1985 (3) TMI 89 - AT - Income Tax

Issues Involved:

1. Jurisdiction of the CIT under Section 263 of the IT Act, 1961.
2. Validity of weighted deduction under Section 35B for specific expenditures.
3. Adequacy of the ITO's enquiry into the claims for weighted deduction.
4. Binding nature of Tribunal decisions on the ITO.

Issue-wise Detailed Analysis:

1. Jurisdiction of the CIT under Section 263 of the IT Act, 1961:

The CIT assumed jurisdiction under Section 263, asserting that the ITO's order was erroneous and prejudicial to the interests of the Revenue. The CIT's jurisdiction under Section 263 requires a finding that the ITO's order is both erroneous and prejudicial to the Revenue. The CIT observed that the ITO allowed weighted deductions without proper examination, particularly for expenditures under serial Nos. 1 to 3, despite a Special Bench decision in J.H. & Co. case, which should have been followed. The CIT also noted that the ITO did not conduct adequate enquiries for expenditures under serial Nos. 4 to 11. However, the Judicial Member disagreed, stating that the CIT cannot assume jurisdiction merely because he disagrees with the ITO's reliance on Division Bench decisions, which were valid at the time of assessment.

2. Validity of Weighted Deduction under Section 35B for Specific Expenditures:

The CIT found that the ITO erroneously allowed weighted deductions for freight, clearing, and inspection charges (serial Nos. 1 to 3) based on earlier Tribunal decisions, which were later contradicted by a Special Bench decision. The CIT held that the Special Bench's interpretation was correct and should have been followed. For expenditures under serial Nos. 4 to 11, the CIT noted that the ITO allowed deductions without verifying whether these expenditures were incurred wholly and exclusively for export promotion activities as specified in Section 35B(1)(b). The CIT directed the ITO to re-examine these claims with adequate evidence.

3. Adequacy of the ITO's Enquiry into the Claims for Weighted Deduction:

The CIT criticized the ITO for not making proper enquiries into the claims for weighted deductions. The CIT noted that the ITO accepted the claims without sufficient evidence to show that the expenditures were incurred on activities mentioned in Section 35B(1)(b). The Judicial Member, however, pointed out that the ITO had called for and examined the details provided by the assessee, including several Tribunal decisions supporting the claims. The Judicial Member argued that the ITO's enquiry was adequate and that the CIT's assumption of inadequate enquiry was not justified.

4. Binding Nature of Tribunal Decisions on the ITO:

The CIT argued that the ITO should have followed the Special Bench decision in J.H. & Co., which was available before the assessment order was passed. The CIT viewed the Special Bench decision as having greater authority. However, the Judicial Member emphasized that the Special Bench decision does not overrule Division Bench decisions and that the ITO was justified in following the Division Bench decisions available at the time. The Judicial Member also noted that the ITO's reliance on Tribunal decisions cannot be considered erroneous or prejudicial to the Revenue.

Conclusion:

The Judicial Member concluded that the CIT's order under Section 263 was not justified, as the ITO did not commit an error by following Tribunal decisions and conducting adequate enquiries. The Judicial Member emphasized that the CIT's assumption of jurisdiction was based on a subjective interpretation of the law and not on any concrete error by the ITO. The Third Member agreed with the Judicial Member, stating that the ITO's reliance on Tribunal decisions and the enquiries made were sufficient, and the CIT's order was not valid under Section 263. The appeal by the assessee was thus allowed, and the CIT's order was set aside.

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