2015 (1) TMI 1010 - AT - Income Tax

Revision u/s 263 - claim of deduction u/s.10B was allowed by AO without proper investigation - Held that - In a situation when the admitted factual position was that the order of the AO was a cryptic order without considering the substantial claim of exemption u/s.10B of ₹ 3,26,27,651/- then in our humble opinion such an order can be reviewed by learned Commissioner u/s.263 of IT Act. Although certain notices u/s.143(2)/142(1) were issued but we have found that the issue was not examined in the light of the provisions of Section 10B, Explanation 2(iv) of IT Act by the AO. Facts have revealed that the assessee was granted approval as 100% export oriented unit (EOU) by the Director of the Software Technology Parks of India (STPI) Gandhinagar for IT enabled services. Learned Commissioner has therefore raised objection that STPI was not competent to grant such approval being simply a Society and the approval was required to be granted by Development Commissioner under Ministry of Chemicals and Industry as prescribed in one of the CBDT instruction dated 9th March, 2009. Due to these reasons, we hereby hold that the order passed u/s.263 of IT Act is an order sustainable in the eyes of law. We uphold the order u/s.263 for a limited purpose that the claim of deduction u/s.10B was allowed by AO without proper investigation. But simultaneously we are also of the view that learned Commissioner has exceeded the jurisdiction by unilaterally directing the AO to pass a fresh order by disallowing the claim u/s.10B of IT Act. According to us, learned Commissioner could have examined both the aspects of the issue that whether the assessee is entitled for the exemption as prescribed u/s.10A of IT Act, especially under the circumstances when this legal argument was raised before him. According to us, learned Commissioner could have referred the issue of alternate claim of exemption u/s.10A back to the AO to be decided afresh after considering the provisions of the Act in the light of the evidences filed. We hereby modify the directions of learned Commissioner that instead of disallowing the claim of deduction u/s.10B, the AO is hereby directed to examine the alternate legal claim of the assessee and thereupon pass an appropriate assessment order. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Invocation of powers under Section 263 of the Income Tax Act, 1961.
2. Validity of the assessment order under Section 143(3).
3. Disallowance of deduction under Section 10B of the Income Tax Act.
4. Consideration of alternate deduction under Section 10A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Invocation of Powers under Section 263:
The learned Commissioner of Income Tax (CIT) invoked Section 263 of the Income Tax Act, 1961, to revise the assessment order passed under Section 143(3). The CIT argued that the conditions stipulated for invoking such extraordinary jurisdiction were satisfied because the assessment order was erroneous and prejudicial to the interests of the revenue. The assessee contested this, stating that the assessment order was neither erroneous nor prejudicial, as the Assessing Officer (AO) had examined the issue during the assessment proceedings.

2. Validity of the Assessment Order under Section 143(3):
The assessment order dated 17.11.2011 was challenged on the grounds that it was a cryptic order without a detailed discussion on the claim of deduction under Section 10B. The CIT observed that the AO had failed to verify the approval of the Software Technology Parks of India (STPI) and had not applied his mind while passing the order. The CIT issued a show cause notice and concluded that the assessment order was erroneous and prejudicial to the interests of the revenue.

3. Disallowance of Deduction under Section 10B:
The CIT disallowed the deduction under Section 10B amounting to Rs. 3,26,27,651/- on the grounds that the approval was granted by the Director of STPI, a society, and not by the Development Commissioner under the Ministry of Commerce and Industries, as required. The assessee argued that the approval by STPI was sufficient and cited various tribunal decisions supporting their claim. However, the CIT was not convinced and directed the AO to disallow the claim under Section 10B.

4. Consideration of Alternate Deduction under Section 10A:
The assessee's alternate plea for deduction under Section 10A was also rejected by the CIT, who argued that Sections 10A and 10B are not interchangeable and that the legislature did not intend for one section to be superfluous. The CIT referenced the case of Regency Creations Ltd., where the High Court held that the procedures for approval under Sections 10A and 10B are distinct and must be followed separately.

Tribunal's Conclusion:
The Tribunal upheld the CIT's order under Section 263, agreeing that the AO's assessment order was cryptic and lacked proper investigation into the substantial claim of deduction under Section 10B. However, the Tribunal found that the CIT exceeded his jurisdiction by directing the AO to disallow the claim under Section 10B unilaterally. Instead, the Tribunal directed the AO to examine the alternate claim for deduction under Section 10A, following the principles laid down by the Delhi High Court in the cases of Valiant Communications Ltd. and Regency Creations Ltd. The Tribunal modified the CIT's directions, allowing the AO to pass an appropriate assessment order after considering the provisions of the Act and the evidences filed.

Result:
The appeal of the assessee was partly allowed, with the Tribunal directing the AO to examine the alternate legal claim of deduction under Section 10A and pass an appropriate assessment order.