PER A.D.JAIN, VICE PRESIDENT
This is assessee's appeal for assessment year 2017-18 against the order dated 31.03.2022 passed by the ld. PCIT (Central) Ludhiana, u/s 263 of the Income Tax Act. The following grounds have been taken :
1. Whether Ld. PCIT has erred in exercising jurisdiction under Section 263 of the Act, where specific inquiry was already conducted by the Ld. AO?
2. Whether on facts and circumstances of the case and in law the Ld. CIT has exceeded legislative jurisdiction under Section 263 of the Act, and the order passed is bad in law?
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3. That the Ld. CIT has erred in passing an order under Section 263 of the Act in the absence of any erroneous position prejudicial to the interest of revenue, in the original assessment order passed by Ld. 1TO under Section 143(3) of the Act.
4. That Ld. CIT has erred in substituting an alternative view as against a view already adopted by the Ld. AO at the time of assessment proceedings under Section 143(3) of the Act.
2. There is a delay of 214 days in filing the appeal. As per the application for condonation of delay, on account of search conducted at the assessee's place of business from 03.03.2022 to 06.03.2022 and the post search enquiries conducted thereafter, the assessee was unable to participate before the ld. PCIT, or to take the necessary action of filing appeal against the PCIT's order by 30.05.2022, i.e., the last date of limitation; that it is only now, that the assessee was informed by its Tax Professional about the passing of the PCIT's order, and the assessee filed the appeal on 26.12.2022, incurring an inadvertent and bonafide delay of 214 days. The application is accompanied by an affidavit of the assessee.
3. The contents of the application, as above, are patent on record. The search on the assessee was conducted from 03.03.2022 to 06.03.2022. Thereafter, post-search enquiries were also conducted. The Show Cause Notice u/s 263 of the Act was issued within a week of the search, i.e., on 11.03.2022 and the impugned order was passed on 31.03.2022. Obviously, therefore, the assessee is correct when it contends that it could
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not come present before the PCIT in the revisionary proceedings and it was unaware of the passing of the impugned order til l the Tax Professional informed the assessee about it, thus, delaying the filing of the appeal which delay was, hence, inadvertent and bonafide. Even otherwise, the assessee cannot be said to have gained anything by filing its own appeal late. Thus, finding that the assessee was prevented by sufficient cause from filing appeal in time, we condone the delay of 214 days in filing the appeal.
4. The rival contentions on the merits of the case have been heard and the material on record has also been examined.
5. A Show Cause Notice (APB 12-15) dated 11.03.2022 was issued to the assessee by the PCIT u/s 263 of the Act. This notice also stands reproduced in para 2, at pages 1 to 4 of the impugned order. In the Show Cause Notice, it was, inter-alia, stated that the case had been selected under complete scrutiny through CASS to examine the issues of (i) large increase in unsecured loans during the year, (ii) large value cash deposits during the demonetization period, and (ii i) expenses debited to the Profit & Loss Account for earning exempt income as compared to investments made to earn exempt income. It was stated that scrutiny assessment in the case had been completed, where income had been assessed at the returned income; that the assessee company had shown non-current investment amounting to Rs.28.50 Cr during the year, in its group companies. Details of
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these non-current investments were given. It was stated that income, if any earned/received/receivable on such investments is not includible in the taxable income, being taxable income; and that however, the provisions of Section 14A of the Income Tax Act read with those of Rule 8D of the IT Rules provide for disallowance of expenditure incurred for earning exempt income/income not includible in total income. Referring to CBDT Circular No.14 of 2001, it was stated that the legislative intent is to allow only that expenditure which is relatable to earning of income, meaning thereby, that expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of whether any such income has been earned during the year, or not. It was stated that the use of the term
"includible" in the heading of Section 14A and that of Rule 8D, as also the fact that Section 14A uses the expression "income under the Act' and not "income of the year", indicates that for invoking disallowance u/s 14A, it is not material that the assessee should have earned such exempt income during the financial year under consideration. It was also stated that this position is substantiated by the language implied in Rules 8D(2)(ii) and 8D(2)(iii) of the IT Rules. The assessment order dated 28.12.2019 was, thus, stated to be erroneous and prejudicial to the interests of the Revenue.
