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2014 (1) TMI 1176 - AT - Income TaxValidity of order passed u/s 263 - Held that - There must be nexus between the reasons given in the show-cause notice and the order of the Commissioner under section 263 - For invoking provisions of section 263 of the Act, contents of the show cause notice and the final order should not be different or rather they should be same - Assessee comes to know about the proposed revision, for the first time, when he receives a notice from the CIT. Accordingly, he files his explanation - If the CIT, while passing final orders u/s.263 of the Act, directs the AO to revise or modify the order on some other ground the assessee would not get any chance to defend himself. Such an order passed by the CIT would fall in the category of ex-parte orders. If the CIT without confronting an assessee, by way of show cause notice, decides some issue against him while passing the final order, same cannot be endorsed, though he is vested with revisionary powers. It is said that power and duty go together or cannot be separated - It is the duty of the CIT that; while using his powers as envisage by the provisions of Sec.263 of the Act; he should not to travel beyond the reasons recorded in the show cause notice. While issuing the show cause notice CIT had informed the assessee that deduction u/s.10B of the Act ought to have been allowed in respect of profits of the EOU I and EOU II undertakings after setting off of the losses incurred by the EOU III undertaking - While passing the final order CIT has held that section 10B dealt with exemption, that setting off of losses was not allowable if a claim pertained to an exemption-section - If the CIT was of the opinion that provisions of section 10B,being exemption section, did not allow setting off of losses she should have mentioned the same it in the show cause notice issued by her - It would have given the assessee an opportunity to deal with question raised by the CIT CIT had travelled beyond the reasons mentioned in the show cause notice - Decided in favour of assessee.
Issues Involved:
1. Legality of the order passed under Section 263 of the Income Tax Act. 2. Interpretation and application of Section 10B of the Income Tax Act regarding setting off losses. Detailed Analysis: 1. Legality of the Order Passed Under Section 263 of the Income Tax Act: The primary issue raised by the appellant was the legality of the order passed by the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act. The appellant contended that the CIT erred in passing the order under Section 263 on the grounds that the Assessing Officer (AO) allowed deductions under Section 10B without setting off losses incurred by another Export Oriented Unit (EOU). The appellant argued that the provisions of Section 10B do not stipulate that losses from one EOU should be set off against profits from another EOU for allowing deductions under the said section. The CIT issued a show cause notice to the appellant, stating that the AO's order was erroneous and prejudicial to the interest of the Revenue. The notice highlighted that under Section 10B(6)(ii), losses of EOUs should be carried forward or set off only against profits of other EOUs and not against non-EOU profits. The CIT concluded that the AO's calculation was erroneous, as it allowed the set off of EOU losses against non-EOU profits, thereby reducing taxable income and claiming double benefits. 2. Interpretation and Application of Section 10B of the Income Tax Act Regarding Setting Off Losses: The appellant argued that Section 10B does not require setting off losses from one EOU against profits from another EOU. They cited various judicial precedents, including the decisions of the Bombay High Court in cases like Hindustan Unilever Ltd. and Black and Veatch Consulting Pvt. Ltd., to support their claim that the AO's order was correct and in line with the law. The CIT, however, held that Section 10B is an exemption provision and that losses from EOUs should not be set off against other taxable income. The CIT's final order differed from the reasons mentioned in the show cause notice, which primarily focused on setting off losses between EOUs. The Tribunal analyzed the principles laid down by higher courts regarding the scope and application of Section 263. It emphasized that the reasons given in the show cause notice and the final order under Section 263 should be consistent. The Tribunal referred to the decisions in G.K. Kabra and Ashish Rajpal, which underscored that the CIT must provide the assessee an opportunity to respond to the exact errors identified in the show cause notice. In this case, the Tribunal found that the CIT's final order introduced a new reasoning-that Section 10B is an exemption provision-which was not part of the original show cause notice. This discrepancy violated the principles of natural justice, as the appellant was not given an opportunity to address this new reasoning. Conclusion: The Tribunal concluded that the CIT had traveled beyond the reasons mentioned in the show cause notice while passing the final order under Section 263. This action deprived the appellant of a fair opportunity to defend their position, thereby violating the principles of natural justice. Consequently, the Tribunal reversed the CIT's order and allowed the appellant's appeal. Order: The appeal filed by the assessee was allowed, and the order pronounced in the open court on 13th November 2013.
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