M/S SUMILON INDUSTRIES PVT. LTD.,SURAT vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX - 1, SURAT

4. Later on, Learned Principal Commissioner of Income Tax-1, Surat (in short “ld. PCIT”], has exercised his jurisdiction under section 263 of the Income Tax Act, 1961. On going through the assessment records, it was observed by ld PCIT that assessee-company has made following investment in unquoted shares, which can earn exempt income: Sr.No. Nature of investment Amount of investment Amount of investment as on 01.04.2016 (Rs) as on 31.03.2017 (Rs) 1 Shares of Global Enviro Care 4,27,900/- 7,74,345/- Ltd. 2 Shares of Sumilon Polyester 9,00,000/- 9,00,000/- Ltd. (equity shares) 3 Shares of Sumilon Polyester 15,00,90,196/- 15,00,90,196/- Ltd.(preference shares) Total 24,05,18,096/- 24,08,61,541/- The CBDT vide Circular No.05/2014 dated 11.02.2014 has clarified that Rule 8D read with Section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. Accordingly, ld PCIT noted that disallowance u/s 14A is applicable to the case of assessee, the amount of disallowance as per Rule 8D r.w.s.14A is worked out as under: As per Rule 8D(2)(i) Direct expenditure relating to income NIL which does not for part of total income As per Rule 8D(2)(ii) Indirect expenditure interest not directly attributable to any particular income receipt Total investment which can earn Rs.24,05,18,096/- exempt income as on 01.04.2016 as shown in above table. Total investment, which can earn Rs.24,08,61,541/- exempt income as 31.03.2017, as shown in above table Average value of investment (D) Rs.24,06,89,818/- income form which is exempt (B)+(C) divided by 2

A.Y.17-18 M/s Sumilon Industries Pvt. Ltd. 1% x average value of investment 1% x Rs.24,06,89,818/- Rs.24,06,898/- (income from which is exempt) Total disallowance Rs.24,06,898/- Accordingly, while finalizing the assessment proceedings an amount of Rs.24,06,898/- should have been disallowed u/s 14A and required to be added to total income of the ae company. No inquiry in this regard has been made by the AO in the course of assessment proceedings. Therefore, ld PCIT issued a show cause notice bearing DIN No.ITBA/REV/F/REV1/2021-22/1040733398(1) dated 15.03.2022 and duly served on the assessee.

1. 1. At the very outset we would like to submit herein below the details of investment made by the company in unquoted shares: Nature of investment Amt. as on Amt. as on 01.04.2016 (Rs) 31.03.2017 (Rs) Shares of Globe Enviro 4,27,900 7,74,345 Care Shares of Sumilon Polyester 9,00,00,000 9,00,00,000 Ltd. Shares of Sumilon Polyester 15,00,90,196 15,00,90,196 Ltd.

2. From the above table your honour may kindly note that there is small amount of addition to total investment during the year but no income (dividend) has been actually earned on the aforesaid investment during the year.

3. Further in regard to sources of investment made in current year and earlier years, we would like to submit that the same has been from funds realized from sale/business activity and no interest bearing bank funds have been used for making the aforesaid investment. The said can be further vouched from the statement attached herewith as Exhibit-1, showing source of funds from which investment is made in the aforesaid shares.

4. Further we would like to submit that the company has actually not earned any exempt income during the year under consideration.

5. Hence, we would like to submit that disallowance under Section 14A is generally made with respect to expenditure which is already claimed to be a deduction for earning the exempt income in the subject case, our company A.Y.17-18 M/s Sumilon Industries Pvt. Ltd. has not earned any exempt income nor claimed any deduction of any expenses incurred for earning exempt income and hence question of any disallowance u/s 14A is bad in law.

1. 1. The Delhi High Court in the case of PCIT v. Caraf Builders & Constructions (P.) Ltd. (2019) 261 Taxman 47 (Del) (HC) has held that CBDT Circular No.5/2014 dated 11-2-2014 cannot override express provisions of Section 14A,read with Rule 8D.

