HN SAFAL INFRA DEVELOPER PVT LTD (ON BEHALF OF SAFAL ORG PVT LTD),AHMEDABAD V. PRINCIPAL COMMISSIONER OF INCOME TAX, AHMEDABAD, AHMEDABAD

ITA 737/AHD/2024

AI Insights

The case revolves around an appeal by HN Safal Infra Developer Pvt. Ltd. against the order of the Principal Commissioner of Income Tax, Ahmedabad, which exercised revisionary powers under Section 263 of the Income Tax Act, 1961. The PCIT had directed the Assessing Officer (AO) to disallow certain expenses related to earning exempt income, which the AO had not initially disallowed. The Tribunal examined whether the PCIT's order was justified and whether the AO had erred in his assessment. The Tribunal concluded that the PCIT had overstepped by assuming that disallowances under Section 14A were automatic upon the earning of exempt income, without the necessary satisfaction required by law.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 773872 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2018-2019
• Appeal Filed On: 16-04-2024
• Other Referred Cases: Principal Commissioner of Income Tax V. CIMS Hospital (P.) Ltd., Principal Commissioner of Income-tax, Vadodara-1 V. Gujarat State Fertilizers And Chemicals Ltd., Principal Commissioner of Income-tax V. Gujarat Flurochemicals Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RIGNESH DAS
• Assessee Lawyers: VARTIKCHOKSHI
• Keywords: Set aside; Difference of opinion; Change of opinion; Earning of tax free income; Assessment record; Rule 8D; Revision of order
• Section: 143(3); 263; 14A

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD BEFORE: SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER आयकर अपील सं./I.T.A. No. 737/Ahd/2024 (\u0001नधा\u0005रण वष\u0005 / Assessment Year : 2018-19) HN Safal Infra Developer Pvt. Ltd. (On behalf of Safal Org. Pvt. Ltd.) HN Safal House Beside Circle P Complex, Nr. Prahladnagar, SG Highway, Ahmedabad, Gujarat - 380015 बनाम / Vs. Principal Commissioner of Income Tax Ahmedabad \u0001थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAVCS9736P (Appellant) .. (Respondent) अपीलाथ ओर से /Appellant by : Shri Vartik Chokshi, A.R. \u0010\u0011यथ क\u0012 ओर से/Respondent by : Shri Rignesh Das, CIT. DR Date of Hearing 16/07/2025 Date of Pronouncement 09/09/2025 (आदेश)/ORDER PER ANNAPURNA GUPTA, AM: The present appeal has been filed by the assessee against the order of the Ld. Principal Commissioner of Income Tax, Ahmedabad-3 (hereinafter referred to as “PCIT”), dated 22.03.2024 exercising revisionary power under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y.) 2018-19. 2. The grounds of appeal raised by the assessee are as under: Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 2 – “1. In law and in facts and circumstances of the appellant's case the ld. Principal Commissioner of Income Tax Act (for short 'Ld. PCIT) erred in passing revisional order dated 22-03-2024 under section 263 of the Income Tax Act, 1961 (for short 'the Act'). The order passed in name of Safal Organisers Pvt Ltd which is already ceases to exist after amalgamation with HN Safal Infra Developer Pvt Ltd with effect from 01.04.2021. The Appellant has already informed to the Department on the ITBA Portal and also stated in the response to revision proceeding which is violation to the settled position by the Hon'ble Supreme Court that no provision can be carried out in entity which do not exist. Thus, the entire proceeding is void and bad- in-law and required to be quashed. 2. In law and in the facts and circumstances of the Appellant's case, the Ld. PCIT erred in passing the revisional order dated 22-03-2024 under section 263 of the Act without appreciating that the order passed by the Ld. Assessing officer u/s 143(3) of the Act on 12-04-2021 was neither erroneous nor prejudicial to the interest of revenue and that the provision of section 263 of the Act invoked in the case of Appellant without complying the condition stated in the said section. 3. In law and in the facts and circumstances of the Appellant's case, the Id. PCIT erred in passing revisional order dated 22- 03-2024 under section 263 of the Act only on the surmises, conjecture and whims that Id. Assessing Officer has not taken the cognizance of material filed during the course of Assessment proceeding which is bad in law. 4. In law and in the facts and circumstances of the Appellant's case, the finding of Id. PCIT that the Ld. Assessing officer has passed the order u/s 143(3) r.w.s 144B of the Act on 12-04- 2021; without making necessary inquiry and due diligence in respect to earning of exempt income via-a-vis application of Section 14A of the Act. Thus, making specific direction to disallow the same is void and bad in law and must be quashed. 5. In law and in facts and circumstances of the Appellant's case, the Ld. PCIT has failed to appreciate that the Ld. AO during the course of Assessment proceeding has called for several details and after looking into the same has passed the Assessment Order dated 12-04-2021 u/s 143(3) of the Act. Thus, mere change of opinion of the Ld. PCIT on the same set of facts won't make Assessment order erroneous and prejudicial to the interest of revenue. Hence, the order passed under Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 3 – section 263 dated 22-03-2024 is without jurisdiction, bad-in- law and void-ab-initio. 6. In law and in facts and circumstances of the Appellant case, the Ld. PCIT has failed to appreciate that during the course of Assessment, Assessing officer vide notice dated 03.03.2021 has made specific enquiry regarding income from partnership firm against which Appellant has submitted the relevant facts and after considering the facts the ld. Assessing officer has passed the Assessment order dated 12.06.2021 under section 143(3) of the Act. Thus, the assessment order dated 12-04-2021 is neither erroneous nor prejudicial to the interests of the revenue and therefore, the impugned order has been passed merely on the basis of change of opinion. Hence, the order dated 22-03-2024 passed under section 263 of the Act is bad-in-law and the same be quashed. 7. In law and in the facts and circumstances of the Appellant's case, the specific direction given by Ld. PCIT regarding setting aside the order passed u/s 143(3) of the Act and direction given to Assessing officer to pass fresh Assessment order and compute disallowance invoking provisions u/s 14A of the Act r.w. Rule 8D is specific direction beyond her jurisdiction and the same is erroneous and thus require to quash. 8. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal.” 3. A perusal of the order of the Ld. PCIT reveals that the power of revision was exercised by the Ld. PCIT on the assessment order passed in the case of the assessee in the impugned year u/s.143(3) of the Act on the issue of disallowance of expenses incurred for the purpose of earning exempt income in terms of provisions of Section 14A of the Act. As per the Ld. PCIT, the AO ought to have made the disallowance of expenses and the AO ought to have made the disallowance of expenses by invoking Rule 8D of the Income Tax Rules, 1962 (in short ‘IT Rules’) and having not done so and made no disallowance, therefore, the assessment order , he held, was erroneous causing prejudice to the Revenue. The Ld. Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 4 – PCIT accordingly directed the AO to pass a fresh assessment order and compute the disallowance invoking provisions of Section 14A of the Act r.w.s. Rule 8D of IT Rules. 4. The facts noted by her from the assessment records leading to her finding of error in the assessment order in this regard are that the assessee had earned exempt income to the tune of Rs.55,978/- from investment made in firms/LLP and the P&L account revealed that the assessee had claimed various other expenses, miscellaneous expenses. However, while computing total income, disallowance u/s.14A of the Act r.w.s. Rule 8D of the IT Rules was not made. 5. We have heard both the parties and have gone through the order of the Ld. PCIT and we hold that the order is not sustainable in law for the reason; i. The jurisdiction assumed by the Ld. PCIT u/s 263 of the Act is not in accordance with law. ii. There is no basis for finding the assessment order to be erroneous on account of disallowance of expenses u/s.14A of the Act having not been made. The reason for the same is derived from the law relating to the disallowance of expenses u/s.14A of the Act as interpreted by various judicial authorities including the Jurisdictional High Court. The jurisdictional High court has repeatedly interpreted the provisions of section 14A(2) of the Act to provide for a condition precedent for invoking Rule 8D of the Income Tax Rules, 1962, Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 5 – and computing the disallowance as per formula prescribed therein, of recording requisite satisfaction by the AO that the disallowance made by the assessee u/s 14A of the Act is not as per its Books of accounts. That invocation of Rule 8D of the Rules was not automatic. This proposition has been laid down by the Hon’ble Gujarat High court in the following cases: (i) Principal Commissioner of Income Tax V. CIMS Hospital (P.) Ltd. [2021] 125 taxmann.com 227 (Gujarat) “7. On perusal of the aforesaid provisions, it is clear that to determine the amount of expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act 1961, the Assessing Officer can apply the method to calculate such expenditure as provided under Rule 8D of the Rules 1962 only if the Assessing Officer having regard to accounts of the assessee is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure in relation to the exempted income under the Act-1961. Thus, pre-condition for applying rule 8D of the Rules-1962, the Assessing Officer is required to be satisfied as provided in sub-section 2 of section 14A of the Act-1961. 9. The Tribunal has arrived at finding of fact that as the Assessing Officer did not record any satisfaction under section 14A(2) of the Act-1961 prior to invoking rule 8D, he could not have made any disallowance by applying rule 8D of the Rules-1962.” (ii) Principal Commissioner of Income-tax, Vadodara-1 V. Gujarat State Fertilizers And Chemicals Ltd. [2019] 108 taxmann.com 560 (Gujarat) “18. The language of Section 14A of the Act is plain and clear. Before invoking Rule 8D, the Assessing Officer is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act. To put it in other words, the condition precedent of recording the requisite satisfaction which is a safeguard provided in Section 14A should not be overlooked before going to Rule 8. In such circumstances, we are not impressed by the Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 6 – submission canvassed on behalf of the Revenue that once there are mixed funds, Rule 8 would be attracted automatically. 