2004 (4) TMI 596 - AT - Income Tax

Validity of the order u/s 263 by the Commissioner of Income-tax (CIT) - Depreciation is optional while computing deduction u/s 80HHC - merger of the assessment order with the order of CIT(A) - value of goods exported - HELD THAT - We find that there is a merit in the case of the assessee. It has been demonstrated by the above-mentioned chronology of events that computation of deduction under section 80HHC was a subject-matter of appeal before CIT(A). The CIT(A) has given some findings on the computation of deduction u/s 80HHC. Therefore, the assessment order had merged with the order of CIT(A). Thus, under Explanation (c) to section 263(1), such action of CIT was not permissible. The word ';matter'; is certainly a word of wide import and represents a subject or situation that you need to think about, discuss or deal with. Thus, it is difficult to accept the submission of the Learned D.R. that the issue of depreciation being optional or the issue that assessee was at all entitled to deduction u/s 80HHC or not was not a subject-matter of appeal filed by the assessee before CIT(A). A matter may have many aspects and the above-mentioned two factors may be the aspects of the matter but not entire ';matter'; itself. The ';matter'; in the present case is ';deduction u/s 80HHC. Therefore, we hold that assessment order so as it relates to deduction u/s 80HHC had merged with the order of CIT(A), therefore, exercise of power by Commissioner of Income-tax u/s 263 was even not available under Explanation (c) to section 263(1). We, therefore, hold that order u/s 263 is not a valid order in the eyes of law. Having held that powers under section 263 having been exercised wrongly by CIT as the assessment order had merged with the appellate order, it is not necessary to consider the other aspects of the matter that when CIT was wrong in holding that assessee did not have positive profit from export activity as per provisions of section 80HHC(1), therefore, the assessee is not entitled at all for deduction u/s 80HHC under the proviso to section 80HHC(3) as the same will be of academic interests only. It is nobody';s case that the export incentive received by the assessee does not fall within the ambit of items described in clauses (iiia), (iiib) and (iiic) to section 28 of the Act, therefore, export incentives have to be taken into account as per proviso to section 80HHC(3). This point of view is well supported by the Special Bench decision of Delhi Bench in the case of Lalsons Enterprises 2004 (2) TMI 294 - ITAT DELHI-E . On this count also, the order u/s 263 is not correct. Thus, we quash the impugned order and allow the appeal filed by the assessee.

Issues Involved:
1. Validity of the order u/s 263 by the Commissioner of Income-tax (CIT).
2. Whether depreciation is optional for the assessee.
3. Whether the assessment order had merged with the order of CIT(A).
4. Computation of deduction u/s 80HHC.

Summary:

1. Validity of the order u/s 263 by the Commissioner of Income-tax (CIT):
The CIT issued a show-cause notice u/s 263, stating that the assessment order was erroneous and prejudicial to the interest of revenue. The CIT directed the Assessing Officer (AO) to recompute the assessee's total income by allowing depreciation and disallowing the deduction u/s 80HHC. The Tribunal quashed the order u/s 263, holding that the assessment order had merged with the order of CIT(A) regarding the computation of deduction u/s 80HHC, and thus, the CIT could not invoke powers u/s 263.

2. Whether depreciation is optional for the assessee:
The assessee contended that claiming current depreciation was optional, citing decisions of the Bombay High Court and Supreme Court. However, the Tribunal held that as per the jurisdictional High Court's decision in Indian Rayon Corpn. Ltd. v. CIT, where the assessee claims deduction under Chapter VI-A, profits must be computed as per sections 29 to 43A, including depreciation u/s 32. Thus, depreciation is not optional.

3. Whether the assessment order had merged with the order of CIT(A):
The Tribunal found that the computation of deduction u/s 80HHC was a subject matter of appeal before CIT(A), and CIT(A) had given directions to recompute the deduction. Therefore, the assessment order had merged with the order of CIT(A). Under Explanation (c) to section 263(1), the CIT could not invoke powers u/s 263 for matters already considered and decided in appeal.

4. Computation of deduction u/s 80HHC:
The CIT argued that since there was no positive profit from export activities, the assessee was not entitled to deduction u/s 80HHC. The Tribunal disagreed, stating that even if there is no positive profit as per section 80HHC(3), the negative profit must be increased by 90% of the export incentives as per the proviso to section 80HHC(3). This view was supported by the Special Bench decision in Lalsons Enterprises v. Dy. CIT.

Conclusion:
The Tribunal quashed the order u/s 263 and allowed the appeal filed by the assessee, holding that the assessment order had merged with the order of CIT(A) and that the CIT's view on depreciation and deduction u/s 80HHC was incorrect.

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