No Exempt Income Means No Disallowance; ITAT Says PCIT Overreached

The taxpayer, engaged in real estate development, was subjected to revision under Section 263 for AY 2018-19 on two grounds, namely, alleged failure to disallow expenditure under Section 14A despite no exempt income, and mismatch between TDS credits and declared revenue under the percentage of completion method (POCM).

The Principal CIT directed reassessment, citing improper inquiry by the Assessing Officer. The assessee argued that without earning exempt income, no disallowance was legally permissible and that the POCM method naturally causes timing differences in revenue recognition vis-à-vis TDS credits, as accepted in earlier assessments.

Central Issue: Whether the Assessing Officer‘s acceptance of no Section 14A disallowance because of there being no exempt income and TDS mismatch due to consistent revenue recognition was a legally acceptable opinion, and whether revision under Section 263 was warranted.

Tribunal Held: The ITAT held that since the assessee earned no exempt income, the Assessing Officer’s decision not to invoke Section 14A was a possible legal view, not an error. Regarding TDS mismatch, the Tribunal noted that the POCM method consistently applied by the assessee explained the differences and that mere suspicion without concrete prejudice could not sustain revision under Section 263.

Therefore, the Hon’ble Tribunal quashed the PCIT’s order and allowed the assessee company’s appeal.

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