2. The Kolkata Tribunal Bench in the case of Eveready Industries India Ltd. vs. PCIT [2020] 14 taxmann.com 610 (Kolkata-Trib.) has held that – Assessee filed its return of income which was processed under Section 143(3).Subsequently, Pr. Commissioner initiated revision under section 263 on ground that disallowance under section 14Awasnot made by Assessing Officer keeping in view Circular No.5/2014 (F.No.225/182/2013-IITA.II), dated 12-2-2014 as well as provision laid down in Act. It was noted that during relevant year assessee did not earn any dividend income from its investments, thus, no disallowance was to be made u/s 14A and assessee had explained same before Assessing Officer during original scrutiny assessment -whether impugned invocation of revision was unjustified – Held, yes [para 33 and 34].

9. Further we would like to submit that amended Rule 8D applicable w.e.f. 2 June 2016 provides for disallowance of 1% of the annual average of the monthly average of the opening & closing balances of investment, income from which does not or shall not form part of total income. Generally, the same is wrongly interpreted to mean that Rule 8D is applicable even where taxpayer in a particular year has not earned any exempt income. However, higher authorities in many cases have held that Section 14A read with Rule 8D cannot be made applicable in absence of exempt income in this regard, reliance is placed on following judicial pronouncement”

6.However, ld PCIT rejected the contention of the assessee and held that assessment order passed by the assessing officer u/s 143(3) of the Act, dated

A.Y.17-18 M/s Sumilon Industries Pvt. Ltd. 23.12.2019, in the case of the assessee, is erroneous and prejudicial to the interest of Revenue. 7.Aggrieved by the order of Ld.PCIT, the assessee is in appeal before us. 8.Learned Counsel for the assessee at the outset submitted that during assessment proceedings, the Assessing Officer has raised the relevant question relating to section 14A, which is reproduced below: “18. For the exempted income received by you or the investment in the instruments bearing exempted income, give the disallowance made by you u/s 14A of the Income Tax Act. If no disallowance made provide the reason for the same. In case you claim that you have interest free funds please give the detailed working for the same.” In response to the question raised by the Assessing Officer by way of issuing notice u/s 142(1) of the Act, the assessee has submitted its reply, which is placed in paper book page-8, which is reproduced below: “9. Your honour may note that the assessee company has not earned any exempt income during the year.” Therefore, Ld. Counsel contended that relevant question was raised by the Assessing Officer during the assessment proceedings and assessee has replied the same and Assessing Officer then taken plausible view, therefore order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of Revenue, hence order of ld PCIT may be quashed. 9.On the other hand, Learned CIT-DR for the Revenue submitted that during assessment proceedings, assessee was asked to submit the details and computation u/s 14A of the Act and the interest free funds etc. The said working has not been furnished by the assessee at the time of assessment proceedings, therefore order passed by the Assessing Officer is erroneous and prejudicial to the interest of revenue.

A.Y.17-18 M/s Sumilon Industries Pvt. Ltd.

10. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld PCIT and other materials brought on record. We note that during the assessment stage, the Assessing Officer has raised a query relating to the issue raised by ld PCIT and asked the assessee to furnish the relevant documents and evidence, which is placed at paper book page-6. In response to the question asked by the Assessing Officer, the assessee submitted its reply, which is placed at paper book page-8. The assessee also submitted before the assessing officer the balance- sheet, which is placed at paper book page-19 and stated that assessee’s own funds were sufficient to make investment in securities/shares and therefore no addition should be made on that account. We note that Hon'ble jurisdictional High Court in the case of Principal Commissioner of Income-tax vs. Dipesh Lalchand Shah [2022] 143 taxmann.com 419 (Guj) held that in relevant assessment year, assessee-individual earned profits form partnership firm and made investments in shares of a company, since its income from partnership was negative and no exempt income was earned, in such case disallowance under section 14A could not be made. The relevant para-10 to 11of the Hon'ble jurisdictional High Court are as follows: “8. PCIT however, observed that case laws are clearly distinguishable on the fact inasmuch as in the case before the Apex Court shares of public limited companies were purchased with the intention of earning dividend which was not the case in respect of the assessee as the investment was in a private limited company. Further in case of assessee, investment was for providing funds to the company for its operation in the form of purchase of shares. It was observed that the total fund came from the family and management was also of the family of the assessee which controlled the company affairs. PCIT further observed that the judgments cited by the assessee were also distinguishable on facts. The PCIT therefore, held that deduction claimed under section 57(iii) of the Act, 1961 was not allowable.

