ITAT allows appeal against revision under section 263 for non-disallowance under section 14A without exempted income

The ITAT Ahmedabad allowed the assessee's appeal against revision u/s 263. The CIT sought to revise the assessment for non-disallowance u/s 14A when the assessee had investments in shares and securities capable of generating exempted income u/s 10(34), despite no actual exempted income being earned. The tribunal held that both conditions for revision u/s 263 must be satisfied - the order must be erroneous and prejudicial to revenue interests. Since no exempted income was earned, no disallowance u/s 14A r.w. Rule 8D was required, following established SC precedent. The amendment requiring disallowance even without exempted income was not applicable for the assessment year in question.

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Issues Involved:
1. Whether the Principal Commissioner of Income Tax (PCIT) erred in holding the assessment framed by the Assessing Officer (AO) as erroneous and prejudicial to the interest of revenue under section 263 of the Income Tax Act, 1961.
2. Applicability of Section 14A read with Rule 8D of the Income Tax Rules in the absence of exempt income.

Summary:

Issue 1: Assessment Order under Section 263
The appeal was filed by the Assessee against the order of the Learned Principal Commissioner of Income Tax (PCIT), Ahmedabad-1, which set aside the assessment framed by the AO under section 143(3) of the Income Tax Act, 1961, on the grounds that it was erroneous and prejudicial to the interest of revenue. The PCIT observed that the assessee had made significant investments in shares and securities that could generate exempted income under section 10(34) of the Act. However, no disallowance was made under section 14A read with Rule 8D of the Income Tax Rules, despite the CBDT Circular No. 05/2014 mandating such disallowance even if no exempt income was earned. The PCIT directed the AO to reassess after necessary inquiries.

Issue 2: Applicability of Section 14A read with Rule 8D
The Assessee contended that since no exempted income was received during the year, the provisions of section 14A read with Rule 8D were not applicable. The Assessee relied on the judgment of the Hon'ble Jurisdictional High Court in CIT vs. Corrtech Energy Pvt Ltd., which was upheld by the Hon'ble Supreme Court in CIT vs. Chettinad Logistics Pvt. Ltd. The Revenue, however, supported the PCIT's action, citing the judgment of the Hon'ble Bombay High Court in Vedanta Ltd vs. CIT.

Tribunal's Findings:
The Tribunal noted that for revising an assessment order under section 263, the twin conditions of the order being erroneous and prejudicial to the interest of revenue must be satisfied. Given that no exempt income was earned by the assessee, the Tribunal held that no disallowance under section 14A read with Rule 8D could be made. The Tribunal relied on the Jurisdictional High Court's decision in Corrtech Energy Pvt. Ltd., which was affirmed by the Supreme Court in Chettinad Logistics Pvt. Ltd., stating that section 14A could not be invoked in the absence of exempt income.

The Tribunal further addressed the amendment to section 14A by the Finance Act, 2022, clarifying that the disallowance needs to be made even if no exempt income is earned. However, it was held that this amendment is applicable from the assessment year 2022-23 onwards and not retrospectively. The Tribunal also distinguished the facts of the present case from the cited judgment of Vedanta Ltd.

Conclusion:
The Tribunal quashed the revisional order passed by the PCIT under section 263 of the Act, holding that there was no error causing any prejudice to the interest of revenue in the assessment framed under section 143(3). The appeal filed by the assessee was allowed.

Order Pronounced:
The order was pronounced in the Court on 20/10/2023 at Ahmedabad.

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