PCIT's revision order under section 263 set aside for section 14A disallowance on dividend exempt income

ITAT Chennai set aside PCIT's revision order under section 263 regarding disallowance under section 14A. The tribunal held that AO had properly examined the issue during original assessment proceedings and made no disallowance as assessee received no dividend exempt income. PCIT's reliance on Explanation to section 14A inserted by Finance Act 2022 was misplaced since assessment year 2017-18 predated the amendment. Following Delhi HC precedent in Era Infrastructure case, tribunal ruled assessment must be made per law existing at relevant time. PCIT's exercise of revisional jurisdiction was unjustified and assessee's grounds were allowed.

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Issues Involved:
1. Justification of the Principal Commissioner of Income Tax (PCIT) in directing the Assessing Officer to disallow under section 14A of the Income Tax Act, 1961.
2. Applicability of the amendment to section 14A of the Act by Finance Act, 2022.

Issue-Wise Detailed Analysis:

1. Justification of the Principal Commissioner of Income Tax (PCIT) in directing the Assessing Officer to disallow under section 14A of the Income Tax Act, 1961:

The appellant challenged the order dated 30.03.2024 passed by the Principal Commissioner of Income Tax (PCIT), Madurai, under section 263 of the Income Tax Act, 1961, for the assessment year 2017-18. The primary issue was whether the PCIT was justified in directing the Assessing Officer to work out disallowance under section 14A of the Act, contrary to the decision of the Hon'ble High Court of Delhi in PCIT v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi).

The PCIT invoked jurisdiction under section 263, holding that the assessment order dated 24.01.2022 was erroneous and prejudicial to the interest of Revenue. The PCIT directed the Assessing Officer to pass a fresh assessment order after making necessary enquiries and verification as per law.

The appellant's representative argued that the Assessing Officer had completed the original assessment in detail, issuing a notice under section 142(1) of the Act and requesting details of investments and exempt income. The appellant responded that no exempt income was earned during the year under consideration. The representative contended that the PCIT, without considering these submissions and the amendment to section 14A by Finance Act, 2022, erroneously held the assessment order as prejudicial to the Revenue.

The respondent's representative argued that the Assessing Officer did not apply his mind while completing the original assessment, supporting the PCIT's decision. He argued that the amendment to section 14A by Finance Act, 2022, has retrospective effect, requiring disallowance even if no exempt income was earned.

Upon hearing both parties, the Tribunal noted that the Assessing Officer had issued a notice under section 142(1) and received a response indicating no exempt income earned during the year. The Tribunal found that the Assessing Officer examined the issue in detail during the original assessment proceedings and made no disallowance under section 14A, as the relevant statutory provision did not require it at that time.

2. Applicability of the amendment to section 14A of the Act by Finance Act, 2022:

The Tribunal considered the insertion of the Explanation to section 14A by Finance Act, 2022. The Hon'ble High Court of Delhi in PCIT v. Era Infrastructure (India) Ltd. held that the amendment is applicable from assessment year 2022-23 onwards and not to previous years. The Tribunal reproduced relevant parts of the judgment, emphasizing that the law applicable is the one in existence at the relevant time.

The Tribunal also referred to the Supreme Court's judgment in Sedco Forex International Drill. Inc. v. CIT, which held that a retrospective provision in a tax act cannot be presumed to be retrospective if it alters the law as it earlier stood. The Tribunal concluded that the amendment to section 14A by Finance Act, 2022, is prospective and does not apply to the assessment year 2017-18.

Conclusion:

The Tribunal held that the PCIT's exercise of jurisdiction under section 263 was not justified. The original assessment order was not erroneous or prejudicial to the interest of Revenue, as the amendment to section 14A by Finance Act, 2022, is not applicable to the assessment year 2017-18. The appeal filed by the assessee was allowed, and the revision order passed under section 263 was set aside. The order was pronounced on 14th August, 2024, at Chennai.

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