9. PCIT invoking Explanation (2) of section 263 of the Act, 1961 held that the assessment order passed under section 143(3) by the Assessing Officer was erroneous and set aside the assessment framed with a direction to the Assessing Officer to frame the assessment after taking into account, the observations made by the PCIT for disallowance under section 14A of the Act, 1961 read with rule 8D of the Income-tax Rules and further directed to properly verify the claim under section 57(iii) of the Act, 1961.

A.Y.17-18 M/s Sumilon Industries Pvt. Ltd.

10. Being aggrieved by the order of PCIT, the assessee filed appeal before the Tribunal. The Tribunal after considering the submissions made by the Revenue as well as assessee held as under : '8. We have heard the rival submissions of both the parties and perused the material available on record. We have gone through all the judgements cited by the parties before us. We note that section 263 of the Act enables supervisory jurisdiction to the Pr. CIT over the AO. The Pr. CIT is empowered to act under section 263 of the Act when he considers that AO's order is erroneous in so far as it is prejudicial to the interest of Revenue. It is a settled position of law that the aforesaid twin condition i.e. AO's order is erroneous and prejudicial to the interest of revenue is sine qua non for assumption of revisionary jurisdiction by Pr. CIT. As per the scheme of the Act, AO has a dual role to discharge while assessing the income of an assessee. He is both an investigator as well' as an adjudicator. If the AO fails in discharging any of the two said duties i.e. as an investigator or that of an independent/impartial adjudicator, the Pr. CIT's supervisory jurisdiction is attracted because the order of the AO would be erroneous for lack of inquiry. Thus, if he does not investigate, it would be erroneous, for failure of AO to adjudicate as an independent/impartial adjudicator, which means that if the AO passes assessment order in violation of natural justice, or there is bias or arbitrariness etc., then also the order of AO would be erroneous. When, we say that lack of inquiry. makes an AO's order erroneous, one has to keep in mind the difference between lack of inquiry and inadequate inquiry. Lack of inquiry makes the AO's order erroneous, but inadequate inquiry does not make the order of AO erroneous. Thus, in order to exercise the powers under section 263(1) of the Act, the Pr.CIT must be satisfied that the assessment order made by the AO was (a) erroneous; and (b) prejudicial to the interests of the Revenue.

9. The perusal of facts of the present case reveals that the assessee has taken unsecured loans, which have been utilized for the purpose of investment in shares of private limited companies controlled by the family members and investment in partnership firm. Such investment was at Rs.26.55 crores as on 31-3-2013 and Rs.27.17 crores as on 31-3-2014. The assessee has paid interest of Rs.2,91,18,343/on unsecured loans and claimed deduction out of income, which has been during allowed by the AO. The Pr. CIT viewed that such interest is not allowable under section 14A and under section 57(iii) as investment made was related to exempt income and interest expenses were incurred for earning income from other source. However, it is noticed that there was negative income from partnership firm and no dividend income h:+ en eared. during the year under consideration therefore, no expenditure has been incurred for earning exempt income, hence, disallowance under section 14A read with rule 8D cannot be made as held by the Hon'ble Gujarat High Court in the case of CIT v. Corrtech Energy Pvt. Ltd. [2015]-372 ITR 97 (Guj.): [2014] 45 taxmann.com 116 ; 223 Taxman 130 (Guj.) wherein it was held that Section 14A (1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does

