2011 (1) TMI 27 - HC - Income Tax

Revision u/s 263 - Deduction u/s 32AB - Method of computation - Book profit under schedule VI of the companies act, 1956 or profit and gains of business - Held that - it is found that the view which was prevalent at the appropriate point in time was that of the Tribunal at Delhi taken in the case of the Assistant Commissioner of Income Tax Vs. Northern India Theatres Pvt. Ltd. and in Indian Transformers Ltd. (1995 -TMI - 62254 - ITAT COCHIN). In terms of these judgments, the income of the assessee, shown in its balance sheet under the head other income had not to be excluded for purposes of determining the permissible deduction under section 32 AB of the Act. The notice was issued by the CIT under section 263 of the said Act on 21.02.1994 when, the aforesaid legal position was admittedly enuring for the benefit of the assessee. Therefore, on the date the CIT issued the show cause notice, the legal position which obtained supported the view taken by CIT (A) in its order dated 07.08.1992. In these circumstances, the issuance of show cause notice to the respondent/assessee was uncalled for. - Decided in favor of assessee.

Issues:
1. Assessment of income under section 32 AB of the Income Tax Act, 1961 for the Assessment Year 1989-90.
2. Challenge of assessment order before the Commissioner of Income Tax (Appeal) regarding short deduction under section 32 AB.
3. Show cause notice issued under section 263 of the Act in respect of the deduction enhancement.
4. Jurisdiction of CIT to exercise power under Section 263 of the Income-tax Act.

Analysis:

1. The respondent filed returns for the Assessment Year 1989-90, and the Assessing Officer assessed the income under section 32 AB of the Income Tax Act, 1961. The assessment order highlighted the inclusion of "other income" in the balance sheet of the respondent company. The taxable income was determined after allowing a deduction under section 32 AB, resulting in a specific amount.

2. The assessment order was challenged before the Commissioner of Income Tax (Appeal) by the assessee, raising concerns about the short deduction under section 32 AB. The appeal led to a re-computation of the deduction against profits and gains of business as per the Companies Act, reducing the taxable income accordingly.

3. Subsequently, the CIT issued a show cause notice under section 263 of the Act, questioning the approach adopted in enhancing the deduction by including "other income" in the profits and gains from business. After due consideration and response from the respondent, the CIT passed an order allowing the deduction after excluding "other income."

4. The respondent appealed this order before the Tribunal, which ruled in favor of the assessee. The department then appealed this decision, questioning the jurisdiction of the CIT to exercise power under Section 263 of the Income-tax Act. The legal issue revolved around whether the order passed by the Assessing Officer was erroneous and prejudicial to the interest of revenue, as required by section 263.

5. The Court analyzed the legal principles established in previous judgments, emphasizing that the phrase "prejudicial to interest of revenue" in section 263 must be linked to an "erroneous order" by the Assessing Officer. It was clarified that a loss of revenue alone does not make an order prejudicial unless it is unsustainable in law. In this case, the legal position at the time supported the view taken by the CIT (A) and the notice issued under section 263 was deemed unnecessary.

6. Ultimately, the Court ruled in favor of the respondent, dismissing the appeal and affirming that the issuance of the show cause notice was unwarranted based on the prevailing legal position and the actions taken by the Assessing Officer and the CIT (A).

This detailed analysis of the judgment highlights the assessment process, challenges raised, the show cause notice issued, and the legal principles governing the jurisdiction of the CIT under section 263 of the Income-tax Act.

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