BAN LABS PRIVATE LIMITED,RAJKOT V. THE PRINCIPAL COMMISSIONER OF INCOME TAX-1, RAJKOT, RAJKOT

ITA 202/RJT/2024

AI Insights

The case involves Ban Labs Pvt. Ltd., which appealed against the order of the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income-tax Act, 1961, for the assessment year 2018-19. The PCIT had set aside the assessment order passed by the Assessing Officer, claiming it was erroneous and prejudicial to the interest of the revenue as it failed to disallow expenses related to earning exempt income under section 14A read with rule 8D. The Tribunal examined whether the Assessing Officer had conducted a proper inquiry and whether the assessment order was erroneous. The Tribunal concluded that the Assessing Officer had indeed conducted a thorough inquiry and made a reasonable decision, thus allowing the appeal of Ban Labs Pvt. Ltd.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 716597 (ITAT-RAJKOT)
• Duration Of Justice: 1 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2018-2019
• Appeal Filed On: 03-04-2024
• Other Referred Cases: CIT v. Deepak Mittal, Commissioner of Income-tax, Ahmedabad -IV v. Torrent Power Ltd., Shree Siddhi Infrabuild (P.) Ltd.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY PUNGLIA
• Assessee Lawyers: D.M. RINDANI
• Keywords: Set aside; Principle of natural justice; TDS; Earning of tax free income; Rule 8D; Revision of order; Prejudicial to interest
• Section: 143(3); 142(1); 263; 14A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT BEFORE DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER AND SHRI DINESH MOHAN SINHA, JUDICIAL MEMBER आयकर अपील सं./ITA No.202/RJT/2024 (Ǔनधा[रण वष[ / Assessment Year: 2018-19) Ban Labs Pvt. Ltd., Ban House, Dr. Vikram Sarabhai Nagar, Gondal Road (South), Rajkot-360004 (Gujarat) Vs. Principal Commissioner of Income Tax-1, Rajkot èथायीलेखासं./जीआइआरसं./PAN/GIR No.: AAACB8999C (Appellant) (Respondent) Appellant by : Shri D.M. Rindani, AR Respondent by : Shri Sanjay Punglia, CIT DR Date of Hearing : 04/06/2025 Date of Pronouncement : 19/08/2025 आदेश / O R D E R Per, Dr. A. L. Saini, AM: By way of this appeal, the assessee has challenged, the correctness of the order dated 31.03.2024, passed by the Learned Principal Commissioner of Income-tax (in short “Ld PCIT”) under section 263 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), for the assessment year 2018-19. Grievances, raised by the assessee, which, being interconnected, will be taken up together, are as follows: 1.The Learned Principal Commissioner of Income Tax -1, Rajkot erred in passing, the order u/s 263 of the Act, is unwarranted, unjustified and bad in law. 2.The Hon’ble Principal Commissioner of Income Tax, Rajkot -1 Rajkot, has erred in setting aside the issues of disallowance u/s 14A r.w.s. Rule 8D for the investment made during the year is unwarranted, unjustified and bad in law. 3.The Hon’ble Principal Commissioner of Income Tax Rajkot-1, Rajkot, has erred in wrongly mentioned the facts in body of order and set aside the speaking order passed by Assessing Officer, and treated as erroneous and prejudicial to interest of the Revenue within the meaning of Section 263 of the I.T. Act. It is totally wrong, unwarranted, unjustified and bad in law. 4.Your appellant reserves his rights to make any addition or alteration in the ground of appeal at the time of hearing.” Printed from counselvise.com Page | 2 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT 2. The facts of the case which can be stated quite shortly are as follows: The Assessee- company (M/s Ban Labs Pvt Ltd) had filed its return of income for assessment year (A.Y.) 2018-19, declaring total income of Rs.65,66,03,930/-. The return of income was processed u/s.143(1) of the Act, on 16.10.2019, and assessed total income of Rs. 66,03,34,160/-. The Assessment was finalized u/s 143(3) r.w.s.144B of the Income-tax Act, 1961, on 01.09.2021, accepting returned income of Rs.66,03,34,160/-. 3. Later on, Learned Principal Commissioner of Income-tax (in short “Ld PCIT”) exercised his jurisdiction, under section 263 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). The case records of the assessee- company was perused carefully by learned PCIT. On perusal of case records, it was noticed that during the year under consideration, the company has earned exempt income to the tune of Rs.76,88,398/-, in form of Share of profit from Firms. On verification of Balance Sheet of the company, income tax return (ITR) and non-current investments, it was noticed that the company has made investment in unlisted equity shares and partnership firms, during the year under consideration. Considering, the above facts, the ld. PCIT was of the view that it is obvious that the assessee must have made expenditure in connection with investments made to earn the exempt income. However, the assessee has not made any disallowance u/s 14A in connection with such expenditure. The ld. PCIT also noticed that during the assessment proceedings, in the reply submitted, the assessee had stated that the monthly closing and opening balance of investment were attached as Annexure A-11 but on verification of submission available on ITBA Portal, there was no submission regarding the monthly opening and closing balance of investments. However, on perusal of the audit report and ITR, the annual average of the opening balance and closing balance of the investment that has/may have yielded exempt income comes out to be Rs. 57,90,74,553/-. Considering this aspect and as per the section 14A r.w.r. Printed from counselvise.com Page | 3 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT 8D, the disallowance u/s 14A comes out to be Rs.57,90,745/-(1% of Rs.57,90,74,553/-, that is, the average investment). In the absence of information provided by the assessee, the assessing officer ought to have carried out necessary inquiry to arrive at the disallowance u/s 14A of the Act. In view of the above facts, the ld. PCIT noticed that the company and assessing officer (AO) has failed to make appropriate disallowance u/s 14A read with Rule 8D for the investments which may have yielded exempt income. Thus, it is clear that while completing the assessment u/s 143(3) read with section 144B of the I.T. Act for A.Y. 2018-19, on 01.09.2021, the AO has not properly verified/ examined the facts of the case and the issue under consideration. Considering such facts, notice u/s 263 of the Income- tax Act, 1961, was issued on 04/03/2024 and duly served upon the assessee. The notice u/s 263 is reproduced by ld PCIT in its revision order on page no.3. 4. In response to the notice of the Ld. PCIT, the assessee submitted it’s reply on 11.03.2024. The assessee stated in his reply that the assessee has earned exempt income by way of share of profit in partnership firm. For the purpose of earning income assessee has not incurred any expenditure. The assessee has merely made investment by way of share capital in the firm. In order to establish any actual expenditure incurred or not for earning above exempt income, the only possibility is use of borrowed fund and claim of interest expenditure incurred on such borrowed fund. However, in assessee`s case there is no any common borrowed funds. The assessee has made investment in the above firms out of his own funds. The assessee have share capital of Rs. 8,17,87,000.00 and reserves and surplus of Rs. 14,44,15,3717.00 i.e. total own fund of Rs. 1525940717.00. The extract of share capital and reserves were submitted before the learned PCIT. Printed from counselvise.com Page | 4 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT 5. However, Ld. PCIT rejected the above reply of the assessee and observed that the company has earned exempt income to the tune of 76,88,398/- in form of Share of profit from Firms. However, the assessee has not made any disallowance u/s 14A in connection with expenditure incurred for making investments to earn the exempt income. However, on perusal of the audit report and ITR, the annual average of the opening balance & closing balance of the investment that has/may have yielded exempt income comes out to be Rs. 57,90,74,553/-. Considering this, aspect and as per the section 14A r.w.r. 8D, the disallowance u/s 14A comes out to be Rs.57,90,745/-(1% of Rs. 57,90,74,553/- i.e. the average investment). The ld. PCIT also noticed that assessee has not maintained separate accounts to earn exempt and non-exempt income. In the absence of separate accounts by way of which the management and administrative expenditure could be segregated, there is no dispute and there cannot be any doubt that some expenditure is incurred to earn exempt income. In case of mixed accounting, the expenditure is not identifiable as such, which directly related to earning of dividend but that cannot be a ground to say that no expenditure is incurred for earning dividend income or that no expenditure could be related to that income. Therefore, learned PCIT held that the impugned assessment order passed by the A.O. u/s 143(3) r.w.s 144B of the Income-tax Act, on 01.09.2021, is erroneous and prejudicial to the interest of the revenue and therefore directed the assessing officer to make fresh assessment. 6. Aggrieved by the order of the Ld. PCIT, the assessee is in appeal before us. 7. Shri D.M. Rindani, Ld. Counsel for the assessee argued that Ld. PCIT has exercised his jurisdiction mainly on the fact that Assessing Officer has not conducted proper inquiry, so far, the disallowance of expenses under Printed from counselvise.com Page | 5 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT Section 14A r.w.r.8D of the Act, is concerned. However, during the assessment proceedings, the Assessing Officer has issued the notice under Section 142(1) of the Act dated 22.12.2020, which is placed at Paper Book Page No. 19-23, wherein the Assessing Officer has specifically asked the question from the assessee, regarding expenses, incurred for earning exempt income. The Assessing Officer has again issued, the show-cause notice dated 08.04.2021, which placed at Paper book Page No. 29, and the relevant question was asked by the assessing officer, and in response to these notices of the assessing officer, the assessee submitted detailed reply before the assessing officer along with evidence and documents. Therefore, assessing officer has conducted enough enquiry during the assessment proceedings and applied his mind and thereafter framed the assessment order, which is neither erroneous nor prejudicial to the interest of the revenue. Hence, order of the ld. PCIT may be quashed. 8. The Ld. Counsel further contended that during the assessment proceedings, the Assessing Officer has conducted enough inquiry and the case of the Ld. PCIT is that proper inquiry was not conducted in relation to expenses incurred for earning exempt income under Section 14A of the Act. The Ld. Counsel also submitted that assessee has its own free funds to make the investment and assessee has not any borrowed funds, in its balance sheet, therefore, addition under Rule 8D in third limb @1% cannot be made by the Assessing Officer. Moreover, the assessee does not have any exempt income during the assessment year under consideration, therefore, no disallowance would be made. 9. On the other hand, Ld. D.R. for the Revenue submitted that the main plea of the Ld. PCIT was that opening and closing balance of investment were not submitted by the assessee, during the assessment proceedings. The assessee, is not maintaining separate accounts for expenses incurred Printed from counselvise.com Page | 6 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT for exempt income and the Assessing Officer failed to conduct proper inquiry in respect of this aspect, therefore, assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. 10. We have heard both sides in detail and also perused the records of the case including the paper book filed by the assessee- company. We note that main grievance of the learned PCIT, in his revision order, under section 263 of the Act, is that assessing officer has not conducted proper enquiry, in respect of exempt income of the assessee and did not make the disallowance under section 14A read with rule 8D of the Rules. Therefore, first of all, we should examine that what type of enquiry was conducted by the assessing officer, during the assessment proceedings, in respect of the issue raised by the learned PCIT. We note that the Assessing Officer has issued the notice under Section 142(1) of the Act, dated 22.12.2020, which is placed at Paper Book Page No. 19-23, wherein the Assessing Officer has specifically asked the question from the assessee, regarding expenses, incurred for earning exempt income. The relevant portion of the show- cause notice is reproduced below: “In connection with the assessment for the assessment year 2018-19 the case is selected for compulsory scrutiny (CASS) - for the following issues; i. Claim of Any Other Amount Allowable as Deduction in Schedule BP ii. Duty Drawback iii. Deduction Claimed for industrial Undertaking U/S 80IA / 80IAB / 80IAC / 1B / 1C / IBA / 80ID / 80IE / 10A /10AA iv. Expenses Incurred for Earning Exempt Income v. Deduction from Total Income under Chapter VI-A” 11. In response to the notice under section 142(1) of the Act, the assessee submitted its reply, dated 06.01.2021 which is placed at Paper Book Page No. 25. The relevant portion of the reply is reproduced below: Printed from counselvise.com Page | 7 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT “f. Details of investments made during the year under consideration are attached herewith for your reference. The details have been provided as per the format given by your goodself. (Annexure A-10) g. Monthly opening and closing balance during the year with respect to investments are attached herewith for your reference. (Annexure A-11) h. Exempt income is the profit earned from M/s. Dwarikadhish Packaging. We are 50% partner in the firm M/s. Dwarikadhish Packaging. The exempt income claimed by us is our tax-free portion of profits from the firm as a partner. i. No direct or indirect expenses have been claimed by us to incur the exempt income. j. We have not paid any interest expense as we have not borrowed funds for investment purpose. In fact whatever finance costs are reflected in the Audit Report are of bank charges paid and export charges paid. We have incurred zero interest expense during the year under consideration. k. As no expenses have been incurred to earn exempt income, question of computation as per Rule 8D read with section 14A of the Income Tax Act does not arise.” 