Spandana Sphoorty Financial Ltd., Hyd, Hyderabad V. Addl.CIT, Circle.3(2), Hyd., Hyderabad

ITA 717/HYD/2015

• Counselvise Citation: 71722514 RSA 2015
• Duration Of Justice: 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2015
• Appeal Filed By: Assessee
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 28-05-2015
• Court: TRIBUNAL
• Department Lawyers: S MO HARANA
• Keywords: Earning of tax free income; Source of fund; Right to appeal
• Section: 143(3); 14A; 263; 63

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 717/HYD/2015 ASSESSMENT YEAR: 2010-11 SPANDANA SPHOORTY FINANCIAL LTD., HYDERABAD [PAN: AAICS6213N] VS ADDL. COMMISSIONER OF INCOME TAX, CIRCLE-3(2), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI G.V. N. HARI, AR FOR REVENUE : SHRI S. MOHARANA, CIT-DR DATE OF HEARING : 26-08-2015 DATE OF PRONOUNCEMENT : 18-09-2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF THE PRINCIPAL COMMISSIONER OF INCOME TAX-3, HYDERABAD DATED 19-03 -2015. LD. PR.CIT INVOKED THE JURISDICTION U/S. 263 OF THE INCOME TAX ACT [ACT] TO SET ASIDE THE ASSESSMENT COMPLETED BY THE ASSESSING OFFICER ( AO) U/S. 143(3) DT. 30-03-2013 ON THE ISSUE OF NON-DISALLOWANCE OF AN A LLEGED AMOUNT OF RS. 5,55,41,854/- UNDER THE PROVISIONS OF SECTION 14A O F THE ACT. I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 2 -: 2. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS CONTES TING THE ACTION OF PR.CIT: 2. THE LEARNED PR. COMMISSIONER OF INCOME TAX IS NOT JUSTIFIED IN ASSUMING JURISDICTION U/S. 263 OF THE ACT IN AS MUCH AS THE ASSESSMENT ORDER DT. 30-03-2013 U/S. 143(3) OF THE ACT IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTERESTS OF REVENUE. 3. THE LEARNED PR. COMMISSIONER OF INCOME TAX IS NO T JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO RE- WORK THE DISALLOWANCE, ALREADY CALCULATED AS PER PROVISIONS OF SECTION 36(1)(III), BY APPLYING PROVISIONS OF SECTION 14A A ND INCREASING THE DISALLOWANCE BY RS. 5,55,41,854/-. 4. THE LEARNED PR. COMMISSIONER OF INCOME TAX OUGHT TO HAVE APPRECIATED THAT THE ISSUE OF DISALLOWANCE UND ER TWO SECTIONS, SECTION 14A AND SECTION 36(1)(III), WAS D ULY CONSIDERED AND ACCORDINGLY GIVEN EFFECT TO BY THE ASSESSING OF FICER AND MERELY BECAUSE THE LEARNED PR. COMMISSIONER OF INCO ME TAX ENTERTAINS A DIFFERENT VIEW THE ASSESSMENT CANNOT B E TERMED AS ERRONEOUS. 5. THE LEARNED PR. COMMISSIONER OF INCOME TAX OUGHT TO HAVE APPRECIATED THAT THE ISSUE OF DISALLOWANCE U/S . 36(1)(III) AND SECTION 14A IS THE SUBJECT MATTER OF APPEAL FIL ED BEFORE THE LEARNED CIT(A) AND AS SUCH, IT IS NO MORE WITHIN TH E JURISDICTION OF COMMISSIONER OF INCOME TAX U/S. 263 OF THE ACT TO C ONSIDER THE SUFFICIENCY OF DISALLOWANCE IN RESPECT OF THIS ISSU E. 3. BEFORE ADVERTING TO THE MERITS OF THE ACTION OF THE PR.CIT, IT IS NECESSARY TO MENTION THE CHRONOLOGY OF EVENTS LEADI NG TO THE PRESENT ORDER. ASSESSEE IS ENGAGED IN THE BUSINESS OF MICR O FINANCE AND FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 3,19 ,56,37,810/-. THE SAME WAS SCRUTINIZED BY THE AO AND VIDE ORDER