Tribunal Reverses CIT's Decision: Depreciation Mandated for Chapter VI-A Deductions; Export Incentives Considered.

The Tribunal annulled the CIT's order under section 263, affirming that the assessment order had merged with the CIT(A)'s order concerning the deduction under section 80HHC. It held that depreciation is mandatory when claiming deductions under Chapter VI-A, aligning with the jurisdictional High Court's decision. Additionally, the Tribunal disagreed with the CIT's stance on section 80HHC, emphasizing that even without positive export profits, deductions should account for export incentives. Consequently, the Tribunal allowed the assessee's appeal, confirming the CIT's misinterpretation of depreciation and section 80HHC deductions.

---

---

Issues Involved:
1. Validity of the order u/s 263 by the Commissioner of Income-tax (CIT).
2. Whether depreciation is optional for the assessee.
3. Whether the assessment order had merged with the order of CIT(A).
4. Computation of deduction u/s 80HHC.

Summary:

1. Validity of the order u/s 263 by the Commissioner of Income-tax (CIT):
The CIT issued a show-cause notice u/s 263, stating that the assessment order was erroneous and prejudicial to the interest of revenue. The CIT directed the Assessing Officer (AO) to recompute the assessee's total income by allowing depreciation and disallowing the deduction u/s 80HHC. The Tribunal quashed the order u/s 263, holding that the assessment order had merged with the order of CIT(A) regarding the computation of deduction u/s 80HHC, and thus, the CIT could not invoke powers u/s 263.

2. Whether depreciation is optional for the assessee:
The assessee contended that claiming current depreciation was optional, citing decisions of the Bombay High Court and Supreme Court. However, the Tribunal held that as per the jurisdictional High Court's decision in Indian Rayon Corpn. Ltd. v. CIT, where the assessee claims deduction under Chapter VI-A, profits must be computed as per sections 29 to 43A, including depreciation u/s 32. Thus, depreciation is not optional.

3. Whether the assessment order had merged with the order of CIT(A):
The Tribunal found that the computation of deduction u/s 80HHC was a subject matter of appeal before CIT(A), and CIT(A) had given directions to recompute the deduction. Therefore, the assessment order had merged with the order of CIT(A). Under Explanation (c) to section 263(1), the CIT could not invoke powers u/s 263 for matters already considered and decided in appeal.

4. Computation of deduction u/s 80HHC:
The CIT argued that since there was no positive profit from export activities, the assessee was not entitled to deduction u/s 80HHC. The Tribunal disagreed, stating that even if there is no positive profit as per section 80HHC(3), the negative profit must be increased by 90% of the export incentives as per the proviso to section 80HHC(3). This view was supported by the Special Bench decision in Lalsons Enterprises v. Dy. CIT.

Conclusion:
The Tribunal quashed the order u/s 263 and allowed the appeal filed by the assessee, holding that the assessment order had merged with the order of CIT(A) and that the CIT's view on depreciation and deduction u/s 80HHC was incorrect.

---