SHRI MANOJ B. MANSUKHANI,,RAJKOT-GUJARAT vs. THE PR. COMMISSIONER OF INCOME TAX-1, , RAJKOT

आदेश/ORDER PER BENCH:- This assessee’s appeal for A.Y. 2017-18, arises from order of the Principal Commissioner of Income Tax, PCIT, Rajkot dated 28-01-2022, in DIN & Order No. ITBA/REV/F/REV5/2021-22/1039173335(1), in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.

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“1. That, the ld. Principal CIT has wrongly invoked provision of section 263 of the I.T. Act and wrongly held that order passed by the AO is erroneous and prejudicial to the interest of the Revenue. The Ld. PCIT has travelled beyond jurisdiction and wrongly passed order u/s 263 of the I.T. Act. 2. The Ld. PCIT has erred in invoking the revisionary powers by stating that the AO has failed to make adequate inquiry w.r.t. to section 14A disallowance and merely accepted assessee's submission. 3. The Ld. PCIT has wrongly invoked explanation -2 to section 263 of the IT. Act. 4. That, the Revision u/s 263 is made on the basis incorrect legal provisions and therefore the order u/s 263 is bad-in-law.”

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rws 14A of the Act, the disallowance of expenditure can be made even when the taxpayer has not earned exempt income in a particular year. Hence, disallowance of � 38,31,044/- should have been made under Rule 8D rws 14A of the Act by the AO during the course of assessment proceedings. Accordingly after giving opportunity of hearing to the assessee, Principal CIT set aside the assessment order on the ground that the same is erroneous and prejudicial to the interests of the revenue, with the following observations:

“6. I have gone through the records carefully, it may be mentioned that two essentials condition for invoking the provisions of section 263 of IT Act are that the order passed by the AO is erroneous and prejudicial to the interest of revenue. 7. It is noticed from the record that the assessee has merely submitted vide his point-wise reply stating please note that no expenditure was incurred to earn exempt income during the year under consideration, Hence not applicable. Further, the assessee has submitted his justification for non-applicability of section 14A of the IT Act, 1961 in their case. However, it is noticed that the AO has not made any further enquiry / verification to ascertain whether any interest bearing funds have been utilized for the purpose of investment in unquoted shares and capital account. Neither the assessee has provided the nexus of interest bearing funds vis a vis its utilization. Even the AO has not examined /verified the same. Thus, there was lack of enquiry and non application of law at the part of the AO. The inflow of fund has to be seen with the outflow of funds to arrive on the answer to question whether such interest bearing funds have been utilized for the purpose of investment in shares / capital. Further, the assessee has submitted that they had interest free fund available for the investment and also submitted justification for non-applicability of section 14A which has no substance to consider in view of the Circular No. 5/2014 dated 11.02.2014 which says that:

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"5. The above position is further substantiated by the language used in Rule 8D(2(ii) & 8D(2)(iii) of I. T. Rules which are extracted below: "(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely:-

B= the average of value of investment, income from which does not or shall not form part of total income as appearing in the balance sheet of the assesses, on the first and last day of the previous year."

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(SC)/[2000] 159 CTR 1 (SC), has also affirmed the same proposition of law. 9. The Hon'ble Courts have held that where the assessment has been completed by the AO, without proper inquiries, by assuming incorrect facts of the case, by incorrect application of law or the AO has not applied his mind properly then the said order has been held to be erroneous and prejudicial to the interest of revenue.

The Hon'ble Gujarat High Court in the case of CIT vs. M M Khambhatwala (1992) 193 ITR 144 has upheld that the CIT can exercise his powers u/s. 263 of I T Act even where issue is debatable.

The Hon'ble ITAT, A Bench, Ahmedabad in the case of Shri Vijaykumar Gupta vs. CIT Central-1, Ahmedabad in ITA No 1530/Ahd/2010 has held that when the AO has not applied his mind on the issues in the reassessment stage, there is no question of having taken one view of the matter or taking two different views by the AO or by the CIT.

The Hon'ble ITAT, Cochin in the case of Shri Narayana Dharam Paripaiana Yuvadhana Samiti vs. ITO, Exemption (2019) 111 taxmnan.com 416 has held that where the AO has taken a wrong decision without considering material available on record or he takes a decision without making inquiry into a matter, where such enquiry was prima facie warranted CIT is empowered to initiate proceedings u/s. 263 of I T Act.

The Hon'ble 1TAT, Cochin in the case of Baby Memorial Hospital Ltd vs. ACIT(2019) 111.taxmann.com 189 has held that even in a case of limited scrutiny assessment, Commissioner can exercise jurisdiction u/s. 263 of I T Act.

The Hon'ble ITAT, Hyderabad In the case of Smt S Umadevl vs. CIT (2015) 62.taxmann.com 64 has held that where AO had passed cryptic, non speaking order, CIT was justified in invoking jurisdiction u/s. 263 of I T Act.

