2015 (2) TMI 538 - AT - Income Tax

Revision u/s 263 - non-invoking of section 40(a)(ia) by the Assessing Officer - Held that - It is a well-settled proposition that a Commissioner is denuded from exercising his revisionary power u/s 263 of the Act unless he is able to establish that the order under revision is erroneous as well as prejudicial to the interests of the Revenue. The absence of either of the two conditions would not justify invoking section 263 of the Act by the Commissioner. In the present case, the action of the Commissioner to direct the Assessing Officer to disallow ₹ 1,32,83,963/- u/s 40(a)(ia) of the Act does not establish any loss of tax for the Department in the face of assessee s assertions that such income is exempt u/s 10A of the Act, which is in line with the judgement of the Hon ble Bombay High Court in the case of Gem Plus Jewellery ( 2010 (6) TMI 65 - BOMBAY HIGH COURT ). Therefore, in the absence of fulfillment of one of the condition of the order being prejudicial to the interest of the Revenue, the impugned action of the Commissioner is not tenable. The order of the Commissioner qua the disallowance u/s 40(a)(ia) of the Act is hereby set aside. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of revision proceedings
2. Disallowance of expenses under Section 40(a)(i)
3. Eligibility for deduction under Section 10A

Issue 1: Validity of revision proceedings
The appellant challenged the order of the Commissioner of Income Tax- I, Pune, dated 28.03.2013, which arose from an order passed by the Assessing Officer u/s 143(3) r.w.s. 144(C(13) of the Income-tax Act, 1961, for the assessment year 2006-07. The Commissioner invoked his revisionary jurisdiction u/s 263 of the Act based on the treatment of facility relocation expenses and failure to deposit taxes deducted at source. The Commissioner set aside the issue of relocation expenses for fresh assessment and directed the disallowance of expenses under section 40(a)(ia) of the Act. The appellant contested these actions, leading to an appeal before the ITAT.

Issue 2: Disallowance of expenses under Section 40(a)(i)
The Commissioner directed the Assessing Officer to disallow expenses corresponding to outstanding taxes deducted at source but not paid to the Central Government, invoking section 40(a)(ia) of the Act. The appellant argued that the expenses represented excess provisions, reversed in the subsequent year, and offered for tax under section 41(1) of the Act. Additionally, the appellant claimed eligibility for deduction u/s 10A of the Act on enhanced profits resulting from the disallowance under section 40(a)(ia). However, the Commissioner rejected these contentions, emphasizing the statutory obligation to remit taxes to the government and the sequence of income determination before deductions. The Commissioner relied on a Tribunal decision and directed the re-computation of income after disallowing the expenses.

Issue 3: Eligibility for deduction under Section 10A
The appellant argued that even if expenses were disallowed under section 40(a)(ia), it would be tax-neutral as the enhanced income would qualify for exemption u/s 10A of the Act. Citing a High Court judgment, the appellant contended that any disallowance due to statutory provisions would increase business profits eligible for exemption. The appellant also highlighted that the expenses in question were reversed in the subsequent year, ensuring no prejudice to tax revenue. The ITAT considered these arguments, noting that the enhanced income eligible for section 10A benefits was undisputed. The ITAT concluded that the Commissioner's direction to disallow expenses under section 40(a)(ia) did not establish a loss of tax revenue, rendering the revisionary action unjustified. Consequently, the ITAT set aside the Commissioner's order on this issue, ruling in favor of the appellant.

In conclusion, the ITAT partially allowed the appeal, setting aside the Commissioner's order regarding the disallowance of expenses under section 40(a)(ia) of the Income-tax Act, 1961. The judgment emphasized the importance of establishing both error and prejudice to the interests of the Revenue for invoking revisionary powers under section 263 of the Act.