2008 (11) TMI 612 - AT - Income Tax

Tribunal Rules AO's Order Valid, Cancels CIT's Revision u/s 263 of Income Tax Act.

The Tribunal held that the AO's order was not erroneous since it was based on one of the possible views, as supported by various Tribunal decisions. ... Deduction under section 10A to be computed undertaking-wise - separate undertaking doctrine for set-off of losses - revisional power under section 263 of the Income tax Act - requirement of order being both erroneous and prejudicial to revenueRevisional power under section 263 of the Income tax Act - requirement of order being both erroneous and prejudicial to revenue - one of the possible views - bar to exercise of section 263 - Validity of the Commissioner's invocation of section 263 to revise the AO's assessment order - HELD THAT: - The Tribunal applied the two fold test for exercise of power under section 263, namely that the order sought to be revised must be (i) erroneous and (ii) prejudicial to the interests of revenue. Where the Assessing Officer has adopted one of the possible views open in law, such adoption does not render the order erroneous so as to attract section 263 unless that view is unsustainable in law. The AO in the present case had taken a view supported by earlier Benches of the Tribunal and other authorities and, therefore, his order could not be characterised as erroneous and prejudicial merely because the CIT preferred a different view. Consequently, the CIT had no jurisdiction to cancel the AO's order under section 263 in the facts of the case (see paras. 20-21). [Paras 20, 21]CIT's exercise of revisional power under section 263 was unwarranted and the CIT's order is cancelled.Deduction under section 10A to be computed undertaking-wise - separate undertaking doctrine for set-off of losses - Whether loss of STP Unit 2 could be set off against the profit of STP Unit 1 for computing deduction under section 10A - HELD THAT: - Section 10A permits deduction in respect of profits and gains derived by an 'undertaking'; the deduction must be computed with reference to the profits of that undertaking. Legislative history and amendments to subsection (4) confirm that the proportionate deduction is to be worked out with reference to the profits of the business of the undertaking and not from other businesses of the assessee. Judicial precedents, including decisions of coordinate Benches and higher courts dealing with analogous deduction provisions, support the proposition that distinct undertakings should be considered independently and losses of one undertaking cannot be set off against the profits of another in computing the deduction. In the present case the two STP units were treated as separate undertakings and, therefore, the loss of STP Unit 2 could not be set off against STP Unit 1 for the purpose of computing deduction under section 10A (see paras. 11-19). [Paras 11, 12, 15, 16, 18]Deduction under section 10A must be computed undertaking wise and the loss of STP Unit 2 cannot be set off against the profit of STP Unit 1 for computing the deduction.Final Conclusion: The CIT's revision under section 263 (relating to assessment for asst. year 2003 04) was quashed: the AO's computation, which treated STP Unit 1 and STP Unit 2 separately for section 10A purposes, was one of the permissible views and the loss of STP Unit 2 could not be set off against the profit of STP Unit 1; appeal allowed. Issues Involved:1. Invocation of power under Section 263 of the Income Tax Act by the CIT.2. Computation of deduction under Section 10A of the Income Tax Act for STP Unit-1 without setting off the loss of STP Unit-2.3. Whether the order of the Assessing Officer (AO) was erroneous and prejudicial to the interest of the revenue.Detailed Analysis:1. Invocation of Power under Section 263 of the Income Tax Act by the CIT:The appellant challenged the CIT's invocation of power under Section 263 of the Income Tax Act, arguing that the AO's order was not erroneous as it accepted one of the possible views. The CIT issued a show-cause notice to the assessee under Section 263, stating that the AO's assessment order for the assessment year 2003-04 was erroneous and prejudicial to the interest of the revenue. The CIT believed that the AO wrongly allowed the deduction under Section 10A for STP Unit-1 without setting off the loss of STP Unit-2 against the income of STP Unit-1.2. Computation of Deduction under Section 10A of the Income Tax Act:The assessee claimed deduction under Section 10A for STP Unit-1 based on its profit, without claiming any deduction for STP Unit-2, which incurred a loss. The CIT directed the AO to recompute the deduction allowable under Section 10A for STP Unit-1 after setting off the loss of STP Unit-2. The assessee argued that Section 10A is to be computed on an undertaking-wise basis, and the loss of one undertaking cannot be adjusted against the profit of another for computing the deduction under Section 10A. The assessee relied on several Tribunal decisions, including ACIT v Yokogawa India Ltd. and ITO v SCT Software Solutions India Pvt. Ltd., which supported the view that deduction under Section 10A is to be computed separately for each undertaking.3. Whether the AO's Order was Erroneous and Prejudicial to the Interest of the Revenue:The CIT argued that the AO's order was erroneous as it allowed a higher deduction under Section 10A than what was permissible by law, thereby prejudicing the interest of the revenue. The Tribunal, however, noted that the AO had taken one of the possible views, which was supported by various Tribunal decisions. The Tribunal referred to the Supreme Court's judgment in Malabar Industrial Co. Ltd. v CIT, which held that for the CIT to invoke Section 263, the order must be both erroneous and prejudicial to the interest of the revenue. If the AO adopted one of the permissible views, the order could not be considered erroneous.Conclusion:The Tribunal concluded that the AO's order was not erroneous as it was based on one of the possible views. Consequently, the CIT did not have the authority to invoke Section 263 to revise the AO's order. The Tribunal allowed the appeal of the assessee, thereby canceling the CIT's order under Section 263 of the Income Tax Act. The Tribunal did not address the alternative submission as the primary issue was resolved in favor of the assessee.Pronouncement:The appeal of the assessee was allowed, and the judgment was pronounced in the open court on 14.11.2008.