2025 (7) TMI 1061 - HC - Income Tax

Revision u/s 263 - Disallowance u/s 14A - as per CIT order passed by the Assessing Officer (AO) u/s 153A was erroneous and prejudicial to the interest of the Revenue - HELD THAT - AO had accepted the Assessee s contention that there would be no disallowance u/s 14A of the Act for the reason that the Assessee did not have any exempt income during the AY 2018-19 in as much as the AO did not make any disallowance under Section 14A read with Rule 8D. It is the Assessee s case that no expenditure could be disallowed u/s 14A as the Assessee did not have any exempt income during the relevant AY 2018-19 and therefore no part of the expenditure could be attributed to the exempt income. It is also the Assessee s contention that all investments were made from surplus funds and therefore in any event there would be no occasion of disallowing any expenditure in respect of any exempt income that such an investment could possibly have yielded. Notwithstanding the said submission the learned PCIT found that the disallowance under Section 14A of the Act was required to be made. ITAT noted that there were decisions of various High Courts supporting the view as expressed by the Assessee. It also noted that this Court in the case of IL FS Energy Development Company Limited 2017 (8) TMI 732 - DELHI HIGH COURT and M/s Era Infrastructure (India) Limited 2022 (7) TMI 1093 - DELHI HIGH COURT has also accepted the view and those decisions were ignored. Assessment order cannot be held as erroneous and prejudicial to the interest of the Revenue. In any event the view in this regard would be a plausible view and does not warrant any interference under Section 263 of the Act. No substantial question of law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

• Whether a disallowance under Section 14A of the Income Tax Act, 1961 (the Act) read with Rule 8D of the Income Tax Rules, 1962 is warranted when the assessee has not earned any exempt income during the relevant Assessment Year (AY) 2018-19.
• Whether the order passed by the Assessing Officer (AO) under Section 153A of the Act for AY 2018-19 was erroneous and prejudicial to the interest of the Revenue, thereby justifying the invocation of Section 263 of the Act by the Principal Commissioner of Income Tax (PCIT).
• The applicability and binding nature of precedents from the jurisdictional High Court regarding disallowance under Section 14A in the absence of exempt income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance under Section 14A of the Act in absence of exempt income

Relevant legal framework and precedents: Section 14A of the Income Tax Act empowers the Assessing Officer to disallow expenditure incurred in relation to income which does not form part of the total income (exempt income). Rule 8D prescribes the methodology for computing such disallowance. The principle underlying Section 14A is that expenses incurred to earn exempt income should not be allowed as a deduction against taxable income.

Several High Court decisions, including those of the jurisdictional High Court, have clarified the scope of Section 14A. In particular, the jurisdictional High Court decisions in Pr. Commissioner of Income Tax-04 v. IL & FS Energy Development Company Limited and Pr. Commissioner of Income Tax (Central)-2 v. M/s Era Infrastructure (India) Limited held that no disallowance under Section 14A is warranted if the assessee has not earned any exempt income during the relevant assessment year.

Court's interpretation and reasoning: The ITAT carefully examined the balance sheet and schedules of the assessee, which showed no receipt of dividend or any exempt income during AY 2018-19. The AO had accepted the assessee's contention that no disallowance under Section 14A was required since no exempt income was earned. The PCIT, however, disagreed and invoked Section 263 to hold the AO's order as erroneous and prejudicial to the Revenue's interest, directing a disallowance under Section 14A.

The ITAT noted that the PCIT relied on various non-jurisdictional High Court decisions to justify disallowance even in the absence of exempt income. The ITAT held that the binding decisions of the jurisdictional High Court in IL & FS Energy and Era Infrastructure cases were ignored by the PCIT. These decisions clearly established that disallowance under Section 14A read with Rule 8D cannot be made if no exempt income is earned.

Key evidence and findings: The balance sheet and income schedules showed no exempt income. The assessee's response to the AO's questionnaire under Section 142 also confirmed no claims under Chapter VI or Section 10 of the Act, which relate to exempt income deductions. The AO's order accepted these facts and did not make any disallowance under Section 14A.

Application of law to facts: Since the assessee did not earn any exempt income in AY 2018-19, the foundational condition for invoking Section 14A disallowance was absent. The AO's acceptance of this fact was consistent with the binding jurisdictional precedent. The PCIT's contrary view was based on non-binding decisions and was therefore unsustainable.

Treatment of competing arguments: The Revenue argued for disallowance under Section 14A despite absence of exempt income, relying on non-jurisdictional High Court rulings. The assessee and ITAT relied on binding jurisdictional High Court decisions supporting the view that disallowance is not warranted without exempt income. The ITAT gave primacy to binding precedent and rejected the Revenue's reliance on non-jurisdictional decisions.

Conclusion: The ITAT concluded that no disallowance under Section 14A should be made where the assessee has not earned exempt income. The AO's order was not erroneous or prejudicial to the Revenue's interest on this ground.

Issue 2: Validity of PCIT's invocation of Section 263 of the Act

Relevant legal framework and precedents: Section 263 permits the PCIT to revise an order if it is erroneous and prejudicial to the interest of the Revenue. However, the power is to be exercised sparingly and only where the order is clearly erroneous and prejudicial.

Court's interpretation and reasoning: The ITAT held that since the AO's order was consistent with the binding jurisdictional High Court decisions and the facts on record, it could not be held as erroneous or prejudicial. The PCIT's order invoking Section 263 was therefore unjustified. The ITAT emphasized that a plausible view taken by the AO, supported by binding precedents, does not warrant interference under Section 263.

Key evidence and findings: The AO's acceptance of no exempt income and consequent non-application of Section 14A disallowance was a plausible and legally sound view. The PCIT's contrary order was based on ignoring binding precedent.

Application of law to facts: The AO's order was neither erroneous nor prejudicial to the Revenue's interest. The twin conditions for invoking Section 263 were not satisfied.

Treatment of competing arguments: The Revenue argued the AO's order was erroneous and prejudicial, justifying revision under Section 263. The ITAT rejected this, holding that the AO's order was a plausible view backed by binding precedent and facts.

Conclusion: The PCIT's order under Section 263 was quashed as unjustified.

3. SIGNIFICANT HOLDINGS

The Court preserved the following crucial legal reasoning verbatim from the ITAT's order:

"...since the assessee had not earned any exempt income there cannot be any disallowance u/s 14A and we hold that the assessment orders passed by the Assessing Officer u/s 153A for the assessment years 2018-19 and 2019-20 are not erroneous and prejudicial to the interest of the Revenue as the twin conditions are not satisfied for invoking the provision of section 263 of the Act. In the circumstances, we quash the orders passed by the Ld. PCIT u/s 263 of the Act for the assessment years 2018-19 and 2019-20."

Core principles established:

• Disallowance under Section 14A read with Rule 8D of the Income Tax Rules cannot be made if the assessee has not earned any exempt income during the relevant assessment year.
• The power under Section 263 to revise an order can only be exercised if the order is both erroneous and prejudicial to the interest of the Revenue; a plausible view supported by binding precedent does not warrant interference.
• Binding jurisdictional High Court decisions take precedence over non-jurisdictional High Court decisions when determining the correctness of tax assessments and related disallowances.

Final determinations on each issue:

• The AO's order for AY 2018-19, which did not make any disallowance under Section 14A due to absence of exempt income, was upheld as correct and not erroneous or prejudicial.
• The PCIT's order under Section 263 revising the AO's order was quashed for lack of jurisdiction and absence of error.
• No substantial question of law arose for consideration, and the appeal filed by the Revenue was dismissed.