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Issues involved: Jurisdiction of CIT u/s 263 for assessment year 2005-06 regarding deduction u/s 10A for STPI unit and setting off losses of non-STPI unit.
Jurisdiction of CIT u/s 263: The appeal by the Assessee was against the order of the CIT-I, Hyderabad dated 27/01/2010, passed u/s 263 for the assessment year 2005-06. The CIT observed that the assessment completed u/s 143(3) for the AY 2005-06 was erroneous and prejudicial to the revenue as the AO wrongly allowed deduction u/s 10A without setting off the loss of non-STPI unit, resulting in revenue loss. A show cause notice was issued to rectify this error. Deduction u/s 10A for STPI unit: The CIT held that the deduction u/s 10A for the STPI unit should be computed after setting off the losses of the non-STPI unit. The Assessee's contention that the deduction u/s 10A should be computed for each undertaking without setting off losses of other units was rejected. The CIT directed that the business loss of the non-STPI unit should be set off against the profits of the STPI unit before computing relief u/s 10A for the STPI unit. Legal Precedents: The issue of whether losses of non-10A unit can be set off against the income of the 10A unit was settled by the Karnataka High Court in CIT v Yokogawa India Ltd. The High Court held that income of the 10A unit should be removed at the source itself, not after computing total income, making the income eligible for exemption u/s 10A not enter into computation. The Special bench of the Chennai Tribunal also reached a similar conclusion in Scientific Atlanta Indi technology P Ltd v ACIT. The existence of multiple views on the matter indicated that the CIT erred in assuming jurisdiction u/s 263. Decision: The ITAT Hyderabad held that both in terms of jurisdiction and merits, the Assessee succeeded. The Appeal of the Assessee was allowed, overturning the CIT's order.
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