2023 (10) TMI 389 - AT - Income Tax

Tribunal Overturns Pr. CIT's Order Under Section 263, Citing Misinterpretation of Facts and Law

The Tribunal quashed the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, concluding that the ... Revision u/s 263 - Disallowance u/s 14A r.w.r 8D - as per CIT AO has made disallowance u/s 14A r.w.r. 8D only on one of the limbs provided in Rule 8D and failed to explore the other conditions enumerated in this Rule - HELD THAT:- A perusal of the financial statement would indicate that the assessee was having more interest-free funds than the investment. The interest-free funds are to the tune of Rs. 381 crores, whereas the investment which yielded tax-free income in the shape of dividend is only Rs. 133 crores. Therefore, there is no error in the order of the ld. Assessing Officer by not making any disallowance under Rule 8D(i). Also we are of the view that as per clause (c) of Section 263, if an item is under dispute before the ld. 1st Appellate Authority, then, proceeding under section 263 will not be taken up on that item. In the present case, AO has made the disallowance u/s 14A r.w.r. 8D that disallowance is subject matter of appeal before the ld. 1st Appellate Authority at the instance of assessee. In case, the ld. 1st Appellate Authority forms an opinion that ld. AO has committed an error by not making complete disallowance on all the limbs of Rule 8D, then, he could have issued a notice for enhancement of income by exercising his appellate power. Therefore, this issue ought to have not been taken up in 263 proceeding. The order of ld. Pr. CIT is not sustainable on the first-fold of reasoning given by him. As there is a domestic transaction between inter-related parties AO was required to make a reference to the ld. TPO mandatorily which he failed - We are of the view that Coordinate Benches have taken a view that since clause (i) of section 92BA stands omitted from the provision and omission of such is to be construed as if it never existed in the Statute Book and if it never existed in the Statute Book, then, no Arm’s Length Price is required to be determined for a transaction with specified persons in section 40A(2)(b) of a domestic transaction. If no Arm’s Length Price is required to be determined, then, no reference was required to be made. Therefore, on this fold of contention also, the order of the ld. Pr. Commissioner is not sustainable. Considering the above facts and circumstances in their setting as a whole, we allow this appeal and quash the order of ld. Pr. Commissioner passed Assessee appeal allowed. Issues Involved:1. Legitimacy of the order passed under Section 263 of the Income Tax Act.2. Disallowance of expenditure attributable to earning tax-free income under Section 14A read with Rule 8D.3. Requirement of reference to the Transfer Pricing Officer (TPO) for domestic transactions.Summary:Issue 1: Legitimacy of the order passed under Section 263 of the Income Tax Act.The Tribunal examined whether the Principal Commissioner of Income Tax (Pr. CIT) was justified in invoking Section 263. The Pr. CIT believed the assessment order was erroneous and prejudicial to the interests of the Revenue, leading to a show-cause notice. The Tribunal noted that Section 263 allows the Commissioner to revise an order if it is erroneous and prejudicial to the Revenue, but only if both conditions are met. The Tribunal emphasized that if the Assessing Officer (AO) has applied his mind and made inquiries, the Commissioner cannot substitute his judgment merely because he disagrees with the AO's conclusions.Issue 2: Disallowance of expenditure attributable to earning tax-free income under Section 14A read with Rule 8D.The Pr. CIT argued that the AO did not fully explore all conditions under Rule 8D for disallowance. However, the Tribunal found that the AO had considered the investment and disallowed administrative costs under Rule 8D(2). The Tribunal observed that the assessee had more interest-free funds than the investments yielding tax-free income, thus no interest expenditure disallowance was necessary. Additionally, since the disallowance under Section 14A was already under appeal before the first Appellate Authority, the Pr. CIT should not have invoked Section 263 on this issue.Issue 3: Requirement of reference to the Transfer Pricing Officer (TPO) for domestic transactions.The Pr. CIT contended that the AO should have referred the case to the TPO for domestic transactions. The Tribunal referred to CBDT Circular No. 3/2016, which mandates TPO reference only if the case is selected for scrutiny based on transfer pricing risk parameters or specific conditions are met. The Tribunal found that the case was not selected based on transfer pricing risk parameters, and none of the conditions in the Circular were applicable. The Tribunal also noted that Section 92BA(i), which required Arm's Length Price determination for transactions with specified persons, was omitted by the Finance Act, 2017, making the reference to the TPO unnecessary.Conclusion:The Tribunal concluded that the Pr. CIT misread the facts and law, and the order under Section 263 was not sustainable. The appeal was allowed, and the Pr. CIT's order was quashed.Result:The appeal of the assessee is allowed.Order pronounced in the open Court on August 25, 2023.