2016 (7) TMI 179 - AT - Income Tax

Reopening of assessment - Deduction under Section 10B - Held that - Since the issue on merits regarding the restriction of the deduction under Section 10B of the Act arising from the original assessment order has been decided by this Tribunal therefore, subsequent revision order becomes infructuous. Accordingly, we set aside the impugned revision order. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the revision order under Section 263 of the Income Tax Act, 1961.
2. Whether the Assessing Officer's (AO) order was erroneous and prejudicial to the interest of the revenue.
3. Eligibility for deduction under Section 10A/10B for onsite software development subcontracted to associated enterprises.
4. Computation of disallowance under Section 10A/10B considering total expenditure in foreign currency.

Issue-wise Detailed Analysis:

1. Validity of the Revision Order under Section 263:
The primary issue was whether the Commissioner of Income Tax (CIT) was justified in invoking Section 263 to revise the assessment order. The assessee argued that the CIT's order was "bad in law and void ab initio" because the conditions precedent for the assumption of jurisdiction under Section 263 were not satisfied. Specifically, the CIT concluded that the AO's order was erroneous and prejudicial to the interest of the revenue without proper justification. The tribunal noted that the AO had already examined the impugned issue during the reassessment proceedings and passed the order after due consideration. Therefore, the tribunal found the CIT's invocation of Section 263 to be unjustified and set aside the revision order.

2. Whether the AO's Order was Erroneous and Prejudicial to the Interest of the Revenue:
The CIT had concluded that the AO's order was erroneous and prejudicial to the interest of the revenue because the AO allowed deductions under Section 10B, including amounts paid to associated enterprises (AEs) for software development charges. The tribunal observed that the AO had already restricted the deduction under Section 10B in proportion to the onsite expenditure paid to the AE under subcontract in the original assessment. This disallowance was challenged by the assessee and decided in favor of the assessee by the tribunal in a previous order. Therefore, the tribunal found no error or prejudice in the AO's original order.

3. Eligibility for Deduction under Section 10A/10B for Onsite Software Development Subcontracted to Associated Enterprises:
The CIT had concluded that the assessee was not eligible for deduction under Section 10A/10B for the onsite portion of software development subcontracted to associated enterprises. The tribunal referred to its earlier decision, where it was established that the assessee was engaged in software development, part of which was subcontracted to associated enterprises. The tribunal found that the software development was undertaken by the assessee, and the associated enterprises performed the work under the supervision and control of the assessee. The tribunal held that the assessee was eligible for deduction under Section 10B for the income earned from onsite software development carried out by the associated enterprises, as the entire consideration was received in foreign exchange and the work was performed under the assessee's control.

4. Computation of Disallowance under Section 10A/10B Considering Total Expenditure in Foreign Currency:
The CIT had concluded that the total expenditure in foreign currency debited to the Profit and Loss account should be considered in the denominator for computing the disallowance under Section 10A/10B, with the numerator being the software development charges paid to associated enterprises. The tribunal found the CIT's rationale incorrect and contrary to the facts. The tribunal followed its earlier decision and held that the assessee was eligible for deduction under Section 10B, and the CIT's conclusion regarding the computation was not justified.

Conclusion:
Since the tribunal had already decided the issue on merits regarding the restriction of the deduction under Section 10B in favor of the assessee, the subsequent revision order by the CIT became infructuous. Therefore, the tribunal set aside the impugned revision order and allowed the appeal of the assessee. The order was pronounced in the open court on 24.6.2016.