A.Y.17-18 M/s Sumilon Industries Pvt. Ltd. not form part of total income under the Act. In the instant case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on that basis the Tribunal held that disallowance under section 14A could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in the case of CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had had observed that where the assessee did not make any claim for exemption, section 14A could have no application. Similar findings was given by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154 SC holding that only expenses proportionate to earning exempt income could be disallowed. We are of the view that the provisions of section 57(iii) lays down that the expenditure must be laid wholly and exclusively for the purpose of earning income and not that is income must have been earned. The plain requirement of section is that the purpose for which the expenditure is incurred should fructi into any benefit by way of return in the shape of income. This view is further, supported .by the decision of Hon'ble Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 579 (SC) wherein it was held that interest paid on money borrowed for investment in shares is deductible under section 57(iii) even though the shares did not yield any dividend. Similar views were also expressed by the Hon'ble Calcutta High Court in the case of Sri Saytasai Properties & Investment (P.) Ltd. v. CIT [2014] 45 taxmann.com 120 (Cal.) In view of these facts and circumstances, where the AO has taken a plausible view which is sustainable in law, invocation of provisions of section 263 are not justified. We further observe that similar disallowance made by the AO in assessment year 2012-13 in the case of the assessee, were deleted by the Ld. CIT (A) and appeal against which has been dismissed by the tribunal on account of low tax effect. We further, observe that the Pr. CIT has not discussed as to how the assessment order passed by the AO is prejudicial to the interest of the Revenue. The Hon'ble Rajasthan High Court in the case of CIT v. Jain Construction Co. [2013] 257 CTR 336 (Raj.) of which head notes reads as: Held, that safeguard provided to assessee in section 263 is that mere erroneous orders are not revisable but revisional authority has to further establish with material on record that such erroneous order is also prejudicial to the interest of revenue- twin conditions of assessment order being erroneous and it also being prejudicial to the interest of revenue, keeps initial burden on Commissioner, who invokes such jurisdiction Premises for invoking the revisional jurisdiction on the ground that the Assessing Authority made insufficient inquiry or improper enquiry and paid to verify closing the stock in record of the assessee, before passing assessment order, falls flat by a bare perusal of assessment order itself-Thus, Tribunal was justified in holding that Commissioner was in error invoking revisional jurisdiction u/s. 263 — Mere alleged insufficiency of inquiry in of opinion of Commissioner By Assessing Authority, would not permit him to in walk revisional jurisdiction u/s. 263 — Therefore, essential twin condition for invoking revisional jurisdiction, were not satisfied — Order' of tribunal upheld Revenue's appeal dismissed. The Pr. CIT has not given any A.Y.17-18 M/s Sumilon Industries Pvt. Ltd. finding as to how the order in prejudicial to the interest of the Revenue. We also note that the Pr. CIT has though invoked Explanation 2 to section 263 but not divulge as to how it is applicable, when legal position is in favour of the assessee. Further, such claim was found acceptable by the Id. CIT (A) in preceding assessment year Where two views are possible even then revision jurisdiction cannot be invoked as held by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) 109 Taxman 66 (SC) had interpreted the provisions of section 263(1) in the following words :"A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo moto moto under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue—recourse cannot be had to section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. 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 consequence of an order of the 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."

10. Following the aforesaid judgment, the Hon'ble Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282(SC) reiterated that the phrase "prejudicial to the interests of the Revenue" as used in section 263(1) of the Act must be read in conjunction with the expression "erroneous" and unless the view taken by the Assessing Officer is found to be unsustainable in law, the powers under section 263 of the Act cannot be invoked.

11. In view of legal position discussed in above pars of this order, the order passed by the AO, in our opinion, shall be deemed to be erroneous in so far as it prejudicial to the interest of the Revenue, if the Pr. CIT would have specifically pointed out which of inquiries or verification should have been carried out by the AO in this regard and the AO failed to carry out those inquiries and verification as desired by the Pr. Commissioner of Income-tax. Since the Pr. CIT has not suggested the A.Y.17-18 M/s Sumilon Industries Pvt. Ltd. basis of inquiry or verification to be carried out by the AO, the order passed by the AO cannot be deemed to be erroneous in so as far as it is prejudicial to the interest of the Revenue. In the light of the above 'mentioned judicial precedents and facts of the present case, we are of the opinion that the AO has adopted one possible legal view sustainable in law on the issue and mere invoking proviso based on revenue audit objection amounts non application of mind. Merely just because the view taken by the AO was not found acceptable does not mean that the AO has failed to make requisite enquiries. Thus, the view taken by the AO was plausible view, which cannot be disturbed by the Ld. Pr. CIT. Therefore, we find that twin condition were not satisfied for invoking the jurisdiction under section 263 of the Act. Therefore, in absence of the same the Id. Pr. CIT was not correct in exercise the jurisdiction under section 263 of the Act. In view of these facts and circumstances, we quash the impugned order passed under section 263 of the Act and allow the appeal of the assessee.

