S. 14A Disallowance Not Applicable Without Exempt Income: ITAT quashes Revision Order [Read Order]

The Income Tax Appellate Tribunal, Delhi Bench, has quashed a revisionary order passed under Section 263 of the Income Tax Act, 1961 and held that the facts did not warrant the interference of the Principal Commissioner of Income Tax (PCIT), as the issue of Section 14A disallowance had already been examined by the Assessing Officer during the original assessment.

The matter arose from an order dated 20 March 2024, whereby the PCIT (Central)-1, Delhi, held the original assessment to be erroneous and prejudicial to the interest of revenue, computing the income of the company by an additional ₹79,34,636 and directing the AO to recompute total income for the year. The revision notice issued by the PCIT had alleged that the assessee made investments in equity shares but did not disallow expenses related to such income under Section 14A, and the AO had failed to make any such disallowance.

Read More about Section 14A of the Income Tax Act

The assessee’s representatives contended before the Tribunal that the matter was directly covered by an earlier decision of the Coordinate Bench in M/s Jagriti Job Finder Private Ltd. v. PCIT (Central)-1, involving identical facts. In that case, the Tribunal had rejected similar revisionary action. A copy of that decision was placed on record. The Departmental Representative could not controvert the assessee’s submissions.

Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here

Noting that the AO had raised specific queries on the applicability of Section 14A during the original assessment and that the assessee had filed detailed replies along with the requested information, the Bench stated that “we don’t find any reason to deviate from the stand taken by the Coordinate Bench in the identical situation.”

It was observed by the Two-Member Tribunal Bench of Accountant Member Renu Jauhri and Judicial Member Madhumita Roy that, “Considering the order passed by the Coordinate Bench, we find that in the instant case before us when specific queries were raised by the AO, reply was duly filed by the assessee along with details as asked for which has been duly considered by the Ld. AO in its proper perspective and the return filed by the assessee was then accepted, taking into consideration of the judgment passed by the Hon’ble Delhi High Court in the case of PVIT Vs. Indian Farmers & Fertilizers Co-operative Ltd.”

It was also noted further, “that the Explanation 2 of Section 263 of the Act which has been amended by the Finance Act, 2022 giving effect on and from 01.04.2022 and further that the judgment passed by the Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd. Vs. CIT , we don’t find any reason to deviate from the stand taken by the Coordinate Bench in the identical situation.”

Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here

The Members noted that the revisionary powers under Section 263 of the Income Tax Act must be exercised within statutory limits and cannot be used to reopen issues already examined in assessment proceedings.

Finding the facts of the present appeal aligned with the earlier ruling, the Tribunal concluded as “Respectfully relying upon the same we, therefore, quash the order passed by the Ld. CIT(A) as the same is found to be unsustainable in the eyes of law.”

With that, the Tribunal allowed the appeal in full, recording that the assessee’s appeal is allowed.

Where the Assessing Officer has made specific enquiries on a point such as the applicability of Section 14A and taken a view based on the assessee’s response, the order cannot be branded as erroneous and prejudicial solely to justify Section 263 revision, when no exempt income has arisen in the relevant year.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates