ORDER

G. S. Pannu, Accountant Member - This appeal by the assessee is directed against the order of the Commissioner of Income Tax-II, Pune (in short "the Commissioner") dated 05.11.2012 passed u/s 263 of the Income Tax Act, 1961 (in short "the Act") whereby the assessment order passed by the Assessing Officer u/s 143(3) of the Act dated 10.11.2010 has been held to be erroneous in so far as it is prejudicial to the interests of the Revenue within the meaning of section 263 of the Act qua the disallowance of Rs.12,73,000/- made in the assessment order in terms of section 14A of the Act r.w. rule 8D of the Income Tax Rules, 1962 (in short "the Rules").

2. In brief, the facts relevant to appreciate the controversy in this appeal can be summarized as follows. The appellant, a partnership firm engaged in the business of Property Developers and Promoters, filed its return of income for assessment year 2008-09 declaring total income of Rs.92,77,21,550/-. The return of income filed by the assessee was subject to a scrutiny assessment by the Assessing Officer u/s 143(3) of the Act and vide order dated 10.11.2010 the total income was determined at Rs.92,91,68,022/-, which inter-alia, included a disallowance in terms of section 14A of the Act amounting to Rs.12,73,000/-, which as per by the Assessing Officer, was worked out in terms of rule 8D of the Rules.

3. Subsequently, the Commissioner while invoking his revisionary power contained in section 263 of the Act show-caused the assessee as to why the assessment order be not considered erroneous in so far as it is prejudicial to the interests of the Revenue on account of fact that the disallowance computed by the Assessing Officer u/s 14A of the Act amounting to Rs.12,73,000/- was not as per rule 8D of the Rules. In order to appreciate the issue raised by the Commissioner, the following discussion is relevant. The assessee had declared total income of Rs.92,77,21,550/- in the return of income, which inter-alia, included income by way of dividends of Rs.1,79,47,737/- which was exempt in terms of section 10(34) of the Act. Section 14A prescribes that for the purposes of computing total income no deduction shall be allowed in respect of an expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. During the assessment proceedings, the Assessing Officer invoked section 14A of the Act and confronted the assessee as to why expenditure incurred in relation to the income which does not form part of the total income (i.e. the dividend income of Rs.1,79,47,737/-), should not be disallowed. Ostensibly, assessee had not disallowed any expenditure u/s 14A of the Act in the return of income filed. After examining the various pleas of the assessee, the Assessing Officer finally required the assessee to submit a working of the amount disallowable u/s 14A of the Act as per the formula contained in rule 8D of the Rules, and accordingly the disallowance was determined at Rs.12,73,000/-. The Commissioner has found the order of the Assessing Officer erroneous in so far as it is prejudicial to the interests of the Revenue on the point of the disallowance computed at Rs.12,73,000/-. As per the Commissioner, the working of the disallowance submitted by the assessee during the assessment proceedings has been accepted by the Assessing Officer "without any verification and without any application of mind". Secondly, the Commissioner has also observed that the disallowance of Rs.12,73,000/- determined by the Assessing Officer u/s 14A of the Act was also not in accordance with rule 8D of the Rules, and it was thus erroneous in law. On the basis of the aforesaid twin reasons, the Commissioner has held the assessment order as erroneous in so far as it is prejudicial to the interests of the Revenue within the meaning of section 263 of the Act. As per the Commissioner, the correct amount disallowable as per rule 8D of the Rules is Rs.1,07,73,516/- as per a working contained in para 10 of his order as against Rs.12,73,000/- computed by the Assessing Officer; and, accordingly he directed the Assessing Officer to modify the assessment order dated 10.11.2010 by making a disallowance of Rs.1,07,73,516/- u/s 14A of the Act instead of Rs.12,73,000/- already made by the Assessing Officer. The assessee has challenged the aforesaid direction of the Commissioner before us.

4. The sum and substance of the plea raised by the appellant is that the Commissioner has erred in law and on facts in invoking section 263 of the Act inasmuch as the assessment order was neither erroneous and nor prejudicial to the interests of the Revenue within the meaning of section 263 of the Act. The learned counsel for the assessee has argued that the Commissioner was wrong in asserting that the assessment order was passed without application of mind on the issue of working of disallowance u/s 14A of the Act r.w. rule 8D of the Rules; and, it is further contended that the Commissioner has erred in law by computing the disallowance in terms of rule 8D of the Rules at Rs.1,07,73,516/- as against Rs.12,73,000/- correctly determined by the Assessing Officer. In the course of hearing, learned counsel has referred to the relevant material placed in the Paper Book to show that in the course of assessment proceedings assessee was required by the Assessing Officer to furnish its say with regard to the applicability of section 14A of the Act as also the working of disallowance u/s 14A of the Act, although assessee was of the opinion that no disallowance u/s 14A of the Act was merited. The aforesaid material has been referred to justify that there was due application of mind by the Assessing Officer while determining the disallowance u/s 14A of the Act r.w. rule 8D of the Rules, and the assessment order could not be held as erroneous. The second limb of assessee's argument is that the Commissioner is wrong in law also to say that the working of the disallowance under rule 8D of the Rules accepted by the Assessing Officer was wrong. It is contended that the Commissioner is wrong in including the interest expenditure for computing the disallowance as per clause (ii) of sub-rule (2) of rule 8D of the Rules. For this purpose, attention was invited to the submissions made before the Assessing Officer whereby it was pointed out that entire interest expenditure debited in the Profit & Loss Account was on account of funds utilized to earn taxable income and were not utilized to invest in mutual funds, which have yielded the impugned exempt dividend income. It was, therefore, contended that in law and on facts, the Commissioner has erred in invoking his revisionary power u/s 263 of the Act in the present case.

5. On the other hand, the learned CIT-DR appearing for the Revenue has defended the order of the Commissioner by pointing out that the Assessing Officer while computing the disallowance in terms of rule 8D of the Rules had omitted to consider clause (ii) of sub-rule (2) of rule 8D of the Rules and therefore the disallowance computed in terms of rule 8D of the Rules in the assessment order was incorrect in law. It was also reiterated that since the Assessing Officer accepted the assessee's working of disallowance as per rule 8D of the Rules without any further verification, it amounted to an assessment made without due application of mind and that the same was a justifiable ground for invoking section 263 of the Act. In this context, reliance has been placed on the judgement of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 which has also been relied upon by the Commissioner in the impugned order.

6. We have carefully considered the rival submissions, perused the respective orders of the authorities below as well as the other relevant material on record. The crux of the controversy before us is with regard to invoking of section 263 of the Act by the Commissioner to hold the assessment order dated 10.11.2010 as erroneous in so far as it is prejudicial to the interests of the Revenue within the meaning of section 263 of the Act. Section 263 of the Act empowers the Commissioner to call for and examine the record of any proceeding under the Act, and if he considers any order passed therein by the Assessing Officer as erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such enquiries as he may deem necessary, pass such order thereon including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. In the present case, the Commissioner has invoked his revisionary power and has found the assessment order to be erroneous in so far as it is prejudicial to the interests of the Revenue and has directed the Assessing Officer to enhance the assessment on account of the disallowance u/s 14A of the Act r.w. rule 8D of the Rules. The phraseology of section 263 of the Act makes it clear that the Commissioner is competent to invoke his revisionary power only on satisfaction of two conditions, namely, that (i) the order of the Assessing Officer sought to be revised is erroneous; and, (ii) such order it is prejudicial to the interests of the Revenue. In the case of Malabar Industrial Co. Ltd. (supra) the Hon'ble Supreme Court held that an incorrect assumption of facts or an incorrect application of law or an assessment order made without application of mind by the Assessing Officer is liable to be considered as erroneous within the meaning of section 263 of the Act. In the present case, the first issue raised by the Commissioner is that the assessment order has been passed without application of mind qua the disallowance u/s 14A of the Act computed as per rule 8D of the Rules. While there cannot be any dispute with the aforesaid proposition in-principle, so however, one has to examine as to whether the charge made by the Commissioner in the present case to the effect that the determination of disallowance under rule 8D of the Rules by the Assessing Officer is without application of mind, is justified on facts or not. It is a trite law that whether or not an assessment order is passed without application of mind is an aspect which is required to be examined having regard to the facts of each case. In this context, it would be relevant to observe that it is not only the assessment order but the entire assessment record which has to be examined before arriving at a conclusion as to whether or not the Assessing Officer has applied his mind on an issue or not. As per the Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108/71 Taxman 585 an assessment order could not be held to be erroneous simply because there is absence of an elaborate discussion in respect of a particular point if the record otherwise showed that the Assessing Officer had made enquiries with regard to the point raised by the Commissioner and that assessee had made detailed explanations in writing in the course of assessment proceedings. The enquiries by the Assessing Officer as well as the replies of the assessee were held to be a part of the 'record' of the proceedings under revision, though an elaborate discussion in the assessment order was not present. As per the Hon'ble High Court, under the aforesaid circumstances, the assessment order could not be held to be erroneous simply because it did not contain an elaborate discussion on this issue.

