IN INCOME TAX APPELLATE TRIBUNAL BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER . I.T.A. No.3587 Mum 2014 (Assessment Year : 2009-10) Lak shmiwadi Mines & Commissioner of Income Mine rals P rivate Ltd., Tax 2, v. Yusu f Building, 3 r d floor, R. No. 344 , Room No. 20, Aayakar Bhavan, 43-45, M.G. Road, Fort, Mumbai 400 020. Mumbai 400 001. . PAN : AAACL 1756 F ( Appellant) .. ( Respondent) Assessee by Shri Vipul Joshi Revenue by : Shri A. Ramachandran Date of Hearing : 27-6-2016 Date of Pronouncement : 21-09-2016 ORDER PER RAMIT KOCHAR, Accountant Member This appeal, filed by assessee company, being ITA No. 3587 Mum 2014, is directed against order dated 28th March, 2014 passed by learned Commissioner of Income Tax- 2, Mumbai (hereinafter called CIT ) u s 263 of Income Tax Act, 1961 (Hereinafter called Act ), for assessment year 2009-10, proceedings initiated by learned CIT u s 263 of Act is aimed at exercising revisionary powers directed against assessment order dated 21st December, 2011 passed by learned Assessing Officer (hereinafter called AO ) u s 143(3) of Act. 2 ITA 3587 Mum 2014 2. grounds of appeal raised by assessee company in memo of appeal filed with Income Tax Appellate Tribunal, Mumbai (hereinafter called Tribunal ) read as under:- 1. BREACH OF PRINCIPLES OF NATURAL JUSTICE 1.1. Learned Commissioner of Income - tax - 2, Mumbai ["Ld. CIT"], erred in framing revision order u s. 263 of Income - tax Act, 1961 [ Act"] by not giving proper, sufficient and effective opportunity of being heard to Appellant. 1.2 It is submitted that in facts and circumstances of case, and in law, order is required to be held as bad and illegal in breach of principles of natural justice, as well as non-application of mind to facts and contentions brought on record by Appellant. 2. REVISION ILLEGAL 2.1 Ld. CIT erred in passing order u s. 263 of Act, revising assessment order passed by A.O. u s. 143 (3) of Act. 2.2 It is submitted that in facts and circumstances of case, and in law, order is bad, illegal and void as necessary pre- conditions for initiating revision proceeding as well as completion thereof were not fulfilled. 2.3 Without prejudice to generality of above, CIT failed to appreciate that: (i) order which he was seeking to revise had already merged with appellate order and, accordingly, was not "record" within meaning of section 263 of Act; (ii) In any case, assessment order framed was not "erroneous" within meaning of section 263 of Act; and (iii) assessment order was not "prejudicial to interest of revenue" within meaning of section 263 of Act. 2.4 It is submitted that in facts and circumstances of case, and in law, no revision u s 263 of Act was called for. WITHOUT PREJUDICE TO ABOVE 3 ITA 3587 Mum 2014 3.1 Even on merits, it is submitted that order of Ld. CIT is bad in law as it is based on total misinterpretation of section 14A of Act read with Rule 8D of Income - tax Rules, 1962. 3.2 It is submitted that in facts and circumstances of case, and in law, computation of disallowance u s 14A as returned by Appellant and as confirmed by CIT (A) was proper and reasonable and no variation enhancement was called for. 3.3 It is submitted that in facts and circumstances of case, and in law, no such revision was called for even on merits also. 3. brief facts of instant case are that return of income was filed by assessee on 30th September, 2009 declaring total loss of Rs. 1,00,26,688 -. assessment was completed by AO u s 143(3) of Act on 21st December, 2011 , assessing total loss at Rs. 95,22,971 -. On verification of records , it was observed by learned CIT that while calculating disallowance under section 14A of Act read with Rule 8D of Income Tax Rules, 1962, A.O. did not disallow proportionate interest expenditure incurred at Rs. 98,42,238 - as it was stated by assessee that interest paid during year was for term loan from State Bank of India at Gandhidham. It was further stated that no fund was transferred out of borrowed funds to Mumbai wherein investments are held. A.O. accepted explanation of assessee and did not disallow interest expenditure u s.14A of Act for earning exempted dividend income. It was observed by learned CIT that interest paid during year for term loan from State Bank of India at Gandhidham was only Rs.13,51,398 - instead of Rs. 98,42,238 - and hence, balance interest expenditure of Rs.84,90,840 - was required to be considered for disallowance u s 14A of Act against dividend income of Rs. l,16,56,557 - which is exempt from tax under provisions of Act. 4 ITA 3587 Mum 2014 Thus, it was observed by learned CIT that assessment order u s. 143(3) of Act passed by AO was without conducting proper inquiries and without proper application of mind and was erroneous order in as much as same was prejudicial to interest of Revenue. Notice u s 263 of Act were issued to assessee company on 17th January, 2013 and assessee was asked to file objections, if any, to proposal to set aside assessment order dated 21-12-2011 passed by AO u s 143(3) of Act under revisionary powers of learned CIT u s. 263 of Act. assessee was also given opportunity of personal hearing by learned CIT. assessee filed submissions before learned CIT whereby assessee objected to notice dated 17-01-2013 issued by learned CIT u s 263 of Act mainly on technical grounds and not on merits. learned CIT observed that A.O. had accepted assessee's contention regarding interest expenditure in assessment order dated 21.12.2011 passed u s. 143(3) of Act without any verification . learned CIT observed that AO had made disallowance with regard to Rule-8D(2)(iii) of Income Tax Rules,1962 only and no disallowance under Rule 8D(2)(i) or (ii) of Income Tax Rules, 1962 was made by AO while framing assessment order u s. 143(3) of Act. It was observed by learned CIT that if assessee has earned exempt income , interest expenses as are debited to P&L account, expenditure towards interest is to be considered for disallowance for purpose of Rule 8D (2)(ii) of Income Tax Rules, 1962. On going through assessment order dated 21-12-2011 passed by AO u s 143(3) of Act , it was observed by learned CIT that A.O. had not conducted proper inquiry into above issues and there was error in assessment order in as much as same is prejudicial to interest of revenue . learned CIT relied on decision of Hon ble Allahabad High Court in case of CIT v. Bhagavandas , 272 ITR 267 and P.T. Laskar Ram v. CIT (2005)272 ITR 309(All.HC) and held that action u s. 263 of Act is valid as 5 ITA 3587 Mum 2014 assessment order dated 21-12-2011 passed by AO u s. 143(3) of Act is passed without application of mind by AO and without conducting proper enquiry . It was observed that same view was confirmed by Hon ble Madras High Court in case of Ashok Leyland Limited v. CIT (2003)260 ITR 599(Mad. HC). learned CIT held that assessment framed by A.O. was not correct and is required to be reframed and accordingly learned CIT set aside assessment order dated 21-12-2011 passed by AO u s. 143(3) of Act for making fresh assessments de- novo after undertaking proper enquiries, vide revisionary order dated 28.03.2014 passed by CIT u s 263 of Act. 4.Aggrieved by revisionary order dated 28.03.2014 passed by ld. CIT u s 263 of Act, assessee filed first appeal before Tribunal. 5. ld. Counsel for assessee submitted that assessee has submitted entire details before A.O. during course of assessment proceedings u s 143(3) read with Section 143(2) of Act conducted by AO with respect to disallowance u s 14A of Act. said details before AO are placed in paper book pages 43 to 75 filed with Tribunal which were given vide written submissions dated 15-11-2011, 08-12-2011 and 08-12-2011. ld. Counsel submitted that all details were submitted before A.O. with respect to disallowance u s 14A of Act and A.O. after applying his mind disallowed amount of Rs. 6,05,192 - u s 14A read with Rule 8D(2)(iii) of Income Tax Rules 1962 and since assessee has voluntarily made disallowance of Rs. 1,20,000 - in return of income filed with Revenue, balance addition of Rs.4,85,192 - was confirmed by AO vide assessment order dated 21-12-2011 passed by AO u s. 143(3) of Act. ld. Counsel drew our attention to assessment order of A.O. u s 143(3) of Act dated 21st December, 2011 wherein detailed observations were given by AO with respect to 6 ITA 3587 Mum 2014 disallowance u s 14A of Act after considering submissions of assessee . It was submitted that assessee carried matter before ld. CIT(A) in first appellate proceedings who deleted additions as were made in assessment order dated 21.12.2011 u s. 143(3) of Act, vide appellate orders dated 19-12-2012 passed by learned CIT(A). It was submitted that after passing of appellate order by ld. CIT(A) dated 19th December, 2012, Revenue invoked revisionary powers u s. 263 of Act vide notice dated 17th January, 2013 which is clearly impermissible as is against law as matter was settled by ld. CIT(A). After appellate orders dated 19.12.2012 passed by learned CIT(A) in favour of assessee by deleting addition made by AO u s 14A of Act read with Rule 8D of Income Tax Rules, 1962 , Revenue raised same issue of disallowance u s 14A of Act once again which was concluded matter so far as assessee is concerned. It was submitted that powers of learned CIT(A) is co-terminus with powers of AO and learned CIT(A) could have enhanced assessment after complying with provisions and scheme of Act but learned CIT(A) considered submissions of assessee and held that disallowance of Rs.1,20,000 - made by assessee voluntarily is reasonable keeping in view facts and circumstances of case. ld. Counsel drew our attention to appellate order of ld. CIT(A) dated 19.12.2012 which is placed in file. It was submitted that investments as per balance sheet as at 31st March, 2009 were of Rs. 12,31,07,108 - (Rs.11,91,40,827 - as at 31-03-2008) and assessee s own funds were Rs. 21,14,51,971 - as at 31-03-2009 ( Rs. 20,97,42,428 - as at 31-03-2008) comprising of share capital of Rs. 48,51,200 - as at 31-03-2009 ( Rs. 48,51,200 - as at 31-03-2008) and Reserves and surplus of Rs.20,66,00,771 - as at 31-03-2009 ( Rs. 20,48,91,228 - as at 31-03-2008) and hence presumption will apply that assessee has invested its own funds in making investments in securities which are capable of yielding exempt income in absence of any finding by Revenue that 7 ITA 3587 Mum 2014 assessee has diverted interest bearing funds for making investments in securities capable of yielding exempt income. Reliance was placed on decision of Hon ble Bombay High Court in case of CIT v. Reliance Utilities and Power Ltd., (2009)313 ITR 340(Bom. HC) and HDFC bank Limited v. DCIT (2016) 383 ITR 529(Bom. HC) and submitted that in absence of any cogent material brought on record by Revenue that interest bearing funds were diverted in making investment in securities capable of yielding exempt income, presumption shall apply that assessee has invested own funds in making investment in securities capable of yielding exempt income as assessee has sufficient own funds which are much more than investments in securities capable of yielding exempt income held by assessee as at 31-30-2009 and 31-03-2008 as borne out from audited accounts. said audited financial statements are placed in paper book page 2-22. assessee drew our attention to notice dated 17-01-2013 issued u s 263 of Act by learned CIT , which is placed in paper book page 91. learned counsel for assessee drew our attention to assessment order dated 21-12-2011 passed by learned AO u s 143(3) of Act, which is placed in paper book page 86-90. assessee submitted that complete details were submitted before learned AO whereby details as to financials of Head Office and factory at Gandhidham were submitted separately reflecting complete bifurcations of these two profit centre s in company for which even separate books of accounts are maintained by assessee, said financials are placed at page 70 paper book which clearly shows that investments in securities are reflected in profit centre HO and was Rs.12.31 crores as at 31-03-2009 while own funds of HO is Rs.23.49 crores as at 31-03-2009, which clearly reflects that assessee s own funds are much higher than investment in securities which are capable of yielding exempt income . It was submitted that during previous year relevant to impugned assessment year, only Rs. 40 lacs share application money has been invested for which share has not been allotted by issuing 8 ITA 3587 Mum 2014 company by end of year. learned counsel for assessee drew our attention to page 16-17 paper book and submitted that secured loans were raised from banks which are term loans against charge on factory building and plant and machinery , further it was submitted that cash credit facilities were obtained against hypothecation of stock and book debts and also hire purchase loan was taken for movable assets against hypothecation of assets. learned counsel for assessee drew our attention to page 92- 109 of paper book being replies submitted to learned CIT during revisionary proceedings u s 263 of Act. learned counsel drew our attention to page 76-78 being ledger account of interest bearing ICD raised by assessee during year. complete utilization of ICD s raised during year were also submitted which is placed in file which reflects that assessee has either granted loans and advances out of same or have repaid loans raised earlier during year. It was submitted that assessee has duly submitted all details