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The Hon'ble M P High Court in the case of Nagal Garment Industries Pvt Ltd{2020) 113.taxmann.com 4 has held that where AO had issued detailed questionnaire, in reply to which submissions have been made but AO did not applied his mind nor did he conduct any enquiry while accepting claim of assessee although he recorded in note sheet that reply filed by the assessee was not satisfactory and did not explain the facts, the assessment order was held to be erroneous and prejudicial to the interest of revenue.

"Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, it, in the opinion of the Principal Commissioner or Commissioner. (a) The order is passed without making inquiries or verification which should have been made; (b) The order is passed allowing any relief without inquiring into the claim; (c) The order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

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passed by the AO is erroneous and prejudicial to the interest of revenue to that extent. 12. Keeping in view these facts, I am of the considered view that this is a fit case for invoking section 263 of I, T, Act as the 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 are satisfied. Accordingly the impugned assessment order is set aside for fresh assessment and the AO is directed to complete the assessment only after due enquiries and verification/enquiries only to the extent of the issues discussed supra.”

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partnership firms. Therefore, the total investment in the partnership firm is out of assessee’s own capital and not out of any borrowed fund or interest- bearing fund. The assessee further submitted that no new investments were made during the impugned year and the assessee had duly explained the source of the investments generating tax-free income. He further submitted that even in the previous assessment years, no disallowance under section 14A were made. In response, the Ld. DR relied upon the observations made by the Principal CIT in the 263 order.

5.1 Before deciding the issue, it would be useful to refer to some Supreme Court decisions on this subject which would throw useful light on the scope of enquiry under Explanation (a) to section 263 of the Act.

5.2 The Supreme Court of India in the case of Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd.[2021] 130 taxmann.com 294 (SC) dismissed SLP filed by the assessee against order passed by High Court holding that where assessee-company had received unsecured loans from two different companies and Assessing Officer had made inquires in detail and accepted genuineness of same, such view of Assessing Officer being a plausible view could not be considered erroneous or prejudicial to interest of revenue. The facts of this case were that respondent assessee has filed its return of income showing total income of Rs. 62,55,900/- which was assessed under section 143(3) of the Act, 1961 by

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an assessment order dated 14th March 2016. The respondent company received unsecured loans from M/s. Georgett Tradecom Pvt Ltd and M/s. Purba Agro Food Pvt Ltd amounting to Rs. 2.49 Crore and the Assessing Officer allowed these unsecured loans. The Principal Commissioner of Income-tax invoked section 263 of the Act, 1961 for revising the assessed income of the respondent assessee. It was noticed by the PCIT that the unsecured loans obtained by the respondent assessee are shown as investment in the name of the assessee in the share application as well as in the balance sheet of the respective companies. The PCIT passed an order under section 263 of the Act directing the Assessing Officer to pass fresh assessment order under section 143(3) of the Act, 1961 on the aspect of unsecured loans shown by the respondent assessee. The Hon’ble Supreme Court made the following observation while deciding in favour of the assessee:

“Thus, the Tribunal has considered in detail the aspect of revisional power to be exercised by the PCIT in the facts of the case and has given a finding of facts that the Assessing Officer has made inquiries in detail and after applying mind, accepted the genuineness of loans received by the respondent assessee from the aforesaid two companies and such view of the Assessing Officer is a plausible view, and therefore, the same cannot be said to be erroneous or prejudicial to the interest of the Revenue.”

5.3 The Supreme Court in another recent case of Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates*[2019] 106

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taxmann.com 31 (SC), held that where Pr. CIT passed a revisional order making addition to assessee's income under section 69A in respect of on- money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee's income. The Principal Commissioner passed a revisional order under section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee's on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee's onmoney transactions and Tribunal thus set aside revisional order passed by Commissioner. The High Court upheld Tribunal's order. The Supreme Court while dismissing the SLP filed by the Department held as under:

“We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee's on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed”

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5.4 The Supreme Court in the recent case of Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd[2020] 114 taxmann.com 545 (SC), dismissed the Revenue’s SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law, with the following observations:

“Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere with the view of the Tribunal. The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ought to have so held in the order of revision. There was simply no necessity to remand the proceedings to the Assessing Officer when no further inquiries were called for or directed”

5.5 The Supreme Court in the case of Principal Commissioner of Income-tax--8 Mumbai v. Sumatichand Tolamal Gouti [2019] 111 taxmann.com 287 (SC) held that where High Court upheld Tribunal's order holding that AO had made detailed enquiries while allowing assessee's claim for deduction of business expenditure and, thus, revisional order passed by Commissioner was not sustainable, SLP filed against High Court's order was liable to be dismissed. The facts of this case were that in course of assessment, Assessing Officer allowed assessee's claim for deduction of

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certain expenditure on purchase of CDs on Jain Religion by expending an amount of Rs. 10.4 crores, after due examination. The Commissioner passed revisional order holding that Assessing Officer had not carried out any enquiries as to nature of expenditure being capital or not. The Tribunal, however, allowed assessee's appeal holding that Assessing Officer had carried out detailed enquiries and taken a view which was a plausible view. Accordingly, Tribunal set aside revisional order passed by Commissioner. The High Court upheld order passed by Tribunal. The Supreme Court on consideration of above facts held that SLP filed against High Court's order was to liable to be dismissed. The Supreme Court made the following observations, while passing the order:

“It is by now well settled that, the Commissioner can exercise revisional powers under Section 263 of the Act only when it is found that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of Revenue. In the present case, the Tribunal noted the observations of the Assessing Officer in the order of remand to the effect that Jain munis do not advocate spread of religion through use of computers, source of electronic media is usually shunned, very small section of the community uses computer technology for religious purposes as plenty of printed literature is available in the market. All these factors led to the market value of the CDs declining dramatically. It was on account of these reasons, that the assessee had incurred substantial loss arising out of reduction in the value of stock lying at the end of the year. The Tribunal, therefore

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noted that the Assessing Officer had carried out detailed enquiries and taken a plausible view.”

5.6 Now coming to the instant set of facts before us, the first aspect to be considered is whether the AO made inquiries in respect of deduction of claim under section14A of the Act during the course of assessment proceedings. On perusal of records, we observe that the AO had made specific queries on this aspect, to which the assessee had also filed its reply (annexed in the Paper-Book filed before us) . Therefore, in this case, the AO had applied his mind on the aspect of deduction of claim under section 14A of the Act. The second aspect to be considered as whether on merits, the assessee had reasonable case and therefore could be inferred that the view taken by the AO is a leally plausible view or whether from the facts it can be inferred that the view taken by the AO is prima facie erroneous. Before the AO, the assessee submitted that the assessee had interest-free capital of the proprietor amounting to � 1,53,73,45,614/- as on 31-03-2017. Out of the same, the total investment in interest free funds is amounting to Rs. 7,71,58,852/-. Therefore, considering the investment in the firms from which tax free income is earned, it is just 5% of the total interest-free capital of the proprietor. Further, the assessee submitted that there is no interest-bearing loan in the personal balance sheet of the assessee. Therefore, the assessee submitted before the AO that no interest-bearing funds were utilised in the investment which generated interest-free income in the hands of the proprietor. It was further submitted that there is no new investment during the year under consideration with reference to investment generating exempt income. Therefore interest or other expenses incurred during the year under

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consideration cannot be directly or indirectly related to exempt income, as no new fund has been invested for the investment generating exempt income. The assessee further placed reliance on the case of CIT v. Torrent Power Ltd (2014) 272 CTR 270 (Gujarat High Court) which is to the effect that where it is apparent from records assessee had sufficient funds for making investments in shares and interest rate bonds and had not used borrowed funds for such purpose, AO was not justified in invoking the provisions of section 14A in order to disallow 1% of the interest expenses incurred for earning income. The assessee also and placed reliance on several other judicial precedents on the Gujarat High Court upholding the above proposition. Therefore, in the instant set of facts, the assessee gave detailed explanation in respect of its claim u/s 14A of the Act. The assessee placed various documents on record to substantiate that since he was having adequate interest-free funds at its disposal, then in view of several jurisdiction Gujarat High Court decisions, it would be reasonable to presume, that interest-bearing funds were not utilised the purpose of making investments in instruments which will yield interest free income. In view of the explanation given by the assessee with respect to claim of deduction u/s. 14A of the Act, in our view, the view taken by the A.O. is a legally plausible view. Further, it is a well settled position of law that if from the assessment records, it is evident that the Ld. AO has made due enquiries in response to which assessee has filed detailed submissions, then even if the assessment order does not discuss all aspects in detail with regards to claim of the assessee, it cannot be held that the order is erroneous and prejudicial to the interests of the Revenue. The above proposition has been upheld in the case of CIT v. Reliance Communication 69 taxmann.com 109 (Bombay),

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Smt. Anupama Bharat Gupta v. ITO in ITA 1685/Ahd/ 2018, Goyal Private Family Specific Trust [1988] 171 ITR 698, CIT v. Mahendra Kumar Bansal [2008] 297 ITR 99 (All.) (para 10) etc.

5.8 We thus find no error in the order of Ld. AO so as to justify initiation of 263 proceedings by the Ld. Pr. CIT. The Ground of appeal raised by the assessee is thus allowed.

Order pronounced in the open court on 21-09-2022

Sd/- Sd/- (WASEEM AHMED) (SIDHHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 21/09/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order,

Assistant Registrar, Income Tax Appellate Tribunal, Rajkot