SAURASHTRA CEMENT LIMITED,PORBANDAR vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX, JAMNAGAR, JAMNAGAR

Later on, Learned Principal Commissioner of Income-tax (in short “Ld PCIT”), has exercised his jurisdiction under section 263 of the Income-tax Act, 1961.On perusal of case records, ld.PCIT observed that during the course of scrutiny assessment proceedings, the following issues have not been verified, by the assessing officer:

The ld.PCIT noticed that during assessment proceedings, the assessing officer has failed to verify above issues and the same remained unverified at the time of passing the order u/s 143(3) rws 144C(3) of the Act, dated 29/10/2021. In view of the above, the order passed by the assessing officer u/s 143(3) r.w.s. 144C(3) of the Act, dated 29/10/2021, is prima facie erroneous and prejudicial to the interest of revenue within the meaning of the provisions of section 263 of the Act.

Accordingly, a show cause notice for initiation of proceedings u/s 263 of Act, dated 12/01/2024 was issued to the assessee through ITBA, which is reproduced by the learned PCIT, on page No. 2 to 4 of the revision order. In the said notice, learned PCIT stated that the assessing officer has failed to make the disallowance u/s 14A of the Act, rwr 8D of the Rule which works out to be at least to the tune of Rs. 35,89,720/-(1% of Rs.35,89,72,000/-). Such failure on the part of the assessing officer has rendered the assessment order erroneous and prejudicial to the interest of the revenue within the meaning of the provisions of section 263 of the Act. Therefore, ld PCIT intended to revise the order passed by the assessing officer u/s 143(3) rws 144C(3) rws 144B of the Act dated 29/10/2021 for the AY 2018-19. The ld.PCIT also noticed that during the previous year, the borrowed funds have been diverted to non-business uses. The proportionate interest expense on loans and advances of Rs.2,12,54,000/- applying average interest rate paid by assessee @12.11% comes to Rs.25,73,859/- and the same was required to be disallowed by the assessing officer at the time of finalizing the assessment order passed u/s 143(3) rws 144C(3) rws 144B of the Act dated 29/10/2021. This has resulted under Saurashtra Cement Ltd.

In response to the above, assessee, submitted its written reply before learned PCIT, vide letter dated 22/01/2024.The assessee submitted that in the assessment proceedings, if the A.O. has not verified any specific issues which were not within the scope of selection of scrutiny, such assessment order cannot be said to be erroneous or prejudicial to the interest of revenue and therefore, the proposed revision on the issues, viz:(i)Disallowance u/s 14A of the Act r.w.r. 8D of Income-tax Rule in respect of expenses incurred for earning exempt income, and (ii)Disallowance u/s 36(1)(iii) of the Act, for interest in respect of capital borrowed, as these were not subject matter of verification before the A.O. under the limited scrutiny is not permissible as the order sought to be revised cannot be erroneous or prejudicial to the interest of revenue. About disallowance u/s. 14A r.w.r. 8D in respect of expenses incurred for earning exempt income, the assessee further submitted that during the year under consideration, the assessee has not earned any exempt income and the same is evident from remarks mentioned by the tax auditor against clause 21(h) in the notes to Form 3CA-3CD enclosed as Annexure-C. Hence, in the absence of any exempt income earned during the year under consideration, there is no question of disallowance of expenditure u/s. 14A of the Act. In respect of disallowance u/s 36(1) (iii) of the Act, the assessee submitted that for interest in respect of capital borrowed, that loans and advances given to Agrima Consultants International Ltd. and Reeti Investments Private Limited are not given during the year under consideration but were given many years ago. The assessee further submitted that "the question of diversion of interest-bearing funds of Saurashtra Cement Ltd.

However, learned PCIT rejected the above reply of the assessee and held that the assessment order, dated 29/10/2021 passed by the Assessing Officer u/s 143(3) rws 144C(3) of the Act, for the AY 2018-19 is erroneous in so far as it is prejudicial to the interest of revenue within the meaning of section 263 of the Act and therefore, ld PCIT set aside the assessment order to the extent of the issues mentioned and discussed in the foregoing paragraphs and directed the assessing officer to examine the genuineness of the documents submitted by the assessee during the course of revision proceedings u/s 263 of the Act, by issuing notices u/s 133(6) of the Act wherever necessary. The Assessing Officer was also directed to revise the assessment after giving proper opportunity of being heard to the assessee.

