ITAT Ahmedabad: PCIT’s 263 Revision on 14A Quashed – No Automatic Disallowance

HN Safal Infra Developer Pvt. Ltd. Vs PCIT (ITAT Ahmedabad)

ITAT Ahmedabad: PCIT’s 263 Revision on 14A Quashed – No Automatic Disallowance; Jurisdictional Safeguards Ignored – Tribunal Sets Aside 263 Order

Background

• PCIT invoked sec.263, revising assessment order u/s 143(3) dated 12.04.2021.
• Grounds: AO failed to make disallowance u/s 14A r.w. Rule 8D on exempt income of ₹55,978/- earned from LLP/firm investments.
• PCIT held AO’s order “erroneous & prejudicial to Revenue,” directed AO to recompute disallowance.
• Assessee challenged revision, arguing:

Order passed in name of amalgamated (non-existent) entity.

AO had already called for details & applied mind.

PCIT cannot substitute AO’s satisfaction with her own.

Tribunal’s Findings

Jurisdiction under Sec.263:

• AO must first record dissatisfaction u/s 14A(2) with assessee’s claim before invoking Rule 8D.
• Disallowance is not automatic merely because exempt income exists.
• PCIT assumed revisionary jurisdiction ignoring this statutory safeguard.

Ignoring Assessee’s Explanation:

• Assessee had explained that no expenditure was incurred for exempt income (detailed item-wise).
• PCIT did not examine correctness of explanation; she directly directed AO to disallow.
• This was contrary to SC in Maxopp Investment Ltd. and Gujarat HC rulings (CIMS Hospital, GSFC, Gujarat Fluorochemicals).

Error in Law:

• PCIT cannot usurp AO’s role by directing disallowance without examining AO’s satisfaction.
• Revision based on presumption of automatic 14A disallowance is bad in law.

Decision

• ITAT held PCIT’s order unsustainable.
• Entire revision u/s 263 quashed.
• Assessee’s appeal allowed in full.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD