Cytecare Hospitals Private Limited, Ahmedabad V. The Pr. CIT-1, Ahmedabad

ITA 422/AHD/2023

AI Insights

The case involves Cytecare Hospitals P. Ltd., which appealed against the order of the Pr. Commissioner of Income-tax, Ahmedabad, concerning the assessment year 2018-19. The primary issue was the disallowance of expenses under section 14A of the Income Tax Act, 1961, related to investments in mutual funds that allegedly yielded exempt income. The Pr. CIT had reopened the assessment, noting that no disallowance was made by the Assessing Officer (AO) despite significant investments in mutual funds. The Tribunal, however, agreed with the assessee's contention that the investments were in debt mutual funds which did not yield exempt income, and thus, disallowance under section 14A was not applicable.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133582 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 23-08-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 24-05-2023
• Other Referred Cases: CIT Vs. Shree Manjunathesware Packing Products & Camphor Works, CIT vs. Seshasayee Paper & Boards Ltd., CIT Vs. South India Shipping Corporation Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revision of order; Earning of tax free income; Rule 8D; Set aside; Capital Gains
• Section: 263; 14A

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘C’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER ITA No.422/Ahd/2023 Assessment Year :2018-19 Cytecare Hospitals P. Ltd. 105/A, Shagun Complex B-93, Swastik Society C.G. Road, Navrangpura Ahmedabad. PAN : AAJCM 1355 Q Pr.CIT-1 Ahmedabad. (Applicant) (Responent) Assessee by : Shri Dhinal Shah, AR Revenue by : Shri Kamlesh Makwana, CIT-DR स ु नवाई क तार ख/Date of Hearing : 24/08/2023 घोषणा क तार ख /Date of Pronouncement: 13/09/2023 आदेश/O R D E R PERANNAPURNA GUPTA, ACCOUNTANT MEMBER The present appeal has been filed by the assessee against the order of ld.Pr.Commissioner of Income-tax, Ahmedabad [hereinafter referred to as “ld.CIT(A)”] dated 29.3.2023passed under section 263 of the Income Tax Act, 1961 [hereinafter referred to as "the Act" for short] for the assessment year 2018-19. 2. A perusal of order of the Ld.Pr.CIT reveals that the case of the assessee was reopened exercising revisionary jurisdiction noting error in the order of the AO to the effect that no disallowance under ITA No.422/Ahd/2023 2 section 14A of the Act was made with respect to the expenses incurred in relation to exempt income earned by the assessee, despite the fact on record that the assessee had made huge investments in mutual funds. Para-2 of the order of the ld.Pr.CIT reveals the facts which were noticed by the ld.Pr.CIT on going through the record of the case, that the balance sheet of the assessee for the impugned year revealed investment in mutual funds to the tune of Rs.6,82,64,607/- whichin the preceding year was to the tune of Rs.2.00 crores. As per the Ld.PCIT the annual accounts of the assessee revealed that the average opening and closing balance of the investments yielding exempt income were to the tune of Rs.13,41,32,500/-. The ld.Pr.CIT deduced from the said facts that disallowance under section 14A of the Act was required to be made, which if computed in accordance with formula prescribed in Rule 8D of the Income Tax Rules, 1962 would come to Rs.13,41,325/-. He noted that the AO while completing the assessment for the year had not properly seen and examined this issue, and therefore, he found the assessment order to be prima facie erroneous and prejudicial to the interest of the Revenue. Accordingly, notice under section263 of the Act was issued to the assessee. Para-2 to 2.3 of the order of the ld.Pr.CIT revealing the above facts is reproduced as under: “2. On perusal of current assets in the Balance Sheet Part of ITR, (Investments), it is noticed that the assessee had made investment in mutual funds for Rs.6,82,64,607/-. Further, as per Note-13 (current investment) of Audited Balance Sheet, during the year, the assessee had shown following investments: ..... ...... ..... ....... ..... ...... ..... ....... ITA No.422/Ahd/2023 3 2.1 In this case, the assessee's monthly closing & opening balance of investments are not verifiable as the assessee has not submitted any details regarding purchase or sale of the investments during the year. However, the annual average of the opening balance & closing balance of the investment that have/may have yielded exempt income comes to Rs. 13,41,32,500/-. 2.2 Further, on verification of Audited Cash Flow statement {(B) cash flow from investing activates} it is noticed that the assessee has received net proceeds from sale of current investment of Rs.33,46,02,000/- and purchased current investments of Rs. 19,32,64,000/- for the year under consideration. The correct figure of the current investment' cannot be calculated for the year under consideration due to non-submission of monthly opening and closing balance of investments 2.3 From the above, disallowance, as per provisions of section 14A of IT. Act read with rule 8D of the IT. Rule, 1962, comes to Rs.13,41,325/- (1% of average investment of Rs. 13,41,32,303/-) which required to be disallowed. The AO while completing the assessment order for the year under consideration has not properly seen and examined the above issues and therefore the order passed by the AO was prima facie erroneous and prejudicial to the interest of revenue.” 