Court affirms set-off for export units under Income Tax Act, rejects Commissioner's challenge.

The High Court upheld the Tribunal's decision that the assessing officer's view allowing set off of losses between 100% export oriented units was valid under section 10B of the Income Tax Act. The Court confirmed that the Commissioner could not invoke jurisdiction under section 263 merely based on a disagreement with the assessing officer's decision, as long as it was a possible interpretation. The appeal was dismissed in favor of the assessee, ruling against the Revenue's contention that losses between units could not be set off.

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Issues Involved:
1. Set off of losses between 100% export oriented units.
2. Jurisdiction under section 263 of the Income Tax Act.
3. Interpretation of section 10B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Set off of losses between 100% export oriented units:
The respondent assessee owned three 100% export oriented units: PVC Unit, Traditional Mats Unit, and Pathirapally Unit. For the assessment year 2003-04, while the PVC and Traditional Mats units returned profits, the Pathirapally Unit incurred a loss. The assessing officer allowed the assessee to set off the loss from the Pathirapally Unit against the profits of the other two units. The Commissioner of Income Tax, however, disagreed, holding that such a set off was not permissible under section 10B of the Income Tax Act, 1961, as it would result in a 100% deduction from the profit-earning units, contrary to legislative intent.

2. Jurisdiction under section 263 of the Income Tax Act:
The Commissioner of Income Tax assumed jurisdiction under section 263, arguing that the assessing officer's decision was erroneous and prejudicial to the interests of the Revenue. However, the Income Tax Appellate Tribunal (ITAT) held that the assessing officer's decision was one of the possible views and thus not erroneous or prejudicial to the interests of the Revenue. The Tribunal emphasized that the power of revision under section 263 could not be invoked merely because there was another possible view.

3. Interpretation of section 10B of the Income Tax Act:
The Revenue contended that each unit should be treated separately under section 10B, and thus, the set off of losses between units was not permissible. However, the Tribunal, supported by judgments from the Bombay High Court, held that section 10B, as amended by the Finance Act of 2000, provided for a deduction rather than an exemption. Consequently, the losses from one unit could be set off against the profits from other units.

Detailed Judgment Analysis:

Jurisdiction under section 263:
Section 263 empowers the Commissioner to revise an order if it is erroneous and prejudicial to the interests of the Revenue. The Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income-tax clarified that an order is erroneous if it involves an incorrect assumption of facts or incorrect application of law. The phrase 'prejudicial to the interests of the Revenue' is broad and includes any order resulting in a loss of tax. However, if the assessing officer's view is one of the possible views, the Commissioner cannot invoke section 263 merely because he disagrees with it.

Interpretation of section 10B:
The Tribunal relied on the Bombay High Court's judgments in Hindustan Unilever Limited v. Deputy Commissioner of Income Tax and Union of India and The Commissioner of Income Tax v. Galaxy Surfactants Ltd., which interpreted section 10B as providing for a deduction rather than an exemption. The court noted that after the amendment by the Finance Act of 2000, section 10B allowed for the deduction of profits from 100% export oriented units, and losses from one unit could be set off against the profits from others.

Conclusion:
The Tribunal's conclusion that the assessing officer's view was one of the possible views was upheld. The High Court confirmed that the Commissioner could not assume jurisdiction under section 263 in such circumstances. The appeal was dismissed, and the question of law was answered in favor of the assessee and against the Revenue.

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