scrutiny and order was passed by the National Faceless Assessment Center (NFAC), under Section 143(3). Against the said order, jurisdiction was assumed by the Principal Commissioner of Income Tax, under Section 263, pursuant to which order was passed by PCIT, wherein, for the following issues jurisdiction was assumed under Section 263:-  Disallowance under Section 14A, read with Rule 8D, of Rs. 23,31,312.  Interest of Rs. 55,810 on delayed payment of TDS not eligible for deduction under Section 36(1)(ii) or Section 37.  Excess MAT Credit, pertaining to AY 2016-17, Rs. 96,13,814 erroneously allowed. Each of such issues is now being taken up by us, in the ensuing paragraphs. 2.5.1 Disallowance under Section 14A, read with Rule 8D, of Rs. 23,31,312/- 35 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR PCIT assumed jurisdiction under Section 263, on the issue of Section 14A for the reason that (i) CBDT Circular No. 5/2014, dated 11.02.2014 clarifies that receipt of exempt income, in any year, is not a relevant factor for applicability of Section 14A;(ii) Explanation has been added to Section 14A, vide Finance Act, 2022, clarifying that even if no exempt income is received, then also provisions of such section would be applicable; (iii) Assessee company has claimed Total Finance Cost of Rs. 10,00,82,481/- in the Profit and Loss Account. Further, assessee company’s plea that no interest bearing funds have been utilized in making investment is incorrect; (iv) Assessee company’s claim was incorrect that no direct or indirect investment was made, in relation to the investment, as such investment decisions are complex and needs day to day monitoring. Before us the ld. AR of the assessee submitted that during the year under consideration, assessee had neither earned or claim any income as exempt income. Accordingly, there cannot be any disallowance made under Section 14A. As per the ld. AR, CBDT Circular No. 5/2014, dated 11.02.2014, cannot override Section 14A. For this proposition, ld. AR of the assessee relied upon the decision of Hon’ble Supreme Court in the case of Oil Industry Development Board [2019] 103 taxmann.com 326 (SC). It was also contended by the ld. AR that the Explanation to Section 14A, inserted vide Finance Act, 2022, is to be given a prospective effect and the same would not be applicable for the year under consideration. For this proposition, ld. AR relied 36 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR upon the decision of Hon’ble Delhi High Court in the case of ERA Infrastructure (India) Ltd. [2022] 448 ITR 674 (Delhi), wherein it was held as under:- “..4. Learned counsel for the petitioner also submits that in view of the amendment made by the Finance Act, 2022 to Section 14A of the Act by inserting a non obstante clause and an explanation after the proviso, a change in law has been brought about and consequently, the judgments relied upon by the authorities below including PCIT vs. IL & FS Energy Development Company Ltd. (supra) are no longer good law….” “….5 .However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to Section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years…” “…6 . Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT, MANU/SC/2079/2005 : (2005) 12 SCC 717 has held that a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood….” “…8. Consequently, this Court is of the view that the amendment of Section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood…” Ld. AR argued before us that the own funds of the assessee company were much more than investment made in Equity Shares. In order to put forward this factual position, ld. AR submitted that own funds of the assessee company, as at the end of the relevant previous year, in the form of Shareholder Funds was Rs. 115.94 Cr. whereas, investments, which were made in shares, were Rs. 5.80 Cr, which were considered by the PCIT. It was submitted by the ld. AR that it is a settled proposition that in a situation where the assessee has mixed funds, consisting of Own Funds/Interest Free Refunds and Interest Bearing Funds and payment is made 37 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR out of the Mixed Funds, then the investment must be considered to have been made out of the interest free funds only. Further, the “right of apportionment” and also the “right to assert” from what part of the fund a particular investment is made is of the assessee only. In this regard, our attention was drawn towards the decision of Hon’ble Supreme Court in the case of South Indian Bank Ltd. [2021] 130 taxmann.com 178 (SC)wherein, it has been held as under:-

“…17. In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. For accepting such a proposition, it would be helpful to refer to the decision of the Bombay High Court in Pr. CIT v. Bombay Dyeing & Mfg. Co. Ltd. [IT Appeal No. 1225 of 2015, dated 28-11-2017], where the answer was in favour of the assessee on the question, whether the Tribunal was justified in deleting the disallowance under section 80M of the Act on the presumption that when the funds available to the assessee were both interest free and loans, the investments made would be out of the interest free funds available with the assessee, provided the interest free funds were sufficient to meet the investments. The resultant SLP of the Revenue challenging the Bombay High Court judgment was dismissed both on merit and on delay by this Court. The merit of the above proposition of law of the Bombay High Court would now be appreciated in the following discussion.