3. The order further reveals that the ld.Pr.CIT noted the response of the assessee to the notice issued u/s 263 of the Act at para-4 of his order. He noted that the assessee had contended that no disallowance under section 14A was liable in its case since the investments were such that they would not yield any exempt income. The relevant para-4 of the ld.Pr.CIT’s order noting submissions made by the assessee in response to the notice under section 263 of the Act is as under: “4. In this regard, vide letter dated 13.03.2023, the assessee has re- submitted the documents that were submitted before the AO during the course of assessment proceedings. However, with regard to the impugned issue of disallowance u/s. 14A of the Act read with rule 8D of the Rule, the assessee explained that disallowance cannot be made in respect of investments which yield taxable income as per provision of section 14A of the Act. In other words, section 14A applies to those investments which yield exempt Income. The assessee further explained that all the investments have been made in debt mutual funds which does not yield any exempt income and that the assessee has offered capital gain of Rs.96.02 lakhs for tax. The assessee in its submission has insisted |||t disallowance u/s. ITA No.422/Ahd/2023 4 14A r.w.r 8D cannot be made in this case since there is no exempt income during the year.” 4. Taking note of the above submissions of the assessee, the ld.Pr.CIT went on to hold that the contention of the assessee was not tenable. He held that as per the provisions of law, even if no exempt income is earned by the assessee, disallowance under section 14A is still liable to be made. Holding so, he held that since theAO has not examined the issue in the light of the above, and made no disallowance of expenditure under section 14A of the Act, in relation to the investment made by the assessee, he held the assessment order passed by the AO to be erroneous causing prejudice to the Revenue. His finding at para 5 to 6.1 of the order is as under: “5. I have carefully and thoroughly gone through submission of the assessee. The contentions of the assessee is not found to be tenable. The assessee has contended that the issue has already viewed by the AO during assessment proceedings and there is no exempt income has been earned/ claimed for the year under consideration. However, it is noticed that during the course of assessment proceedings the AO has not applied his mind to the facts of the issue and erred in not considering the amended provision of section 14A read with rule 8D of IT Rule. 5.1 As per section 14A of the Income Tax Act: "Expenditure incurred in relation to income not includible in total income. 14 A (1) Notwithstanding anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. ..... ...... ..... ....... ..... ...... ..... ....... 5.2 Further, in view of CBDT circular No 05/2014 dated 11-02-2014 clarifying the Rule 8D rws 14A of the Act, the disallowance of expenditure can be made even where taxpayer in particular year has not earned exempt income. The CBDT vide its circular [No. 5/2014 dated 11-2-2014] has clarified that by the usage of the term includible in the heading to section 14A of the Act and also in the heading to Rule 8D of the IT. Rules, 1962 which indicates that it is not that exempt income should necessarily be included in a particular years income, for the disallowance to be triggered. Also, section 14A of the Act does not use the word income of the year but the income under the Act. This also indicates that for invoking disallowance under section 14A, it is not material that assessee should ITA No.422/Ahd/2023 5 have earned such exempt income during the financial year under consideration. On this basis, the CBDT has clarified that Rule 8D and section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. 5.3 In view of section 14A of the Act r.w.r. 8D of the IT. Rule,1962, for invoking disallowance under section 14A, it is not material that assessee should have earned exempt income during the financial. 5.4 Therefore, in this case, it, is observed that the assessee has made investment in mutual funds for Rs.6,82,64,607/-. No details regarding the monthly closing and opening balance of investments has been produced by the assessee. Therefore, as per the provisions of Rule 8D of the I.T. Rule, annual average of the opening balance and closing balance of the investment for the year has been calculated which comes to Rs.13,41,32,500/- As per Rule 8D of the IT. Rule, 1% of annual average investment comes to Rs.13,41,325/- (1% of Rs.13,41,32,500/-), which required to be disallowed. 