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

Shri Vimal Desai, Ld. Counsel for the assessee, vehemently argued that the assessee has not earned any exempt income and the same is evident from remarks mentioned by the tax auditor against clause 21(h) in the notes to Form 3CA-3CD (copy submitted before the bench). Hence, in the absence of any exempt income earned during the year under consideration, there is no question of disallowance of expenditure u/s. 14A of the Act. Besides, it is also evident from the fact that the assessee- company has plenty of own interest free funds in the form of Share Capital and Reserves & Surplus amounting to Rs. 41,638.78 Lakhs which are more than the loans and deposit amount and it a settled position of the law that the interest free advances, if any, are to be considered as made out of interest free funds and not otherwise. Therefore, order passed by Saurashtra Cement Ltd.

On the other hand, Ld.CIT- D.R. for the Revenue, has primarily reiterated the stand taken by the ld.PCIT, which we have already noted in our earlier para and is not being repeated for the sake of brevity. Learned DR for the revenue also submitted that assessee`s case was selected for complete scrutiny and not for limited scrutiny, therefore, there is no findings in the assessment order that assessing officer has examined these issues which were raised by the learned PCIT, therefore order passed by the assessing officer is erroneous and prejudicial to the interest of the revenue.

We have heard the Learned Counsel appearing on behalf of the respective parties at length.About revision proposed for disallowance u/s. 14A r.w.r. 8D in respect of expenses incurred for earning exempt income, we find that the impugned notice of ld PCIT proposing revision of order u/s. 143(3) of the Act passed for A.Y. 2018-19 that during the year under consideration there are certain investments reflected in the Audited Balance Sheet of the company and the A.O. has failed to make appropriate disallowance u/s. 14A r.w.r 8D for investments that may have yielded exempt income. Hence, the disallowance for same is proposed by way of revision proceedings by ld PCIT. We also note that ld. PCIT proposed to make disallowance of Rs. 35,89,720/- being 1% of Rs. 35,89,72,000/- being annual average of opening and closing balances of investments. However, we find that assessee submitted that during the year under consideration, the assessee has not earned any exempt income and the same is evident from remarks mentioned by the tax auditor against clause 21(h) in the notes to Form 3CA-3CD enclosed as Annexure-C. Hence, in the absence of any exempt income earned during the year under consideration, there is no Saurashtra Cement Ltd.

As regards applicability of disallowance u/s. 14A in view of the CBDT Circular No. 05/2014 dated 11/02/2014 even where taxpayer in a particular year has not earned any exempt income from investment, it is submitted by assessee that the said view of the CBDT has been completely negated by the Hon'ble Supreme Court (supra) and various High Courts in the following judicial pronouncements wherein the Hon'ble High Courts have held that disallowance u/s. 14A cannot exceed the exempted income after specifically considering therein the CBDT Circular No. 05/2014 dated 11/02/2014.In this connection, reliance is also placed on the following judicial pronouncements wherein the Hon'ble High Courts have held that no disallowance u/s. 14A is to be done in absence of exempted income after specifically considering therein the CBDT Circular No. 05/2014 dated 11/02/2014:

About revision proposed by ld PCIT, for disallowance u/s 36(1)(iii) of the Act for interest in respect of capital borrowed, it is stated in the impugned notice of ld PCIT, proposing revision of order u/s. 143(3) of the Act, passed for A.Y. 2018-19 that during the year under consideration, the company has granted Saurashtra Cement Ltd.

Further, it will also be evident from the Audited Balance Sheet of the company that the company has plenty of own interest free funds in the form of Saurashtra Cement Ltd.

In view of the above noted facts of the case and legal position, it can be seen that the assessing officer has not committed any error while passing the assessment order and the issued raised subsequent to passing of order are also devoid of any merits. Therefore, such an order cannot be said to be erroneous and prejudicial to the interests of revenue on merits so as to justify revision action u/s. 263 of the Act. Let us take the guidance of judicial precedents laid down by the Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the Saurashtra Cement Ltd.

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