ITAT Chennai rules against PCIT's Section 263 revision, citing ongoing appeal on Section 14A disallowance

The ITAT Chennai held that the PCIT's revision of the assessment order under Section 263 was not justified as the issue regarding disallowance of expenditure under Section 14A was already subject to appeal proceedings before the ITAT. The ITAT emphasized that once an issue is considered by the appellate authority, the PCIT cannot exercise parallel jurisdiction on the same issue. The decision was based on statutory provisions and relevant case law, ultimately leading to the quashing of the PCIT's order and the restoration of the AO's assessment order.

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Issues:
1. Revision of assessment order under Section 263 of the Income Tax Act, 1961.
2. Jurisdiction of Principal Commissioner of Income Tax (PCIT) to revise assessment orders subject to appeal.

Issue 1: Revision of assessment order under Section 263:

The appeal filed by the assessee was against the order of the Principal Commissioner of Income Tax - 1, Coimbatore passed under Section 263 of the Income Tax Act, 1961, for the assessment year 2013-14. The PCIT invoked revisional jurisdiction based on the disallowance of expenditure incurred in relation to exempt income under Section 14A of the Act. The PCIT contended that the Assessment Officer (AO) had not considered the disallowance of interest expenditure under Rule 8D(2)(ii) despite the assessee incurring substantial financial costs. The PCIT found the assessment order erroneous and prejudicial to the interest of the Revenue. The PCIT set aside the assessment order and directed the AO to redo the assessment. The assessee challenged this order before the ITAT.

Issue 2: Jurisdiction of PCIT to revise assessment orders subject to appeal:

The assessee argued that the PCIT erred in invoking revisional jurisdiction under Section 263 as the AO's order was not erroneous or prejudicial to the Revenue's interest. The assessee contended that the issue of disallowance of expenditure under Section 14A was already considered during assessment proceedings and appealed before the CIT(A). The assessee further highlighted that the issue was pending before the ITAT. The assessee relied on Clause (c) to Explanation 1 of Section 263(1) to assert that the PCIT lacked the power to revise an assessment order on issues subject to appeal. The PCIT's exercise of powers under Section 263 was challenged based on the principle that once an issue is considered by the appellate authority, the assessment order merges with the appellate order, limiting the PCIT's jurisdiction. The ITAT, after considering the arguments from both sides and relevant case law, concluded that the PCIT's exercise of powers under Section 263 on the issue of disallowance of expenditure under Section 14A was contrary to the statutory provisions. The ITAT quashed the PCIT's order and reinstated the assessment order passed by the AO under Section 143(3) of the Act.

In summary, the ITAT Chennai held that the PCIT's revision of the assessment order under Section 263 was not justified as the issue regarding disallowance of expenditure under Section 14A was already subject to appeal proceedings before the ITAT. The ITAT emphasized that once an issue is considered by the appellate authority, the PCIT cannot exercise parallel jurisdiction on the same issue. The decision was based on statutory provisions and relevant case law, ultimately leading to the quashing of the PCIT's order and the restoration of the AO's assessment order.

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