12. We note that Assessing Officer has again issued the show-cause notice dated 08.04.2021, which is placed at Paper Book Page No. 29, and the relevant question asked by the assessing officer, is reproduced below: “1. In reply dated 06.01.2021 you have given justification regarding non applicability of disallowance u/s. 14A claiming that you have not incurred direct or indirect expense to earn the income and not paid any interest expense on borrowed some for investment and hence question of computation of as per rule 8D to section 14A does not arise. 2. In this connection, please furnish bifurcation of 'interest expenses-other' of Rs. 58,791/- appearing in note no. 21 of the P&L account. In case you fail to give bifurcation of the interest income on the due date mentioned in this letter, it will be held that you have nothing to say in this matter and the computation of disallowance will be worked out as per Rule 8D of the IT Rule, 1962 as calculated in the following paras:- 2.1 As per CBDT circular No: 5/2014 dated 11/02/2014, CBDT clarified that Rule 8D read with Section 14A of the Act provides that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. Thus, in light of the above, Central Board of Direct Taxes in exercise of its powers under Printed from counselvise.com Page | 8 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT Section 119 of the Act hereby clarifies 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.” 13. In response to the show-cause notice of the Assessing Officer, the assessee submitted detailed reply before the Assessing Officer, which is placed at Paper Bok Page No. 35, the relevant reply of the assessee, dated 12.04.2021, reproduced below: “1. In this connection, it is humbly submitted that the \"interest expense others\" of Rs.74,698/- comprises of interest expense incurred towards late payment of provident fund, professional tax, TDS and other statutory payments. Ledger copy of 'interest -expenses others' is enclosed herewith. It is not interest payment made on any unsecured loans. In fact, if your honour go through the balance sheet, it can be ascertained that the assessee has no borrowed money or no unsecured loans are borrowed. Whatever, the assessee has invested is out of its own funds and no expenses are incurred to earn the exempt income. There is no interest expense on any kind of borrowings. Hence the question of proposed disallowance u/s 14A r.w.s. 8D to the tune of Rs. 3,41,435/- does not arise. 2. It would be pertinent to mention here that in the case of CIT v. Deepak Mittal, the High Court has laid down that when consistent case / version of the assessee was that he had not incurred any expenditure for earning exempt income, the Assessing Officer, in terms of section 14A(2) of the Act, was to proceed further to collect the relevant material or evidence, to determine the expenditure relating to such exempt income. It was also held that application of rule 8D by the Assessing Officer as a substitute for section 14A(2), is not permissible in law. As per the aforesaid judgement, in the case of Deepak Mittal, the High Court has held that in a case where no expenditure has been incurred by the assessee in earning the exempt income, there cannot be any disallowance of expenditure under section 14A, r.w.r. 8D of the Income-Tax Rules, 1962 (the Rules). [CIT v. Deepak Mittal (2014) 361ITR131 (2013) 219 Taxman 314 (P&H)]. Reliance is placed in the case of Commissioner of Income-tax, Ahmedabad -IV v. Torrent Power Ltd. [2014] 44 taxmann.com 441 (Gujarat) wherein it is held that - ''Where it was apparent from records that assessee had sufficient funds for making investments in shares and interest free bonds and it had not used borrowed funds for such purpose, Assessing Officer was not justified in invoking provisions of section 14A in order to disallow one per cent of interest expenses incurred for earning exempt income\" 3. As submitted vide earlier reply dated 06.01.2021 and at the cost of repetition, it is submitted that the assessee has not incurred direct or indirect expense to earn the income and not paid any interest expenses on borrowed sum for investment and hence the question of disallowance u/s. 14A r.w.r 8D does not arise.” Printed from counselvise.com Page | 9 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT 14. From the above facts, it is vivid that during the assessment proceedings, assessing officer has issued two notices to conduct enquiry in respect of issue u/s. 14A r.w.r 8D of the Rules. Therefore, it is not a case of “no enquiry”. The sufficient and detailed enquiry was conducted by the assessing officer, during the assessment proceedings, by issuing two show cause notices and assessee, has submitted its reply before the assessing officer with documentary evidences, as noted above. Therefore, the allegation of the learned PCIT that assessing officer has not conducted sufficient enquiry, is baseless. 