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6. By virtue of the impugned order dated 31.03.2022, the ld. PCIT set aside the assessment order on the issue of Section 14A of the Act and directed the AO to pass a fresh assessment order in accordance with law, after granting sufficient opportunity to the assessee. While doing so, the ld. PCIT observed, inter-alia that;
"It is also a matter of common sense that assessee who makes huge investments in securities incurs some expenditure. It is not possible / conceivable that investments can be made, managed and monitored without efforts and expenditure. The AO was required to give a finding on the claim of the assessee that no expenditure was incurred in earning exempt income or towards activities relating to investment and monitoring thereof. Once it is so then application of rule 8D comes into play and disallowance of part expenditure would get attracted. Therefore, in view of the aforesaid position of the law, I am of the view that the assessment order passed by the AO in the case of assessee for A.Y.2017-18 dated 28.12.2019, without consideration of circular No.5 of 2014 issued by the CBDT on the subject of disallowance u/s 14A read with rule 8D and the law as discussed above, is erroneous and prejudicial to the interest of revenue. Therefore the said assessment order is held to be erroneous and prejudicial to the interest of the revenue within the meaning of section 263 read with explanation 2 thereof."
7. Thus, in effect, the PCIT was of the view that the assessee would not have been able to make the huge investments made by it without incurring some expenditure and that the AO had not given any finding on the assessee's claim that no expenditure had been incurred; and that thus, the assessment order was erroneous and prejudicial to the interests of the Revenue.
8. Before us, the ld. Counsel for the assessee has contended that the ld. PCIT has erred in exercising jurisdiction u/s 263 of the Act, where specific enquiry had already been conducted by the AO; that the ld. PCIT has erred in passing the impugned
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order u/s 263 of the Act, in the absence of any erroneous position prejudicial to the interests of the Revenue taken by the AO in the original assessment order; that the ld. PCIT has erred in substituting an alternative view in place of the view already adopted correctly by the AO at the time of the assessment proceedings u/s 143(3) of the Act. It has been submitted that the assessee company, during the year, had made investments of Rs.28.50 Cr in its group subsidiary companies; that these investments had been made by the assessee out of its surplus accumulated profits/reserves, in the normal course of its business operations; that the assessee company had neither earned any exempt income, nor had it claimed any expenditure relatable to earning exempt income during the year under consideration; that the investments were not made from out of any funds borrowed from outside; that the company has not earned any tax free income, like dividend/interest from such investments during the year and so, the provisions of Section 14A of the Act read with Rule 8D of the IT Rules are not attracted and have wrongly been applied by the ld. PCIT during the year under consideration. It has been contended that month-wise details of total investments held by the assessee during the year under consideration, in the prescribed format, had been filed before the AO alongwith reply dated 12.12.2019 (APB 4-8), in response to Show Cause Notice dated 07.12.2019 (APB 1-3),
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issued u/s 142(1) of the Act; that month-wise details of fresh investment of Rs.28.50 Cr during the year, alongwith bank statements had also been filed; and that details of investments alongwith copy of Current Account Statement for the year under consideration were also furnished. It has been contended that the fact that the information so requisitioned and duly furnished before the AO had been duly examined by the AO is evident from the assessment order itself, wherein, in para 3 thereof, the AO states, "………..the information requisitioned as per questionnaire and further called for was furnished, which is placed on record and examined. The reasons for selection of case by CASS were duly examined. After verification of information/documents filed by the assessee, the returned income as declared by the assessee at Rs.24,90,55,130/- is accepted…….". It has been contended that in these facts and circumstances, the order passed by the AO having been passed after complete enquiry and being fully satisfied therewith, the invocation of revisionary powers by the ld. PCIT was not in accordance with law; and that therefore, the order passed by the ld. PCIT be quashed and that passed by the AO be revived, on allowing the appeal.
