2011 (11) TMI 117 - AT - Income Tax

Legality of revision proceedings in view of different legal position prevailing at time of assessment and at time of revision orders- set off of loss from eligible profits of business for the purpose of computing deduction u/s 80 HHF of the Act- deductibility of expenses incurred in foreign currency from export turnover and total turnover for computing deduction u/s 80HHF- allowability of bad debts- Held that - What is to be seen is the legal position prevailing as on the point of time when revision order is passed, particularly when there is significant difference in the legal position between the point of time when assessment is framed and when it is revised. Such invoking of revision powers is upheld . Thereby, It is held that brought forward business losses should be reduced before computing the deduction under section 80 HHF. See IPCA Laboratories Ltd Vs. Dcit (2004 - TMI - 6141 - Supreme court). Regarding deductibility of expenses incurred in foreign currency for rendering technical services outside India from export turnover and total turnover, for the purpose of computing deduction u/s 80 HHF , this point was picked up for revision during the revision proceedings. The show cause notice is issued on the ground that the computation is incorrect. On submission by the assessee there are no findings by the CIT to the effect that any of these contentions are incorrect.The reason which can be inferred from the revision order (that the AO has not verified the issue) is different from the reason set out in the show cause notice (that such expenses cannot be allowed). Unless the CIT points out any defect in the stand of the Assessing Officer, it cannot be open to him to exercise the revision powers. With regard to allowability of bad debts, it is held that -it is no longer necessary for the assessee to establish that the debt has actually become unrecoverable and as long as the assessee has actually written off the debt in the books of accounts, and upon fulfillment of other necessary preconditions. See TRF Ltd Vs CIT(2010 - TMI - 76626 - Supreme Court ). Decided partly in favor of the Assessee.

Issues Involved:
1. Set off of loss from eligible profits of business for the purpose of computing deduction under section 80 HHF of the Act.
2. Deductibility of expenses incurred in foreign currency from export turnover and total turnover for the purpose of computing deduction under section 80 HHF of the Act.
3. Allowability of bad debts as a deduction.

Issue-wise Detailed Analysis:

1. Set off of Loss from Eligible Profits of Business for the Purpose of Computing Deduction Under Section 80 HHF of the Act:
The assessee contested the revision order by the CIT, which denied the deduction under section 80HHF amounting to Rs 9,51,70,949, arguing that the law prevailing at the time of passing the revision order should be considered. The CIT's revision was based on the Supreme Court's decision in IPCA Laboratories Ltd Vs. DCIT, which mandated the set off of brought forward business losses before computing the deduction under section 80 HHF. The assessee argued that the decision of the Bombay High Court in CIT Vs Shirke Construction Equipment Ltd held the field at the relevant time, and the assessment could not be termed erroneous. However, the Tribunal upheld the CIT's action, stating that the legal position at the time of the revision order is what matters, and the view taken by the Assessing Officer, even if a possible view, was contrary to the law laid down by the Supreme Court. Thus, the revision proceedings on this issue were upheld.

2. Deductibility of Expenses Incurred in Foreign Currency from Export Turnover and Total Turnover for the Purpose of Computing Deduction Under Section 80 HHF of the Act:
The CIT initiated revision proceedings on the ground that the expenses incurred in foreign currency were not reduced from export turnover and total turnover. The assessee contended that no income was earned by providing technical services outside India, and the majority of the foreign currency expenditure was related to license fees for distribution business, not export business. The CIT did not reject these submissions but directed the Assessing Officer to examine the applicability of the provisions of Explanation c and j below Section 80 HHF. The Tribunal found that the CIT's revision order lacked specific findings against the assessee and merely directed re-examination. Citing various judicial precedents, the Tribunal held that the CIT must point out specific defects in the Assessing Officer's order to exercise revision powers. Since no such defects were identified, the Tribunal quashed the revision proceedings on this issue.

3. Allowability of Bad Debts as a Deduction:
The CIT's revision order questioned the allowability of bad debts, stating that the claim was allowed without proper inquiry. However, both parties agreed that the Supreme Court's decision in TRF Ltd Vs CIT clarified that the assessee need only write off the debt in the books of accounts to claim the deduction. The Tribunal, therefore, vacated the revision order on this issue, aligning with the Supreme Court's judgment.

Appeals Against CIT(A)'s Order:

ITA No. 3201/Mum/2010:
The assessee's appeal against the CIT(A)'s order denying the deduction under section 80 HHF was dismissed. The Tribunal noted that the issue was covered against the assessee by the Supreme Court's judgment in Shirke Construction Equipment Ltd, and since the challenge to the revision proceedings was also dismissed, the CIT(A)'s order was upheld.

ITA No. 3315/Mum/2010:
The Tribunal addressed multiple grounds, including the disallowance of bad debts, which was already quashed in the revision proceedings. The CIT(A)'s deletion of the addition of Rs 8,87,400 was upheld, as the income had already been taxed in the same assessment year, preventing double taxation.

Conclusion:
While ITA No. 7476/Mum/2007 was partly allowed, ITA Nos. 3201/Mum/2010 and 3315/Mum/2010 were dismissed. The Tribunal's judgments emphasized the importance of prevailing legal positions at the time of revision orders and the necessity for the CIT to identify specific defects to exercise revision powers.

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