Baghban Packaging LLP. Vs PCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that where no exempt income is earned by the assessee there is no case for making any disallowance under Section 14A of the Income Tax Act.
Facts- The present appeal is filed by the assessee against order passed by PCIT in exercise of the revisionary power u/s 263 of the Income Tax Act.
Notably, PCIT found that the assessment order passed by AO is erroneous so as to cause prejudice to the interest of the revenue since AO made no disallowance of expenses incurred by the assessee for earning exempt income in terms of section 14A.
Conclusion- Held that where no exempt income is earned by the assessee there is no case for making any disallowance under Section 14A of the Act.
The finding of the ld. PCIT that the Assessing Officer was bound by CBDT Circulars including those contrary to the decision of the Hon’ble jurisdictional High Court – we cannot agree with the same. As rightly pointed out by the learned Counsel for the assessee, the circulars issued by the CBDT are binding on their officers only to the extent that they are not in contradiction to the judicial interpretation of provisions of law. Circulars cannot override express provisions of law as interpreted by the Courts.
Held that neither of the reasons by the Ld. PCIT for holding the assessment order erroneous so as to cause prejudice to the Revenue, is sustainable in law . We therefore set aside the order of the ld. PCIT passed in exercise of his revisionary jurisdiction u/s 263 of the Act and allow the appeal of the assessee.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal filed by the assessee is directed against the order passed by the learned Principal Commissioner of Income-Tax-3, Ahmedabad [hereinafter referred to as “PCIT”] dated 28.03.2022, in exercise of his revisionary powers under Section 263 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], for the Assessment Year 2017-18.
2. The assessee has challenged the order passed by the learned PCIT, raising the following grounds before us:-
“1. The Learned Pr. Commissioner of Income – Tax – 3, Ahmedabad has erred in passing an order u/s.263 of the LT. Act, 1961 setting aside the Assessment Order passed u/s.143(3) of the I.T. Act, 1961 dtd. 19.10.2019 and directing the Assessing officer to make fresh assessment after examining the issue.
2. The Learned Pr. Comm. of Income Tax – 3, Ahmedabad has erred in holding that provisions of Sec.14A r.w.r.8D are applicable even if no exempt income was earned by the assessee and that the Assessing Officer has passed the Assessment order without making addition u/s.14A of the Act towards disallowance of expenditure to the tune of Rs.21,26,959/-.
3. The Learned Pr. Comm. of Income Tax – 3, Ahmedabad has erred in holding that the entire amount of depreciation of Rs.34,48,97,336/- claimed on goodwill of Rs.1,83,94,52,457/- need to be disallowed in view of the proposition that as per AS-14 no goodwill is generated in case of pooling of interest method ignoring the fact that no amalgamation or other merger has taken place in the year under consideration.
4. The Learned Pr. Comm. of Income Tax – 3, Ahmedabad has erred in treating the order as erroneous only on account of the fact that the assessment has not been converted into Complete Scrutiny as against Limited Scrutiny by the Assessing Officer.”
3. The learned Counsel for the assessee, during the course of hearing before us, pointed out that the learned PCIT found the assessment order passed by the Assessing Officer in the present case under Section 143(3) of the Act to be erroneous so as to cause prejudice to the interest of the revenue, on the following two grounds:-
i) that the Assessing Officer made no disallowance of expenses incurred by the assessee for earning exempt income in terms of provisions of Section 14A of the Act;
ii) that the Assessing Officer has not made proper inquiry regarding assessee’s claim of depreciation on goodwill which otherwise was not allowable to the assessee.
4. With respect to the issue of disallowance of expenses under Section 14A of the Act, the contention of the learned Counsel for the assessee before us was that the assessee’s case had been selected for “limited scrutiny” for the purpose of scrutinizing the expenses debited to the Profit and Loss account for earning exempt income and the issue had been thoroughly examined by the Assessing Officer and noting that no exempt income had been earned by the assessee, he had made no further disallowance of expenses following the proposition of law laid down in this regard by the Hon’ble jurisdictional High Court in the case of CIT vs. Corrtech Energy (P.) Ltd., [2015] 372 ITR 97 (Guj.). His contention, therefore, was that the view taken by the Assessing Officer was a plausible view and, therefore, the view of the ld. PCIT that the disallowance ought to have been made under Section 14A of the Act by invoking Rule 8D of the Income-Tax Rules, 1962 only tantamounted to change of opinion, which would not result in the assessment order being erroneous. Even otherwise, he pointed out, that the case of the ld. PCIT for holding that the Assessing Officer ought to have made disallowance under Section 14A of the Act was that as per the CBDT Circular No.5/2014 ,which clarified that expenses relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial-year, was binding on the Assessing Officer. In this regard, he drew our attention to paragraph No. 6.1 of the ld. PCIT’s order holding so:-
“6.1 Submission of the assessee is considered but the same is not found acceptable for the following reasons:
[A1 It is true that during the assessment proceedings, the then AO raised the query in this regard vide notice u/s 142(1) dt. 30.09.2019 [ABP Pg 5-71 and reply was filed by the assessee LLP vide letter dt. 07.10.2019 [APB Pg 8-101 but the AO failed to compute the disallowable amount by applying Rule 8D in this case. CBDT vide Circular No. 5/2014 has clarify that the expenses which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact that whether any such income has been earned during the year or not. It is settled legal position that Circulars are binding on Revenue Authorities as held in the case of K.P Varghese v/s ITO 131 ITR 597 SC. Thus not following the binding instruction is an error as provided in clause (c) of Explanation to Sec 263 of the Act. Besides this, it is evident from notice u/s 263 of the Act. Besides this, it is evident from notice u/s 142(1) and reply filed by the assessee thereto inter alia assessment order (where no discussion has been made about this point) that ld. AO accepted the claim of the assessee without application of mind. Hence, there remains no doubt in my mind that impugned assessment order was erroneous as well as prejudicial to the interest of revenue.
[B] It is observed from the Balance Sheet, that, value of investment in Mutual Funds is shown as on 31.03.2017 at Rs. 42,53,91,884. As on 31.03.2016, there was NIL investment that can fetch exempt income. This is true that during the current year, the assessee has not shown any “exempt income” in statement of income. However, one should not lose sight of clear-cut instruction of CBDT vide circular No. 05/2014 which provides for disallowance out of relatable expenses even if there is no exempt income earned during any particular year. CBDT vide Circular No. 05/2014 dated 11.02.2014, prescribes that, even if no exempt income was earned by the assessee from the investment in a particular year, provisions of section 14A r.w.r. 8D are still applicable in that year. In the P&L account for AY 201718, no interest expenses have been incurred. It is undisputed fact that during the year, the assessee has huge investment to the tune of Rs. 42,53,91,884 which is capable of earning ‘exempt income’ although not earned during this particular year. So, provision of Sec 14A is still attracted in this year. However, various administrative expenses totaling to Rs. 39,01,175 and Employees benefit expenses totaling to Rs. 35,95,347 have been claimed. Further, out of total asset of Rs. 179,40,98,918, it is observed that, investment in Mutual fund investment is Rs. 42,53,91,884, which is 23.71% of total assets. Therefore, definitely some of the administrative expenses and employee benefit expenses must be attributable to the investment in mutual funds. Accordingly, amount disallowable u/s 14A is calculated in the manner provided in Rule 8D as under:
