2021 (4) TMI 206 - AT - Income Tax

Tribunal rules in favor of Assessee on time limitation and disallowance under section 14A

The Tribunal allowed the Assessee's appeal, finding that the order passed by the Principal Commissioner of Income Tax was barred by limitation and that ... Revision under section 263 - limitation for exercise of revisional power - reopened assessment under section 147 - disallowance under section 14A - computation under Rule 8D - disallowance not to exceed exempt incomeRevision under section 263 - limitation for exercise of revisional power - reopened assessment under section 147 - Validity of the Principal Commissioner of Income Tax's order under section 263 insofar as it seeks to revise the assessment passed on 30.01.2015. - HELD THAT: - The Tribunal examined whether the order under section 263 dated 07.12.2018 was within the two year period prescribed by section 263(2) having regard to the assessment order dated 30.01.2015 in which section 14A was considered and disallowance made. Although the assessment proceedings were later reopened under section 147 on a separate issue (deduction under section 80IA), the reassessment did not revisit the section 14A disallowance. The revisional power under section 263 relates back to the earlier assessment order of 30.01.2015; therefore the two year limitation from the end of the relevant financial year for exercising revision applied. The order under section 263 was passed on 07.12.2018, which is beyond the statutory two year period for revisional action against the 30.01.2015 assessment, and is accordingly time barred. [Paras 7]The revisional order under section 263 is barred by limitation and is invalid.Disallowance under section 14A - computation under Rule 8D - disallowance not to exceed exempt income - Whether, on merits, the disallowance under section 14A made by the Assessing Officer was erroneous and prejudicial to the interests of revenue. - HELD THAT: - On the merits the Tribunal noted that the AO had applied Rule 8D and made a disallowance of Rs. 2,35,039/-. The assessee contended that exempt income was Rs. 2,02,337/- and that the disallowance under section 14A should not exceed the exempt income. The Principal CIT directed a higher disallowance, but the Tribunal observed that it is settled that the section 14A disallowance cannot exceed the exempt income and that the AO's order of 30.01.2015 was therefore not shown to be erroneous. Having found the AO's disallowance not to be prejudicial to revenue on this basis, the Tribunal concluded that the revisional exercise was also unsustainable on merits. [Paras 8]The Assessing Officer's disallowance under section 14A was not erroneous on merits; the assessee succeeds on merit.Final Conclusion: Appeal allowed. The order passed by the Principal Commissioner of Income Tax under section 263 is held to be time barred and, on merits, the Assessing Officer's disallowance under section 14A is sustained; the revisional direction is quashed. Issues:1. Validity of the order passed under section 263 of the Income Tax Act, 1961.2. Correctness of disallowance under section 14A and Rule 8D.3. Compliance with the limitation period for passing the order under section 263.4. Maximum disallowance under section 14A not exceeding exempt income.Issue 1: Validity of the order passed under section 263:The appeal was filed against the order of the Learned Principal Commissioner of Income Tax under section 263 for the A.Y. 2012-13. The Assessee contended that the assessment order passed under section 147 r.w.s. 143(3) was not erroneous or prejudicial to the revenue's interest. The Ld. PCIT held that the disallowance under section 14A was incorrectly computed, resulting in an underassessment of income. The Ld. PCIT set aside the assessment order, directing a de-novo assessment. The Assessee argued that the order was beyond the two-year limitation period from the end of the relevant assessment year, citing relevant case laws. The Tribunal held that the order passed by the Ld. PCIT was indeed barred by limitation, and the Assessee succeeded on this ground.Issue 2: Correctness of disallowance under section 14A and Rule 8D:The Assessing Officer made disallowances under section 14A of the Act, invoking Rule 8D, which were challenged by the Assessee. The Ld. PCIT found the disallowance under section 14A to be incorrectly computed, leading to an underassessment of income. The Assessee argued that the disallowance should not exceed the exempt income earned. The Tribunal agreed with the Assessee, stating that the disallowance under section 14A should not exceed the exempt income. Consequently, the Tribunal held that the assessment order was not erroneous, and the Assessee succeeded on this issue as well.Issue 3: Compliance with the limitation period for passing the order under section 263:The Tribunal noted that the order passed by the Ld. PCIT under section 263 was beyond the two-year limitation period prescribed by the Act. As the assessment order was passed on 30.01.2015, and the order under section 263 was issued on 07.12.2018, it was held that the order was barred by limitation. Therefore, the Tribunal ruled in favor of the Assessee on this ground.Issue 4: Maximum disallowance under section 14A not exceeding exempt income:The Assessee contended that the disallowance under section 14A should not exceed the exempt income earned, which was &8377; 2,02,337/-. The Ld. PCIT directed the AO to frame a de-novo assessment, disregarding the Assessee's argument. The Tribunal, considering settled law, agreed with the Assessee that the disallowance under section 14A should not exceed the exempt income. Consequently, the Tribunal held that the assessment order was not erroneous, and the Assessee succeeded on this issue.In conclusion, the Tribunal allowed the Assessee's appeal, holding that the order passed by the Ld. PCIT was barred by limitation and that the assessment order was not erroneous regarding the disallowance under section 14A.