2019 (5) TMI 190 - HC - Income Tax

Revision u/s 263 - Disallowance u/s 14A - non-consideration of essential points in an assessment order which might come out of non application of mind definetely makes an assessment order erroneous - HELD THAT - Though the assessee tried to make some submission on the merits of the case like the challenging on the validity of the order passed u/s 263 we are satisfied that the Tribunal has passed the order u/s 263 holding that the order passed by the Assessing Authority exhibits non application of mind and, therefore, this Court being satisfied with the order passed by the Tribunal, at this stage, is not inclined to go into the merits of the contentions raised with regard to the order passed u/s 263. The Assessee would be free to raise contentions on merits for issue u/s 14A in appropriate appellate forum, in accordance with law. Appeal of Assessee has become infructuous, in view of later development and therefore Questions of Law framed are not required to be answered.

Summary

Issues:
1. Appeal under Section 260 A of the Income Tax Act, 1961 regarding substantial questions of law arising from the ITAT order for Assessment Year 2002-2003.
2. Rejection of appellant's contention under Section 263 of the Income Tax Act for the assessment made under Section 143(3) for AY 2002-03.
3. Exclusion of expenditure in foreign currency from "export turnover" and "total turnover" for computing exemption/deduction under Section 10B.
4. Sustaining disallowance under Section 14A by the ITAT.

Analysis:
1. The Assessee filed an appeal under Section 260 A of the Income Tax Act, 1961, challenging the ITAT order for AY 2002-03. The Co-ordinate Bench admitted the appeal based on substantial questions of law related to the applicability of Section 263, exclusion of foreign currency expenditure from turnover for Section 10B deduction, and the disallowance under Section 14A.

2. The ITAT upheld the CIT's order under Section 263, directing the Assessing Authority to reconsider two issues: deduction under Section 10B and disallowance of expenses under Section 14A. The ITAT found errors in the assessment order, emphasizing the importance of discussing major points, especially concerning significant deductions like Section 10B, to avoid prejudicing the Revenue's interest.

3. The ITAT highlighted the Assessing Authority's failure to adequately consider the substantial deduction claimed under Section 10B, which was crucial due to its significant amount. The ITAT ruled that the non-application of mind by the Assessing Authority rendered the assessment order erroneous and prejudicial to the Revenue's interest, justifying the CIT's revision order under Section 263.

4. Regarding the disallowance under Section 14A, the ITAT found the Assessing Authority's lack of realistic consideration, especially concerning expenses related to dividend income. The ITAT emphasized the need for verifying expenses attributable to earning such income and held that the Assessing Authority's error in this regard was prejudicial to the Revenue's interest, supporting the CIT's revision order.

5. The Court noted that the Assessing Authority had implemented the Section 263 order, granting the Section 10B deduction but disallowing expenses under Section 14A. Despite the Assessee's attempts to challenge the Section 263 order's validity, the Court upheld the ITAT's decision, deeming the appeal infructuous due to subsequent developments, and dismissed the case without costs.