INCOME TAX ACT, 1961

Revision under section 263- Erroneous and prejudicial order-Allowability of deduction under section 80-IB and 80HHC-Amount of profit

Assessee claimed deduction under sections 80-IB and 80HHC. AO allowed the claim of the assessee for deduction under sections 80-IB and 80HHC after finalizing the assessment under section 143(3). CIT examined the assessment order and found that for the purpose of calculation of deduction under section 80HHC, AO adopted the same figure of profits as adopted for the purpose of calculation of deduction under section 80-IB, both the deductions were computed after taking into consideration the same amount of profit without considering the provisions of section 80-IA(9) and the provisions of section 80-IB(13). AO while computing the amount of deduction under section 80-IB did not exclude the income by way of duty drawback receipt and sale of samples. He was of view that the provisions of section 80-IA(9) made it clear that the profits of the business for the purposes of calculation of deduction under section 80HHC were to be reduced by the amount of deduction under section 80-IB and that deduction under section 80-IB was to be calculated and allowed first by virtue of section 80-IA(9). AO had overlooked the provisions of section 80-IA(9) while computing deduction under section 80HHC, incomes by way of duty drawback receipts and sales of free samples could not be equated to profits derived from the industrial undertaking and the duty drawback receipts and income from sale of free samples were excludible for computing deduction under section 80-IB. Therefore, CIT was of view that the order of AO was erroneous insofar as it was prejudicial to the interest of the revenue. Thus, he cancelled the assessment order and directed AO to make assessment de novo. Held:Section 263 justify exercise of jurisdiction by CIT, the order of AO is to be erroneous insofar as it is prejudicial to the interest of the revenue. The satisfaction of the twin conditions is a prerequisite to justify intervention by AO under section 263. The order should be erroneous so that section 263 is attracted. Similarly, the second condition of the order being prejudicial to the interest of the revenue is to be applied in conjunction with an erroneous order of AO. Where AO has adopted one of the course permissible in law or where two views are possible and AO has taken a view which CIT does not agree with, such an order of AO cannot be treated as an erroneous order insofar as it is prejudicial to the interest of the revenue. The exception being a situation where the view taken by AO is otherwise unsustainable in law.

In the present case AO had examined the claim of deduction under sections 80HHC and 80-IB. The charge of CIT that AO had overlooked the provisions of section 80-IA(9) did not appear to be justified for the reason that AO had examined the same. The assessee submitted its explanation to AO regarding applicability of section 80-IA(9), in which it stated that the deduction under sections 80HHC and 80-IB would be available on complete profit of business. Therefore, to hold that AO overlooked the provisions of section 80-IA(9) would be a misnomer. Thus, it would be safe to deduce that quantification of deduction under sections 80HHC and 80-IB was made by AO on being satisfied with the explanation of the assessee.