2023 (3) TMI 50 - AT - Income Tax

Revision u/s 263 - deduction for creation of special reserve from the profit of eligible business as per Section 36(1)(viii) - HELD THAT - The detailed working of computation of deduction u/s 36(1)(viii) of the Act had been furnished by the assessee along with giving scientific and cogent basis for the same. The basis of allocation of all elements of income and expenses ,both direct and indirect was given,pointing out that it was in accordance with fundamental principles of cost apportionment as laid down by Cost Accounting Standards issued by the Institute of Cost Accountants of India. CIT having not pointed out any infirmity in the same to the assessee, and even the infirmities pointed out in his order u/s 263 of the Act not addressing this explanation of the assessee, there is no error in the order of the AO found by the PCIT. Even otherwise, we have noted that this assessee s basis of calculating claim of deduction u/s 36 (1)(viii) has been consistently accepted and approved by the CIT(A) in preceding assessment years, i.e. AYs 2014-15 and 2012-13. AO therefore, accepting the assessee s claim of deduction in the impugned year, has taken a plausible view. We hold that there was no error in the order of the AO accepting the assessee s claim of deduction under Section 36(1)(viii) of the Act and the order passed by the Ld. Pr. CIT under Section 263 of the Act is, therefore, set aside. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income-Tax Act.
2. Examination of the claim of deduction under Section 36(1)(viii) of the Income-Tax Act by the Assessing Officer.
3. Calculation and correctness of the deduction claimed under Section 36(1)(viii) by the assessee.

Detailed Analysis:

1. Jurisdiction under Section 263 of the Income-Tax Act:
The learned Principal Commissioner of Income-tax (Pr. CIT) Rajkot-1 assumed jurisdiction under Section 263 of the Income-Tax Act, 1961, on the grounds that the Assessing Officer (AO) had allowed the assessee's claim for deduction under Section 36(1)(viii) without properly examining the calculation. The Pr. CIT noted several anomalies and contradictions in the computation furnished by the assessee, leading to the conclusion that the AO's order was erroneous and prejudicial to the interests of the Revenue.

2. Examination of the claim of deduction under Section 36(1)(viii) of the Income-Tax Act by the Assessing Officer:
The assessee argued that the AO had thoroughly examined the claim during the assessment proceedings under Section 143(3). The assessee provided detailed replies and calculations, which had also been accepted in preceding years by the CIT(A). The assessee contended that the AO had taken a plausible view by accepting the calculation. The Tribunal found that the Pr. CIT did not confront the assessee with the anomalies during the revisionary proceedings, violating principles of natural justice.

3. Calculation and correctness of the deduction claimed under Section 36(1)(viii) by the assessee:
The Pr. CIT found that the computation of profits eligible for deduction had several anomalies, such as arbitrary apportionment of indirect costs and contradictions in the method of profit distribution. The Pr. CIT recomputed the deduction, finding an excess claim of Rs.2.68 crores. However, the Tribunal noted that the assessee had provided a detailed and scientific basis for the calculation, following Cost Accounting Standards. The method had been consistently accepted in earlier years. The Tribunal concluded that the AO's acceptance of the assessee's calculation was a plausible view and not erroneous.

Conclusion:
The Tribunal held that the order of the AO was not erroneous and did not cause prejudice to the Revenue. The Pr. CIT's order under Section 263 was set aside, and the appeal of the assessee was allowed. The detailed working and scientific basis provided by the assessee for the calculation of the deduction under Section 36(1)(viii) were found to be in accordance with the law and previously accepted standards. The Tribunal emphasized the importance of confronting the assessee with any anomalies during the revisionary proceedings to uphold the principles of natural justice.