2015 (1) TMI 360 - AT - Income Tax

Commissioner revises assessment order under sec. 263, restricting deduction to business profits.

M/s. MsourceE(India) Pvt. Ltd. Versus Deputy Commissioner of Income-tax, Circle 12(1), Bangalore.

The Commissioner revised the assessment order under sec. 263 of the Income Tax Act, finding the AO's computation of income and deduction u/s 10A ... Revision u/s 263 - Restriction of deduction u/s 10A – Amount representing the profits and gains from business – Held that:- It cannot be said that there is approval of the DRP with regard to the computation of deduction - assessee’s contention that the DRP having approved the computation part of the draft assessment order cannot again be revised by the CIT u/s 263 is not sustainable - the role of DRP cannot be equated with the role of the CIT u/s 158BC - every assessment order passed u/s 158BC requires mandatory approval of the CIT, whereas every assessment order involving transfer pricing issue does not require the prior approval of the DRP - it can be seen that only where variations are made to the returned ‘income of the assessee’, that the AO has to forward the draft assessment order to the assessee and the assessee shall accept the variations or file objections with the DRP and the DRP may confirm, reduce or enhance the variations - Thus, the approval of the DRP is not to the entire draft assessment order but is only to the variations proposed by the AO, unlike the mandatory approval of the CIT of every order passed u/s 158BC. Jurisdiction of CIT u/s 263 - Erroneous and prejudicial to the interests of the Revenue – Held that:- U/s 92C(4) of the Act, it is clearly provided by the first proviso thereto that no deduction u/s 10A or u/s 10AA or section 10B or under chapter VIA shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under sub-section (4) of 92C - the AO has initially aggregated the business income declared by the assessee and also the ALP adjustment and thereafter has allowed deduction u/s 10A - this is in clear violation of the provisions of sec.92C(4) of the Act and hence, the order of the AO is erroneous and prejudicial to the interests of the Revenue - the AO ought to have allowed deduction u/s 10A of the Act before aggregating ALP adjustment and thereafter should have added the ALP adjustment and computed the taxable income - If computation is to be made, then the claim of deduction u/s 10A would have to be restricted to the income from business available before deduction u/s 10A as rightly observed by the CIT – the order of the CIT(A) u/s 263 is upheld – Decided against assessee. Issues:- Correct application of deduction u/s 10A of the Income Tax Act- Jurisdiction of the Commissioner to revise assessment order passed by the Assessing OfficerAnalysis:1. The appeal involved a dispute regarding the correct application of deduction u/s 10A of the Income Tax Act for the assessment year 2006-07. The Assessing Officer (AO) had initially computed the income of the assessee by aggregating the business income and the ALP adjustment, before allowing the deduction u/s 10A. This approach was found to be in violation of sec. 92C(4) of the Act, which prohibits allowing deductions on the enhanced income after ALP adjustments. The Commissioner observed that the deduction u/s 10A should have been restricted to the profits and gains from business amounting to Rs. 32,59,19,968/-, as per the CIT's directions. The order of the AO was deemed erroneous and prejudicial to the interests of the Revenue, leading to the revision of the assessment order by the Commissioner under sec. 263 of the Act.2. The appellant contended that the assessment order, approved by the Disputes Resolution Panel (DRP), consisting of three Commissioners, could not be revised by the Commissioner under sec. 263. However, it was clarified that the DRP's approval was limited to the ALP adjustment and did not cover the computation of the deduction u/s 10A. The Bombay High Court precedent highlighted that an order approved by the DRP could still be subject to revisional jurisdiction under sec. 263. The role of the DRP in transfer pricing issues differs from the mandatory approval required in search cases, thus not preventing the Commissioner from revising the assessment order.3. The Tribunal emphasized that for the Commissioner to assume jurisdiction under sec. 263, the order of the AO must be both erroneous and prejudicial to the Revenue's interests. The AO's incorrect approach of allowing the deduction u/s 10A after aggregating the ALP adjustment was a violation of the Act. The correct procedure should have been to allow the deduction before adding the ALP adjustment to compute taxable income. Consequently, the order of the Commissioner under sec. 263 was upheld, dismissing the appellant's appeal. The decision was based on the proper interpretation and application of the statutory provisions governing deductions and assessment procedures under the Income Tax Act.