Case Law Details
CIT Vs Chemsworth Pvt. Ltd. (Karnataka High Court)
The Karnataka High Court recently ruled on the case of CIT Vs Chemsworth Pvt. Ltd., focusing on the applicability of Section 263 of the Income Tax Act, 1961. The case revolves around the disallowance of expenses under Section 14A, which pertains to expenditure incurred for earning exempt income. This judgment addresses the nuances of the Commissioner’s revisional powers and the adequacy of inquiries conducted by the Assessing Officer.
The appeal was filed by the revenue under Section 260A of the Income Tax Act, 1961, and pertains to the Assessment Year 2007-08. The central question of law addressed was whether the Tribunal was correct in holding that the revision under Section 263 was not permissible, given that the assessee had furnished all necessary details, despite the Assessing Officer’s failure to examine the expenditure related to exempt income.
Chemsworth Pvt. Ltd., engaged in the business of investment and sale of filtration equipment and spares, filed its income tax return for the Assessment Year 2007-08, declaring a total income of ₹80,93,859. The Assessing Officer completed the assessment without considering the disallowable expenditure under Section 14A, related to exempt dividend income. The Commissioner of Income Tax, upon review, found that the necessary examination of the expenditure incurred for earning the exempt income was not conducted and issued a notice under Section 263.
The Commissioner set aside the Assessing Officer’s order, citing it as erroneous and prejudicial to the interest of the revenue, and directed a fresh assessment. The assessee contested this order before the Income Tax Appellate Tribunal (ITAT), which ruled in favor of the assessee, stating that the Commissioner could not assume revisional jurisdiction merely on the grounds of inadequate enquiry by the Assessing Officer.
The High Court examined the principles of Section 263, which requires twin conditions to be satisfied: the order must be erroneous and prejudicial to the interests of the revenue. Key judgments cited include Malabar Industrial Co. Ltd. vs. CIT, which clarified that not every loss of revenue due to the Assessing Officer’s order is prejudicial, and that a plausible view taken by the Assessing Officer cannot be deemed erroneous if it aligns with one of the possible interpretations of the law.
The Supreme Court’s rulings in CIT Vs. Max India Ltd. and Ultratech Cement Ltd. & Ors. vs. State of Rajasthan & Ors. reiterated that where two views are possible, the Assessing Officer’s decision cannot be simply overturned by the Commissioner. The Delhi High Court’s judgment in CIT Vs. Sunbeam Auto Ltd. was also discussed, emphasizing that the Assessing Officer is not required to detail reasoning for each deduction in the assessment order and that inadequate enquiry alone does not justify the Commissioner’s revisional jurisdiction.
The Karnataka High Court concluded that the Assessing Officer had considered the assessee’s submissions and had taken a plausible view by not attributing any expenditure to the exempt income for the relevant assessment year. Therefore, the Commissioner’s assumption of revisional jurisdiction on grounds of inadequate enquiry was not justified. The Tribunal’s decision to set aside the Commissioner’s order was upheld, and the revenue’s appeal was dismissed.
The Karnataka High Court’s ruling in CIT Vs Chemsworth Pvt. Ltd. underscores the importance of the principles governing revisional jurisdiction under Section 263 of the Income Tax Act. It reaffirms that merely inadequate enquiry by the Assessing Officer does not automatically render the order erroneous and prejudicial to the revenue. This judgment reinforces the need for a balanced approach in tax assessments and the application of revisional powers, ensuring that both the taxpayers’ rights and the revenue’s interests are judiciously protected.
if the assessee has furnished all the details before the AO and if it is found that there is no expenditure under section 14A which are attributable to exempt dividend income and the AO has taken plausibly view then section 263 cannot be invoked merely on the ground that there was inadequate enquiry conducted by the AO.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2007-08. The appeal was admitted by a bench of this Court vide order dated 12.08.2014 on the following substantial question of law:
(i) Whether on the facts and in the circumstances and in law the Tribunal was correct in holding that revision under Section 263 of the Act was not permissible, as the assessee had furnished all the details without appreciating the fact that, Assessing Officer has failed to examine the expenditure incurred by the assessee towards the exempt income as required under Section 14A of the Act?
