Applewoods Estate Pvt. Ltd., Ahmedabad V. The PCIT, Ahmedabad -1, Ahmedabad

ITA 243/AHD/2023

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 6198 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 05-09-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 16-04-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Opportunity of being heard; Earning of tax free income; Question of law; Right to appeal; Rule 8D; Set aside
• Section: 263; 2; 143(3); 142(1); 14A; 64; 2(A)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH Before: Smt. Annapurna Gupta, Accountant Member And Shri T.R. Senthil Kumar, Judicial Member Applewoods Estate Pvt. Ltd. 16, Abhishree Corporate Park Opp Swagat Bunglow, BRTS Stop, Iscon Ambli Road, Ahmeabad PAN: AAGCA6838B (Appellant) Vs The PCIT, Ahmedabad-1, Ahmedabad (Respondent) Assessee Represented: Shri Bandish Soparkar, A.R. Revenue Represented: Dr. Darsi Suman Ratnam, CIT-DR Date of hearing : 06-09-2023 Date of pronouncement : 17-11-2023 आदेश/ORDER PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:- This appeal is filed by the Assessee as against the Revision order dated 30.03.2023 passed by the Principal Commissioner of Income Tax, Ahmedabad-1 arising out of the assessment order passed under section 143(3) r.w.s. 143(3A) & 143(3B) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2018-19. ITA No. 243/Ahd/2023 Assessment Year 2018-19 I.T.A No. 243/Ahd/2023 A.Y. 2018-19 Page No Applewoods Estate Pvt. Ltd. vs. PCIT 2 2. The brief facts of the case is that the assessee is a Private Limited Company engaged in the business of development of real estate projects. For the Assessment Year 2018-19, the assessee filed its Return of Income on 31.10.2018 admitting total income of Rs. 50,50,59,650/-. The return was taken up for complete scrutiny assessment and assessment order was passed on 31.03.2021 accepting the returned income. 2.1. On verification of the above assessment order, Ld. PCIT noticed that the assessee had earned exempt income of Rs.24,57,696/- through dividend income and disallowed an amount of Rs. 4,90,000/- as expenditure related to the earning of exempt income. On verification of Balance Sheet, the assessee shown total investment in unquoted shares of Rs. 128.08 crores. However the monthly closing and opening balances of the investments are not verifiable, however the annual average investment made by the assessee during the year is Rs. 94,91,12,265/-. The Ld. A.O. accepted the voluntary disallowance of Rs. 4,90,000/- made u/s. 14A by the assessee, but the quantum of disallowance as per Rule 8D comes to Rs. 94,91,126/- ( i.e. 1% of Rs. 94,91,12,665/-) . Thus the Assessing Officer failed to make a disallowance of Rs. 90,01,426/- u/s. 14A r.w. Rule 8D while completing the assessment order, which is erroneous order and prejudicial to the interest of Revenue. Therefore a notice u/s. 263 was issued to the assessee as to why not to revise the assessment order. 2.2. The assessee replied this disallowance was considered by the Assessing Officer by issuing notice u/s. 142(1) dated 12.01.2021 I.T.A No. 243/Ahd/2023 A.Y. 2018-19 Page No Applewoods Estate Pvt. Ltd. vs. PCIT 3 and assessee made detailed reply against the investments made by the assessee explaining that the investments consists of preference shares of Rs. 100/- crores and other investments in mutual funds. The dividend income of Rs. 24,57,696/- was received from mutual funds namely ICICI prudential Equity Arbitrage Fund and Kotak Equity Arbitrage Fund. Thus the Assessing Officer considered the disallowance u/s. 14A r.w. Rule 8D only on the securities which is yielding tax free dividend income. Thus the assessment order passed by the A.O. is neither erroneous nor prejudicial to the interest of Revenue and the question of invoking Section 263 does not arise and pleaded to drop the same. 2.3. However the above reply was considered by the Ld. PCIT and was not accepted since the assessee has not furnished bifurcation of the monthly closing and opening balance of investment in its books. Therefore Ld. PCIT set aside the assessment order with a direction to the A.O. to make disallowance of Rs. 90,01,426/- as per Rule 8D by giving reasonable opportunity of being heard. 3. Aggrieved against the same, the assessee is in appeal before us raising the following grounds of appeal: 1. Ld. Pr. CIT Ahmedabad-1 erred in law and on facts revising a scrutiny assessment order which is neither erroneous nor prejudicial to the interest of revenue. The action of ld. Pr. CIT revising an order passed after verification of the details on record is without any justification to invoke revisional jurisdiction. 2. Ld. Pr. CIT erred in law and on facts holding order erroneous on the alleged ground that order was framed without any further disallowance u/s 14A rwr8D by AO for the investments made during the year under consideration. 3. Ld. Pr. CIT erred in law and on facts in passing impugned order on the alleged ground of failure of AO to make incremental disallowance of I.T.A No. 243/Ahd/2023 A.Y. 2018-19 Page No Applewoods Estate Pvt. Ltd. vs. PCIT 4 Rs.90,01,426/- due to wrong application of law not considering the amended provisions of Rule 8D. 4. Ld. Pr. CIT further erred in law and on facts holding scrutiny assessment order as erroneous in so far as prejudicial to the interest of revenue which was passed by AO being satisfied on due verification of the details of investment made during the year as well of disallowance u/s 14A of the Act. 5. Ld. Pr. CIT erred in law and on facts revising scrutiny assessment order on the ground that the average of opening and closing balance of the investment may have yielded exempt income of Rs. 94,91,12,265/- out of which AO ought to have disallowed 1% under the amended provisions of Rule 8D of the Act. 4. Ld. Counsel Shri Bandish Soparkar appearing for the assessee submitted before us three fold of arguments namely (a) Disallowance u/s. 14A r.w. Rule 8D was examined by the Assessing Officer at the time of original assessment by issuing notice u/s. 142(1) and detailed reply filed by the assessee on 06.03.2020 & 29.01.2021, thus there is no case of lack of inquiry or inadequate inquiry by the A.O. (b) Therefore the Ld. PCIT is not correct in invoking Explanation 2 to Section 263 of the Act, no application in the facts of the present case. (c) On merits, and the same has to compute disallowance u/s. 14A, only those investments which earned dividend income during the year is to be considered. Thus the assessee has correctly computed average of dividend yielding investments at Rs. 4,90 crores. And disallowed 1% namely Rs. 4.9 lakhs and relied upon Delhi High Court Judgment in the case of Cargo Motors Pvt. Ltd. vs. DCIT [2022] 145 taxmann.com 641 and Calcutta High Court judgment in the case of PCIT vs. Shalimar Pellet Feeds Ltd. [2022] 138 taxmann.com 124. Thus the Ld. Counsel pleaded the Revision order passed by the Ld. PCIT is liable to be quashed. I.T.A No. 243/Ahd/2023 A.Y. 2018-19 Page No Applewoods Estate Pvt. Ltd. vs. PCIT 5 5. Per contra, Ld. CIT-DR Dr. Darsi Suman Ratnam appearing for the Revenue supported the order passed by the Ld. PCIT and requested to uphold the same. 6. We have given our thoughtful consideration and perused the materials available on record including the Paper Book filed by the assessee. It is seen at Page Nos. 64 to 66 of the Paper Book, the detailed reply filed by the assessee vide letter dated 29.01.2021 as follows: “...2. Details with respect to exempt income earned (refer point no.2 (a to e) of the notice): During the A.Y.2018-19, the assessee company has earned dividend income of Rs.24,57,696 from mutual funds which is claimed as exempt income while filing the return of income. Your goodself has raised certain queries regarding the same replies to which are as under: The assessee company has own funds in form of Equity Share Capital amounting to Rs. 2.10,60,790/- and reserve amounting to Rs 5,23,09,81,197/- as on 31.03.2018. Thus, the company has total owned funds of Rs 5,25.20,41,987/- as on 31 March 2018 whereas total investment in mutual funds as at 31.03.2018 from where income is received is Rs 28,07,53,317 only. Since December 2017, only Rs.7,49,57,694/ were invested in tax free income yielding mutual funds viz. Kotak Equity Arbitrage Fund and ICICI Prudential Equity Arbitrage Fund and majority of them are redeemed by 31.03.2018. We confirm that no borrowed fund has been invested in any investment which is generating tax free income. Copy of ledger accounts of such investment made along with statements from AMCS are attached herewith as Annexure -2. As stated in the above para, the company has sufficient own funds and has not borrowed outside fund for investment purpose. However, a meagre amount of Rs.86,647 being interest on overdraft is paid by the company which was taken for business purpose and not for making investment in tax free income yielding securities. Apart from this, there is no other finance cost incurred by the company. As stated in the earlier para, the company has sufficient own funds and has not borrowed outside fund for investment purpose. The dividend income earned is directly credited into bank account, and hence, there is I.T.A No. 243/Ahd/2023 A.Y. 2018-19 Page No Applewoods Estate Pvt. Ltd. vs. PCIT 6 no cost of collection involved for receipt of such income Thus, there are no direct or indirect expense incurred for earning exempt income. Computation of disallowance made u/s 14A: During the A.Y.2018-19, the assessee company has earned exempt income in the nature of dividend only from two mutual funds amounting to Rs.24,57,696. The company has made investment in shares and mutual funds out of own fund and for making the investment in mutual fund, representative of mutual funds come to collect the form and cheque and in case of redemption also the representative comes to collect the form and redemption proceeds are credited to the account of the company directly by bank and investment in shares is a onetime activity. However, the company has disallowed 75% of the salary of the executive, being Rs 3.45 lakhs, who inter alia looks after the work of investment portfolio and 10% salary of his manager, being Rs 0.94 lakhs and the balance amount on account of other expenses like stationery etc. In aggregate the company has suo moto disallowed the expense of Rs 4.90 lakhs which is quite adequate considering the investment made. In view of the same we humbly feel that the calculation as per Rule 8 D is not required.” 