2015 (6) TMI 93 - AT - Income Tax

Revision u/s 263 - directing AO to compute book profit u/s 115JB of the Act - Held that - . It is well known that ld. CIT can exercise power u/s 263 of the Act, on fulfillment of the twin conditions enshrined in the said provision cumulatively. The conditions are, an order sought to be revised must be erroneous as well as prejudicial to the interests of revenue. In absence of any one of the aforesaid conditions, exercise of power u/s 263 becomes invalid. In the present case, even assuming that there is an error in the assessment order as AO has failed to compute book profit u/s 115JB, it cannot be said that assessment order passed is prejudicial to the interests of revenue as the income determined under the normal provisions was much more than the book profit computed u/s 115JB of the Act. Therefore, as one of the conditions of section 263 is not fulfilled, exercise of power u/s 263 is not valid. Accordingly, we set aside the impugned order of ld. CIT and restore the assessment order. - Decided in favour of assesse.

Summary

Issues:
1. Whether the assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interests of revenue as per section 263 of the Income Tax Act, 1961.
2. Whether the computation of book profit under section 115JB of the Act was required in the case of the assessee, a sick company with accumulated losses.
3. Whether the subsequent order passed by the Commissioner of Income Tax (Appeals) could render the assessment order erroneous and prejudicial to the interests of revenue.

Analysis:

Issue 1:
The appeal was against the order passed by the Commissioner of Income Tax-III, Hyderabad under section 263 of the Income Tax Act for the Assessment Year (AY) 2008-09. The AO determined long term capital gain (LTCG) for the assessee, a company engaged in manufacturing and sale of cement, which was challenged by the assessee before the Commissioner of Income Tax (Appeals). During the pendency of the appeal, the Commissioner of Income Tax (CIT) exercised power under section 263 and found the assessment order to be erroneous and prejudicial to the revenue's interests due to the non-computation of book profit under section 115JB and non-application of section 40(a)(ia) provisions by the AO.

Issue 2:
The contention of the assessee was that as a sick company with accumulated losses, no book profit computation was required under section 115JB. However, the CIT disagreed and held that the AO's failure to apply section 115JB made the assessment order erroneous and prejudicial to the interests of revenue. The CIT further stated that relief under section 115JB(2)(vii) required an order from the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies Act, 1985, which was not present in the assessee's case.

Issue 3:
The Tribunal analyzed the facts and submissions of both parties. It noted that the AO did not compute book profit under section 115JB but determined total income under normal provisions, which was significantly higher than the book profit. The Tribunal held that the subsequent order of the CIT(A) could not render the assessment order erroneous and prejudicial to the revenue as the conditions for invoking section 263 were not met. The Tribunal set aside the CIT's order and restored the assessment order, emphasizing that the assessment order was not prejudicial to the revenue despite the error in not computing book profit.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing that while there was an error in not computing book profit under section 115JB, it did not prejudice the revenue's interests as the income determined under normal provisions was substantially higher. The Tribunal clarified that its decision was limited to the validity of the power exercised under section 263 and did not prevent the AO from computing the correct income tax liability if permissible under the law.