2021 (4) TMI 464 - HC - Income Tax

Court overturns invalid revisionary proceedings, upholds assessment order. Separate books not mandatory for Section 10A units.

The court allowed the appeal, finding that the revisionary proceedings initiated by the Principal Commissioner of Income Tax were invalid. It held that ... Revision u/s 263 - AO has granted deduction claimed under Section 10A of the Act -Tribunal upholding the jurisdictional validity of the revisionary proceedings initiated - Whether tribunal was right in law in concluding that in the absence of separate books of accounts being maintained for the 10A units, the deduction shall be computed based on the overall average profit margin of the appellant despite the provisions of Section 10A of the Act specifically provides for unit-wise computation of deduction? - HELD THAT:- We find there is no discussion and finding with regard to the exercise of jurisdiction under Section 263, which according to the assessee was without jurisdiction. Secondly, the issue whether it is mandatory for the assessee to maintain separate books of accounts was also not decided by the PCIT. If according to the PCIT, it is mandatory to maintain separate books of accounts, the alternate submission made by the assessee that they have maintained separate profit and loss account and the same was submitted to the Assessing Officer, who has considered the same and then completed the assessment, was not dealt with or discussed. To be noted that the Assessing Officer did not reject the profit and loss account submitted by the assessee, but undertook an exercise to rework the deduction, which was not challenged by the assessee. PCIT would state that the Assessing Officer has not made any enquiry. This finding is absolutely vague, as we find from the assessment order under Section 143(3) of the Act, the Assessing Officer did conduct an enquiry, called for details, the details were produced and thereafter, the assessment was completed. Therefore, the finding of the PCIT in that regard is erroneous, consequently, assumption of jurisdiction under Section 263 of the Act was not sustainable. The Tribunal while testing the correctness of the order passed by the PCIT has also not dealt with the issues, which were specifically pleaded by the assessee. Therefore, we are to necessarily hold that the order passed by the Tribunal is also erroneous. The CBDT by Circular No.1/2013, dated 17.01.2013, issued clarification on various issues, which were highlighted by the software industry and one such issue was, whether it is necessary to maintain separate books of account for eligible units claiming tax benefit under Sections 10A and 10B In terms of the above clarification, there is no requirement to maintain separate books of account. By Instruction No.17/2013 dated 19.11.2013, the Field Officers of the Department were advised to follow Circular No.1/2013 dated 17.01.2013, in letter and spirit. By Instruction No.3/2014, dated 14.03.2014, the Department Representatives and the Standing Counsel of the Department were directed to be informed about Circular No.1/2013, who appear for the Department before the Tribunal and the Court. The above circulars and instruction are binding on the Department and therefore, the conclusion of the PCIT that it is necessary to maintain separate books of account is not sustainable. See M/S. CAIRN INDIA LTD. VERSUS DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) [2017 (11) TMI 643 - MADRAS HIGH COURT] as held that Section 80IB does not mandate that for claiming deduction, separate books of accounts should be maintained. - we are of the clear view that the Tribunal committed an error in not interfering with the order passed by the PCIT. - Decided in favour of assessee. Issues Involved1. Jurisdictional validity of revisionary proceedings initiated by the respondent.2. Computation of deduction under Section 10A of the Income Tax Act.3. Remanding of the case back to the Assessing Officer for fresh adjudication.Detailed Analysis1. Jurisdictional Validity of Revisionary ProceedingsThe primary issue was whether the Tribunal was correct in upholding the jurisdictional validity of the revisionary proceedings initiated by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act. The PCIT had issued a notice proposing to set aside the assessment order on the grounds that the profit percentage of 10A units was significantly higher than non-10A units and that the assessee had not maintained separate books of accounts for 10A units. The PCIT believed this resulted in an erroneous assessment order prejudicial to the interest of the Revenue.The court highlighted that for invoking Section 263, the twin conditions of the assessment order being erroneous and prejudicial to the interest of the Revenue must be satisfied. The court found that the Assessing Officer (AO) had indeed applied his mind and conducted an inquiry into the details provided by the assessee, including the unit-wise profit and loss account and the Chartered Accountant's certificate in Form 56F. The AO had reworked the deduction under Section 10A after considering the documents and records submitted by the assessee. Therefore, the court held that the PCIT's assumption of jurisdiction under Section 263 was not sustainable as the AO's order was neither erroneous nor prejudicial to the interest of the Revenue.2. Computation of Deduction Under Section 10AThe second issue was whether the Tribunal was correct in concluding that in the absence of separate books of accounts for the 10A units, the deduction should be computed based on the overall average profit margin of the assessee. The assessee argued that it is not mandatory to maintain separate books of accounts for 10A units, supported by CBDT Circular No.1/2013, which clarified that there is no requirement in law to maintain separate books of account for eligible units claiming tax benefits under Sections 10A and 10B.The court noted that the AO had reworked the deduction under Section 10A by reducing the expenditure incurred in foreign currency and had allowed the deduction after considering the documents produced by the assessee. The court also observed that the assessee had maintained separate profit and loss accounts for each unit and had submitted the same to the AO. Therefore, the court held that the Tribunal erred in concluding that the deduction should be computed based on the overall average profit margin.3. Remanding of the Case Back to the Assessing OfficerThe third issue was whether the Tribunal was right in remanding the case back to the AO for fresh adjudication. The court found that the AO had conducted a thorough inquiry, called for details, and completed the assessment based on the materials and documents placed before him. The PCIT's finding that the AO had not made any inquiry was deemed vague and incorrect.The court emphasized that the AO had reworked the deduction under Section 10A after considering the documents produced by the assessee and the various expenses pertaining to the 10A units. Therefore, there was no justification for remanding the case back to the AO for fresh adjudication, as the original assessment was neither erroneous nor prejudicial to the interest of the Revenue.ConclusionThe court allowed the appeal, holding that the Tribunal committed an error in not interfering with the order passed by the PCIT. The substantial questions of law were answered in favor of the assessee, and the revisionary proceedings initiated by the PCIT were deemed invalid. The court also clarified that it is not mandatory to maintain separate books of accounts for 10A units, and the deduction should not be computed based on the overall average profit margin.