Sterling Addlife India Private Ltd., Ahmedabad V. The Pr. CIT-3, Ahmedabad

ITA 99/AHD/2021

AI Insights

The case involves Sterling Addlife India P. Ltd., which appealed against the order of the Pr. Commissioner of Income-Tax-3, Ahmedabad. The original assessment for the year 2016-17 had allowed certain expenses which the Pr. CIT later deemed insufficient under section 14A of the Income Tax Act, 1961, leading to a revisionary order. The Tribunal examined the facts and found discrepancies in the Pr. CIT's assumptions regarding the assessee's financials, particularly concerning the sources of funds for investments earning exempt income and the related interest expenses. The Tribunal noted that the Pr. CIT did not adequately address the assessee's arguments or recalibrate the disallowances post their submissions, leading to the setting aside of the Pr. CIT's order.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133639 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 08-02-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 16-05-2021
• Other Referred Cases: ITA No.1707/Ahd/2016
• 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
• Section: 263; 2; 14A; 2(A)

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘D’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD ] ] BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND MS.SUCHITRA KAMBLE, JUDICIAL MEMBER ITA No.99/AHD/2021 Assessment Year :2016-17 Sterling Addlife India P.Ltd. Sterling Hospital, Sterling Road Off Gurukul road Memnagar, Ahmedabad. PAN : AADCA 0897 M Vs. The Pr.CIT-3 Ahmedabad. अपीलाथ / (Appellant) यथ /(Respondent) Assesseeby : Shri A.C. Shah, AR & Shri Bhadresh Gandhakwala, AR Revenue by : Shri Sudhendu Das, CIT-DR स ु नवाई क तार ख/Date of Hearing : 09/02/2023 घोषणा क तार ख /Date of Pronouncement: 24/02/2023 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the assessee against order passed by the ld.Pr.Commissioner of Income-Tax-3, Ahmedabad [hereinafter referred to as “Ld.Pr.CIT”]by exercising revisionary power under section 263of the Income Tax Act, 1961 ("the Act" for short) dated 29.3.2021pertainingto the Asst.Year2016-17. 2. We have gone throughthe order of the ld.Pr.CIT and we have noted that the ld.Pr.CIT has held the assessment order passed by the AO in the present case to be erroneous causing prejudice to the Revenue, for the reason that the AO had failed to make inquiries with regard to the expenses to be disallowed incurred for earning ITA No.99/Ahd/2021 2 exempt income, as per the provisions of section 14A of the Act. The ld.Pr.CIT noted that the facts on record revealed that the assessee had earned exempt income; that its current and non-current investments far exceeded its own interest free funds in the form of shareholders’ fund and the assessee had also paid substantial interest, and therefore, the investments had been made out of interest bearing funds on which, the ld.Pr.CIT noted ,the assessee had incurred huge expenditure in the form of interest and debited to the profit & loss account. He accordingly worked out the disallowable expenses u/s 14A of the Act applying Rule 8D of the Income Tax Rules, 1962(in short referred to as Rules)at Rs.36,17,305/- as opposed to Rs.70,519/- suo moto disallowed by the assessee. As per the Ld.PCIT the AO having accepted assesses less quantum of suo moto disallowance ,his order was erroneous causing prejudice to the Revenue. 3. During the course of hearing before us, it was brought to our notice that the facts noted by the ld.Pr.CIT relating to the issue of disallowance of expense incurred for earning exempt income as per section 14A of the Act, were incorrect. It was pointed out to us from the audited financial statements that the exempt income by way of dividend amounting to Rs.66,18,383/- was earned by the assessee on its current investment and not on non-current also, as noted by the ld.Pr.CIT. Further, the interest expenditure incurred by the assessee noted by the ld.Pr.CIT to the extent of Rs.6,26,48,819/- was not the correct figure. The total financial cost as appearingin the audited financials of the assessee amounted to Rs.7,95,22,587/- out of which the component of interest was Rs.5,82,21,299/- on term loan and Rs.44,27,520/- on OD/CC facility. Our attention was drawn to PB Page no.21 being annexure-24 of the audited financials of the assessee-company being the detail of the financial cost. The ITA No.99/Ahd/2021 3 ld.counsel for the assessee contended that out of interest portion of the above, only Rs.44,27,520/- at the most could be considered for the purpose of disallowance. The interest paid on term loans which had been used for the purpose for which the loans had been taken cannot be attributed for investmentin shares/mutual funds earning exempt income. He further contended that despite this fact being brought to the notice of the ld.Pr.CIT, as noted in his order at para no.4, he went on to hold the assessment order as being erroneous for no inquiry being conducted on the issue of disallowance under section 14A of the Act ,without dealing with this contention of the ld.counsel for the assessee. He further pointed out that in the Asst.Year 2011-12 disallowance made under section 14A had been deleted by the ITAT vide is order passed in ITA No.1707/Ahd/2016 dated 31.8.2018. He therefore contended that there was clearly no finding of the error as such in the order of the AO by the ld.Pr.CIT and the order passed therefore under section 263 needed to be set aside. 4. The ld.DR relied on the order of the ld.Pr.CIT. 5. We have considered rival submissions of both the parties. Before dealing with the contentions as made by the ld.counsel for the assessee, it is pertinent to bring out a few relevant facts relating to the issue before us. We have noted from the order of the ld.Pr.CIT that the assessee had declared income in the impugned year at Rs.3,66,83,820/-. By exercise of his revisionary power, the ld.Pr.CIT has in his order computed the prejudice caused to the revenue on account of short disallowance of expenses under section 14A of the Act ,to the extent of Rs.35,46,786/-. The Ld.PCIT computed the disallowance as per Rule 8D of the Rules , which prescribes the method of calculating the amount of disallowance to ITA No.99/Ahd/2021 4 be made as per section 14A of the Act. The working of the ld.Pr.CIT(A) at para-4 of his order is as under: ITA No.99/Ahd/2021 5 6. It is to be noted that as opposed to an income of Rs.3,66,83,820/- returned by the assessee, the ld.Pr.CIT has exercised his revisionary power for escapement of income to the extent of Rs.35 lakhs only, which tantamounted to barely 10% of the income returned by the assessee. Keeping this in mind, we have also noted that the ld.Pr.CIT‘s finding of error on account of the assessee having disallowed less expenses u/s 14A of the Act, is based on assumption ofincorrect facts. The ld.Pr.CIT proceeded on the fact that the assessee having earned exempt income of Rs.66.00 lakhs and its investment in current and non-current assets far exceeding its own share capital and reserves, surely, the investment in this exempt income earning asset was made from the interest bearing funds of the assessee, on which the assessee had paid substantial amount of interest of Rs.6.26 crores. Based onthis assumption of facts, he proceeded to work out the disallowance of interest applying formulae given under Rule 8D(2)(ii) at Rs.30,34,560/- taking interest components at Rs.6,26,48,819/- in the said formula and including the components of non-current investment alongwith the current investment for the purpose of average investment made by the assessee, required as per the said formula. The calculation made by the Ld.PCIT, reproduced above by us, reveals all the aforestated facts. The ld.counsel for the assessee has pointed out that in the first place, the assessee has not incurred interest expenditure to the extent of Rs.6.26 crores, but on the contrary, the interest expenses, which could be attributable at the most to the earning of exempt income was only of Rs.44.27 lakhs, attributable to interest paid to OD/CC facility availed by the assessee. Besides this interest, the assessee has paid interest of Rs.5.8 crores on term loans as per the details of financial cost appearing in its audited balance sheet at Annexure 24 ITA No.99/Ahd/2021 6 whichwas filed before us in the PB. We see no reason for attributing usage of these term loansfor investment purposes for earning exempt income. The Ld.PCIT has, without completely taking note of the facts before him, arbitrarily treated the entire interest paid as relating to mixed funds, the usage of which is not clearly defined, when the possibility of using term loans for purposes other than that for which granted is very slim. Therefore, without specifically finding the usage of the term loans for making investment, this quantum of Rs.5.8 crores of interest paid by the assessee on term loans could not have been included for the purpose of computing interest components disallowable as per Rule 8D(2)(ii) of the Rules. Even otherwise, the assessee has demonstrated before us that exempt income was earned only on the current investment made by the assessee, While the ld.Pr.CIT in his formula as prescribed by Rule 8D(2)(ii) has taken both current and non-current investments for arriving at the average quantum of investment made by the assessee. Thus even average quantum of investments has been incorrectly taken for the purpose of working out quantum of administrative expenses to be disallowed as per Rule 8D(2)(iii). Thus, it is clearly evident that the basis of calculating expenses disallowable under section 14A of the Act by the Ld.PCITwas on the assumption of incorrect facts. 7. We have noted, that despite being so pointed out by the assessee, and having noted so atpara-7 of his impugned order, where he briefly stated the above facts pointed out by the ld.counsel for the assessee, the Ld.PCIT made no effort to re-work the calculation and find out whether any expense was still liable to be disallowed under section 14A of the Act. The ld.Pr.CIT, we find, proceeded to hold the assessment order to be erroneous on the basis ITA No.99/Ahd/2021 7 that no inquiry was conducted by the AO on the issue. He has invoked Explanation 2(a) to section 263 for the said purpose. We are not convinced with the same. The Explanation-2(a) to section 263 of the Act states that the assessment order is deemed to be erroneous causing prejudice to the Revenue, where the AO does not make any inquiry “which he should have made”(emphasis supplied by us). It is clear therefore, merely because no inquiry was conducted by the AO the assessment order cannot be treated as erroneous. It is only in cases where he does not make inquiries which he was required to make that the order can be held erroneous. The Ld.PCIT therefore has to point out what inquiry the AO ought to have made which he did not make , for holding the assessment order erroneous in terms of Expl 2(a) to section 263 of the Act. 8. In the facts of the present case, where the assessee had pointed out to the Ld.PCIT that his calculation of disallowable expenses was based on incorrect facts, the ld.Pr.CIT was duty bound to consider this contention of the assessee, and thereafter give his finding on the same, that despite the said contentions and taking note of the same also, expenses were still liable to be disallowed under section 14A of the Act, and the AO having made no inquiry, the assessment order therefore ought be held to be erroneous so as to cause prejudice to the interest of the Revenue. No such exercise having been done by the ld.Pr.CIT in the present case; his finding of the error, merely on the ground that no inquiry was made by the AO on the issue of 14A, without dealing with the contentions made by the ld.counsel for the assessee before him, is not tenable in law. Explanation 2 to section 263 is clearly not applicable in the present ITA No.99/Ahd/2021 8 case. For this reason, order of the ld.Pr.CIT, we hold, is to be set aside. Further, considering the fact, as noted above, that revisionary power under section 263 of the Act has been invokedfor an inconsequential and immaterial issue; as per the Ld.PCIT’s calculation a disallowance of barely 10% of the income returned by the assessee, the exercise of revisionary power for a trivial issue, that too on the basis of assuming incorrect facts ,is nothing but an arbitrary exercise of the extraordinary power of revision as per section 263 of the Act. There is no reason absolutely to uphold the order of the Ld.PCIT passed u/s 263 of the Act. 9. In view of the above, the order passed by the ld.Pr.CIT is set aside and the appeal of the assessee is allowed. 10. In the result, the appeal of the assessee is allowed. Order pronounced in the Court on 24 th February, 2023 at Ahmedabad. Sd/- Sd/- (SUCHITRA R. KAMBLE) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad, dated 24/02/2023