12. Tax Appeal therefore, stands dismissed.”

9. We note that Hon'ble jurisdictional High Court in the case of Principal Commissioner of Income-tax vs. S.N. Tradelink (P.) Ltd. [2022] 145 taxmann.com 73(Guj) [13-06-2022], wherein the Hon'ble jurisdictional High Court held as: “8. The assessee being aggrieved by order passed by PCIT preferred Appeal before the Tribunal. The Tribunal after considering the facts and law with regard to exercise of powers under section 263 of the Act, 1961 allowed the appeal by quashing and setting aside the order passed by the PCIT under section 263 of the Act as under : "12. In the light of the above mentioned judicial precedents and facts of the present case, what has to be seen is whether the AO has made enquiries about issue under consideration. The Learned Counsel of assessee has drawn our attention to point no. 8 of reply dated 22-12-2015 (PB-22-23) by which the details of TCS/TDS claimed by the assessee in the return of income were filed and TCS not claimed in the return of income (point no. 9) The AO vide questionnaire dated 19-11-2015 (P8-25 by which details of TDS/TCS and prepared 26AS statement were asked for. Thus, the assessment order passed after making enquiries and verification. The learned counsel for the assessee further, referred Paper Book Page Nos. 70 to 74 which is copy of balance sheet and notes on accounts, and submitted that the assessee has done regrouping and A.Y.17-18 M/s Sumilon Industries Pvt. Ltd. recasting of various schedules. The learned counsel for the assessee drawn our attention to Paper Sook Page No. 63 which is forming part of audited notes on account and submitted that as per note No. 9, it mentioned that Previous year's figures have been regrouped and/or rearranged whenever necessary. The learned counsel for the assessee also referred Paper Book Page Nos. 72 to 74 which is reconciliation of liabilities not acceptable. It was submitted that current liabilities were regrouped and figures reflected in Schedules 8,9,10 and 11 of balance sheet as on 31-3-2012 are regrouped and reflected in difference Schedules viz. 4,5,6 and 16 of balance sheet. The change taken place due to change of auditors for both assessment years. The details of same were submitted along with books of accounts during the course of assessment proceedings and also submitted details related to sundry creditors. Therefore, relevant comparable details are available on record and both the figures are comparable and there was no difference in current liabilities and this is merely change of presentation. Therefore, the assessment order passed after verification and enquiry is not erroneous and prejudicial to the interest of the Revenue. Merely just because the view taken by the AO was not found acceptable does not mean that the AO has failed to make requisite enquiries. If the answer is affirmative, then second question arises whether the acceptance of the claim by the AO was a plausible view or on the facts of the finding on the facts that the said finding of the AO can be termed as sustainable in law. We find that vide questionnaire, the assessee regarding current liabilities and details of TCS were asked for. The assessee had furnished his reply, which is placed found placed in Paper Book Pages as referred above. The assessee has explained that the TCS is being accounted separately and no deduction of the same has been claimed in the Profit ± Loss Account. Therefore, it the method of accounting, which does not mean that income has escaped assessment or order being erroneous, because if TCS are considered as part of sale then corresponding debit of TCS was to be claimed the Profit & Loss Account. Hence, there is no revenue loss. In view of these facts and circumstances, we find that the AO has made due enquiries and had taken a plausible view, hence, same, cannot be disturbed by Pr.CIT in the name of verification. Since the AO has made during enquiry and examined the issues, hence, invocation of Expln 2 of section 263 is not justified as same is applicable where the AO had not made enquiry and applied his mind which should have been done in the opinion of Pr.CIT. However, the Pr. CIT has not done any enquiry and not suggested what enquiries were to be carried out, therefore, Explanation 2 of section 263 is not applicable. In view of this matter, we find that twin condition were not satisfied for invoking the jurisdiction under section 263 of the Act. Therefore, in absence of the same the Ld. Pr. CIT was not correct in exercise the jurisdiction under section 263 of the Act and setting aside assessment for making de novo and accordingly, we quash the impugned order passed under section 263 of the Act and allow the appeal of the assessee."

11. Tax Appeal therefore, stands dismissed.” 10.Therefore, we note that if there is no exempt income, no disallowance under section 14A can be made, such order passed by the assessing officer is sustainable in law. Therefore, based on these facts and circumstances, we quash the order passed by ld PCIT under section 263 of the Act.

Order is pronounced on 10/02/2023 by placing record on notice board.