before A.O. hence ld. CIT cannot invoke section 263 of Act which is bad in law liable to be quashed. assessee relied upon following judgments orders: 1 CIT v. K Sera Sera Productions Limited (ITA no 1027 of 2013, order dated 18-03-2015)-Hon ble Bombay High Court 2. CIT v. Fortaleza Developers (2015) 374 ITR 510(Bom. HC) 3. CIT v. Nirma Chemicals Works Private Limited (2009) 309 ITR 67(Guj.) 4. Sonal Garments v. JCIT (2005) 95 ITD 363(Mum.Trib.) 5. Marico Industries Limited v. ACIT (2009) 312 ITR 259(AT) (Mum)-27 SOT 73(Mum-Trib.) 9 ITA 3587 Mum 2014 6. ld. D.R., on other hand, relied on order of ld. CIT. 7. We have considered rival contentions and also perused material placed on record including case laws relied upon . case of assessee for impugned assessment year was selected for scrutiny by Revenue for framing assessment u s 143(3) of Act read with Section 143(2) of Act and A.O. made enquiries with respect to disallowances u s 14A of Act before framing assessment u s 143(3) of Act , wherein assessee submitted replies with respect to disallowance u s 14A of Act which are placed in paper book page 43-75 filed by assessee before Tribunal vide written submissions dated 15-11-2011 and 08-12-2011 along with enclosures annexures. assessee submitted details with respect to disallowance u s 14A of Act which was considered by A.O. before framing assessment u s 143(3) of Act. Perusal of written submission filed by assessee before AO, it was observed that assessee submitted details of secured loans raised from banks and utilization thereof, raising of unsecured loans by assessee and details of interest expenditure, granting of interest bearing loans by assessee, details of dividend received , working of disallowance u s 14A of Act read with Rule 8D of Income Tax Rules, 1962. bank statements were submitted by assessee before AO. assessee also submitted that company has not made investments during year out of borrowed funds . It was also submitted before AO that separate books of accounts are maintained for Head Office(HO) and factory at Gandhidham. It was submitted that factory at Gandhidham paid interest on term loans and cash credit. Separate columnar Profit and Loss Account of HO and factory at Gandhidham was submitted before AO. assessee disallowed amount of Rs. 1,20,000 - voluntarily u s 14A of Act in return of income filed with Revenue. A.O. worked out disallowance of Rs. 6,05,192 - u s 14A of Act read 10 ITA 3587 Mum 2014 with Rule 8D(2)(iii) of Income Tax Rules, 1962 , out of which Rs. 1,20,000 - was declared voluntarily by assessee and addition of balance amount of Rs.4,85,192 - was made by AO while framing assessment order dated 21-12-2011 passed u s 143(3) of Act. AO did not made any disallowance for direct expenses incurred in relation to earning of exempt income , nor interest expenditure was disallowed by AO u r 8D(2)(i) and 8D(2)(ii) of Income Tax Rules, 1962 read with Section 14A of Act, while AO at same time chose to apply Rule 8D(2)(iii) of Income Tax Rules, 1962 for making disallowance u s 14A of Act of Rs.6,05,192 - . We have observed that assessee has made investment of Rs. 12,31,07,108 - as on 31st March, 2009 ( Rs. 11,91,40,827 - as on 31-03-2008) while assessee s own funds are to tune of Rs. 21,14,51,971 - as on 31-03-2009 ( Rs. 20,97,42,428 - as on 31-03-2008) as borne out from audited financial statements which is sufficient to cover investments in securities made by assessee and presumption as contemplated vide decision of Hon ble Bombay High Court in case of Reliance Utilities and Power Limited(supra) shall apply in absence of cogent evidence on record brought by Revenue. additions made by A.O. was deleted by ld. CIT(A) in appellate order dated 19.12.2012 passed by learned CIT(A).The assessee had given separate break up of financials of Head Office and factory at Gandhidaham before AO vide reply dated 08-12-2011 and investments as reflected are mainly old investments wherein this year it is observed that investment of Rs. 40 lacs was made by assessee which is held in form of share application money as at 31-03-2009 in Oriental Power Cables Limited. It is also observed from financials of HO that no interest was incurred as expenditure during preceding year, while in this year incremental investment is only Rs. 40 lacs in share application money with Oriental Power Cables Limited for which assessee has given details that this investment is made out of interest free funds raised by company from Sakarwadi Trading Company Private Limited which is placed at paper book 11 ITA 3587 Mum 2014 page 79-80 . assessee has also submitted bank statement to that effect which is placed at paper book page 99. Further, profits of company before depreciation are to tune of Rs 59.46 lacs during year which are also more than sufficient to cover incremental investment of Rs 40 lacs made during year. It was stated vide reply dated 08-12-2011 before AO that separate books of accounts have been maintained by assessee for Head office and factory at Gandhidham and said factory has paid interest for term loan and cash credit facility. Further, assessee has brought before AO that assessee has paid interest on HO account for first time this year on ICD s raised during year which were deployed to repay old loans as well to grant interest bearing loans from which interest income of Rs. 27.87 lacs were earned by assessee . In our considered view, A.O. has taken plausible and possible view while framing assessment u s 143(3) of Act vide orders dated 21-12-2011 keeping in view facts and circumstances of case and after considering replies of assessee before him whereby no disallowance was made by AO u s 14A of Act read with Rule 8D(2)(ii) of Income Tax Rules, 1962 of interest expenditure as assessee has given explanation to AO with respect to raising of interest bearing funds and submitted that no investments have been made out of interest bearing funds which explanation was accepted by AO and is supported by books of accounts . assessee contentions of not making investments in securities out of borrowed funds is further supported by own funds of assessee of Rs. 21.14 crores as at 31-03-2009 while investments in securities stood at Rs. 12.31 crores which own funds are much more than investments and presumption shall apply as contemplated by decision of Hon ble Bombay High Court in case of CIT v. Reliance Utilities and Power Ltd., (2009)313 ITR 340(Bom. HC) and HDFC Bank Limited v. DCIT (2016) 383 ITR 529(Bom. HC) in absence of rebuttal by Revenue . There is nothing incriminating on record whereby presumption is rebutted by Revenue. We are of considered view that invocation of provisions of 12 ITA 3587 Mum 2014 section 263 of Act is not warranted in instant case as AO took plausible and possible view after considering replies of assessee while framing assessment order u s 143(3) of Act which , and keeping in view decision of Hon ble Bombay High Court in case of CIT v. Reliance Utilities and Power Ltd., (2009)313 ITR 340(Bom. HC) it cannot be said that said view as taken by AO was erroneous so far as it is prejudicial to interest of Revenue to enable CIT to exercise his extraordinary revisionary powers u s. 263 of Act. assessment order was subject to challenge before learned CIT(A) who has passed appellate order dated 19- 12-2012 whereby learned CIT(A) deleted additions made by AO u s 14A of Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 . Revenue invoked Section 263 of Act by issuing notice dated 17-01-2013 u s 263 of Act post appellate order passed by learned CIT(A) on 19- 12-2012 which was also on same issue of disallowance of expenditure under Section 14A of Act read with Rule 8D of Income Tax Rules, 1962 in relation to earning of income which does not form part of total income, which was earlier adjudicated by learned CIT(A) vide orders dated 19-12-2012 which in our considered view is not permissible with respect to same issue of disallowance u s 14A read with Rule 8D of Income Tax Rules, 1962. learned counsel for assessee rightly relied on decisions judgment in this regard which are cited in preceding para s . Keeping in view our detailed discussions and reasoning, we hereby order quashing of revisionary order passed by learned CIT dated 28-03-2014 u s. 263 of Act proposing to set aside assessment order dated 21.12.2011 passed by AO u s. 143(3) of Act for making de-novo assessment. We order accordingly. 13 ITA 3587 Mum 2014 8. In result, appeal filed by assessee in ITA No. 3587 Mum 2014 for assessment year 2009-10 is allowed. Order pronounced in open court on 21st September, 2016. 21-09-2016 Sd - sd - (MAHAVIR SINGH) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 21-09-2016R.K., Ex. Sr. PS Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT(A)- concerned, Mumbai 4. CIT- Concerned, Mumbai 5. , , DR, ITAT, Mumbai Bench 6. [ Guard file. BY ORDER, True Copy (Dy. Asstt. Registrar) , ITAT, Mumbai Lakshmiwadi Mines & Minerals Private Ltd. v. Commissioner of Income-tax – 2, Mumbai