TaxTMI 
TaxTMI 
2026 (3) TMI 549
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....ued on 22.02.2019. Thereafter, notices u/s 142(1) of the Act were issued on various dates asking the assessee to file various details including the details with respect to earning of exempt income and disallowance u/s 14A of the Act and show cause notice was also issued. After considering the submissions and details filed by the assessee, order u/s 143(3) of the Act was passed on dt. 30.09.2021 by making disallowance u/s 36(1)(va) of INR 10,20,287/- and further disallowance u/s 40A(2)(b) of INR 3,09,95,356/- was made. 3. Against the said order, assessee filed an appeal before ld. CIT(A) who vide order dated 18.07.2022, allowed part relief to the assessee and deleted the addition made u/s 40A(2)(b) of the Act, however, confirmed the disallowance made u/s 36(v)(a) of the Act. Thereafter, ld. PCIT in terms of show cause notice issued u/s 263 of the Act dated 12.02.2024 initiated the proceedings u/s 263 of the Act wherein assessee was show-caused to explain as to why the assessment order passed should not be held as erroneous and prejudicial to the interest of the Revenue on following counts:- (i) Wrongly allowed the short term capital loss of INR 66,52,05,871/- to be carri....
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.... by INR 11,59,13,240/- on account of disallowance u/s 14A of the Act therefore, they are taken together for consideration. 7. Before us, Ld.AR for the assessee submits that during the course of assessment proceedings, the AO had made detailed inquiries and issued various notices, asked the assessee to file details of investments made in Mutual Fund, dividend income earned, loss/profit from the redemption of Mutual Fund and working of suo-motto disallowance u/s 14A made by the assessee of INR 1,69,45,588/- in the computation of income. Ld. AR drew our attention to the replies alongwith relevant details filed from time to time which are placed in the paper book, and after considering the said details, AO accepted the contention of assessee that u/a 14A, of the Act, disallowance should be made of the average value of those investments in Mutual Funds which had yielded exempt income by placing reliance on the judgement of Hon'ble Delhi High Court in the case of ACB India Ltd. vs ACIT reported in [2015] 62 taxmann.com 71 (Delhi). The queries so raised and replies made by the assessee on various occasions have been submitted in the written submissions filed before us which reads as un....
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.... Book) the appellant had submitted as under: "1 Query No. 1: Computation under section 14A Your goodself has' correctly quantified the various investment made by the Assessee Company in the notice issued however your goodself would appreciate that the Assessee has earned exempt income of Rs.1.97 crs (as submitted in annexure 12 (page 151 of Paper Book) along with submission dated 30.12.2020) from the mutual funds only out of the total investment made. Accordingly, while computing disallowance u/s 14A, Assessee has considered investment made in dividend earning investment (computation as submitted as Annexure 14 (page 152 of Paper Book) alongwith submission dated 30.12.2020). With reference to the applicability of section 14A in the instant case, it is submitted that the assessee has already made suo-moto disallowance u/s 14A amounting to Rs. 1,69,45,588/-, computed as per Rule 8D, as the expenses attributable to exempt income. In the humble submission of the assessee, the claim of the assessee is strengthen by its facts and also has the approval of judiciary through battery of case laws. In the case of ACB India Limited vs. ACIT (TS 176 HC- 2015IDELI ....
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....ill submit the same shortly. Hope you would find above in order. Further Assessee requests your goodself to grant us 2-week time to collate and submit balance details and documents." 16 That on 28.9.2021 (pages 73-74 of Paper Book) a notice was issued u/s 142(1) of the Act from the learned Assessing Officer wherein following information was sought from the appellant company: "1 A notice u/s 142(1) had been issued to you dated 8.12.2020 seeking your replies on the 20 points specified therein. In your reply dated 30.12.2020, you have stated that no property has been sold during the year. However, loss under the head capital gains is reported in the ITR. You are requested to submit details of capital assets sold during the year." 17 That vide reply dated 29.9.2021 (pages 82-84 of Paper Book) the appellant had submitted as under: "Query No. 1: Detail of capital assets sold during the year: 1 Your goodself has rightly observed that assessee has claimed capital losses in the return of income. Detail of same is enclosed as Annexure 1 & 1A. 2 From the perusal of aforesaid annexures, your goodself would observe that assessee has....
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....he Act, ld. PCIT is empowered to enhance the income of the assessee more particularly, when it is found that assessee is having investment in Mutual Funds and having exempt income also. Thus, ld. PCIT has rightly invoked the provision of section 14A of the Act r.w. Rule 8D for computing the correct amount of disallowance. Ld. CIT DR also vehemently placed reliance on the observations made by ld. PCIT in para 28 of the order which reads as under:- 28. "From perusal of above details, it is observed that the assessee has not made any disallowance on account of purchase and sale of equity shares during the year of Rs. 135,20,99,392 and Rs. 68,78,93,521 respectively resulting in STCL. Also, the total purchase consideration of mutual funds was Rs. 12467,74,61,325 and the sale value of the mutual funds was Rs. 12406,75,52,786. As per above computation of disallowance u/s 14A submitted by the assessee, it is evident that the effect of this sale purchase has not been considered. The monthly average value of the investment based upon purchases value in the mutual funds and shares is taken at Rs. 1050,25,46,724 (Rs. 12603,05,60,717/12) which is required to be added to the average val....
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....ot considered those Mutual Funds from which no exempt income was earned. This view is supported by the judgment of Hon'ble Delhi High Court in the case of ACB India (supra) wherein Hon'ble jurisdictional High Court has held that disallowance u/s 14A r.w. Rule 8D should be in respect of those expenditures which are incurred on the investment yielded exempt income only. It is further observed that during the course of assessment proceedings, vide various notices issued, AO has made detailed inquiries and verification of the facts submitted by the assessee and thereafter, took a view that the disallowance made by the assessee is correct. Once the queries were raised and necessary verification was made, it cannot be held that it is a case of 'lack of inquiry' or 'inadequate inquiry' as held by Hon'ble Delhi High Court in following cases:- 25. "It is submitted that perusal of the order read with show cause notice would show that the learned Principal Commissioner of Income Tax has proceeded on fundamental factual misconception. It is thus not a case of "lack of enquiry" or "lack of investigation" wherein Commissioner is empowered to exercise his revisional powers by calling for....
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....the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that "order passed by the Assessing Officer may be erroneous". The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order passed by the Assessing Officer was erroneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent's computation figures but he had reservations. The CIT in the order has recorded that the consideration receivable was examined by the Assessing Officer but was not properly examined and therefore the assessment order is "erroneous". The said finding will be correct, if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts ....
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.... No substantial question of law arises." [Emphasis supplied] 13. It is further seen that AO has made the inquiries and framed an opinion therefore, the assessment order cannot be held as erroneous or pre-judicial to the interest of the revenue, as has been held by Hon'ble Supreme Court in the case of Max India Ltd. and Malabar Industrial Co.Ltd. (supra). 14. Recently, the Co-ordinate Bench of ITAT, Delhi in the case of Mukul Rohatgi vs PCIT in ITA No.2427/Del/2025 vide order dt. 16.02.2026, has held that once the AO has made the inquiries and investigations and ld. PCIT must bring the material on record to point out what was the error based on which the revisionary powers are exercised by Ld. PCIT. The relevant observations as contained in para 43 of the order are reproduced as under:- 43. "On each of the issues discussed above i.e., investment made by the assessee in various funds whether these are equity-oriented funds or not and liable to capital gain tax under the head 'long term capital gain' to be taxed under Section 112A of the Act or normal provisions under the head 'short term capital gain', secondly, the nil ALV or lower ALV as discussed ....