DT. 3 0-03-2013, DETERMINED THE TOTAL INCOME AT RS. 3,28,29,17,467/- . IN DETERMINING THE INCOME, AO EXAMINED ASSESSEES STATEMENT OF ACCOUNT S, CALLED FOR CERTAIN CLARIFICATIONS, EXPLANATIONS AND VIDE PARA 6 OF THE ORDER, DISALLOWED THE INTEREST U/S. 36(1)(III) OF THE ACT TO AN EXTENT OF RS. 7,85,32,019/-. IN DISALLOWING THE ABOVE AMOUNT, TH E AO NOTICED THAT I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 3 -: ASSESSEE HAS INVESTED HUGE AMOUNTS OF MONEY IN MUTU AL FUNDS WHICH IS NOT THE BUSINESS ACTIVITY OF ASSESSEE. HE ALSO NOT ICED THAT DIVIDEND INCOME EARNED THEREON HAS BEEN CLAIMED AS EXEMPT FR OM TAX. HE WAS OF THE OPINION THAT ASSESSEE DIVERTED THE MONEY TO NON -BUSINESS ACTIVITY, INTEREST EXPENDITURE INCURRED ON SUCH NON-BUSINESS ACTIVITY WAS NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION U/S. 36( 1)(III). AFTER OBTAINING THE DETAILS OF SOURCE OF FUNDS AND INVESTMENTS, A C OMPARATIVE ANALYSIS OF SHARE FUNDS, LOANS AND INVESTMENTS MONTH-WISE WAS P REPARED AND ON THE BASIS OF INVESTMENT, AO QUANTIFIED THE DISALLOW ANCE U/S. 36(1)(III) AT RS. 7,85,32,019/-, WHICH WAS DISALLOWED. 3.1 IN ADDITION TO THE DISALLOWANCE U/S. 36(1)(III) , AO ALSO EXAMINED THE PROVISIONS OF SECTION 14A AND GAVE A FINDING TH AT ASSESSEE DURING THE YEAR PURCHASED UNITS WORTH RS. 5472.44 CRORES DURIN G THE YEAR AND INCLUDING THE OPENING UNITS WORTH RS. 295.05 CRORES , SOLD ALL UNITS TO THE EXTENT OF RS. 5771.02CRORES AND EARNED DIVIDEND OF RS.3,52,19,276/- WHICH WAS CLAIMED AS EXEMPTION UNDER TAX. AO GAVE A FINDING THAT THERE IS NO DIRECT EXPENDITURE TO BE DISALLOWED UNDER RUL E 8D(I) AND INTEREST EXPENDITURE ON SUCH FUNDS UNDER RULE 8D(2)(II) WAS DISALLOWED U/S. 36(1)(III) AND THEREFORE, THERE IS NOTHING WHICH RE QUIRES TO BE FURTHER DISALLOWED UNDER THE ABOVE TWO CLAUSES OF RULE 8D. THEREAFTER, HE DISALLOWED 0.5% OF AVERAGE INVESTMENT UNDER RULE 8D (2)(III) AT RS. 73,76,416/-. THIS ORDER OF THE AO WAS SUBJECT MATT ER OF APPEAL BEFORE THE LD. CIT(A). LD. CIT(A) VIDE THE ORDER DT. 24-1 0-2014, EXAMINED THE ABOVE TWO ISSUES AND CONFIRMED THE DISALLOWANCE UND ER RULE 8D(2)(III), WHEREAS LD. CIT(A) WAS OF THE OPINION THAT ASSESSEE HAS MORE INTEREST FREE FUNDS OF ITS OWN THAN THE INVESTMENTS AND FOLL OWING THE PRINCIPLES LAID DOWN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD., [313 ITR 340] HAS DELETED THE DISALLOWANCE MADE U/S. 36(1)(III). I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 4 -: 4. AFTER THIS ORDER OF CIT(A), LD. PR.CIT EXAMINED THE RECORD AND CAME TO THE CONCLUSION THAT THE ORDER PASSED BY THE AO WAS ERRONEOUS INSOFAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE ON THE REASON THAT THE DISALLOWANCE UNDER RULE 8D(2)(II) WAS TO T HE TUNE OF RS. 13,40,73,873/-, WHEREAS THE AO DISALLOWED ONLY PART AMOUNT, THEREFORE, THERE WAS SHORT COMPUTATION OF INCOME OF RS. 5,51,4 1,860/-. EVEN THOUGH THE SHOW CAUSE NOTICE ISSUED ON 03-03-2015 D OES NOT INDICATE HOW THE ABOVE AMOUNT WAS ARRIVED AT, THE ORDER U/S . 