7. To the same effect is the judgement of the Hon'ble Punjab & Haryana High Court in the case of Hari Iron Trading Co. v. CIT [2003] 263 ITR 437/131 Taxman 535. As per the Hon'ble High Court, section 263(1) of the Act requires the Commissioner to exercise his power only after examining "the record of any proceeding under the Act". Further, the expression 'record' in section 263(1) of the Act has also been defined in clause (b) of the Explanation thereof to include all records relating to any proceeding under this Act available at the time of examination by the Commissioner. Therefore, as per the Hon'ble High Court, it is not only the assessment order but the entire material available on record which has to be examined before arriving at a conclusion as to whether or not the Assessing Officer has examined any issue or not. Explaining further, the Hon'ble High Court noted that the aforesaid exercise was necessary because assessee has no control over the way an assessment order is drafted and therefore mere non-mentioning in the assessment order cannot be singularly determinative of the issue of non-application of mind by the Assessing Officer. Therefore, in order to determine whether or not the Assessing Officer has applied his mind on an issue, a mere perusal of assessment order would not suffice, rather the entire record is liable to be examined before arriving at a conclusion as to whether or not the Assessing Officer has applied his mind. In this background, now we may examine the facts of the present case in order to test the charge made by the Commissioner that the Assessing Officer accepted the working of disallowance under rule 8D of the Rules without any application of mind.

8. The Assessing Officer has discussed the issue in paras 5.1 to 5.1.7 of his order. Ostensibly, in the return of income, assessee had declared dividend income of Rs.1,79,47,737/-, which was exempt u/s 10(34) of the Act but no disallowance u/s 14A of the Act was made. Assessee was show-caused on the issue of disallowance u/s 14A of the Act and was also asked to give computation of expenses incurred in relation to earning of dividend income which was liable for disallowance u/s 14A of the Act. Assessee responded by furnishing written submissions dated 19.10.2010, which have been reproduced by the Assessing Officer in para 5.1.1 of the assessment order. In the written submissions, assessee asserted that no disallowance was made in the return of income as there was no direct expenditure relatable to the earning of such income debited in the Profit & Loss Account. Nevertheless, assessee also furnished a computation of such expenses, which could be considered for disallowance. The Assessing Officer examined the aforesaid plea, as is evident from his discussion in paras 5.1.2 to 5.1.6. of the order. The discussion in the assessment order reveals that initially assessee quantified the disallowance u/s 14A of the Act at Rs.52,000/- by allocating a portion of general expenses against the exempt dividend income in proportion of the dividend income earned vis-à-vis the total income earned by the assessee. The Assessing Officer rejected such working, as according to him, it was not in the manner prescribed under the rule 8D of the Rules. Thereafter, the Assessing Officer records that assessee was asked to specifically submit working of the expenditure disallowable in terms of rule 8D of the Rules, which was furnished by the assessee vide its communication dated 25.10.2010. The Assessing Officer has referred to such communication, in terms of which the disallowance u/s 14A of the Act in terms of rule 8D of the Rules was computed at Rs.12,73,000/-. Accordingly, the Assessing Officer made a disallowance of Rs.12,73,000/- u/s 14A of the Act r.w. rule 8D of the Rules.

9. Before us, the learned counsel for the assessee referred to page 25 of the Paper Book, which is a copy of the communication dated 25.10.2010 addressed to the Assessing Officer, wherein the disallowance as per rule 8D of the Rules was worked out at Rs.12,73,000/-. The said working is reproduced hereinafter as under :—

"Working of Sub-Rule (2) of Rule 8D as per Income Tax Rules, 1962.

10. In the course of hearing, reference was made to another written submission dated 18.10.2010, which was also before the Assessing Officer during the assessment proceedings, a copy of which has been placed in the Paper Book at pages 7 to 11. In the said written submissions also, assessee has furnished its say on the disallowance u/s 14A of the Act.

11. On the basis of the aforesaid factual aspects, in our considered opinion, we have not been able to appreciate as to how the Commissioner has recorded a finding that the assessment on the aspect of disallowance u/s 14A of the Act has been made by the Assessing Officer without application of mind. Ostensibly, the Assessing Officer had show-caused the assessee on the issue of disallowance u/s 14A of the Act and assessee made detailed submissions on more than one occasion to the Assessing Officer. The material available on record suggests that the preliminary assertion of the assessee to the effect that no disallowance u/s 14A of the Act was merited, has been rejected by the Assessing Officer since he has made a disallowance of Rs.12,73,000/-. Secondly, the initial quantification of disallowance proposed by the assessee at Rs.52,000/- was also rejected by the Assessing Officer, as not being per the formula prescribed under rule 8D of the Rules. Subsequently, the assessee furnished a working of disallowance in terms of rule 8D of the Rules, which we have extracted above. The said working is quite exhaustive and brings out the assertion of the assessee on each of the clauses of sub-rule (2) of rule 8D of the Rules; and, the same has been accepted by the Assessing Officer and disallowance of Rs.12,73,000/- made. For the present, we may not go into the merits of the working, which we do a little later in the order; but, all the aforesaid material which was before the Assessing Officer only goes to show that the Commissioner was wrong in coming to conclude that the assessment on the aspect of disallowance u/s 14A of the Act has been made without application of mind. Therefore, on this aspect of the matter, we are unable to uphold the stand of the Commissioner.

12. Now, we may examine the other point made out by the Commissioner that the working of the disallowance under rule 8D of the Rules contained in the assessment order is legally unsustainable and wrong. The working of Rs.12,73,000/- made in the assessment order has already been extracted by us in the earlier part of this order. As per the Commissioner, the disallowance in terms of rule 8D of the Rules works out to Rs.1,07,73,516/-, which is contained in para 10 of his order as under :—

"10. In the case of the assessee it is found that the computation should have been made as per Rule 8D as under :—

A = 1,91,79,303/-

Disallowance as per Rule 8D :

13. Before proceeding further, we may refer to rule 8D(2) of the Rules which prescribes a formula for determination of the amount of expenditure in relation to the income which does not form part of the total income :—

"(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :—

14. If we peruse sub-rule (2) of rule 8D of the Rules, it is noticeable that the formula to determine expenditure in relation to income which does not form part of the total income comprises of three limbs. The first limb [i.e. clause (i)], being the amount of expenditure directly relating to the income which does not form part of the total income. The second limb [i.e. clause (ii)] being computed on the basis of the formula given therein in a case where assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The said formula seeks to apportion the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of average value of investments, etc. prescribed therein. The third limb [i.e. clause (iii)] is an ad-hoc basis of disallowance, namely, one-half of the average value of investment, income from which does not or shall not part of total income, as appearing in the Balance Sheet of the assessee, on the first day of and the last day of the previous year. Ostensibly, it is the aggregate of the three limbs of the formula, which would constitute the expenditure in relation to the exempt income and that would be amount which would be disallowed u/s 14A of the Act. It is also clear from sub-rule (2) of rule 8D of the Rules that the disallowance has broadly two components of expenditure, namely, direct and indirect. The direct expenditure is taken care by clause (i) of sub-rule (2) of rule 8D of the Rules. The indirect expenditure by way of interest is taken care by way of clause (ii) of sub-rule (2) of rule 8D of the Rules on the principle of apportionment. Thirdly, in cases where the indirect expenditure is not by way of interest, a figure is computed by way of a thumb rule prescribed in clause (iii) of sub-rule (2) of rule 8D of the Rules.

15. In the present case, as per the working of the assessee, which is accepted by the Assessing Officer, and even as per the working of the Commissioner, there is no direct expenditure relating to the exempt income in question; thus, no amount qualifies for disallowance in terms of clause (i) of sub-rule (2) of rule 8D of the Rules. Thus, on this aspect, there is no dispute.

16. The dispute arises with regard to the clause (ii) of sub-rule (2) of rule 8D of the Rules, which relates to indirect expenditure by way of interest. As per the assessee there is no amount of interest expenditure which is not attributable to any particular income or receipt or in other words, as per the assessee there is no element of interest expenditure falling for consideration in clause (ii) of sub-rule (2) of rule 8D of the Rules. The assertion of the assessee before the Assessing Officer, which can be seen from the working reproduced by us earlier in para 9, was that the entire expenditure on account of interest is incurred towards funds utilized to earn taxable income and no borrowing has been utilized for investment in mutual funds which have yielded the exempted dividend income. The assessee supported this assertion by pointing out that the interest and loans borrowed were indeed paid out of sale proceeds of certain lands and the balance sale proceeds were invested in mutual funds, which have yielded exempt income. Thus, the case of the assessee was that it has no expenditure by way of interest which is not directly attributable to any particular income. The Commissioner, on the other hand, has observed that assessee has an interest expenditure of Rs.1,91,79,303/-and subjected the same be disallowance in terms of clause (ii) of sub-rule (2) of rule 8D of the Rules. This is the area of difference between the working of disallowance contained in the assessment order and that done by the Commissioner.

17. We have carefully examined the said aspect and find no justification for the action of the Commissioner. In-fact as the phraseology of clause (ii) of sub-rule (2) of rule 8D of the Rules suggest, the apportionment contained therein is in respect of amount of expenditure by way of interest, which is other than the amount of interest which is attributable to any particular income. In the present case, assessee asserted before the Assessing Officer that there was no interest expenditure which was available for apportionment in terms of clause (ii) of sub-rule (2) of rules 8D of the Rules as the entire interest expenditure was directly related to earning of taxable income. This assertion of the assessee was also supported by his explanation that no borrowings were utilized for investment in mutual funds which have yielded exempt income and further that interests and loans borrowed were rather paid out of sale proceeds of land and the balance of the proceeds were invested in mutual funds which yielded exempt income. The aforesaid explanation has been impliedly accepted by the Assessing Officer inasmuch as he has not made any disallowance on this score. The Commissioner, on the other hand, has not pointed out as to how the said explanation of the assessee was wrong or contrary to record. Therefore, we are unable to appreciate as to how the Assessing Officer erred in accepting the stand of the assessee on this count. In the impugned order, the Commissioner has not pointed out either factually or otherwise as to the infirmity in the stand of the Assessing Officer on this score. No specific reference has been made to any material to show that the working accepted by the Assessing Officer as per the second limb contained in clause (ii) of sub-rule (2) of rule 8D of the Rules was wrong or contrary to the record. Therefore, we are unable to uphold the action of the Commissioner on this score.

18. In so far as the third limb of the disallowance in terms of clause (iii) of sub-rule (2) of rule 8D of the Rules, there is no difference between the working accepted by the Assessing Officer and that done by the Commissioner.

19. Therefore, in final analysis we are unable to uphold the stand of the Commissioner that the working of disallowance u/s 14A of the Act r.w. rule 8D of the Rules contained in the assessment order is wrong in law or on facts.

20. In view of our aforesaid discussion, we therefore hold that the Commissioner erred in invoking his revisionary power contained in section 263 of the Act; and, accordingly, the order of the Commissioner in enhancing the disallowance u/s 14A of the Act r.w. rule 8D of the Rules is set-aside and disallowance made by the Assessing Officer in the assessment order is restored.

21. In the result, the appeal of the assessee is allowed.

SUNIL