6.1. And reply filed by the assessee vide letter dated 06.03.2020 as follows: EXPENSES INCURRED FOR EARNING EXEMPT INCOME “In this regard, we would like to state that during the year under consideration, we have earned an exempt income in form of Dividend amounting to Rs. 24,57,696/- and accordingly as per the provisions of Section 14A read with rule 8D we have duly disallowed Rs. 4,90,000/-ie. an amount equal to 1% of the Annual Average of the Monthly Average of opening and closing balances of value of investment and the same is also evident from Clause 21(h) of Tax Audit Report.” 6.2. Thus the assessee has placed all the details/materials before the Assessing Officer before passing the original assessment order. Thus the question of inadequate inquiry does not arise in this case. 7. The validity of exercise Revision power u/s. 263 of the Act was considered by the Hon’ble Supreme Court in the case of CIT vs. Kwality Steel Suppliers Complex [2017] 84 taxmann.com 234 and I.T.A No. 243/Ahd/2023 A.Y. 2018-19 Page No Applewoods Estate Pvt. Ltd. vs. PCIT 7 CIT cannot revise an assessment order on the ground that he does not agree with the view taken by the A.O. as follows: “...7. This provision has come for interpretation time and again before this Court. Such a power given to the Commissioner to revise the order of the Assessing Officer is held to be constitutionally valid having regard to the fact that the Department has no right of appeal to the CIT (A) against any order passed by the Assessing Officer. It is for this reason, Section 263 is enacted to empower the Commissioner with the authority of revising the order of Assessing Officer, where the order is erroneous and the error has resulted in prejudice to the interests of the Revenue. As is clear from the language of the provision, there has to be a proper application of mind by the Commissioner to come to a firm conclusion that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. Thus, two conditions need to be satisfied for invoking such a power by the Commissioner, which are: (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue 8. At the same time, this Court has also laid down that this provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. While interpreting the expression 'prejudicial to the interests of the Revenue', it is also held that order of the Assessing Officer cannot be termed as prejudicia: simply because Assessing Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing Officer has taken one view with which the Commissioner did not agree. 9. It is clear from the above that where two view are possible and the Assessing Officer has taken one view and the CIT again revised the said order on the ground that he does not agree with the view taken by the Assessing Officer, in such circumstances the assessment order cannot be treated as an order erroneous or prejudical to the interest of the Revenue, Reason is simple. While exercising the revisionary jurisdiction, the CIT is not sitting in appeal.” 7.1. The Co-ordinate Bench of Ahmedabad Tribunal in the case of Torrent Pharmaceuticals Ltd. vs. DCIT in ITA No. 164/Ahd/2018 held as follows: “.....9.5 We thus find merit in the plea of the assessee that the Revisional Commissioner is expected show that the view taken by the AO is wholly unsustainable in law before embarking upon exercise of revisionary I.T.A No. 243/Ahd/2023 A.Y. 2018-19 Page No Applewoods Estate Pvt. Ltd. vs. PCIT 8 powers. The revisional powers cannot be exercised for directing a fuller inquiry to merely find out if the earlier view taken is erroneous particularly when a view was already taken after inquiry. If such course of action as interpreted by the Revisional Commissioner in the light of the Explanation 2 is permitted, Revisional Commissioner can possibly find fault with each and every assessment order without himself making any inquiry or verification and without establishing that assessment order is not sustainable in law. This would inevitably mean that every order of the lower authority would thus become susceptible to Section 263 of the Act and, in turn, will cause serious unintended hardship to the tax payer concerned for no fault on his part. Apparently, this is not intended by the Explanation. Howsoever wide the scope of Explanation 2(a) may be, its limits are implicit in it. It is only in a very gross case of inadequacy in inquiry or where inquiry is per se mandated on the basis of record available before the AO and such inquiry was not conducted, the revisional power so conferred can be exercised to invalidate the action of AO. The AO in the present case has not accepted the submissions of the assessee on various issues summarily but has shown appetite for inquiry and verifications. The AO has passed the order in great detail after making several allowances and disallowances on the issues involved impliedly after due application of mind. Therefore, the Explanation 2 to Section 263 of the Act do not, in our view, thwart the assessment process in the facts and the context of the case. Consequently, we find that the foundation for exercise of revisional jurisdiction is sorely missing in the present case. 10. Resultantly, the order of the Pr.CIT passed under s.263 of the Act is set aside and cancelled and the order of the AO under s.143(3) is restored.” 