263 DO INDICATE THAT THIS AMOUNT WAS ARRIVED AT BY CERTAIN FORMULA, THE AMOUNTS OF WHICH WERE NOT CLARIFIED NOR REFERRED TO FROM ANY S CHEDULES. BE THAT AS IT MAY, LD. PR.CIT ISSUED SHOW CAUSE NOTICE TO ASSE SSEE WHY THE SAID ORDER COULD NOT BE REVISED U/S. 263? 5. ASSESSEE OBJECTED TO THE INITIATION OF PROCEEDIN GS U/S. 263 AND GAVE DETAILED SUBMISSIONS WHICH WERE SUMMARIZED BY PR.CIT VIDE PARA 5 OF THE ORDER AS: (I) THE MOA WHEREIN SUCH INVESTMENT IS AMONG THE MA IN OBJECTIVES OF THE BUSINESS AND THE ASSESSEE IS DULY REGISTERED WITH THE ROC AND RBI AS A NON-BANKING FINANCIAL COMPANY (NBFC) W ITH THE SAME SET OF OBJECTIVES THAT HAVE BEEN ACCEPTED AS B EING THE MAIN OBJECTIVES OF A NBFC. (II) DURINQ THE SCRUTINY PROCEEDINGS, THE ASSESSEE STATED THAT THE ENTIRE INVESTMENTS IN MUTUAL FUNDS (THE DIVIDEND IN COME WHERE FROM IS EXEMPT FROM TAX) HAS BEEN MADE OUT OF INTER EST FREE FUNDS AVAILABLE WITH, THE COMPANY. THESE FUNDS COMPRISED OF SHARE CAPITAL AND ACCUMULATED RESERVES AND SURPLUS. FROM THE MONTH WISE COMPARATIVE CHART ATTACHED (AS ANNEXURE-1), IT CAN BE SEEN THAT AT NO POINT OF TIME, THE INVESTMENTS WERE MORE THAN THE SUM OF SHARE CAPITAL AND RESERVES. HENCE, THE ASSESSEE HAS SUFFICIENT NON INTEREST BEARING FUNDS TO SOURCE THE ENTIRE INVESTM ENT DURING THE F Y 2009-10. (III) ONCE THE SUFFICIENCY OF. ASSESSEE'S OWN NON I NTEREST BEARING FUNDS IS ESTABLISHED, IT IS TO BE ASSUMED THAT THE INVESTMENT WERE MADE OUT OF SUCH FUNDS AND MERE PRESENCE OF LOAN OR INTEREST I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 5 -: BEARING FUNDS IN THE BALANCE SHEET SHOULD NOT BE TH E BASIS OF ASSUMING THAT SUCH FUNDS WERE USED FOR INVESTMENTS. (IV) THE ASSESSED IS WELL WITHIN ITS LEGAL RIGHTS T O USE ITS 'OWN FUNDS FOR ANY COMMERCIAL 'PURPOSE AND / OR TO BORROW MONE Y FOR ITS COMMERCIAL OPERATIONS. (V) THE ASSESSEE STATED THAT THE FUNDS INVESTED WER E NOT OUT OF THE BORROWED INTEREST BEARING LOANS FROM BANKS. (VI) THE BASIS FOR APPLICATION OF SECTION 14A IS TH E INCURRENCE OF ANY EXPENSE IN THE EARNING OF THE EXEMPT INCOME. AS THE INVESTMENT IN MUTUAL FUNDS (SOURCE OF SUCH EXEMPT INCOME) HAS BEE N MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE COMPANY, THE POSSIBILITY OF INCURRING INTEREST FOR SOURCING THIS INVESTMENT FRO M LOANED MONEY DOES NOT ARISE. (VII) THE COST OF BORROWING FROM BANKS IS AT AN AVE RAGE RATE OF 12.80% WHEREAS INVESTMENTS YIELD MAXIMUM OF 9%. NO PRUDENT BUSINESS WILL BORROW AT HIGHER COST TO INVEST IN LO WER RETURNS. NEITHER THE SHAREHOLDERS NOR THE BOARD OF DIRECTORS WILL ALLOW SUCH A LOSS MAKING INVESTMENT POLICY. HENCE ONLY THE IDL E WORKING CAPITAL AND NON INTEREST BEARING FUNDS OF THE COMPANY HAS B EEN INVESTED IN LIQUID DAILY REDEEMABLE FUNDS. (VIII) AS SUBSTANTIATED BY SUBMITTED SAMPLE COPIES OF LOAN AGREEMENTS BETWEEN THE COMPANY AND THE BANKS, THE C OMPANY IS NOT ALLOWED TO UTILIZE THE LOANS FOR ANY PURPOSE OT HER THAN DISBURSEMENTS TO BORROWERS. THE COMPANY HAS TO DISB URSE THE ENTIRE BORROWING, CREATE A DETAILED DATA BASE OF AL L THE BORROWERS, CREATE A CHARGE WITH ROC ON THE LOAN PORTFOLIO CREA TED FROM THE (IX) BANK BORROWING AND SUBMIT ALL THESE DETAILS TO THE BANK WITHIN 30 DAYS OF UTILIZE THE LOANS FOR ANY PURPOSE OTHER THAN DISBURSEMENTS TO BORROWERS. HENCE, THE ENTIRE INTER EST EXPENSES INCURRED ON THESE LOANS (AND WHAT IS INTENDED TO BE DISALLOWED THROUGH THE ORDER UNDER SECTION 263) IS TOWARDS GEN ERATION OF INTEREST INCOME THAT IS OFFERED FOR TAXATION. (X) SECTION 14A SHOULD NOT BE APPLIED MERELY BECAUS E THERE IS AN EARNING OF AN INCOME WHICH IS EXEMPT. FOR APPLICATI ON OF SECTION 14A, A CLEAR DIRECT AND DISTINCT CONNECTION HAS TO BE ESTABLISHED BETWEEN THE DISALLOWED EXPENSES AND THE EXEMPT INCO ME. IN THE CURRENT CASE OF THE ASSESSEE, IT HAS STATED THAT TH ERE IS NO CONNECTION BETWEEN, THE EXEMPT INCOME AND THE INTER EST EXPENSES. I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 6 -: (XI) DURING THE SCRUTINY PROCEEDINGS, THE ASSESSEE HAS STATED THAT: (A) NO PART OF INTEREST BEARING LOAN FUNDS WERE USE D AS A SOURCE OF MUTUAL FUND INVESTMENTS. (B) THE ENTIRE INVESTMENTS WERE MADE OUT OF NON INT EREST BEARING FUNDS AVAILABLE WITH THE COMPANY. (C) THE COMPANY DID NOT HAVE THE CONTRACTUAL LIBERT Y TO USE THE LOAN FUNDS FOR ANY OTHER PURPOSES THAN FURTHER LENDING T O MICRO FINANCE BORROWERS. (XII) THE ASSESSEE STATED THAT CASE IS IDENTICAL FO R THE AY 2009-10 THAT HAS BEEN DECIDED 'BY THE HON'BLE HYDERABAD BEN CH OF ITAT THAT HAS RULED THAT RULE 8D(II) CANNOT BE APPLIED A S THE ASSESSEE HAS MENTIONED THAT IT'S OWN NON INTEREST BEARING FU NDS WERE AVAILABLE AND WERE USED FOR DIVIDEND YIELDING INVES TMENTS. ALSO THE LEARNED CIT(A) HAS APPLIED THE SAME DECISION TO THE APPEAL AGAINST THE ORDER U/S. 143(3) FOR AY 2010-11. 6. LD. PR.CIT HOWEVER, WAS OF THE OPINION THAT AO H AS NOT MADE PROPER ENQUIRY AND THEREFORE, THE ORDER IS ERRONEOU S AND PREJUDICIAL TO THE INTEREST OF REVENUE AND AS AO FAILED IN HIS BAS IC DUTY TO EXAMINE THESE ASPECTS WHILE COMPLETING THE SCRUTINY ASSESSM ENT, AN ERROR HAS CREPT IN THE ASSESSMENT ORDER FRAMED BY THE AO WHIC H IS PREJUDICIAL TO THE INTEREST OF THE REVENUE AND DESERVES TO BE SET ASIDE. BY OPINING AS SUCH, LD. PR.CIT-III, SET ASIDE THE ORDER WITH A DI RECTION TO RE-DO THE ASSESSMENT DENOVO AS PER LAW. ASSESSEE IS AGGRIEVED AND RAISED THE ABOVE GROUNDS. 7. LD. COUNSEL FOR ASSESSEE REFERRING TO THE S EQUENCE OF EVENTS AND THE STAND TAKEN BY THE PR.CIT SUBMITTED THAT APPLYI NG FIXED FORMULA WITHOUT CONSIDERING THE DATES OF INVESTMENT AS WAS DONE BY THE LD. PR.CIT WAS NOT CORRECT. IN FACT THIS ISSUE WAS EXA MINED BY THE ITAT IN EARLIER YEAR WHEREIN, THE ITAT OPINED THAT FOR DISA LLOWANCE OF INTEREST, I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 7 -: THE PERIOD OF INVESTMENT IS TO BE CONSIDERED RATHER THAN MECHANICALLY DISALLOWING FOR THE WHOLE OF THE PERIOD EVEN THOUGH THERE IS INVESTMENT FOR A SMALL PERIOD DURING THE YEAR. THUS, THE VIEW OF PR.CIT IS CONTRARY TO THE OPINION OF THE ITAT IN EARLIER YEAR. 8. THE NEXT ARGUMENT RAISED BY THE LD. COUNSEL IS W ITH REFERENCE TO THE FACT THAT THE VERY SAME ISSUE WAS SUBJECT MATTE R OF APPEAL BEFORE THE CIT(A) AND THE AOS ORDER GETS MERGED WITH ORDER OF THE CIT(A) AND RELIED ON ITATS ORDER IN AY. 2009-10 ON SIMILAR ISSUE REL YING ON THE JUDGMENT OF THE ITAT IN THE CASE OF SAW PIPES LTD., VS. ADDL . CIT [3 SOT 237] 9. THE NEXT CONTENTION RAISED BY THE LD. COUNSEL WA S THAT WHOLE INVESTMENT IN MUTUAL FUNDS, EARNING OF DIVIDEND INC OME WHICH WAS CLAIMED EXEMPT AND CORRESPONDING DISALLOWANCE U/S. 14A AND 36(1)(III) WERE EXAMINED BY THE AO IN DETAIL AND THEREFORE, LD . PR.CIT WAS PRECLUDED IN EXERCISING JURISDICTION U/S. 263. 10. LD. DR HOWEVER, RELIED ON THE DETAILED ORDER OF PR.CIT, REFERRED TO THE COMPUTATION AND DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD AND ORS VS CIT 247 CTR 0162 F OR EXPLAINING SECTION 14A AND RULE 8D, PROVISIONS OF THE ACT AND RELIED ON THE PRINCIPLE THAT THE DISALLOWANCE UNDER RULE 8D(II) W AS NOT SUBJECT MATTER OF APPEAL BEFORE THE CIT(A) AND THEREFORE, PR.CIT W AS WELL WITHIN HIS RIGHTS TO INVOKE THE JURISDICTION U/S. 263. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PE RUSED THE PAPER BOOK PLACED ON RECORD AND CASE LAW RELIED UPON BY T HE PARTIES. FIRST OF ALL, IT IS TO BE NOTED THAT ISSUE OF DISALLOWANCE U /S. 36(1)(III) AND ALSO 14A WAS EXAMINED BY THE AO IN DETAIL IN THE SCRUTINY AS SESSMENT. AS BRIEFLY STATED ABOVE, AO DISALLOWED PART OF THE INTEREST CL AIM ON THE REASON THAT I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 8 -: ASSESSEE HAS INVESTED FUNDS IN THE MUTUAL FUNDS DIV ERTING FROM BUSINESS PURPOSES. HE QUANTIFIED THE DISALLOWANCE AT RS. 7, 85,32,019/- BASED ON THE PERIOD OF INVESTMENT DURING THE YEAR. THEREFOR E, AS FAR AS QUANTIFICATION OF INTEREST ON DIVERSION OF FUNDS FO R INVESTMENT IN MUTUAL FUNDS ARE CONCERNED, WE CANNOT SUBSCRIBE TO THE LD. PR.CITS OPINION OF QUANTIFYING THE AMOUNT ON A FORMULA UNDER RULE 8D( 2)(II). THIS ISSUE WAS ALREADY EXAMINED AND ADJUDICATED BY THE ITAT IN ITANO.1653/HYD/2012 DT 10-10-2014 IN EARLIER ASSESS MENT YEAR AY 2009-10 WHEREIN, ITAT WAS OF THE OPINION( IN PARA 6 ) THAT, HOWEVER, FOR MAKING ANY DISALLOWANCE IT HAS TO BE ESTABLISHED ON RECORD HOW MUCH BORROWED FUND HAS BEEN INVESTED IN THE MUTUAL FUNDS AND FOR WHAT PERIOD. AO CERTAINLY CANNOT CHARGE INTEREST FOR TH E ENTIRE YEAR WHEN THE INVESTMENT IS MADE BY ASSESSEE FOR A MONTH OR FEW D AYS. FURTHER, THE LINK IS REQUIRED TO BE ESTABLISHED BETWEEN THE ACTU AL AMOUNT OF INVESTMENT MADE OUT OF BORROWED FUNDS . IN VIEW OF THE ABOVE, THE PR.CITS ACTION IN CONCLUDING THAT AMOUNT TO BE DISALLOWED UNDER RULE 8D(2)(II) AT RS. 13,40,73,873/- IS WITHOUT ANY BASIS. TO THAT EXTEN T, THE BASIC PRESUMPTION FOR INVOKING THE JURISDICTION BEING WRO NG, WE CANNOT UPHOLD THE ACTION OF PR.CIT IN COMING TO THE CONCLUSION TH AT AOS ORDER IS ERRONEOUS. 