2024 (11) TMI 1466 - AT - Income Tax

PCIT's revision order under section 263 set aside for violating natural justice principles and substituting assessment officer's plausible view

Gujarat Power Corporation Ltd. Versus Principal Commissioner of Income Tax, Ahmedabad.

ITAT Ahmedabad set aside the PCIT's revision order u/s 263 regarding disallowances u/s 14A and interest on grants. The tribunal held that PCIT violated ... Revision u/s 263 - Disallowance u/s 14A - HELD THAT:- We observe that while passing the 263 order, the Ld. PCIT has failed to take into consideration any of the arguments / written submissions filed by the assessee during the course of 263 proceedings. We observe that the PCIT, has not dealt with or even discussed any of the submissions filed by the assessee during the 263 proceedings. Therefore, clearly, the order passed by PCIT is against the principle of natural justice wherein none of the arguments / submissions filed by the assessee were even bothered to be considered by PCIT while framing the 263order. For this reason also, we are of the view that the 263 order is liable to be set-aside. Thirdly, it is a well settled principle of law that once AO has taken a legally plausible view after due application of mind, then 263 proceedings cannot be resorted to only with a view to substitute the view of PCIT as against the view to taken by the AO. We are of the view that the 263 order is liable to be set-aside and no further disallowance is called for u/s 14A of the Act r.w.r. 8D of the Income Tax Rules. We hold that the order passed by PCIT is clearly against the principles of natural justice wherein none of the submissions filed by the assessee has been taken into consideration / have not been dealt with and therefore, in our view, the assessment order is not erroneous and prejudicial in the interest of the Revenue and the 263 order is liable to be set-aside on this issue. Disallowance u/s 14A by calculating Book Profit under Section 115JB - Since we have already held that no disallowance is called for under Section 14A r.w.r. 8D, Ground No. 3 of the assessee’s appeal, being consequential, is hereby allowed. Disallowance of interest on grant - PCIT has failed to consider that the assessee has correctly debited and claimed interest expense on unspend amount of grant / financial assistance which is paid as per directions of the Government of India / G.R. of Government of Gujarat against interest income earned and offered to tax on such amount kept with Gujarat State Financial Services. PCIT in the 263 order has failed to taken into consideration / dealt with any of the arguments taken / submissions filed by the assessee during the course of 263 proceedings. Therefore, we are of the view that the 263 order and has been passed against the principles of natural justice, wherein none of the arguments / submissions of the assessee were discussed or dealt with in the 263 order. Secondly, we observe that the 263 order, there is not discussion whatsoever as to why the assessment order is erroneous while allowing the claim of expenditure on this issue. For the aforesaid reasons, we are of the view that order passed u/s 263 of the Act on this issue is liable to be set-aside. Assessee appeal allowed. The core legal questions considered in this judgment revolve around the correctness and legality of the revision order passed under Section 263 of the Income Tax Act, specifically concerning: (1) the disallowance under Section 14A read with Rule 8D(2) of the Income Tax Rules related to exempt income; (2) the consequential disallowance under Section 14A while computing book profit under Section 115JB for Minimum Alternate Tax (MAT); and (3) the disallowance of interest expenditure claimed on government grants. The Tribunal examined whether the Principal Commissioner of Income Tax (PCIT) was justified in revising the assessment order on the grounds that it was erroneous and prejudicial to the revenue's interest, and whether the PCIT complied with principles of natural justice and legal standards in exercising revisionary powers.Issue 1: Disallowance under Section 14A read with Rule 8D(2) of Rs. 1,10,47,762/-The legal framework involves Section 14A of the Income Tax Act, which deals with disallowance of expenditure incurred in relation to income that does not form part of total income (exempt income). Rule 8D provides the methodology for computing such disallowance. The AO had initially disallowed Rs. 86,88,523 under Section 14A after issuing specific notices and receiving detailed submissions from the assessee. The PCIT, however, by way of revision under Section 263, increased the disallowance to Rs. 1,98,36,285, contending that the AO failed to consider investments in subsidiaries, joint ventures, and associated concerns, leading to under-assessment.The Tribunal scrutinized the PCIT's order and found that the AO had indeed conducted detailed and specific inquiries, issuing multiple notices and considering the assessee's written submissions before making a reasoned disallowance. The PCIT's order failed to point out any specific error in the AO's assessment or demonstrate that the AO's view was not legally sustainable. Moreover, the PCIT did not address or consider the detailed submissions filed by the assessee during the revision proceedings, violating the principles of natural justice.The Tribunal relied on authoritative precedents emphasizing that Section 263 powers cannot be exercised merely to substitute the Commissioner's opinion for that of the AO when the AO has taken a plausible view after due application of mind. It cited rulings underscoring that an order is 'erroneous and prejudicial' only if it is not in accordance with law and that mere difference of opinion does not warrant revision. The Tribunal concluded that the PCIT's revision order was unsustainable, as it was based on a change of opinion without due consideration of the assessee's submissions and without establishing any legal or factual error in the AO's order.Issue 2: Disallowance under Section 14A while computing Book Profit under Section 115JBThis issue was consequential and dependent on the outcome of Issue 1. Since the Tribunal held that no additional disallowance under Section 14A was warranted, the corresponding disallowance while computing book profit under Section 115JB was also set aside. The Tribunal allowed the ground of appeal relating to this issue accordingly.Issue 3: Disallowance of Interest on Grant of Rs. 4,18,06,812/-The assessee claimed interest expenditure on government grants as revenue expenditure. The grants were kept in deposits with the Gujarat State Financial Services until utilization, and interest was paid on these unspent amounts to government entities, including the Solar Energy Corporation of India (SECI), in accordance with government directions. The assessee also offered the interest income earned on such deposits to tax.The PCIT, in the revision order, disallowed this interest expenditure without specifying any error committed by the AO in allowing the claim, nor did the PCIT address the detailed submissions made by the assessee explaining the nature and legitimacy of the expenditure. The Tribunal observed that the PCIT's order failed to deal with the assessee's arguments and did not explain why the assessment order was erroneous or prejudicial in this regard. This omission amounted to a breach of natural justice.The Tribunal held that the revision order was not sustainable as it lacked any reasoned discussion or legal basis for disallowing the interest expenditure. It emphasized that the expenditure was incurred in compliance with government guidelines and was correctly claimed. Therefore, the disallowance was set aside, and the ground of appeal was allowed.Significant Holdings and Core Principles Established:'Section 263 of the Act confers power to examine an assessment order so as to ascertain whether it is erroneous and prejudicial to the interest of the revenue but does not confer jurisdiction upon the CIT to substitute his opinion for the opinion of the Assessing Officer.''It is not each and every error in an assessment that invites exercise of powers under Section 263 of the Act, but only orders that are erroneous and prejudicial to the interest of the revenue.''An order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately.''Once the AO has taken a legally plausible view after due application of mind, then 263 proceedings cannot be resorted to only with a view to substitute the view of PCIT as against the view taken by the AO.'The Tribunal underscored the fundamental principle that revisionary powers under Section 263 are not to be exercised as a routine or to conduct 'fishing and roving enquiries' aimed at substituting the Commissioner's opinion for that of the AO. It emphasized adherence to the principles of natural justice, requiring that the assessee's submissions be considered and addressed in any revisionary proceedings.In conclusion, the Tribunal set aside the revision order passed by the PCIT on all grounds raised by the assessee, holding that the assessment order was neither erroneous nor prejudicial to the interest of the revenue. The disallowances under Section 14A and the disallowance of interest expenditure on government grants were quashed, and the appeal was allowed in full.