2010 (12) TMI 708 - AT - Income Tax

Revision u/s 263 - Rule 8 of ITAT Rules - Depreciation - Disallowance u/s 14A - assessee company at the relevant time was mainly engaged in Information Technology related activities with special emphasis on data processing/software development with the use of CRS in India - AO has issued a show cause notice u/s 142 of the Income Tax Act and called for a number of information - It is true that discussion in the asstt. order in respect of these items is not discernable, but it is equally true that AO has called for the information and these have been supplied by the assessee - The disallowance is to be made on actual expenses which Ld. Commissioner has not specified either in the show cause notice or ultimately in the order. Similarly depreciation on computer and computer peripherals is admissible @ 60% - Appeal is allowed

Summary

Issues:
1. Whether the order passed by the Ld. Commissioner under section 263 of the Income Tax Act, setting aside the assessment order for the asstt. year 2005-06, is justified?
2. Whether the Ld. Commissioner's directions regarding grant of depreciation on computers and disallowance under section 14A of the Act are valid?

Analysis:

Issue 1:
The Ld. Commissioner invoked section 263 based on two reasons: first, the non-disallowance of expenses related to dividend income under section 14A, and second, the grant of depreciation on computers at 60% instead of 25%. The Ld. Commissioner held that the AO's order was erroneous and prejudicial to revenue. The assessee contended that the AO had conducted inquiries and accepted the explanations provided. The ITAT emphasized that the CIT must establish that the AO's order is both erroneous and prejudicial to revenue. The ITAT cited various authoritative pronouncements to guide the CIT's actions under section 263. It was noted that if the AO has made inquiries and considered explanations, the CIT cannot substitute his estimate of income. In this case, the AO had sought information on transactions and depreciation, and the details were provided by the assessee. The ITAT concluded that there was no tax effect even if the disallowances were made, hence no prejudice to revenue, and allowed the appeal, quashing the Ld. Commissioner's order.

Issue 2:
Regarding the second issue of grant of depreciation on computers at 60%, the ITAT considered the submissions made by the assessee and the Ld. Commissioner. The ITAT highlighted that the AO had accepted the assessee's claim for depreciation at 60%. The ITAT also referred to a decision by the Hon'ble Bombay High Court stating that Rule 8D of IT rules is not applicable retrospectively. The ITAT further emphasized that the disallowance should be based on actual expenses, which were not specified by the Ld. Commissioner. The ITAT concluded that the assessee was entitled to 100% deduction under section 10A, and even if the disallowances were made, there would be no tax effect, indicating no loss of tax revenue. Therefore, the ITAT allowed the appeal and quashed the Ld. Commissioner's order.

In summary, the ITAT analyzed the issues raised by the assessee against the Ld. Commissioner's order under section 263 of the Income Tax Act for the asstt. year 2005-06. The ITAT emphasized the necessity for the CIT to establish that the AO's order is both erroneous and prejudicial to revenue. The ITAT found that the AO had conducted inquiries and considered explanations provided by the assessee, leading to the conclusion that there was no tax effect even if the disallowances were made, hence no prejudice to revenue. The ITAT allowed the appeal and quashed the Ld. Commissioner's order, providing detailed reasoning for its decision.