2019 (7) TMI 2068 - AT - Income Tax

Revision under s.263 quashed for failure to show AO's assessment was both erroneous and prejudicial to revenue

Johnson & Johnson Pvt Ltd Versus Commissioner of Income Tax (LTU), Mumbai

ITAT MUMBAI - AT quashed revision under s.263 where CIT(LTU) had set aside AO's allowance of s.80IC deduction for a consumer-division unit. Tribunal held ... Revision u/s 263 - assessee wrongly claimed deduction u/s 80IC at 100% of eligible unit in respect of consumer division in the sixth year of operation in violation of the provisions of section 80IC - HELD THAT:- Perusal of assessment order reveals that during the assessment, the AO examined the issue of deduction u/s 80IC. AO, examined the deduction related to consumer division, hospital product and ethicon sutures. AO, after elaborate discussion has recorded partly disallowed certain expenses related to head office, common expenses and shared expenses. However, the Ld. CIT(LTU) treated the assessment order qua deduction u/s 80IC by taking view that substantial expansion of consumer unit cannot be considered for further period of deduction u/s 80IC @100%. We have noted that in the impugned order, the Ld. CIT(LTU) has not given a finding that the assessment order passed by AO is erroneous insofar as it is prejudicial to the interest of revenue. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. [2000 (2) TMI 10 - SUPREME COURT] held that the twin conditions, i.e. order is erroneous and prejudicial to the interest of revenue must cumulatively satisfied. AO has examined the issue of deduction under section 80IC and passed assessment order. CIT(LTU) has not specified as to how the order passed by assessing officer fall with the twin condition as provided u/s 263 of the ACT. Thus, in our view the order passed by ld CIT(LTU) is not sustainable under the law. We have further seen that the Hon’ble Apex Court in PCIT vs Arham Softronics Ltd. [2019 (2) TMI 1285 - SUPREME COURT] held that an assessee who sets up new industry of a kind mentioned in sub-section (2) of section 80-IC and starts availing exemption of 100 per cent tax under sub-section (3) of section 80-IC (which is admissible for five years) can start claiming exemption at same rate of 100 per cent beyond period of five years on ground that assessee has now carried out substantial expansion in terms of clause (ix) of sub-section (8) of section 80-IC within aforesaid period of ten years in its manufacturing unit. Thus, revision order passed by the Ld. CIT(LTU) quashed /set aside. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether revision under section 263 can be validly initiated where the Commissioner has not demonstrated that the assessment order is both erroneous and prejudicial to the interests of revenue. 2. Whether an assessment order can be treated as erroneous under section 263 where the Assessing Officer examined the records, called for explanations, applied mind and reached a view despite the availability of another plausible view. 3. Whether a unit that undertook substantial expansion during the prescribed period is entitled to a fresh 'initial assessment year' for claiming 100% deduction under section 80-IC, such that the period for 100% deduction restarts from the year of substantial expansion. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of initiation of revision proceedings under section 263: legal framework Legal framework: The power of the superior tax authority to revise an assessment under section 263 is supervisory and conditional. Two conjunctive requirements must be satisfied before revision can be exercised: (a) the assessment order must be erroneous (i.e., not in accordance with law) and (b) the error must be prejudicial to the interests of the revenue. Both elements must be shown on the record. Precedent treatment: The Court applied the established two-fold test from higher judicial authority requiring both error and prejudice as preconditions for valid exercise of revisionary power. The tribunal also relied on coordinate bench guidance that extraordinary revision powers cannot be invoked merely because the Commissioner prefers a different assessment outcome. Interpretation and reasoning: The Court examined the assessment record and found that the Assessing Officer had taken up the issue, sought and received explanations and supporting documents (including the audit certificate/form), recorded detailed reasons and made specific disallowances after applying mind. The revisional order failed to identify any material not considered by the AO or any specific legal or factual defect showing the AO's order was contrary to law. The revisional order did not set out prima facie material demonstrating that lawful tax was left unassessed or that the AO had committed a glaring mistake of law or fact. Ratio vs. Obiter: Ratio - revision under section 263 cannot be sustained unless there is cogent material on record demonstrating both that the assessment is erroneous and that such error is prejudicial; absent such material, supervisory power cannot substitute the Commissioner's view for an AO's