2022 (2) TMI 523 - AT - Income Tax

Revision u/s 263 - Disallowance of claim u/s 10B - reasoning given by Ld. Principal CIT was that the A.O. should have set off the brought forward losses before allowing deduction u/s 10B - HELD THAT - We notice that the Ld. Principal CIT did not follow the binding decision of the jurisdictional High Court by observing that the issue is still not reached finality as the matter is pending before Hon ble Supreme Court. It is a well settled proposition of law that all the authorities below the jurisdictional High Court have to necessarily follow the decision rendered by the Hon ble High Court. Accordingly, the Ld. Principal CIT was not justified in refusing to follow the decision rendered by the jurisdictional High Court. In any case, the decision rendered by Hon ble Karnataka High Court in the case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT has since been upheld by Hon ble Supreme Court in the case of CIT Vs. M/s. Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT Hence, the deduction u/s 10B should be allowed without setting off of brought forward losses for the year under consideration. Accordingly, this reasoning od Ld. Principal CIT would fail. R D activity carried out by the assessee in biotechnology services would not qualify as computer software within the meaning given in sec. 10B - We find merit in the said contentions of the Ld. A.R. The Hon ble Bombay High Court in the case of CIT vs. Western Outdoor Interactive Pvt. Ltd. 2012 (8) TMI 709 - BOMBAY HIGH COURT has held that whether a benefit of deduction is available for a particular number of years on satisfaction of certain conditions and under the provision of Act, then without withdrawing or setting aside the relief granted for the first assessment year in which claim was made and accepted, the AO cannot withdraw the relief for subsequent assessment years. This ratio was laid down in the context of section 10A and the same, in our view, can be applied to sec.10B also. Accordingly, once there is no change in the facts and circumstances of the case from the earlier years from the initial year when the claim has been accepted, then the deduction cannot be disallowed or denied in the subsequent years of claim. The deduction so allowed in assessment year 2005-06 has not been withdrawn. In that case, the PCIT was not justified in directing the AO to deny deduction in the intervening year. Hence, the second reasoning given by Ld. Principal CIT also would fail. - Decided in favour of assessee.

Summary

Issues:
1. Validity of revision order passed u/s 263 of the Income-tax Act,1961.
2. Eligibility of the assessee for deduction u/s 10B of the Act based on R&D activity in biotechnology.
3. Whether the R&D activity qualifies as 'computer software' under section 10B of the Act.
4. Application of the decision in CIT vs. Tata Elxsi Ltd. and CIT vs. M/s. Yokogawa India Ltd.
5. Impact of setting off brought forward losses on deduction u/s 10B.
6. Consistency in allowing deduction u/s 10B over subsequent assessment years.
7. Legitimacy of the revision order passed by Ld. CIT(A) against the assessment order.

Analysis:

1. The first issue revolves around the validity of the revision order passed u/s 263 of the Income-tax Act,1961. The Principal CIT initiated revision proceedings based on the deduction allowed to the assessee u/s 10B of the Act without setting off brought forward losses. The Ld. CIT(A) directed the AO to disallow the claim u/s 10B, leading to the assessee challenging the revision order. The Tribunal noted that the Principal CIT failed to follow the decision of the jurisdictional High Court and wrongly cited pending matters before the Supreme Court. The Tribunal upheld the decision in CIT vs. M/s. Yokogawa India Ltd., concluding that deduction u/s 10B should be allowed without setting off brought forward losses.

2. The second issue addresses the eligibility of the assessee for deduction u/s 10B based on R&D activity in biotechnology. The Ld. Principal CIT contended that the R&D activity did not qualify as 'computer software' under section 10B. However, the Tribunal referred to the decision in CIT vs. Western Outdoor Interactive Pvt. Ltd. and held that once the eligibility for deduction u/s 10B is accepted in the initial year, it should be continued in subsequent years unless there are changes in circumstances. The Tribunal found the Principal CIT unjustified in denying the deduction based on this reasoning.

3. The third issue pertains to the legitimacy of the revision order passed by Ld. CIT(A) against the assessment order. The Tribunal quashed the revision order, leading to the assessment order passed by the AO u/s 143(3) r.w.s. 263 of the Act being deemed invalid. Consequently, the appellate order passed by Ld. CIT(A) was also quashed. The Tribunal allowed both appeals filed by the assessee, emphasizing the inconsistency and lack of merit in the decisions taken by the revenue authorities.

In conclusion, the Tribunal's detailed analysis and application of legal precedents resulted in the allowance of the assessee's appeals and the quashing of the revision and assessment orders, providing clarity on the eligibility for deduction u/s 10B and the necessity to adhere to established legal principles in tax assessments.