11.1 APART FROM THE ABOVE, IT IS ALSO TO BE SEEN TH AT THE VERY ISSUE OF DISALLOWANCE OF INTEREST ON BORROWED FUNDS, WHETHER U/S. 36(1)(III) OR UNDER RULE 8D(2)(II) HAS BEEN EXAMINED BY THE AO AN D IS SUBJECT MATTER OF APPEAL BEFORE THE CIT(A). FURTHER, CIT(A)S ORD ER DELETING THE DISALLOWANCE PER SE WAS PRIOR TO THE PROCEEDINGS U/S. 263. AS STATED, LD.CIT(A) PASSED THE ORDER AS EARLY AS ON 24-10-201 4, WHEREAS PR.CIT INITIATED THE PROCEEDINGS BY THE SHOW CAUSE LETTER DT. 03-03-2015. THUS, THE ISSUE HAVING BEEN ADJUDICATED BY THE CIT(A) BOT H U/S. 36(1)(III) AS WELL AS U/S. 14A R.W. RULE 8D, THE PR.CIT CAN NO L ONGER EXERCISE I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 9 -: JURISDICTION TO CONSIDER THE SAME ISSUE U/S. 263. THE CO-ORDINATE BENCH IN AY. 2009-10 ON SIMILAR ORDER IN ASSESSEES OWN C ASE IN ITA NO. 1098/HYD/2014 DT. 20-03-2015, HAS SET ASIDE THE ORD ER U/S. 263 WHILE DECIDING AS UNDER: 7. WE HAVE PERUSED THE RECORDS AND FIND THAT THE O RDER PASSED BY THE CIT (A)-IV DATED 31.08.2012 AND THE O RDER PASSED U/S 263 IS DATED 20.03.2014 AND HENCE THE ORDER OF THE CIT U/S 263 IS SUBSEQUENT TO THE ORDER OF THE CIT (A) ON TH E VERY SAME ISSUE. ONCE A PARTICULAR MATTER HAS BEEN CONSIDERED AND DE CIDED IN APPEAL, ON THE ISSUE OF INCLUSION OF PROCESSING FEE INCURRED DURING THE YEAR FOR INCLUSION OF DISALLOWANCE U/S 14A OF T HE ACT THE ORDER OF A.O HAS GOT MERGED WITH THE ORDER OF THE CIT (A) AN D THE CIT HAS NO JURISDICTION TO INVOKE THE PROVISIONS OF SECTION 26 3 ON THE VERY SAME ISSUE. RELIANCE IS PLACED ON THE FOLLOWING DECISIO N BY US. THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. P. MUNCHER JI & CO. (167 ITR 671) HELD AS FOLLOWS: THE PRINCIPLE UNDERLYING SECTION 263 OF THE INCOME TAX ACT, 1961, CORRESPONDING TO SECTION 33B OF THE INDIAN INCOME TAX ACT, 1992 IS THAT IT IS ONLY THE ORDER O F THE INCOME TAX OFFICER WHICH CAN BE REVISED BY THE COMMISSIONE R. ONCE THE ORDER OF ASSESSMENT IS CONFIRMED BY THE APPELLA TE ASSISTANT COMMISSIONER OR ANY ORDER WITH REGARD TO THE ASSESSMENT HAS BEEN MADE BY HIM, THAT BECOMES A FIN AL ORDER OF ASSESSMENT AND THE ONLY RIGHT THE DEPARTMENT HAS IS THE RIGHT OF APPEAL TO THE APPELLATE TRIBUNAL. 8. FURTHER, THE HON'BLE HIGH COURT WITH RESPECT TO THE D OCTRINE OF MERGER AT PAGE 676 HELD AS FOLLOWS: 9. WE HAVE CONSIDERED RIVAL CONTENTIONS CAREFULLY. IN OUR OPINION, THIS COURT'S DECISION IN TEJAJI FARASR AM KHARAWALA'S CASE (SUPRA) STILL HOLDS THE FIELD AND IS BINDING ON US. CHIEF JUSTICE CHAGLA IN THAT CASE HAS CATEGO RICALLY HELD THAT THE PRINCIPLE UNDERLYING SECTION 33B OF THE IN DIAN INCOME-TAX ACT, 1922 ('THE 1922 ACT'), CORRESPONDIN G TO SECTION 263 OF THE 1961 ACT, IS THAT IT IS ONLY THE ORDER OF THE ITO WHICH CAN BE REVISED BY THE COMMISSIONER. ONCE THE ORDER OF ASSESSMENT IS CONFIRMED BY THE AAC OR ANY ORDER WITH REGARD TO THE ASSESSMENT HAS BEEN MADE BY HIM, THAT BECOMES A FINAL ORDER OF ASSESSMENT AND THE ONLY RI GHT THE I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 10 - : DEPARTMENT HAS IS THE RIGHT OF APPEAL TO THE TRIBUN AL. THE RIGHT OF THE COMMISSIONER CONTINUES SO LONG AS THE ORDER OF THE ITO IS NOT MERGED IN THE ORDER OF THE AAC. AS R EGARDS THE POWERS OF THE AAC, THE LEARNED CHIEF JUSTICE HAS GO NE ON TO SAY THAT ONCE AN APPEAL WAS PREFERRED BY THE ASSESS EE, IT WAS OPEN TO THE COMMISSIONER TO RAISE BEFORE THE AAC AN Y MATTER DEALING WITH THE ASSESSMENT OF THE ASSESSEE. IT IS NOT AS IF THE POWER OF THE AAC WAS CONFINED TO ONLY THOSE QUESTIO NS WHICH HAD BEEN RAISED BEFORE HIM BY THE ASSESSEE. HE HAS WIDEST JURISDICTION. THE COMMISSIONER HAS NO RIGHT OF APPE AL FROM AN ORDER OF THE ASSESSMENT PASSED BY THE ITO. THE R IGHT OF APPEAL IS CONFINED TO THE ASSESSEE ONLY AND UNTIL S ECTION 33B WAS ENACTED THE POSITION IN LAW WAS THAT IF THE ASS ESSEE DID NOT APPEAL AGAINST THE ORDER OF THE ASSESSMENT, THA T ORDER BECAME FINAL AND CONCLUSIVE. IF THE ASSESSEE APPEAL ED AGAINST THE ORDER OF THE ITO THE WIDEST JURISDICTION WAS GI VEN TO THE AAC IN APPEAL. HE HAD THE POWER TO CONFIRM, REDUCE, ENHANCE OR ANNUL THE ASSESSMENT; HE HAD THE POWER TO DIRECT THE ITO TO MAKE A FRESH ASSESSMENT AND THE ONLY LIMITATION ON THE EXERCISE OF JURISDICTION WAS THAT IF HE WANTED TO E NHANCE THE ASSESSMENT HE MUST GIVE THE ASSESSEE REASONABLE OPP ORTUNITY OF BEING HEARD AGAINST ENHANCEMENT. IT WAS CONCLUDED THAT THE COMMISSIONER COMPLETELY WENT OUT OF THE PICTURE ONCE THE AAC PASSED ORDERS IN APPEAL FROM THE DECISION OF THE INCOME TAX OFFICER 9. RESPECTFULLY FOLLOWING THE DECISION OF THE HON'B LE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TEJAJI FAR ASRAM KHARAWALA (1953) (23 ITR 412), WE HOLD THAT THE JUR ISDICTION ASSUMED U/S 263 OF THE ACT IS ERRONEOUS ON THE GROU ND THAT THE ORDER OF THE AO HAS MERGED WITH THE ORDER OF THE CI T (A) AND THE CIT HAS NO JURISDICTION TO REVISE U/S 263 OF THE ACT. THUS, THE ORDER OF AO GETS MERGED WITH THE ORDER OF CIT(A) ON THE SAME ISSUE AND THEREFORE, PR.CIT HAS NO JURISDICTION TO REVISE U/S. 263 OF THE ACT. I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 11 - : 12. THIS CAN ALSO BE LOOKED INTO IN ANOTHER ANGLE. AS ALREADY STATED, THE AO HAS EXAMINED THE ISSUES BY ISSUING SHOW CAUS E NOTICE IN THE COURSE OF SCRUTINY PROCEEDINGS. ASSESSEE VIDE LETT ER DT. 11-10-2012 AND SUBSEQUENT CLARIFICATIONS PLACED IN THE PAPER BOOK, HAS EXPLAINED VARIOUS INVESTMENTS, SOURCES OF FUNDS IN DETAIL. I T CANNOT BE STATED THAT AO HAS NOT EXAMINED THE ISSUES IN THE COURSE OF ASS ESSMENT. MOREOVER, HE HAS CLEARLY MADE HIS FINDINGS IN THE ASSESSMENT ORDER WHILE DISALLOWING THE AMOUNTS, THEREFORE, IT CANNOT BE ST ATED THAT AO FAILED IN THE COURSE OF SCRUTINY ASSESSMENT IN EXAMINING THE ISSUES, AS OPINED BY THE LD. PR.CIT. SINCE THIS ISSUE WAS ALREADY EXAMI NED BY THE AO IN THE COURSE OF SCRUTINY, AND HAS COME TO CERTAIN CONCLUS IONS ON THE BASIS OF THE FACTS, IT CANNOT BE STATED THAT AO HAS NOT EXAM INED THE ISSUES PROPERLY. AS HELD BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. HOTZ INDUSTRIES LTD89 CCH0192 DEL HC DT 23-07-14., WHEREIN IT WAS HELD THAT CIT WAS NOT JUSTIFIED IN EXERCISING JURIS DICTION U/S. 263 AND SETTING ASIDE ASSESSMENT ORDER WITHOUT ARRIVING AT FINDING THAT ASSESSMENT ORDER PASSED BY AO WAS ERRONEOUS. 13. IN THE CASE OF SPECTRA SHARES & SCRIPS PV T LTD., VS. CIT [354 ITR 35 (AP)], HONBLE JURISDICTIONAL HIGH COURT HAS H ELD AS FOLLOWS: IF THERE WAS AN INQUIRY, EVEN INADEQUATE THAT WOUL D NOT BY ITSELF GIVE OCCASION TO THE COMMISSIONER TO PASS OR DERS U/S 263 MERELY BECAUSE HE HAS A DIFFERENT OPINION IN THE MA TTER. IT IS ONLY IN CASES OF LACK OF INQUIRY THAT SUCH A COURSE OF ACTI ON WOULD BE OPEN. AN ASSESSMENT ORDER MADE BY THE INCOME TAX OFFICER CANNOT BRANDED AS ERRONEOUS BY THE COMMISSIONER SIMPLY BEC AUSE, ACCORDING TO HIM, THE ORDER SHOULD HAVE BEEN WRITTE N MORE ELABORATELY. THERE MUST BE SOME PRIMA FACIE MATERIA L ON RECORD TO SHOW THAT THE TAX WHICH WAS LAWFULLY EXIGIBLE HAS N OT BEEN IMPOSED OR THAT BY THE APPLICATION OF THE RELEVANT STATUTE ON AN INCORRECT OR INCOMPLETE INTERPRETATION, A LESSER TA X THAN WAS JUST, HAS BEEN IMPOSED. THE POWER OF THE COMMISSIONER U/S 263(1) IS NOT I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 12 - : LIMITED ONLY TO THE MATERIAL WHICH WAS AVAILABLE BE FORE THE AO AND IN ORDER TO PROTECT THE INTERESTS OF THE REVENUE, T HE COMMISSIONER IS ENTITLED TO EXAMINE ANY OTHER RECORDS WHICH ARE AVA ILABLE AT THE TIME OF EXAMINATION BY HIM AND TO TAKE INTO CONSIDE RATION EVEN THOSE EVENTS WHICH AROSE SUBSEQUENT TO THE ORDER OF THE ASSESSMENT. 14. THE HON'BLE SUPREME COURT IN THE CASE OF MALABA R INDUSTRIAL COMPANY LTD., VS. CIT [243 ITR 83 (SC)] HELD THAT T HE PHRASE PREJUDICIAL TO THE INTEREST OF REVENUE HAD TO BE READ IN CONJU NCTION WITH AN ERRONEOUS ORDER PASSED BY AO. EVERY LOSS OF REVENU E AS A SEQUENCE OF ORDER OF THE AO CANNOT BE TREATED AS PREJUDICIAL TO THE INTEREST OF REVENUE. FOR EXAMPLE, WHEN AN AO ADOPTED ONE OF TH E COURSE PERMISSIBLE IN LAW, AND IT HAS RESULTED IN LOSS OF REVENUE, OR WHETHER TWO VIEWS WERE POSSIBLE AND THE AO TAKEN ONE VIEW W HICH THE CIT DID NOT AGREE, IT COULD NOT BE TREATED AS ERRONEOUS ORD ER PREJUDICIAL TO THE INTEREST OF REVENUE, UNLESS THE VIEW TAKEN BY THE A O WAS UN-SUSTAINABLE IN LAW. 15. EVEN THOUGH IN THIS CASE, LD. PR.CIT TRIED TO JUSTIFY THAT THE ORDER IS ERRONEOUS BUT AS EXPLAINED ABOVE, THE DISALLOWAN CE U/S. 36(1)(III) WAS CORRECTLY MADE ON THE BASIS OF PERIOD OF INVESTMENT MADE BY ASSESSEE IN MUTUAL FUNDS. IT IS HOWEVER, ALTOGETHER DIFFERENT MATTER THAT LD. CIT(A) HAS COME TO A CONCLUSION THAT NO SUCH DISALLOWANCE IS REQUIRED TO BE MADE. AS SEEN FROM THE FACTS ON RECORD, IT CANNOT BE STATED THAT ORDER OF AO IS ERRONEOUS SO AS TO REVISE THE SAME U/S. 263. 16. FOR THE REASONS STATED ABOVE, WE ARE OF THE OPI NION THAT PR.CIT WAS NOT CORRECT IN INVOKING THE JURISDICTION U/S. 2 63 ON AN ISSUE WHICH WAS EXAMINED IN DETAIL BY THE AO, WHICH WAS ALSO AD JUDICATED BY THE I.T.A. NO. 717/HYD/2015 SPANDANA SPHOORTY FINANCIAL LTD :- 13 - : CIT(A). THEREFORE, THE ORDER OF PR.CIT U/S. 263 IS ACCORDINGLY SET ASIDE. ASSESSEES GROUNDS ARE ALLOWED. 17. IN THE RESULT, APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH SEPTEMBER, 2015 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 18 TH SEPTEMBER, 2015 TNMM COPY TO : 1. SPANDANA SPHOORTY FINANCIAL LTD., PLOT NO. 79, C ARE CRYSTAL, VINAYAK NAGAR, GACHIBOWLI, HYDERABAD. 2. ADDL. COMMISSIONER OF INCOME TAX, CIRCLE-3(2), H YDERABAD. 3. PR. CIT-3, HYDERABAD. 4. D.R. ITAT, HYDERABAD. 5. GUARD FILE.