18. In the above context, it would be apposite to refer to a similar decision in CIT v. Reliance Industries Ltd. [2019] 102 taxmann.com 52/261 Taxman 165/410 ITR 466 (SC), where a Division Bench of this Court expressly held that where there is finding of fact that interest free funds available to assessee were sufficient to meet 38 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR its investment it will be presumed that investments were made from such interest free funds….” Lastly, it was submitted that investments in Equity Shares, as considered by PCIT, were made in the preceding years and not during the year under consideration. Accordingly, PCIT was incorrect in assuming jurisdiction under Section 263. After having gone through the factual and the legal position, in relation to the applicability of Section 14A, in the present case of the assessee,we are of the view that there could not have been any disallowance under Section 14A which could have been made by the NFAC. Since, it was undisputed that no new investments were made by the assessee company for the year under consideration and those investments were made in the preceding years. Also, assessee company did not receive any exempt income during the year under consideration. Further, the own funds of the assessee company were much more than the investments made in the Equity Shares. Considering this factual position and the ratio laid down in number of judicial pronouncements,as relied upon by the AR of the assessee, we are of the view that NFAC has not committed any error in not making disallowance under Section 14A. Accordingly, for this particular issue, the order of the PCIT is set aside and the order of the NFAC is restored.

2.5.2 Interest of Rs. 55,810/- on delayed payment of TDS 39 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR Assessee company, during the year under consideration, incurred expenses of Rs. 55,810, on account of interest on delayed payment of TDS. The same was claimed as expense by assessee company and allowed, by NFAC, during the course of assessment proceedings. PCIT assumed jurisdiction under Section 263, in relation to such claim, stating that interest on delayed payment of TDS is nothing but penal in nature, accordingly, should have been disallowed by NFAC. Before us the ld. AR of the assessee, relied upon the decision of Coordinate Bench at Delhi in the case of Delhi Cargo Service Center [2023] 151 taxmann.com 322 (Delhi - Trib.) and at Mumbai in the case of Resolve Salvage & Fire India (P.) Ltd. [2022] 139 taxmann.com 196 (Mumbai - Trib.). Thus, as per the ld. AR of the assessee, allowability of such interest expense was one of the plausible views which was adopted by NFAC and accordingly, PCIT was not correct in law in assuming jurisdiction under Section 263. Considering the factual and legal position involved, NFAC had taken one of the plausible views by not disallowing the interest expense on late deposition of TDS. It is a settled proposition that whenever two views are possible and if the NFAC has taken, one plausible view, the order of NFAC cannot be held to be erroneous on that count. Accordingly, we are of the view that NFAC has not erred in law in not disallowing the interest expense of Rs. 55,810, for the year under consideration.

40 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR 2.5.3 Excess MAT Credit, pertaining to AY 2016-17, Rs. 96,13,814 erroneously allowed. During the year under consideration, assessee company claimed MAT Credit, under Section 115JAA, of Rs. 2,12,99,155, while filing the return of income. Out of the total MAT credit of Rs. 2,12,99,155, Rs. 96,13,814 MAT credit pertained to AY 2016-17 and Rs.1,44,61,931 pertained to AY 2017-18 which had been claimed. Out of such total MAT credit of Rs. 2,40,75,745 [Rs. 96,13,814 + Rs.1,44,61,931], Rs. 2,12,99,155 MAT credit was claimed during the year under consideration and the balance amount of Rs. 27,76,629 [Rs. 2,40,75,74 - Rs. 2,12,99,155] was carried forward for the subsequent year. During the AY 2016-17, additions were made to the income of the assessee company. Against such additions made, assessee company preferred appeal before the National Faceless Appeal Centre, which is still pending to be decided. MAT Credit was claimed by the assessee company, in accordance with the income computed in the return of income filed for AY 2016-17. Ld. AR of the assessee conceded that fate of allowability of MAT Credit would depend upon the outcome in the appellate proceedings for AY 2016-17. If the assessee company‘s appeal is dismissed in the appellate proceedings, MAT credit would not be available. In such a scenario, as per the ld. AR, Assessing Officer would have power to rectify the claim of MAT credit, by taking recourse to Section 154. Accordingly, as per the ld. AR of the 41 ITA243/JP/2023 ASSOCIATED SOAPSTONE DISTRIBUTING CO. PVT LTD. VS Pr.CIT-2, JAIPUR assessee, for such purposes, there cannot be any assumption of jurisdiction under Section 263. We concur with the submissions made by the ld. AR of the assessee that this particular mistake could have been rectified by the Assessing Authority, under Section 154 and jurisdiction should not have assumed under Section 263 for such issue. Accordingly, we hear by set-aside the order of the PCIT on this issue. In the result, the appeal filed by the assessee is allowed as indicated 3.0 hereinabove. Order pronounced in the open court on 04 /03/2024.

Sd/- Sd/- ¼ jkBksM deys'k t;UrHkkbZ ½ ¼lanhi xkslkbZ½ (Rathod Kamlesh Jayantbhai) (Sandeep Gosain) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 04 / 03/2024 *Mishra आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- M/s. Associated Soapstone Distributing Co. Pvt. Ltd., Jaipur 2. izR;FkhZ@ The Respondent- The PCIT, Jaipur-2, Jaipir 3. vk;dj vk;qDr@ The ld CIT 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@ Guard File (ITA No. 243/JP/2023) vkns'kkuqlkj@ By order,