19. In the overall view of the matter, we are convinced that no error, not to speak of any error of law, could be said to have been committed by the Tribunal in passing the impugned order.” (iii) Principal Commissioner of Income-tax V. Gujarat Flurochemicals Ltd. [2023] 155 taxmann.com 135 (Gujarat) “15 In Maxopp Investment Limited (supra), the Supreme Court has clarified that the satisfaction has to be recorded by the Assessing Officer to show that the voluntary disallowance of the expenditure made by the assessee on the expenditure incurred for earning exempt income is not in order. The Assessing Officer, in such circumstances, is obliged to assign reasons for he not being satisfied having regard to the accounts maintained by the assessee and the suo motu disallowance made by the assessee under section 14A of the Act. We may reproduce the relevant observations of the Supreme Court in this regard thus: \"Having regard to the language of section 14A(2) of the Act. read with Rule 8D of the Rules, before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee suo moto disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned the expenditure but the Assessing Officer did not accept the assessee's apportionment. In that eventuality, he will have to record its satisfaction to this effect. Further while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares or making the investment in shares is to be examined by the Assessing Officer.\" 6. Therefore, there is no doubt about the position of law that AO can validly exercise his power of computing disallowance of expenses as per Rule 8D of the Rules only after recording his dissatisfaction with the explanation of the assessee with respect to the expenses disallowed by the assessee. Having noted the position of law in this regard, in the facts of the present case, we find that the Ld. PCIT’s order finding the assessment order to be erroneous on the issue of disallowance of Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 7 – expenses u/s.14A of the Act has conveniently skipped this essential and mandatory condition provided in law for the disallowance of expenses u/s.14A of the Act by the AO, both while assuming jurisdiction u/s.263 of the Act and even while passing order u/s.263 of the Act finding the assessment order erroneous causing prejudice to the Revenue on this count. The documents and facts on record reveal that the PCIT assumed jurisdiction u/s.263 of the Act noting that while the AO ought to have disallowed expenses u/s.14A of the Act based on facts on record, he had not done so. The Ld. PCIT noted the assessee to have earned exempt income and incurred expenses but she found that no expenses were disallowed by the AO u/s.14A of the Act and, accordingly, on this basis, she assumed jurisdiction u/s.263 of the Act. This is revealed in the notice issued to the assessee u/s.263 of the Act, copy of which, placed before us in the paper book paged nos. 32 to 35: “4. Further, on examination of case records during the year under consideration and scrutiny of P&L A/c, Balance sheet, ITR, computation of income and your submissions it is also observed that you had earned exempt income of Rs. 55,978/-(as per para 2.5-2.6 of your submission dated 08.03.2021, though this amount was not considered in the books of accounts as the exempted profit derived from the investment in M/s Safal Goyal Developer but at the time of finalizing your books, (the books of M/s Safal Goyal Developer were not finalized) from the investments in firms/LLPs. As such you had made various investments, income from which do not form part of total income. 4.1 As per P&L A/c., you had claimed various other expenses miscellaneous expenses during the year. It was however noticed that while computing total income, disallowance u/s 14A read with rule 8D was not made. The A.O should have worked out the disallowance by invoking the provisions u/s. 14A of the Act r.w.s. 8D of the Income tax rules. As per section 14A read with rule 8D the disallowance of 1% of Rs. 30,50,27,500 1.e., Rs. 30,50,275/- was required to be made. Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 8 – By not doing so, disallowance of expenses of Rs. 30,50,275/- u/s 14A read with rule 8D has resulted in underassessment of income of Rs.30,50,275/-, 5. It is thus, apparent that order passed by the then AO in your case for AY 2018-19 u/s 143(3) of the Act is erroneous in so far as it is prejudicial to the interest of revenue to above extent. You are therefore, requested to show cause why above discussed additions/disallowances should not be made to your total income of AY 2018-19 by passing appropriate revisional order u/s 263 of the Act in your case.” 7. Clearly the Ld. PCIT has noted the earning of exempt income and the incurrence of expense and on that basis, she has held that the AO ought to have disallowed expenses u/s.14A of the Act. This is grossly against the provisions of law which as noted above by us, provides that an explanation is required to be sought from the assessee regarding its claim of expenses disallowed or not disallowed u/s 14A of the Act and only after finding the said explanation to be not satisfactory with regard to the accounts of the