2011 (11) TMI 756 - AT - Income Tax

Summary

Issues involved: Appeal against order u/s 263 of the Income-tax Act, 1961 regarding deduction u/s 10A and set-off of brought forward losses u/s 72 and unabsorbed depreciation u/s 32(2).

The appellant raised grounds challenging the order of the Commissioner of Income-tax u/s 263, claiming it to be bad and erroneous in law. The main issue was the deduction u/s 10A and the treatment of brought forward losses. The Commissioner held that the deduction u/s 10A was excessive as it was allowed before setting off the brought forward losses, resulting in an excess carry forward of business loss. The appellant contended that the AO's order was not erroneous, citing a similar view taken by the jurisdictional High Court. The Commissioner, however, maintained that the assessment order was indeed erroneous and prejudicial to revenue due to the excess deduction u/s 10A.

The facts of the case revealed that the assessee, engaged in software development, filed a return declaring Nil income, which was later scrutinized. The AO allowed deductions u/s 10A, and the assessment order was passed. Subsequently, the Commissioner u/s 263 found the assessment order erroneous as the deduction u/s 10A was excessive. The Commissioner issued a show cause notice, which the assessee responded to by citing provisions of the Income-tax Act in support of the AO's order. Despite the assessee's submissions, the Commissioner upheld the view that excess deduction u/s 10A had been allowed, leading to an incorrect assessment.

In the appeal, the appellant argued that the AO's order was valid and not prejudicial to revenue, referencing a judgment by the jurisdictional High Court. The Commissioner, supported by the CIT(DR), maintained that the assessment order was indeed erroneous. The Tribunal considered the arguments of both parties and noted a significant judgment by the jurisdictional High Court regarding the treatment of deductions under Section 10-A. The High Court clarified that unabsorbed business loss u/s. 72 and unabsorbed depreciation u/s. 32(2) should not be set off against the profits of the eligible undertaking before calculating the exemption u/s. 10A. Based on this interpretation, the Tribunal allowed the appeal by the assessee, setting aside the Commissioner's order and restoring the assessment order passed by the AO.

In conclusion, the Tribunal's decision highlighted the importance of correctly applying the provisions of the Income-tax Act, particularly concerning deductions u/s 10A and the set-off of brought forward losses. The judgment emphasized the need for consistency in interpreting tax laws to ensure fair and accurate assessments.