2025 (6) TMI 651 - AT - Income Tax

ITAT sets aside PCIT revision order u/s 263, upholds AO's assessment on FDR interest and section 14A disallowance

The ITAT Delhi allowed the assessee's appeal and set aside the PCIT's revision order u/s 263. The tribunal held that the AO was justified in taxing ... Revision u/s 263 - taxability of interest income on FDRs - HELD THAT:- We find merit in the arguments/submissions/contentions of the Ld. AR that the AO is justified in holding that interest income on FDRs has been rightly taxed in the original assessment and no interest income on FDRs remined left out of the taxable income. No merit in the finding of the PCIT in this regard; the taxability of interest income on FDRs. Disallowance u/s 14A - Keeping into past history on the issue of disallowance u/s 14A of the Act in original assessment orders, we also hold that this issue has germinated from the change of the opinion. We find merit in the argument of assessee’s case gets squarely covered by the decision of Clix Finance India Pvt. Ltd. [2024 (3) TMI 157 - DELHI HIGH COURT] hold that the PCIT is not justified in holding the assessment order erroneous and prejudice to the interest of the revenue. We, therefore, set aside the impugned order. Appeal of the assessee is allowed. The core legal questions considered in the appeal are as follows:1. Whether the order passed under section 263 of the Income Tax Act, 1961 (the Act) by the Principal Commissioner of Income Tax (PCIT) holding the original assessment order as erroneous and prejudicial to the interests of revenue was justified.2. Whether the Assessing Officer (AO) failed to tax the interest income of Rs. 16,18,16,439/- earned on Fixed Deposit Receipts (FDRs), thereby rendering the assessment order erroneous and prejudicial to revenue.3. Whether the AO erred in not disallowing expenditure under section 14A of the Act amounting to Rs. 1,39,57,619/-, despite the assessee having suo motu disallowed such expenditure and the AO having accepted the same.Issue-wise Detailed Analysis1. Legality and correctness of the PCIT's order under section 263 of the ActLegal Framework and Precedents: Section 263 empowers the Commissioner to revise an assessment order if it is found to be 'erroneous' and 'prejudicial to the interests of the revenue'. The Supreme Court and various High Courts have held that these twin conditions must be satisfied cumulatively. Explanation 2 to section 263 further clarifies circumstances when an order can be deemed erroneous and prejudicial, including lack of enquiry or verification which should have been made.Precedents relied upon include the Supreme Court's ruling in Malabar Industrial Co. Ltd., which elucidates the meaning of 'prejudicial to the interests of the Revenue' as involving loss of tax lawfully payable, and the Delhi High Court's decisions in Clix Finance India Pvt. Ltd., Sunbeam Auto Ltd., and Anil Kumar Sharma, which emphasize that mere inadequacy of enquiry or difference of opinion by the Commissioner does not justify revision under section 263.Court's Interpretation and Reasoning: The Court noted that the AO had conducted enquiries and applied his mind in the original assessment proceedings, as evidenced by the detailed submissions and responses to questionnaires. The PCIT's order primarily highlighted procedural shortcomings such as non-recording of satisfaction and non-application of Rule 8D(2) in respect of section 14A disallowance, but failed to demonstrate how these amounted to an erroneous order prejudicial to revenue.The Court emphasized that the power under section 263 cannot be exercised merely due to a change of opinion or because the Commissioner disagrees with the AO's conclusions. The Court relied on the principle that 'lack of inquiry' is different from 'inadequate inquiry' and only the former justifies invoking section 263.Application of Law to Facts: The AO had accepted the assessee's suo motu disallowance under section 14A and had not left out any interest income on FDRs from taxation. The PCIT's direction for reassessment was found to be based on a non-application of mind and procedural lapses rather than substantive errors affecting revenue.Treatment of Competing Arguments: The Revenue argued that the AO's order was erroneous due to failure to compute disallowance correctly and non-application of Rule 8D. The assessee contended that the AO had made detailed enquiries, accepted the disallowance, and taxed the interest income fully. The Court sided with the