assessee that the AO can proceed to disallow expenses u/s.14A of the Act. The Ld. PCIT has found expenses needed to be disallowed in the present case u/s.14A of the Act without even asking the assessee to explain its claim of expenses if any disallowed. Her interpretation of the provisions of Section 14A of the Act, it seems is that the disallowance of expenses u/s.14A of the Act is automatic once an assessee is found to have earned exempt income and incurred expenses ,which argument has been consistently thrashed by judicial authorities in a number of decisions categorically holding that the disallowance by the AO u/s.14A of the Act by invoking Rule 8D is not automatic and ,at the cost of repetition we may state, it has been held that the said Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 9 – power is to be exercised only once the AO records his satisfaction that the explanation of the assessee with regards to the expenses disallowed or not disallowed ,is not correct. Clearly the jurisdiction assumed, therefore, in the present case by the Ld. PCIT finding the assessment order erroneous for not having disallowed expenses u/s.14A of the Act is not as per law and is in based on incorrect understanding and interpretation of law. The Ld. PCIT could not have assumed jurisdiction on the basis that disallowances expenses u/s.14A of the Act is automatic, as consistently held by Courts, and for this reason alone the order passed in the present case needs to be set aside. However, we may add, that even her finding of error in the impugned year and thereafter directing the AO to disallow the expenses, is also not in accordance with law and, therefore, not sustainable. The Ld. PCIT’s order reveals that during revisional proceedings, when confronted with the issue in the show cause notice, the assessee explained the reason for not disallowing any expenses u/s.14A of the Act ,which included besides other reasons, that none of the expenses debited to its P&L account were incurred in relation to the earning of exempt income. The assessee’s explanation in this regard at length, dealing with each expense debited to the P&L account is reproduced at page nos. 13 to 17 of the order where the assessee has given its explanation in this regard in relation to 14 expenses so debited to the P&L account. Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 10 – 8. We have noted that despite the assessee offering its explanation so, the Ld. PCIT has chosen to completely ignore the same. She has not commented on the correctness or otherwise of the explanation or for that matter, her dissatisfaction with the said explanation and simply gone on to reiterate her finding of error in the assessment order of the AO for not having disallowed expenses when the assessee had earned exempt income and incurred expenses also. Again her finding of error in this regard is in clear violation of law which clearly provides for recording of dissatisfaction with the explanation of the assessee by the AO before proceeding to make any disallowance u/s.14A of the Act. Even otherwise, law provides for this dissatisfaction to be that of the AO and it cannot be assumed by any other authority i.e. even the Ld. PCIT. In such circumstances, at best she ought to have referred the matter back to the AO to consider the explanation of the assessee and thereafter proceed with the matter in accordance with law. 9. On contrary, in the present case, the Ld. PCIT has given no comment at all on the explanation of the assessee being satisfactory or not but has directly held that in the facts of the case disallowance ought to have been made u/s.14A of the Act and directed the AO to disallow the expenses by invoking Rule 8D of the IT Rules. The order of the Ld. PCIT, we have no doubt, is clearly against the provisions of law. Her finding of error in the order of the AO is not in accordance with law and we have no hesitation in holding that there is in fact no valid finding of error Printed from counselvise.com ITA No. 737/Ahd/2024 [HN Safal Infra Developer Pvt. Ltd. vs. PCIT] A.Y. 2018-19 - 11 – by the Ld. PCIT in the assessment order with regards to the disallowance of expenses u/s.14A of the Act. In the light of the same we find the exercise of power u/s.263 of the Act by the Ld. PCIT to be against the provisions of law. The order passed by the Ld. PCIT is, therefore, not sustainable for this reason also. In the light of our above discussion, we have no hesitation in holding the order passed by the Ld. PCIT in the present case u/s.263 of the Act to be not sustainable in law. The assessee succeeds in its appeal for the above mentioned reasons. No other arguments were heard. 10. In the result, appeal filed by the assessee is allowed. This Order pronounced on 09/09/2025 Sd/- Sd/- (T.R. SENTHIL KUMAR) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 09/09/2025 S. K. SINHA आदेश क\u000f \u0010\u0001त\u0012ल\u0014प अ\u0017े\u0014षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. \u0010\u0011यथ / The Respondent. 3. संबं\u0015धत आयकर आयु\u0019त / Concerned CIT 4. आयकर आयु\u0019त(अपील) / The CIT(A)- 5. \u001aवभागीय \u0010 त न\u0015ध, आयकर अपील य अ\u0015धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड& फाईल / Guard file. आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ!धकरण, अहमदाबाद / ITAT, Ahmedabad Printed from counselvise.com "