2004 (12) TMI 680 - AT - Income Tax

Challenged the Order passed by CIT u/s 263 - assumption of jurisdiction u/s 147 - exchange fluctuation - Allowability of ESOP expenditure as a business deduction - depreciation on Intellectual Property Rights (IPRs) - validity of the invocation of Section 263 - HELD THAT - We are of the view that the use of the words 'pass such orders as the circumstances of the case justify' cannot give the power to do both the acts in one order not only for the reason that it will render the latter part of the section nugatory but also because once an assessment is set aside, such assessment is a nullity in law until a fresh assessment is made. In such a case it is not possible to direct an enhancement on an assessment, which is already cancelled. We, therefore, hold that the CIT in exercise of the powers under Section 263 can either enhance/modify or cancel and direct a fresh assessment. An offshoot of this conclusion will be whether in the instant case, where there is both an enhancement and a set aside of the assessment, the entire order of the CIT stands vitiated or whether only a part of such order will stand vitiated. We hold that the entire order will stand vitiated for it will not be possible to hold that only a part of the order will be vitiated; if we were to hold so it will not be possible for us to bifurcate and conclude as to whether the enhancement/modification is valid or the set aside is valid. The only possible conclusion in these circumstances is to hold that the entire order would be invalid. There is no provision for setting aside an issue without setting aside the assessment. As we see it, an order passed u/s 143(3) which was otherwise final is sought to be modified by the CIT through the medium of Section 263. Once the said order is disturbed, either it is modified as desired by the CIT or set aside to be redone according to law and on the basis of directions contained in the order u/s 263. Section 263 itself, contains enough clues to this effect. In our considered view, the order as passed u/s 263 is unworkable, because once an assessment is set aside it has to be redone according to law, if it is not set aside, the assessment has to be modified as directed, in which event the CIT cannot set aside an issue for reconsideration or investigation. In any case, since we have, on the merits of the directions made by the CIT, held that in each of the directions there was either no error or prejudice or both, we hold that the CIT was not justified in invoking his jurisdiction u/s 263, a detailed examination of this aspect of his order is purely academic. In the result the assessee's appeal is allowed.

Issues Involved:
1. Business Expenditure
2. ESOP Expenditure
3. Enhancement and Setting Aside of Assessment
4. Allowability of Depreciation
5. Surplus Arising on Exchange Fluctuation
6. Amortization of Preliminary Expenses u/s 35D

Summary:

1. Business Expenditure:
The assessee entered into an agreement with government schools to provide computer education, requiring installation of infrastructure like wooden partitions and furniture. The AO treated this as business expenditure. The CIT, invoking section 263, allowed 1/5th depreciation over five years. The Tribunal held that the expenditure did not create any asset or enduring benefit, thus the allowance of the expenditure in its entirety was neither erroneous nor prejudicial to the interest of revenue.

2. ESOP Expenditure:
The AO granted a deduction for ESOP expenditure as per SEBI guidelines, considering it not a contingent liability. The CIT invoked section 263, but the Tribunal held that the AO's order was neither erroneous nor prejudicial to the revenue.

3. Enhancement and Setting Aside of Assessment:
The CIT directed enhancement on four issues and set aside one issue for fresh consideration after invoking section 263. The Tribunal held that enhancement and setting aside of assessment simultaneously vitiated the order of the CIT entirely, as the legislative intent allows either enhancing or modifying the assessment, or cancelling and directing a fresh assessment, but not both.

4. Allowability of Depreciation:
The assessee acquired intellectual property rights (IPRs) through the acquisition of an American firm, AOC, and claimed depreciation. The CIT invoked section 263, pointing out the need for further investigation. The Tribunal held that section 263 has a limited scope and cannot be used for a roving enquiry. The CIT failed to demonstrate an error in the assessment that was prejudicial to the revenue.

5. Surplus Arising on Exchange Fluctuation:
The AO treated the surplus from exchange fluctuation on GDR proceeds as a capital receipt for deduction u/s 80HHE. The CIT invoked section 263, considering it erroneous. The Tribunal held that the surplus was not revenue in nature as it resulted from exchange rate fluctuation, not from any activity by the assessee. The AO had taken one of the two possible views, thus the CIT's order was not justified.

6. Amortization of Preliminary Expenses u/s 35D:
The assessee claimed amortization of expenses related to the acquisition of AOC and GDR issue under section 35D. The CIT, invoking section 263, disallowed the claim. The Tribunal held that the expenditure was for the expansion of an existing undertaking, and the acceptance of the claim by the AO was not erroneous. The assessee had preferred a lesser claim, and the grant of deduction was not prejudicial to the revenue.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the CIT's invocation of section 263 was not justified on all counts. The directions to disallow certain expenditures and set aside the assessment for fresh consideration were invalid.

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