9. The ld. DR, on the other hand, has placed strong reliance on the impugned order. It has been contended that as rightly observed by the ld. PCIT, it is a matter of common sense that an assessee who makes huge investments in security incurs some
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expenditure, that it is not possible /conceivable that investments can be made, managed and monitored, without efforts and expenditure; that the AO was required to give a finding on the claim of the assessee that no expenditure was incurred in earning exempt income or towards activities relating to investment and monitoring thereof; that once it is so, application of Rule 8D comes into play and disallowance of part expenditure would get attracted; that therefore, the AO ought to have examined the assessee's claim of no expenditure having been incurred, which has not been done; that this being so, the order under appeal is well versed and it does not require any interference; and that hence, the appeal filed by the assessee being shorn of merit, the same be dismissed.
10. The short issue is as to whether indeed the assessee has been able to make out a case that no expenditure stood incurred so as to dispel the applicability of Section 14A of the Act read with Rule 8D of the IT Rules.
11. Before the AO, in response to the notice issued u/s 142(1), on 07.12.2019, the assessee had, inter-alia, filed month-wise detail of total investments held by the assessee during the year. These details are as follows:
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12. Further, the assessee had also filed details of fresh investments of Rs.28.50 Cr during the year. This detail is as follows :
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13. The assessee had also filed before the AO, details of investments made during the year under consideration. This detail is as follows :
14. It is seen that as per the Cash Flow Statement of the assessee for the year ended 31.03.2017, forming part of the Audit Report of the assessee, net cash from operating activities stands at Rs.56,92,31,992/-. Then, as per the notes forming part of the Financial Statements of the assessee as at 31.03.2017, forming part of the Audit Report of the assessee, share capital has been shown at Rs.17,50,00,000/-, whereas reserves and surplus are at Rs.1,76,79,87,805/-, meaning thereby, that the net total of the
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shareholders' funds during the year, are of Rs.2,19,56,73,298/-, the investment is of Rs.28.50 Crs. This investment is, therefore, demonstratedly out of the assessee's own funds, which were sufficient to undertake the said investments by the assessee in its group concerns.
15. From the above, it is crystal clear that the investments of Rs.28.50 Cr made by the assessee during the year under consideration, in its group companies, were made out of the assessee's own surplus funds, i.e., it is own surplus accumulated profits and not from out of any borrowed funds. This position was duly taken into consideration by the AO while passing the assessment order, which is clear from the recital in the assessment order itself, as reproduced herein above and it is not in the hands of the assessee, as to how an assessment order is passed. The above position, however, has remained oblivious to the ld. PCIT and the impugned order has been passed in ignorance thereof.
16. From the above discussion, in our considered opinion, the assessment order did not suffer from the vice of either being erroneous, or being prejudicial to the interests of the Revenue. That being so, the ld. PCIT erred in invoking the provisions of Section 263 of the Act and in passing the impugned order. Accordingly, finding merit in the grievance sought to be raised by the assessee, the same is accepted. The order under appeal is,
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accordingly, reversed and that passed by the AO is ordered to be revived. Ordered accordingly.
17. In the result, the appeal is allowed. Order pronounced in the Open Court on 25thMay,2023. Sd/- Sd/-
(VIKRAM SINGH YADAV) (A.D.JAIN )
ACCOUNTANTMEMBER VICE PRESIDENT
"Poonam"
आदशे क ितिलिप अ ेिषत/ Copy of the order forwarded to :
1. अपीलाथ/ The Appellant
2. यथ/ The Respondent
3. आयकर आयु/ CIT
4. िवभागीय ितिनिध, आयकर अपीलीय आिधकरण, च डीगढ़/ DR, ITAT, CHANDIGARH
5. गाड फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar