2002 (9) TMI 907 - AT - Income Tax

Summary

Issues Involved:

1. Jurisdiction of CIT under Section 263 of the IT Act.
2. Doctrine of Merger.
3. Applicability of Clause (baa) of Explanation to Section 80 HHC.
4. Erroneous and prejudicial assessment order.

Issue-wise Detailed Analysis:

1. Jurisdiction of CIT under Section 263 of the IT Act:

The appeal was filed against the CIT's order under Section 263, which set aside the assessment for AY 92-93. The CIT observed that the AO did not consider the exclusion of supervision charges from business profits while computing the deduction under Section 80 HHC. The CIT held that the assessment order was erroneous and prejudicial to the interest of the Revenue and directed a fresh assessment. The assessee argued that the AO's order had merged with the CIT(A)'s order, precluding the CIT from invoking Section 263. The Tribunal, however, upheld the CIT's jurisdiction under Section 263, emphasizing that the CIT can exercise revisional powers on issues not considered and decided in appeal, as per the amended Explanation to Section 263.

2. Doctrine of Merger:

The assessee contended that the AO's order had merged with the CIT(A)'s order, citing various ITAT decisions. The Tribunal examined the doctrine of merger, noting that it applies only to matters considered and decided in appeal. The Tribunal referred to several High Court and Supreme Court decisions, including CIT v. Shri Arbuda Mills Ltd., which clarified that the CIT's powers under Section 263 extend to matters not considered and decided in appeal. The Tribunal concluded that the supervision charges issue was neither considered nor decided by the CIT(A), and thus, the AO's order did not merge with the CIT(A)'s order on this specific issue.

3. Applicability of Clause (baa) of Explanation to Section 80 HHC:

The CIT observed that the AO failed to deduct 90% of the supervision charges from business profits as required by Clause (baa) of the Explanation to Section 80 HHC. The Tribunal agreed with the CIT's view, noting that the AO did not apply his mind to this crucial issue while computing the deduction under Section 80 HHC. The Tribunal emphasized that the AO's omission rendered the assessment order erroneous and prejudicial to the interests of the Revenue.

4. Erroneous and Prejudicial Assessment Order:

The Tribunal upheld the CIT's finding that the AO's failure to consider the exclusion of supervision charges from business profits made the assessment order erroneous and prejudicial to the interests of the Revenue. The Tribunal referred to the Hon'ble Rajasthan High Court decision in CIT v. Emery Stone Mfg. Co., which held that an AO's order is erroneous and prejudicial if it fails to consider an important aspect. The Tribunal concluded that the CIT was justified in passing the order under Section 263 and setting aside the assessment on the limited issue of supervision charges.

Conclusion:

The Tribunal dismissed the appeal, upholding the CIT's jurisdiction under Section 263 and confirming that the assessment order was erroneous and prejudicial to the interests of the Revenue due to the AO's failure to consider the exclusion of supervision charges from business profits under Clause (baa) of the Explanation to Section 80 HHC.