8. On merits of the case, for the purpose of making disallowance of expenses u/s. 14A r.w. Rule 8D, only those investments were to be considered for computing average value of investments that yielded exempt income during relevant year as held by the Delhi High Court in the case of Cargo Motors Pvt. Ltd. (cited supra) as follows: “....13. Having heard learned counsel for the parties, this Court is of the view that while section 14A is the charging section, rule 8D is a method/mechanism to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the assessee. By virtue of the charging Section, namely, section 14A, the Assessing Officer has the power only to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act. 14. This Court is further of the view that rule 8D(2)(iii) clearly postulates that in the calculation of the disallowance amount, "an amount equal to one-half percent of the value of the investment, income from which does I.T.A No. 243/Ahd/2023 A.Y. 2018-19 Page No Applewoods Estate Pvt. Ltd. vs. PCIT 9 not or shall not form part of the total income" should be taken into consideration. Thus, it is not all investment but only that which is read with section 14A and rule 8D(i) which is to be reckoned for the expressly spelt out in rule 8D(2)(iii) purpose of calculation of average of half per cent. 15. In fact, the aforementioned issue is no longer res integra. A Division Bench of this Court in ACB India Ltd. v. Asstt. CIT [2015].62 71/235 Taxman 22/347 ITR 108 (Delhi) has held as under: “4.The A.O. instead of adopting the average value of investment of which income is not part of the total income i.e the value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT (Appeals) noticed the exact value of the investments which yielded taxable income, he did not correct the error but chose to apply his own equity...." 16. Another coordinate Bench of this Court in Pr. CIT v. Caraf Builders & Constructions (P) Ltd. [2019] 101 taxmann.com 167/261 Taxman 47/414 ITR 122 has held as under: "26. There is another error made by the Assessing Officer in computing the disallowance under clauses (ii) of rule 8D(2) with reference to the formula prescribed. Numerical B in clause (ii) refers to average value of the investment, income from which does not form part or shall not form part of the total income. The Assessing Officer for numerical B in clause (ii) had taken the total value of the investment and not the investment that had yielded exempt income. The Delhi High Court in ITA No. 615/2014, ACB India Ltd. vs. Asstt. Commissioner of Income-tax decided on 24 th March, 2015 has held that only average value of the entire investment that does not form part of the total income is the factor which could be covered by the numerical B for computing disallowance under clause (ii) of rule 8D(2) of the Rules...." 8.1. Further the Calcutta High Court in the case of Shalimar Pellet Feeds Ltd. held that the machinery provision under Rule 8D can be applied only with regard to the shares which yielded dividend income only by observing as follows: “....11. The next substantial question of law is with regard to the disallowance under section 14A of the Act. The tribunal after noting several decisions has directed the assessing officer to compute the disallowance as per Rule 8D by taking into consideration only those shares which have yielded dividend income in the year under consideration. Though the Tribunal has noted the decision of the Tribunal in REI Agro Ltd. v. Dy CIT [2013] 35 taxmann.com 404/144 ITD 141 (Kol. - Trib.), there are several other decisions on the said point and the I.T.A No. 243/Ahd/2023 A.Y. 2018-19 Page No Applewoods Estate Pvt. Ltd. vs. PCIT 10 machinery provision under rule SD can be applied only with regard to the shares which yielded dividend income in the year under consideration. Therefore, we find that the tribunal rightly applied the legal principle and granted relief. Accordingly, the substantial question of law framed on the said issue, namely, the deduction under section 14A of the Act is decided against the revenue.” 9. Respectfully following the above judicial precedents, we have no hesitation in quashing the Revision order passed by the Ld. PCIT and restore the Assessment Order passed by the Assessing Officer. 10. In the result, the appeal filed by the Assessee is hereby allowed. Order pronounced in the open court on 17-11-2023 Sd/- Sd/- (ANNAPURNA GUPTA) (T.R. SENTHIL KUMAR) ACCOUNTANT MEMBER True Copy JUDICIAL MEMBER Ahmedabad : Dated 17/11/2023 आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपीलȣय अͬधकरण, अहमदाबाद