M/S. AZIMUTH INVESTMENTS LTD.,NEW DELHI vs. ACIT, NEW DELHI

Brief facts of the case are that the assessee company, a Non Banking Financial Company, in the relevant assessment year, was engaged in the business of Inter-Corporate deposits and investments of surplus funds. The assessee had filed return of income declaring loss of Rs. 3,86,87,237/-. The assessing officer determined the total income at a loss of Rs. 3,83,15,120/- inter- alia making disallowance u/s 14A of the Act of Rs. 3,64,970/-, as against 2 zimuth Investments Ltd. the sum of Rs. 25,000/- disallowed by assessee in respect of dividend income of Rs. 33,59,952/- which it had claimed as exempt u/s 10(34) of the Income Tax Act. The disallowance had been made by invoking Section 14A read with Rule 8D of the Income Tax Rules.

Before Ld. CIT(A) the assessee submitted that AO should be satisfied first with the explanation of the assessee being not acceptable. Ld CIT(A) referred to the decision in the case of Ram Gopal Enterprises Ltd. vs. JCIT wherein the decision of Hon’ble Jurisdictional High Court in the case of Max Opp Investment Ltd. vs. CIT 203 Taxman 364 (Del) had been referred to wherein it has been held that AO has to record his satisfaction first regarding assessee’s claim being not acceptable and then only he can embark upon determination of the amount of expenditure for the purposes of Section 14A. Ld. CIT(A) observed that though assessee had not provided as to what was the basis for arriving at sum of Rs. 25,000/- but at the same time AO had also not recorded his satisfaction in the assessment order. He further held that the first appellate authority has coterminous power with the AO and, therefore, he was satisfied that the explanation of the assessee was not acceptable.

Being aggrieved with these findings the assessee is in appeal before us and has taken following grounds of appeal -: “That the order dated 07.11.2012 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income – Tax (Appeals)-V, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Learned Assistant Commissioner of Income Tax, Circle 2(1), New Delhi in adding back a sum of Rs. 3,64,917/- on account of expenditure incurred by the Appellant Company for earning dividend by applying the provisions of Section 14A of the Income-Tax Act, 1961 read together with Rule 8D of the 3 zimuth Investments Ltd. Income Tax Rules, 1962 as against Rs. 25,000/- estimated by the Appellant Company.”

Ld. Counsel submitted that admittedly assessing officer had not recorded the satisfaction as contemplated u/s 14A(2) and this basic function assigned to a particular authority by legislature could not be usurped by higher authorities.

Ld. DR relied on the order of CIT(A).

We have considered the rival submissions and have perused the record of the case. The short issue is whether the basic functions assigned to the assessing officer in the Act can be discharged by CIT(A) while exercising his coterminous power or not. Section 14A(2) reads as under -: “14A(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this 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.”

A bare reading of the aforementioned provision makes it clear that the satisfaction is to be recorded by assessing officer and by no other authority. Under section 251 Ld. CIT(A) in an appeal against an order of assessment is empowered to confirm, reduce, enhance or annul the assessment but if the assessment order suffers from jurisdictional errors then Ld. CIT(A) has no power to correct such jurisdictional errors. The coterminous powers vested in CIT(A) does not imply that he can clothe himself with powers to correct 4 zimuth Investments Ltd. the jurisdictional defects in the assessment order. It is well settled law that where the very initiation of assessment proceedings by the AO was invalid then Ld. CIT(A) cannot direct for making a fresh assessment. The CIT(A) should annul the assessment where the assessment proceeding is a nullity in the sense that the AO had no jurisdiction ab initio to take the proceeding. In the present case the AO could take up the issue regarding disallowance u/s 14A only after recording satisfaction. Non-recording of satisfaction results into creeping of illegality in the assessment order and not a mere irregularity. The jurisdiction of recording satisfaction for invoking section 14A lies with the assessing officer and once he has not recorded such satisfaction then the said basic function of AO which clothes him jurisdiction to make disallowance u/s 14A cannot be usurped by Ld. CIT(A). We, therefore set aside the order of Ld. CIT(A).

In the result the assessee’s appeal is allowed. (Order Pronounced in the Court on 08 /01/2016).