2026 (2) TMI 447 - AT - Income Tax

Disallowance of expenditure attributable to exempt income and strategic investment exclusion required verification; revisionary powers upheld against taxpayer.

Revision under the tax code challenged an assessing officer's acceptance of an assessee's self computed disallowance for exempt income without testing the ... Revision u/s 263 - as per PCIT AO failed to consider the necessity of revisiting the method of disallowance under Rule 8D read with Section 14A - AO accepting the suo motu disallowance offered by the assessee - HELD THAT:- CIT has rightly pointed out the disallowance offered by the assessee, without taking into account its claim for excluding Strategic Investment, needed proper verification by the AO. His observations are in sync with the landmark decision of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] in which similar issue of strategic investment was decided in favour of the Revenue for the purposes of computation of disallowance under section 14A r.w. Rule 8D.We are of the considered opinion that it was incumbent on the AO to examine a third party report especially in the light of the Apex Court ruling and the provisions of the Act in this regard and more so, in the light of suo motu disallowance of mere Rs. 1.82 cr. on exempt income exceeding Rs. 274 cr., against investments of Rs. 11,813 cr., without testing the computation method under Rule 8D, which demonstrates clear case of lack of any inquiry worth the name. Therefore, on the facts and the circumstances of the case, the deeming provisions of Explanation 2,clause(a) are clearly applicable. Accommodation entries as AO did not examine the issue at all -Information was already available to the AO on Insight Portal which he completely overlooked although the information revealed that the assessee was recipient of accommodation of accommodation entries as a consequence of search action on Sankalp Group. This fact has not been controverted by the ld.AR who kept on stressing that the ld.PCIT did not make available the said information to it during revision proceedings without taking due cognizance of the fact that the assessment order has been set aside for necessary verification and enquiry allowing adequate opportunity of hearing to the assessee. This contention of the assessee cannot take away the fact on record that the AO failed to take any note of such vital piece of information which was very much available with him at the time of assessment proceedings. It is also clearly a case of no inquiry, hit by the deeming provisions of Explanation 2. In so far as the requirement of due enquiry to be conducted by the Assessing Officer while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of Ram Pyari Devi Saraogi [1967 (5) TMI 10 - SUPREME COURT] and Tara Devi Aggarwal [1972 (11) TMI 2 - SUPREME COURT] holding that in a stereo-typed order which simply accepts what the assessee has stated and fails to make enquiries which are called for in the circumstances, is erroneous. Thus, the issuance of notice u/s 263 of the Act and impugned order passed by the PCIT u/s 263 of the Act is validly assumed jurisdiction of Revisionary powers which cannot be alleged as invalid assumption of jurisdiction or bad in law and we confirm the same. Decided against assessee. Issues: (i) Whether the assessment order was erroneous and prejudicial to the interests of Revenue for failing to examine and verify the correctness and computation of disallowance under section 14A read with Rule 8D (strategic investments and methodology); (ii) Whether the assessment order was erroneous and prejudicial to the interests of Revenue for failure to examine information suggesting receipt of accommodation entries (Insight Portal / Sankalp Group) and whether the revision under section 263 directing further enquiry was valid.Issue (i): Whether the AO failed to make inquiries or verification required for determining disallowance under section 14A read with Rule 8D, making the assessment order erroneous and prejudicial to Revenue.Analysis: The deeming provisions of Explanation 2(a) to section 263 treat an order as erroneous and prejudicial where it is passed without making inquiries or verification which should have been made. The record shows the assessee offered a suo motu disallowance backed by an expert report and the AO accepted the offered figure without further queries or independent application of the Rule 8D methodology, despite large strategic investments and substantial exempt income. Relevant judicial precedent establishes that absence of meaningful inquiry or verification attracts Explanation 2(a).Conclusion: The AO did not conduct necessary verification of the Rule 8D computation and the assessment order is erroneous and prejudicial to the interests of Revenue on this issue; the revision under section 263 in respect of disallowance is justified.Issue (ii): Whether the AO failed to examine information indicating receipt of accommodation entries and whether setting aside the assessment for further enquiry under section 263 was permissible.Analysis: Explanation 2(a) applies where the AO omitted inquiries or verifications which should have been made. Departmental information (Insight Portal / investigation material) identifying potential accommodation entries was available in the record and was not addressed in the assessment. The revisionary direction restores the matter to the AO to examine and verify that material, affording the assessee opportunity of hearing; remand for proper inquiry is an accepted remedy where absence of inquiry precludes a conclusive finding.Conclusion: The AO failed to make requisite inquiries regarding alleged accommodation entries; the setting aside of the assessment and direction for fresh enquiry under section 263 is valid.Final Conclusion: Both issues involve lack of requisite inquiry or verification by the AO such that the assessment order is deemed erroneous and prejudicial to Revenue under Explanation 2(a) to section 263; the revisionary order under section 263 is confirmed and the appeal is dismissed, while the matters are remitted to the AO for fresh verification and decision after affording opportunity of hearing to the assessee.Ratio Decidendi: Where the Assessing Officer accepts the assessee's claim or computation without conducting inquiries or verifications which ought to have been made-particularly regarding Rule 8D computations for strategic investments or available investigative information-Explanation 2(a) to section 263 renders the assessment order erroneous and prejudicial, authorising the Commissioner to set aside the order and direct the AO to conduct fresh enquiries.