considered quasi-judicial determination. Obiter - commentary cautioning against revisional re-estimation by the Commissioner where AO applied mind. Conclusions: The revision was invalid because the revising authority did not satisfy the twin conditions on the record and merely disagreed with the AO's view. The order of revision was therefore quashed on this ground. Issue 2 - Applicability of section 263 when two reasonable views exist and AO adopted one view Legal framework: Where statutory language or its application admits more than one reasonable interpretation, an Assessing Officer's adoption of one permissible view after applying mind cannot be branded erroneous for purposes of section 263. Revisionary power is not a vehicle to enforce the Commissioner's preference where the AO's conclusion is one of two tenable positions. Precedent treatment: The Court followed binding principles recognizing the legitimacy of competing views and that an AO's choice among reasonable views precludes treating the assessment as erroneous absent illegality or non-application of mind. Interpretation and reasoning: The controversy concerned whether completion of 'substantial expansion' can operate to produce a new 'initial assessment year' thereby re-commencing the five-year 100% deduction period. Higher judicial pronouncements reflect conflicting positions; the AO adopted a view after examining records and explanations. The Tribunal found that the question permitted multiple reasonable interpretations and thus the AO's considered choice could not be overturned under section 263. Ratio vs. Obiter: Ratio - where two plausible views exist, AO's adoption of one view after due application of mind precludes treatment of the order as erroneous under section 263. Obiter - observations on the line between mistaken assessment and lack of application of mind. Conclusions: Revision could not be sustained on the ground that the AO adopted a view contrary to the Commissioner's; the presence of an alternative reasonable view precludes invoking section 263. Issue 3 - Entitlement to a fresh initial assessment year following substantial expansion (interpretation of section 80-IC) Legal framework: The statutory scheme provides a special deduction (100% for a limited period) for eligible undertakings; the definition of 'initial assessment year' includes reference to commencement of operations or completion of substantial expansion. The taxpayer's entitlement to 100% deduction depends on whether the statutory criteria for fresh commencement (and consequently a new initial year) are satisfied. Precedent treatment: The Court identified two lines of judicial authority: one limiting the taxpayer to a single initial assessment year (precluding re-commencement of the 100% period on subsequent expansion), and another, including a later full-bench decision, holding that substantial expansion can create a new initial assessment year and restart the 100% deduction period. The Tribunal accepted the later full-bench apex authority as governing. Interpretation and reasoning: The Tribunal noted that the Assessing Officer did not dispute the factual occurrence of substantial expansion in the relevant year. Given the prevailing higher-court full-bench authority recognizing a fresh initial assessment year upon substantial expansion, the Tribunal concluded that the assessee's claim to restart the 100% deduction period on account of substantial expansion was legally tenable. The revising authority's contrary reading (that the statutory 'or' must be read mutually exclusively to preclude a second initial year) was inconsistent with the binding full-bench precedent. Ratio vs. Obiter: Ratio - where a unit undertaking substantial expansion in the prescribed period meets the statutory test, the year of completion of substantial expansion constitutes a new initial assessment year and the assessee is eligible to claim 100% deduction for the statutory period starting from that year (as per the binding full-bench authority). Obiter - discussion on the text-interpretive function of 'or' and on competing appellate lines prior to the full-bench ruling. Conclusions: On the merits, the assessee was entitled to treat the year of substantial expansion as an initial assessment year for purposes of claiming 100% deduction under section 80-IC. The revisional order disallowing that treatment was set aside both because the revisional power was not properly invoked and because the higher authority favoured reinstatement of the entitlement. Overall Conclusion The revisional order was quashed: (a) it failed to establish on record the twin prerequisites (error and prejudice) necessary to validly exercise revisionary jurisdiction; (b) the Assessing Officer had examined submissions and applied mind such that his considered view could not be branded erroneous where a reasonable alternative view existed; and (c) on the substantive point concerning restart of the 100% deduction following substantial expansion, binding higher authority supported the taxpayer's claim, entitling the taxpayer to relief. The appeal was allowed accordingly.