2015 (1) TMI 241 - HC - Income Tax

Cancellation of order of CIT u/s 263 by Tribunal Held that - Assessee maintains its books of accounts on the basis of mercantile system of accounting and that export incentives are linked to and springs from the exports made by the assessee - the assessee was justified in including the amount of export incentive and licence premium in the A.Y. 1993-94 and the AO was justified in accepting the revised return filed by the assessee wherein, the sum of ₹ 17,45,430/was included as income of the A.Y. 1993-94 on the basis of assessee having followed the mercantile system of accounting. Calculation of deduction u/s 80HHC Held that - Since the deduction claimed by the assessee and accepted by the AO is in accordance with the interpretation of Section 80HHC, the CIT was not justified in setting aside the order of the AO in Commissioner of Income Tax v. Max India Ltd. 2007 (11) TMI 12 - Supreme Court of India it has been held that the phrase prejudicial to the interests of the Revenue in section 263 of the Act has to be read in conjunction with the expression erroneous order passed by the AO every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue thus, the CIT committed serious error in law in cancelling the order of the A.O u/s.263 thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Revision of income tax return and claim of deduction u/s. 80HHC.
2. Treatment of export incentives and licence premium in the assessment.
3. Validity of CIT's decision under Section 263 of the Income Tax Act.

Analysis:

1. The first issue involved the revision of the income tax return by the assessee, where the claim of deduction under section 80HHC was revised. The CIT found discrepancies in the return filed for A.Y. 1993-94 and the revised return, leading to a scrutiny of the export incentive claimed. The A.O. had initially considered the export incentive as income for A.Y. 1993-94, although it was received in A.Y. 1994-95. The CIT issued a show cause notice under Section 263 of the Act to revise the assessment based on these discrepancies.

2. The second issue revolved around the treatment of export incentives and licence premium in the assessment. The CIT argued that the profit on the sale of the licence should only be considered when the licence is actually sold and profits are received, not on a mercantile basis. The CIT questioned the inclusion of income in A.Y. 1993-94 when it was received in A.Y. 1994-95. The Appellate Tribunal initially set aside the CIT's order, leading to further legal scrutiny.

3. The third issue focused on the validity of the CIT's decision under Section 263 of the Income Tax Act. The Appellate Tribunal referred the question of law to the High Court regarding the cancellation of the CIT's order. The High Court analyzed the case law and determined that the CIT's decision to set aside the A.O.'s order was erroneous. The High Court held that the A.O.'s interpretation of Section 80HHC was correct, and the CIT's action was not justified.

In conclusion, the High Court ruled in favor of the assessee, stating that the CIT's decision to cancel the A.O.'s order under Section 263 was a serious error in law. The High Court's decision was based on the interpretation of the relevant sections of the Income Tax Act and previous legal precedents, ultimately upholding the assessee's position in the case.