2. Facts leading to filing of the appeal briefly stated are that the assessee is engaged in business of investment and sale of filtration, equipment and spares and service. The assessee filed the return of income on 26.10.2007 for Assessment Year 2007-08 and declared a total income of Rs.80,93,859/-. The Assessing Officer by an order dated 30.09.2009, without considering the expenditure which was not allowable under Section 14A of the Act proceeded to complete the assessment. The Commissioner of Income Tax, on examination of the records, found that the assessee had earned dividend income, which was exempt from tax. The Assessing Officer without examining the quantum of expenditure incurred by the assessee for earning the exempt income, proceeded to complete the assessment. It was further noticed that expenditure incurred for earning exempt income has to be disallowed under Section14A of the Act.
3. Thereupon, the Commissioner of Income Tax issued a notice under Section 263 of the Act to the assessee and held that non consideration of disallowable expenditure under Section 14A of the Act is erroneous and is prejudicial to the interest of the revenue. Accordingly, the Commissioner of Income Tax by an order dated 11.01.2012 set aside the order of the Assessing Officer and remitted the matter to the Assessing Officer to re do the assessment. Being aggrieved, the assessee approached the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’ for short). The Tribunal by an order dated 19.04.2013 inter alia held that the Commissioner of Income Tax erred in setting aside the order passed by the Assessing Officer merely on the ground that the enquiry conducted by the Assessing Officer is inadequate. In the aforesaid factual background, this appeal has been filed by the revenue.
4. Learned counsel for the revenue submitted that the Tribunal ought to have appreciated that the Assessing Officer has failed to conduct any enquiry with reference to the expenditure debited by the assessee. It is further submitted that the Tribunal grossly erred in holding that invocation of revisional powers under Section 263 of the Act was not permissible as the assessee had furnished all the details without appreciating the fact that Assessing Officer has failed to examine the incurring of expenditure by assessee towards exempt income as required under Section 14A of the Act. On the other hand, learned counsel for the assessee has supported the order passed by the Tribunal.
5. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of the relevant extract of Section 263 of the Act, which reads as under:
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- Revision of orders prejudicial to revenue
(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
6. Thus, from close scrutiny of Section 263 it is evident that twin conditions are required to be satisfied for exercise of revisional jurisdiction under Section 263 of the Act firstly, the order of the Assessing Officer is erroneous and secondly, that it is prejudicial to the interest of the revenue on account of error in the order of assessment.
7. The aforesaid provision was considered by the Supreme Court in MALABAR INDUSTRIAL CO. LTD.I supra and it was held that the phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer and every loss of revenue as a consequence of the order of the Assessing Officer cannot be treated as prejudicial to the interest of revenue. It was further held that where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, the order passed by the Assessing Officer cannot be treated as erroneous order prejudicial to the interest of the revenue. The principles laid down in the aforesaid decision were reiterated by the Supreme Court in ‘CIT VS. MAX INDIA LTD.,’ 295 ITR 282 (SC) and recently in ‘ULTRATECH CEMENT LTD. AND ORS. VS. STATE OF RAJASTHAN AND ORS.’, CIVIL APPEAL NO.2773/2020 DECIDED ON 17.07.2020.
8.In the backdrop of aforesaid well settled legal principles, we may examine the facts of the case in hand. In ‘CIT VS. SUNBEAM AUTO LTD.’, 332 ITR 167, it has been held by Delhi High Court that Assessing Officer in the order of assessment is not required to give detailed reasoning in respect of each and every item of deduction and therefore, the question whether there has been an application of mind before allowing expenditure has to be examined from the record of the case. The question of lack of enquiry / inadequate enquiry is also required to be kept in mind and mere inadequacy of the enquiry would not confer jurisdiction on the Commissioner of Income Tax under Section 263 of the Act. In the instant case, the Commissioner of Income Tax has held that the enquiry conducted by the Assessing Officer is inadequate and has assumed the revisional jurisdiction. The assessee has filed all the details before the Assessing Officer and Assessing Officer has accepted the contention of the assessee that no expenditure is attributable to the exempt income during the relevant Assessment Year. Thus, while recording the aforesaid finding, the Assessing Officer has taken one of the plausible views in allowing the claim of the assessee and therefore, the Commissioner of Income Tax could not have set aside the order of assessment merely on the ground of inadequacy of enquiry, the order passed by the Commissioner of Income Tax is not sustainable in law and the same has rightly been set aside by the Tribunal.
In view of preceding analysis, the substantial question of law framed by this court is answered against the revenue and in favour of the assessee.
In the result, we do not find any merit in the appeal. The same fails and is hereby dismissed.
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