R. Vi jayaraghavan, Advocate for the Appellant. Abani Kantha Nayak,CIT for the Respondent.

This appeal filed by the assessee is directed against the order of the Principal Commissioner of Income Tax - 1, Coimbatore passed u/s.263 (of Income Tax Act, 1961) (hereinafter ‘the Act’), dated 26.03.2018 and pertains to the assessment year 2013-14.

2. The assessee has raised the following grounds of appeal:-

1. The order of the Principal Commissioner of Income Tax - 1 issued u/s 263 (of Income Tax Act, 1961) is opposed to law, facts and circumstances of the case' 2) The Principal commissioner of Income Tax has erred in passing order under section 263 (of Income Tax Act, 1961) for revision of assessment order u/s 143(3) (of Income Tax Act, 1961) for the A.Y 2013-14 to recompute the disallowance under Section 144 (of Income Tax Act, 1961) r.w.r 8D(2).

a.. The Appellant had preferred an appeal before CIT(A) on 29.03.2016 against the disallowance under section 144 (of Income Tax Act, 1961) as per the assessment order under section 143(3) (of Income Tax Act, 1961) and the appeal was decided in favour of the revenue. Further the appellant preferred an appeal before honorable ITAT on 01.06.2017 and it is pending till date.

b. The Principal Commissioner of Income Tax had passed the order under section 263 (of Income Tax Act, 1961) in relation to the disallowance under section 144 (of Income Tax Act, 1961) mentioned in the assessment order which is in appeal before the honorable ITAT without taking into account the relevant provision of Law which is stated below Clause c to Explanation 1 of section 263(1) (of Income Tax Act, 1961) "where any order referred to in this subsection and passed by the Assessing officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988,the powers of the Principal commissioner or] commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.”

c. Hence, the powers u/s 263 (of Income Tax Act, 1961) cannot be invoked when assessment order is subject to appeal because appellate order stands merged with the assessment order when the issues raised in the order u/s 263 (of Income Tax Act, 1961) deals with the issue subject to appeal.

d. The Learned PCIT has failed to appreciate the important principle that once the issue that has been considered for order u/s 263 (of Income Tax Act, 1961) has had already been dealt with by the Appellate Authority then the appellate order gets merged with the order of the Assessing Officer and consequently the administrative commissioner cannot invoke the provisions of section 263 (of Income Tax Act, 1961) and this has been the view expressed by the High Court of Bombay in the case of CIT vs K. sera Sera Productions Limited (2015) 374 ITR 503 (Bombay).

e. Reliance has also been placed on the following judicial pronouncements:

I. Commissioner of Income Tax vs Farida Prime Tannery (259 ITR 342), where it has been held that the issues on which the appellate authority had already deliberated, the matter could not be reopened by way of revision.

II. The same view has been held in the case of Fortaleza developers vs. commissioner of lncome-Tax-15 (ITA No.2648/MUM/2012), and

III. Ranga Jewellers vs Additional commissioner of Income Tax (328 ITR 148)

f. Further, the appellant had replied to the notice under section 263 (of Income Tax Act, 1961) mentioning of the details of the appeal pending before the ITAT regarding the disallowance under section 14A (of Income Tax Act, 1961) but the Principal Commissioner of income tax passed the order under section 263 (of Income Tax Act, 1961) without considering the above fact which is not legally tenable.

g. For these and such other grounds that may be adduced at the time of hearing. It is prayed that the order u/s263 (of Income Tax Act, 1961) passed by the Principal Commissioner of Income Tax may kindly be set aside.

3. The brief facts of the case are that the assessee company is primarily engaged in the business of manufacturing of Indian made foreign liquor, filed its return of income for the assessment year 2013-14 on 29.11.2013 declaring total income of Rs.Nil under normal provisions and book profit of Rs. (-)57,76,370/- under the provisions of Section 115JB (of Income Tax Act, 1961). The assessment for the impugned assessment year has been completed u/s.143(3) (of Income Tax Act, 1961) on 01.03.2016 and determined total income of Rs.Nil under normal provisions and book profit of Rs.(-)28,50,552/- under the provisions of Section 115JB (of Income Tax Act, 1961) by making addition towards disallowance u/s.14A (of Income Tax Act, 1961) for Rs.29,25,820/-.

4. The case has been subsequently taken up for revision u/s.263 (of Income Tax Act, 1961) by the Principal Commissioner of Income Tax-1 (PCIT), Coimbatore and accordingly issued show cause notice dated 12.03.2018 and called upon the assessee as to why the assessment order shall not be revised under the provisions of Section 263 (of Income Tax Act, 1961) for the reasons stated in the said show cause notice. The ld.PCIT in the said show cause notice has taken up the issue of disallowance of expenditure incurred in relation of exempt income u/s.14A (of Income Tax Act, 1961) and was of the opinion that although the AO has disallowed expenditure in relation to exempt income u/s.14A (of Income Tax Act, 1961) r.w.rule 8D(2)(iii) (of Income Tax Rules, 1962), however failed to consider disallowance of interest expenditure under Rule 8D (of Income Tax Rules, 1962)2(ii) although the assessee has incurred huge financial cost for the relevant year which rendered the assessment order is erroneous in so far as it is prejudicial to the interest of the Revenue. In response to show cause notice, the assessee submitted that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue in so far as the issue of disallowance of expenditure u/s.14A (of Income Tax Act, 1961) r.w.rule 8D(ii) (of Income Tax Rules, 1962) because the AO has considered the issue of disallowance and has made disallowance of Rs.27,39,148/- under Rule 8D(2)(iii) (of Income Tax Rules, 1962) at the rate of 0.5% on average investments, however not considered interest expenditure for the reasons that the assessee has not utilized interest bearing funds for making investments in investments which yield exempt income. Further, the assessee has challenged the findings of the ld.AO before the appellate authority on the issue and the appeal filed by the assessee is pending for adjudication. Therefore, the PCIT cannot take up the case for revision, the issue which is subject matter of appeal proceedings before the CIT(A). The PCIT after considering the submissions of the assessee and by relying upon certain judicial precedents including decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., vs. CIT was of the opinion that as could be seen from the assessment records, the AO while determining the aggregate amount of disallowance has taken Nil as per Rule 8D(2)(ii) (of Income Tax Rules, 1962) even though the assessee has incurred huge interest expenses of Rs.5,41,70,506/- by incorrect application of law which rendered the assessment order erroneous in so far as it is prejudicial to the interest of the Revenue. In view of the above, set aside the assessment order passed by the AO u/s.143(3) (of Income Tax Act, 1961) dated 01.03.2016 and directed the AO to redo the assessment afresh considering the issues discussed. Aggrieved by the PCIT order, the assessee is in appeal before us.

5. The ld.AR for the assessee submitted that the ld.PCIT has erred in invoking revisional jurisdiction u/s.263 (of Income Tax Act, 1961), even though the order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue. The ld.AR further submitted that the issue of disallowance of expenditure u/s.14A (of Income Tax Act, 1961) was subject matter of consideration from the AO during the assessment proceedings and the assessee has challenged the findings of the AO before the ld.CIT(A) against the disallowance u/s.14A (of Income Tax Act, 1961) and the appeal was decided in favour of the Revenue. Further, the assessee preferred second appeal before ITAT on 01.06.2017, which is pending for disposal. It is further submitted that as per clause ‘c’ to Explanation 1 of Section 263(1) (of Income Tax Act, 1961), it is very clear that the PCIT has power u/s.263 (of Income Tax Act, 1961) to revise an assessment order on such matters as had not been considered and decided in such appeal. If any issue is subject matter of appeal before the CIT(A), then the CIT(A) will have jurisdiction over such issue because the assessment order stands merged with the appellate order and the CIT(A) shall exercise his powers on the issue including enhancement of assessment and hence PCIT does not have any power to revise the assessment order on such issues. In this regard, the ld.AR relied upon the decision of the Hon’ble Delhi High Court in the case of CIT vs. Sera Sera Productions Limited, (2015) 374 ITR 503.

6. The ld.DR on the other hand submitted that the facts brought out by the ld.PCIT clearly indicate that the AO has not applied his mind to the facts of the case in right perspective of law while disallowing expenses u/s.14A (of Income Tax Act, 1961), which is evident from the fact that the AO has failed to compute disallowance of interest expenditure under Rule 8D(2)(ii) of the Income Tax Rules, 1962, even though the assessee has incurred huge financial expenditure for the relevant financial year, which rendered the assessment order erroneous in so far as it is prejudicial to the interest of the Revenue. The ld.PCIT after considering relevant facts has rightly exercised his powers u/s.263 (of Income Tax Act, 1961) to revise the assessment order and hence there is no reason to interfere in the findings of the ld.PCIT.

7. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below along with case law cited by the ld.counsel for the assessee.

The facts borne out from the records clearly indicate that the AO has considered disallowance of expenditure u/s.14A (of Income Tax Act, 1961) and has computed total disallowance of Rs.29,37,148/- under Rule 8D(2)(iii) (of Income Tax Rules, 1962) at the rate of 0.5% on average investments. It is also an admitted fact that the assessee has challenged the additions made by the AO towards disallowance of expenditure u/s.14A (of Income Tax Act, 1961) before the first appellate authority and was unsuccessful because the ld.CIT(A) has upheld the disallowance computed by the ld.AO.

The assessee has preferred further appeal before the ITAT on the same issue which was pending for disposal. In this factual background, if we examine the provisions of Section 263 (of Income Tax Act, 1961), we find that as per clause (c) to explanation (1) of Section 263(1) (of Income Tax Act, 1961), “where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner of Income Tax under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal”. A plain reading of Clause (c) to Explanation (1), makes it very clear that the PCIT shall have powers u/s.263 (of Income Tax Act, 1961) to examine the issues which had not been subject matter of appeal before the appellate authority. In other words, if any issue is a subject matter of appeal before the appellate authority, then the PCIT cannot exercise his powers on such issues which are subject matter of appeal before the appellate authority. In this case on perusal of facts available on record, we find that the issue of disallowance of expenditure u/s.14A (of Income Tax Act, 1961) is a subject matter of appeal before the appellate authority and further once an issue is before the appellate authority then the assessment order merged with the appellate order and the appellate authority shall have all powers including enhancement of income. Therefore, when the Appellate Commissioner is having power to examine the issue, then the PCIT cannot have parallel jurisdiction to examine the same issue u/s. 263 (of Income Tax Act, 1961) proceedings, because if we allow the PCIT to have jurisdiction on said issue then it leads to multiple proceedings which is not the intention of the Legislature. This view is fortified by the decision of the Hon’ble High Court of Bombay in the case of CIT vs. Sera Sera Productions Limited, supra, where the High Court clearly held that once the issue that has been considered for order u/s.263 (of Income Tax Act, 1961) as had already been dealt with by the appellate authority then the appellate order gets merged with the order of the Assessing Officer and consequently the Administrative Commissioner cannot invoke the revisional jurisdiction u/s.263 (of Income Tax Act, 1961).

8. In this view of the matter and respectfully following the decision of the Hon’ble High Court of Bombay in the case of CIT vs. Sera Sera Productions Limited, we are of the considered view that the powers exercised by the PCIT u/s.263 (of Income Tax Act, 1961) on the issue of disallowance of expenditure u/s.14A (of Income Tax Act, 1961) is contrary to the provisions of Clause (c) to Explanation (1) of Section 263 (of Income Tax Act, 1961) and hence we are of the considered view that the PCIT has erred in revising the assessment order u/s.263 (of Income Tax Act, 1961). We, therefore, quash the order passed by the PCIT u/s.263 (of Income Tax Act, 1961) and restore the assessment order passed by the AO u/s.143(3) (of Income Tax Act, 1961).

9. In the result, the appeal filed by the assessee is allowed.

Order pronounced on 28th December, 2020 at Chennai.

Sd/- Sd/- (MAHAVIR SINGH)

VICE PRESIDENT

(G. MANJUNATHA)

ACCOUNTANT MEMBER Chennai, Dated, the 28th December, 2020