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2025 (6) TMI 968 - AT - Income TaxValidity of Revision u/s 263 - PCIT holding the assessment order erroneous insofar as prejudicial to the interest of revenue as the AO failed to examine disallowance u/s.14A and disallowance u/s.36(1)(va) for delay in deposit of employees contribution to PF. HELD THAT - For disallowance u/s 14A since the dividend income has not been earned from the investment in equity shares no disallowance u/s. 14A of the Act is called for on the alleged investment in equity shares. To conclude we find that since the assessee had not made any investment in Kalyan Raj Desai JV and has not earned dividend income from investment in equity shares of NDDADPPL no disallowance u/s. 14A is called for. Thus even if the issue is set aside to the file of the Ld.AO for necessary enquiry no disallowance will be called for and therefore no prejudice is caused to the Revenue. Disallowance u/s. 36(1)(va) for delay in depositing employees contribution - As we find that at the time of finalizing the assessment order there were various judgments of the Hon ble Courts where consistent view was taken that if there is any delay in payment of employees contribution and the said sum is deposited prior to the due date of furnishing return of income provided u/s. 139(1) of the Act no disallowance u/s. 36(1)(va) is called for. Similar view was taken in the case of CIT (Central) vs. Ghatge Patil Transports Ltd. 2014 (10) TMI 402 - BOMBAY HIGH COURT The judgment of Hon ble Apex Court in the case of Checkmate Services P. Ltd. 2022 (10) TMI 617 - SUPREME COURT (LB) was pronounced on 12/10/2022 whereas the AO passed the assessment on 19/03/2022 and therefore the AO while passing the assessment order was bound by the judgment of Hon ble Jurisdictional High Court in the case of Ghatge Patil Transports Ltd (supra). This Tribunal in M/s. Karan Sanran Associates 2024 (9) TMI 1048 - ITAT PUNE while dealing with the revisionary proceedings carried out u/s. 263 as held assessee has admittedly deposited the employees contribution to PF and ESI before the due date of filing of return therefore the PCIT was not justified in invoking the provisions of section 263 is squarely applicable on the issue raised in the instant appeal and therefore the order of the AO is neither erroneous nor prejudicial to the interest of the Revenue on the issue of disallowance u/s. 36(1)(va) of the Act raised in the show- cause notice issued by the Ld.PCIT. Assessee appeal allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal were: (a) Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary powers under section 263 of the Income Tax Act, 1961 ("the Act") to set aside the assessment order passed under section 143(3) on the ground that the order was erroneous and prejudicial to the interests of revenue due to failure of the Assessing Officer (AO) to verify and disallow certain amounts. (b) Specifically, whether the AO erred in not making disallowance under section 14A of the Act in respect of exempt income earned from investments in a joint venture and equity shares, and whether the PCIT was correct in holding that the AO had failed to examine this issue. (c) Whether the AO erred in not disallowing an amount under section 36(1)(va) of the Act for delayed payment of employees' contribution to provident fund, and whether the PCIT was justified in setting aside the assessment order on this ground. (d) Whether the AO had indeed made proper verification on the above issues, and if the AO had taken a legally permissible view, whether the revisionary powers under section 263 could be invoked. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Disallowance under Section 14A of the Act Legal framework and precedents: Section 14A of the Act mandates disallowance of expenditure incurred in relation to income that does not form part of total income, typically exempt income. Rule 8D provides the methodology to compute such disallowance. The Supreme Court and High Courts have held that disallowance under section 14A is warranted where exempt income is earned from investments made out of interest-bearing funds. Court's interpretation and reasoning: The PCIT contended that the AO failed to verify disallowance under section 14A despite the assessee earning exempt income of Rs. 1,44,42,319/- from an AOP/BOI and holding tax-free investments. The PCIT computed disallowance at 1% of average investment balances. The Tribunal examined the nature of investments, particularly the investment in "Kalyan Raj Desai JV" and equity shares of "Nature Delight Dairy and Dairy Products P. Ltd." (NDDDPPL). It was found that the amount shown as investment in Kalyan Raj Desai JV was actually the net profit share from the joint venture and not an investment made out of interest-bearing funds. Thus, no disallowance under section 14A was warranted on this account. Regarding equity shares of NDDDPPL, the Tribunal noted that no dividend income was earned by the assessee from these shares during the year. The Tribunal relied on the Delhi High Court decision which held that disallowance under section 14A should not exceed the exempt income earned. Since no exempt income arose from these shares, no disallowance was called for. Key evidence and findings: The assessee submitted documentary evidence showing that the amount credited as investment in the joint venture was in fact profit share, and no fresh investment was made. No dividend income was earned from equity shares. The Tribunal found these submissions credible and supported by the record. Application of law to facts: Since no interest-bearing funds were invested in the joint venture and no exempt dividend income was earned from equity shares, the AO's decision not to disallow any expenditure under section 14A was a legally permissible view. Treatment of competing arguments: The PCIT argued that disallowance was mandatory due to exempt income and investments. The Tribunal rejected this, emphasizing the factual matrix that no relevant investments existed and no exempt dividend income was earned. Conclusion: The AO's order was not erroneous or prejudicial to revenue on this issue. Even if remanded, no disallowance would arise, thus no prejudice to revenue. Issue 2: Disallowance under Section 36(1)(va) of the Act for delayed payment of employees' contribution to Provident Fund Legal framework and precedents: Section 36(1)(va) mandates disallowance of employer's expenses where employees' contribution to provident fund is not deposited within the prescribed time. The Supreme Court in Checkmate Services Pvt. Ltd. vs. CIT clarified the applicability of this provision. However, prior to this judgment, various High Courts had held that if the employees' contribution was deposited before the due date for filing the return under section 139(1), no disallowance was warranted. Court's interpretation and reasoning: The PCIT contended that the AO failed to disallow Rs. 4,71,825/- relating to delayed payment of employees' contribution. The Tribunal noted that the assessment order was passed on 19/03/2022, prior to the Supreme Court's judgment in Checkmate Services (pronounced on 12/10/2022). At the time of assessment, the AO followed the then-prevailing judicial view favoring the assessee. The Tribunal relied on the jurisdictional High Court's decision in CIT (Central) vs. Ghatge Patil Transports Ltd., which held that no disallowance under section 36(1)(va) is called for if the contribution is deposited before the due date of filing the return. The Tribunal also referred to its own decision in M/s. Karan Sanran Associates, which upheld this view in revisionary proceedings under section 263. Key evidence and findings: The assessee deposited the employees' contribution before the due date of filing the return. The AO took a legally permissible view based on binding judicial precedents at the time of assessment. Application of law to facts: The AO's decision not to disallow under section 36(1)(va) was consistent with the law as it stood at the time of assessment. The subsequent Supreme Court ruling could not be retrospectively applied to hold the order erroneous. Treatment of competing arguments: The PCIT relied on the Supreme Court judgment in Checkmate Services for disallowance. The Tribunal rejected this reliance for revisionary proceedings under section 263, as the assessment predated the judgment and the AO followed a permissible judicial view. Conclusion: The AO's order was neither erroneous nor prejudicial to revenue on this issue. Revision under section 263 was not justified. Issue 3: Whether the AO had made proper verification and inquiry on the above issues The PCIT alleged that the AO had not verified the issues of section 14A disallowance and delayed PF payment. The assessee contended that the AO had called for and examined relevant documents and had taken a legally permissible view. The Tribunal found that the AO had indeed sought and examined relevant information, and the assessment order reflected application of mind on these issues. The AO's conclusions were based on the facts and prevailing judicial precedents. Therefore, the AO's order was not passed without verification or inquiry, and there was no failure warranting revision under section 263. 3. SIGNIFICANT HOLDINGS "There can be no doubt that the provision [section 263] cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. ... Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law." (Supreme Court precedent) "Since the assessee had not made any investment in Kalyan Raj Desai JV and has not earned dividend income from investment in equity shares of NDDADPPL, no disallowance u/s. 14A is called for." "The AO while passing the assessment order was bound by the judgment of Hon'ble Jurisdictional High Court in the case of Ghatge Patil Transports Ltd. (supra). ... since the assessee has admittedly deposited the employees' contribution to PF and ESI before the due date of filing of return, the PCIT was not justified in invoking the provisions of section 263 of the Act by relying on the decision of the Hon'ble Supreme Court in the case of Checkmate Services Pvt. Ltd. vs. CIT (supra), which came subsequent to the order passed by the Assessing Officer." Final determinations: (a) The assessment order dated 19/03/2022 passed under section 143(3) was not erroneous or prejudicial to the interests of revenue in respect of the two issues raised by PCIT. (b) The AO's decision not to disallow under section 14A was justified on facts and law. (c) The AO's decision not to disallow under section 36(1)(va) was a legally permissible view based on judicial precedents prevailing at the time of assessment. (d) The PCIT erred in setting aside the assessment order under section 263, and the revisionary proceedings were quashed.
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