2008 (5) TMI 298 - AT - Income Tax

Summary

Issues Involved:
1. Erroneous and prejudicial assessment order regarding brought forward losses and deduction u/s 80HHC.
2. Deduction u/s 80HHC and its computation with export incentives.
3. Computation of book profit u/s 115JB.
4. Jurisdiction of Commissioner of Income-tax u/s 263.
5. Application of the Supreme Court's decision in IPCA Laboratory Ltd. v. Deputy CIT.
6. Merger of the Assessing Officer's order with the Commissioner of Income-tax (Appeals) order.
7. Incorrect application of law and its impact on Revenue.

Summary:

1. Erroneous and Prejudicial Assessment Order:
The Commissioner of Income-tax held that the assessment order was erroneous and prejudicial to the interests of the Revenue because the brought forward losses amounting to Rs. 5,71,15,119 should have been adjusted against the gross total income before calculating the deduction u/s 80HHC.

2. Deduction u/s 80HHC and Export Incentives:
The Commissioner of Income-tax found that the assessee's profits from exports were reduced to negative after reducing export incentives from the income under the head 'Business and profession'. Therefore, no deduction u/s 80HHC should have been allowed. The Assessing Officer had allowed a deduction of Rs. 1,53,84,762, which was incorrect as there was a loss in exports.

3. Computation of Book Profit u/s 115JB:
The Commissioner of Income-tax held that the book profit computed at nil was incorrect because the assessee was not entitled to any deduction u/s 80HHC. The book profit should have been computed after reducing the available deduction u/s 80HHC, which was not permissible.

4. Jurisdiction of Commissioner of Income-tax u/s 263:
The Commissioner of Income-tax invoked his powers u/s 263, directing the Assessing Officer to first set off the carry forward business losses and depreciation to arrive at the gross total income on which deduction can be computed u/s 80HHC. The Tribunal upheld this jurisdiction, stating that the Commissioner can revise the assessment order in respect of items not decided in appeal.

5. Application of Supreme Court's Decision:
The Commissioner of Income-tax applied the ratio of the Supreme Court in IPCA Laboratory Ltd. v. Deputy CIT [2004] 266 ITR 521, which states that deduction u/s 80HHC is admissible only when there is profit from export. The Tribunal found this application correct.

6. Merger of Orders:
The Tribunal found that the issue regarding the computation of gross total income and set off of brought forward losses and depreciation was not before the Commissioner of Income-tax (Appeals). Therefore, the order of the Assessing Officer did not merge with the order of the Commissioner of Income-tax (Appeals).

7. Incorrect Application of Law:
The Tribunal noted that the Assessing Officer's failure to consider the provisions of sections 80A(2), 80AB, and 80B(5) rendered the order erroneous. The Supreme Court's decision in CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. [1997] 224 ITR 604 clarified that gross total income must be computed after setting off unabsorbed business losses and depreciation before allowing any deduction under Chapter VI-A.

Conclusion:
The Tribunal allowed the appeal of the assessee in part, upholding the jurisdiction of the Commissioner of Income-tax u/s 263 and the requirement to set off brought forward losses and depreciation before computing deductions u/s 80HHC. The decision was pronounced on May 30, 2008.