6. The assessee has relied on various judgments in support of its claim. The facts of this case are different from the decision relied on by them. Therefore, the decision relied on by them are not applicable in this case. The other arguments stated in its reply are in general nature. 6.1 The above facts indicates that the AO while completing the assessment have not properly seen and examined the above issues and therefore the order passed by the AO was erroneous and prejudicial to the interests of revenue. Such cases where the assessment has been completed without conducting any inquiries or verification of facts tantamount to erroneous orders as also order prejudicial to the interest of Revenue. For such proposition of law, reliance is placed on following cases: ..... ...... ..... ....... ..... ...... ..... ....... 6.2 Further, It is settled law that u/s 263 of the Act the CIT has the power to set aside the assessment order and send the matter for fresh assessment if he is satisfied that further enquiry is necessary and that the impugned order is erroneous and prejudicial to the interests of revenue. The Supreme Court has held in CIT Vs. Shree Manjunathesware Packing Products & Camphor Works, 231 ITR 53, that the revisional power conferred on the Commissioner u/s 263 is of wide amplitude. Reliance is also place on CIT vs. Seshasayee Paper & Boards Ltd. (2000) 242 ITR 490 (Madras), CIT Vs. South India Shipping Corporation Ltd. (1998) 233 IR 546 (Mad), etc. Moreover, the recent amendment in Act w.e.f. 1.4.2015 leaves no scope for any doubt in the matter as lack of enquiry is enough to invoke the provision of section 263. The following judicial pronouncements endorse the above contention: (i) The Madras High Court in the case of CIT vs. Seshasayee Paper & Boards Ltd. (2000) 242 ITR 490 (Mad) has held that failure of the Assessing Officer to make an inquiry before granting deduction would render the assessment erroneous and prejudicial to the interest of revenue. (ii) The Madras High Court, in the case of CIT vs. South India Shipping Corporation Ltd. (1998) 233 ITR 546 (Mad) has held that the order of the Assessing Officer may be erroneous in law or in fact. It may be erroneous in the sense that the Assessing Officer had passed the order without properly conducting the inquiry in completion of the assessment and the order may also be erroneous when the expenditure allowed as against the provisions of law. ITA No.422/Ahd/2023 6 5. Before us, the ld.counsel for the assessee contended that the ld.Pr.CIT has, while holding the assessment order erroneous causing prejudice to the Revenue, failed to appreciate contentions made by the assessee in this regard before him in the correct perspective. He pointed out that the assessee had contended that all the investments had been made in debt mutual funds which earned no exempt income. The ld.counsel for the assessee explained before us that the investment in debt mutual funds either earned capital gains on sale of units of mutual funds or they earned interest income, both of which are liable to tax as per the provision of the Act. The ld.counsel for the assessee contended that having pointed out the fact that the investments were made in mutual funds, income from which was liable to tax, and therefore, the provisions of section 14A was not attracted in the present case, the ld.Pr.CIT, he contended, had assumed the explanation of the assessee as to the effect that the assessee had earned no exempt during the year, and accordingly applied the provision of law in this regard that even if no exempt income is earned, the expenses are to be disallowed under section 14A. 6. We are in complete agreement with the ld.counsel for the assessee inthis regard. We find, as categorically noted in para-4 of his order, the submissions of the assessee to the effect that it had invested in debt mutual funds, income from which are liable to tax, and not exempt from tax. We have also noted that from para- 5 of the ld.Pr.CIT’s order that he has misunderstood this contention of the assessee, to the effect that the assessee had earned no exempt income during the year. There is a vast difference betweenthe two phrases,”of the investment not capable of earning any exempt income”, and “the investment not earning any exempt ITA No.422/Ahd/2023 7 income during the year “. The ld.Pr.CIT, therefore, having misunderstood the contention made by the assessee before it, its finding of the error is based on an incorrect appreciation of facts. The investments of the assessee not capable of earning any exempt income, we agree with the Ld.Counsel for the assessee that there is no case for disallowance of any expense u/s 14A of the Act. The order passed by the ld.Pr.CIT, therefore, we find is based on incorrect appreciation of facts and accordingly incorrect application of law thereto and is therefore not sustainable. The order passed u/s 263 of the Act is accordingly set aside. The ground of the appeal of the assessee is allowed. 7. In the result, the appeal of the assessee is allowed. Order pronounced in the Court on 13 th September, 2023 at Ahmedabad. Sd/- Sd/- (SIDDHARTHA NAUTIYAL) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad,dated 13/09/2023