15. We also find that the allegation of learned PCIT was that the assessee- company may have made certain expenditure for tax-free investments. However, this allegation by ld. PCIT is based on surmise, as the ld. PCIT has no record, as to which expenditure was incurred. The second allegation of learned PCIT was that assessing officer (AO) has not properly verified/examined the facts of the case and issue under consideration. However, it is not so, as we have noted above that during the assessment proceedings, the assessing officer issued two notices to the assessee to conduct the enquiry, and in response to these notices, the assessee submitted its reply along with documentary evidence. Therefore, detailed inquiries were made by the assessing officer and specific replies were filed by the assessee. Therefore, we find that order u/s 143(3) of the Act, was passed by assessing officer after making inquiries on very same issue and after examining documents filed and consciously, the disallowance u/s 14A r/w Rule 8D was not made by the assessing officer hence the allegation of PCIT is unfounded. Besides, the disallowance of 1% as per section 14A r/w Rule 8D is also unwarranted, as interest free funds of the Appellant are far in excess of tax-free investments, hence on merits too, addition could not have survived, for that reliance is placed on the judgement of the Hon`ble Printed from counselvise.com Page | 10 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT jurisdictional High Court of Gujarat in the case of Torrent Power Ltd, (2014) 44 taxmann.com 441 (Gujarat HC). The Hon`ble jurisdictional High Court of Gujarat in the case of Shree Siddhi Infrabuild (P.) Ltd, [2025] 172 taxmann.com 232 (Gujarat), held that where Assessing Officer had made inquiries with regard to disallowance under section 14A read with rule 8D during the course of regular assessments and had not made any disallowance for same, revision order passed by Pr. Commissioner under section 263 of the Act, holding that assessment order was erroneous and prejudicial to interest of revenue was liable to be quashed and set-aside. 16. Therefore, according to us, the present order of assessing officer passed u/s 143(3) of the Act, dated 01.09.2021, cannot be termed as erroneous since enquiry was, in fact, carried out by him on the issue on which the ld PCIT has found fault with and has taken a plausible view. Thus, we note that the AO enquired during assessment proceedings and the assessee had filed details before him. So, we find that the AO’s action cannot be termed “erroneous”. Since not only enquiry was carried out by the AO on the issue under consideration and based on the evidence gathered he has taken a plausible view, which at any rate cannot be called as an un-sustainable view. The Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions needs, to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the PCIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without Printed from counselvise.com Page | 11 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT application of mind; (v) if the AO has not investigated the issue before him; then the order passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”. Therefore, we are of the considered opinion that AO’s order cannot be termed as erroneous as well as prejudicial to the interest of the revenue and therefore, jurisdictional condition precedent as prescribed by statute for invoking revisional jurisdiction is absent and therefore, we are inclined to quash the impugned order dated 31-03-2024 of the ld. PCIT. 17. In the result, appeal filed by the assessee is allowed. Order is pronounced in the open court on 19/08/2025 Sd/- Sd/- (DINESH MOHAN SINHA) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Rajkot Ǒदनांक/ Date: 19/08/2025 Printed from counselvise.com Page | 12 ITA No.202/RJT/2024/AY.2018-19 Ban Labs Pvt. Ltd. vs. PCIT Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. Pr. CIT 5. DR/AR, ITAT, Rajkot 6. Guard File By Order Assistant Registrar/Sr. PS/PS ITAT, Rajkot Printed from counselvise.com "