Gujarat High Court
Principal Commissioner Income Tax, ... vs Dipesh Lalchand Shah on 13 June, 2022
Author: A.J.Desai
Bench: A.J.Desai, Bhargav D. Karia
C/TAXAP/272/2022 ORDER DATED: 13/06/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 272 of 2022
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PRINCIPAL COMMISSIONER INCOME TAX, SURAT-2
Versus
DIPESH LALCHAND SHAH
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Appearance:
MRS KALPANAK RAVAL(1046) for the Appellant(s) No. 1
for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE A.J.DESAI
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 13/06/2022
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE A.J.DESAI)
1. Revenue has preferred this appeal under section 260A of the Income Tax Act, 1961 (For short "the Act, 1961") for the assessment year 2014-2015 challenging the judgment and order dated 10.12.2019 passed by the Income Tax Appellate Tribunal, Surat Bench, Surat in I.T.A. No.218/SRT/2019.
2. Following substantial questions of law are proposed by the Revenue :
"(i) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in holding that the Ld. PCIT was not correct in exercising jurisdiction u/s 263 of the Act by ignoring the fact that the Assessing Officer has passed assessment Page 1 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 order without making inquiries/verification in the light of the fact that the disallowance u/s 14A of the Income Tax Act r/w Rule 8D to the tune of Rs.2,54,61,097/- should have been made?
(ii) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in holding that the Ld. PCIT was not correct in exercising jurisdiction u/s. 263 of the Act by ignoring the fact that the Assessing Officer has passed the assessment order without making inquiries/verification in the light of the fact that the disallowance of Rs.2,91,18,343/- should have been made as provided u/s 57(iii) of the Act?
(iii) Whether on the facts and
circumstances of the case and in law, the
Hon'ble ITAT has erred in setting aside the
impugned order u/s.263 of the Income Tax Act
and allowing the appeal of the assessee?"
3. Brief facts of the case are that the assessee is engaged in the business of trading and earned income from salary, profits and gains from business and profession, income from other sources and profit from partnership firm. The respondent-assessee filed his return of income on 5.11.2014 declaring nil income. The case of the assessee was selected for scrutiny and order under section 143(3) of the Act, 1961 was passed by the Assessing Officer on 28.12.2016 assessing total income of the assessee at Rs. Nil.
4. The Principal Commissioner of Income-tax-2 (For short "PCIT"), noticed on examination of profit and loss account, balance sheet and computation of income that the assessee had claimed exempt income of Rs. 53,14,838/- on account of profit Page 2 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 from partnership firm and Rs. 9,900/- on account of dividend and further that the assessee had claimed deduction of interest expenses of Rs. 2,91,18,343/-. On perusal of the balance-sheet, it was further found that the assessee had invested a total sum of Rs.26,55,56,360/- as on 31.03.2013 and Rs. 27,17,19,263/- as on 31.03.2014 and therefore, as per the provisions of section 14A of the Act, 1961 read with Rule 8D of the Income Tax Rules,1962 the expenses pertaining to earning exempt income was required to be disallowed and added to the total income of the assessee.
5. Accordingly, show cause notice under section 263 of the Act, 1961 was issued to the assessee which was replied by the assessee vide letter dated 7.3.2019. In the reply, on the issue of disallowance under section 14A of the Act, 1961 read with Rule 8D of the Income Tax Rules, 1962, the assessee stated that there was negative income (loss) from the partnership firm.
6. However, PCIT after considering the reply observed that CBDT circular No.05/2014 dated 11.02.2014 clarifies that Rule 8D and Section 14A of the Act, 1961 provides for disallowance of expenditure even where tax-payer in a particular year has not earned any exempt income.
7. On the issue of claim of deduction of interest Page 3 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 expenses under section 57(iii) of the Act, 1961, the assessee stated in his reply that section 57(iii) has been wrongly interpreted by relying on the judgment of Hon'ble Supreme Court in case of CIT v. Rajendra Prasad Moody reported in (1978) 115 ITR 579 (SC).
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 Page 4 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 taking into account, the observations made by the PCIT for disllowance 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.
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 Page 5 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 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 31.03.2013 and Rs.27.17 crores as on 31.03.2014. 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.) Page 6 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 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 b the assessee in relation to income which does 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 exem»tion, 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 s income must have been earne 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 Shri Saytsai Properties & Investment (P) Ltd. vs. CIT [2014] 45 taxmann.com 120 (Cal.) In view of these facts and circumstances, where the AO has Page 7 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 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 vs. Jain Construction [2013] 257 ITR 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 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 Page 8 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 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 suomotomoto 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 absentif 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 Page 9 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 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 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 Page 10 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022 C/TAXAP/272/2022 ORDER DATED: 13/06/2022 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, wequash the impugned order passed under section 263 of the Act and allow the appeal of the assessee.
12. In the result, the appeal of the assessee is allowed."
11. In view of above findings of fact arrived at by the Tribunal and in view of settled legal position considered in the aforesaid findings, we are of the opinion that there is no infirmity in the impugned order passed by the Tribunal so as to give rise to any substantial question of law much-less any question of law as proposed or otherwise.
12. Tax Appeal therefore, stands dismissed.
(A.J.DESAI, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 11 of 11 Downloaded on : Sat Dec 24 18:43:01 IST 2022