assessee, finding no error or prejudice to revenue warranting revision.Conclusion: The PCIT's order under section 263 was held to be unjustified and set aside.2. Taxability of Interest Income on Fixed Deposit Receipts (FDRs)Legal Framework: Interest income on FDRs is taxable under the Income Tax Act. The AO is required to ensure that all such income is disclosed and taxed accordingly.Court's Reasoning: The AO, upon reassessment under section 147 read with sections 144 and 144B, verified the details and found that the assessee had offered the entire interest income on FDRs for taxation as per 26AS and no amount was left out. The PCIT's finding that there was a shortfall was therefore incorrect.Application of Law to Facts: The AO's detailed examination and acceptance of the assessee's tax return on this issue demonstrated that the income was correctly taxed.Competing Arguments: The PCIT contended that interest income was omitted; the assessee and AO disproved this with documentary evidence and tax credit details.Conclusion: The Court found no merit in the PCIT's direction to reassess the interest income on FDRs and upheld the AO's original findings.3. Disallowance under Section 14A of the ActLegal Framework: Section 14A mandates disallowance of expenditure incurred to earn exempt income. Rule 8D prescribes the method for computing such disallowance. The AO must record satisfaction regarding the correctness of disallowance and apply Rule 8D appropriately.Court's Interpretation and Reasoning: The AO had examined the issue in detail, including during prior assessment years (2016-17 and 2017-18), and accepted the assessee's suo motu disallowance of Rs. 7,90,061/-. The PCIT's order criticized the AO for not recording satisfaction and not applying Rule 8D fully but failed to establish how this omission caused prejudice to revenue.Reliance was placed on the Delhi High Court decision in Clix Finance India Pvt. Ltd., which held that the absence of detailed reasons or recording of satisfaction in the assessment order does not automatically indicate lack of application of mind or erroneous order. The Court also noted that the assessee's investments were made from surpluses and the only exempt income was dividend from mutual funds, with no significant associated expenditure requiring disallowance beyond what was already made.Application of Law to Facts: The AO's inquiry and acceptance of disallowance, coupled with the absence of any evidence of additional expenditure related to exempt income, negated the PCIT's contention of error and prejudice.Competing Arguments: The PCIT argued procedural lapses and incomplete application of Rule 8D; the assessee and AO demonstrated adequate enquiry and acceptance of disallowance.Conclusion: The Court held that the PCIT's order was based on a mere change of opinion and did not meet the twin conditions under section 263. The AO's order was not erroneous or prejudicial to revenue in respect of section 14A disallowance.Significant Holdings'The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue...unless the view taken by the Income Tax Officer is unsustainable in law.''Merely inadequacy of enquiry would not confer the power of revision under Section 263 of the Act on the Commissioner. It is only in cases of 'lack of inquiry' that such a course of action would be open.''If the AO has applied his mind and conducted enquiry, even if the enquiry is inadequate, it does not justify invoking section 263 merely because the Commissioner has a different opinion.''The AO had not found any interest income on FDRs left out of taxable income and had accepted the assessee's suo motu disallowance under section 14A after detailed investigation. The PCIT's order was based on non-application of mind and procedural lapses, which do not satisfy the twin conditions under section 263.''The issue of disallowance under section 14A in the present case has germinated from a change of opinion and is squarely covered by the decision of the Hon'ble Delhi High Court in Clix Finance India Pvt. Ltd.'Final determinations:1. The PCIT's order under section 263 was set aside as the AO's assessment order was neither erroneous nor prejudicial to revenue.2. The interest income on FDRs was correctly taxed in the original assessment and no income remained undisclosed.3. The disallowance under section 14A was properly made and accepted by the AO, and the PCIT failed to establish any error or prejudice to revenue.4. The appeal of the assessee was allowed accordingly.