2007 (10) TMI 330 - AT - Income Tax

Summary

Issues Involved:
1. Restriction of deductions u/s 80HHC and 80-IB.
2. Admissibility of deduction u/s 80-IB on duty drawback and incentives.
3. Admissibility of deduction u/s 80HHC on export incentives.
4. Validity of proceedings and order u/s 263.
5. Permission to modify grounds of appeal.

Summary:

1. Restriction of deductions u/s 80HHC and 80-IB:
The CIT directed that deductions u/s 80HHC and 80-IB should be restricted as per sub-s. (9A) of s. 80-IA, which was non-existent in law. The CIT held that the AO's order was erroneous and prejudicial to the interest of the Revenue because the AO allowed deductions without reducing the deduction allowed u/s 80-IB from the business profit. The Tribunal upheld the CIT's direction, stating that the AO did not apply the correct provisions of the Act and the order was non-speaking and silent on crucial aspects.

2. Admissibility of deduction u/s 80-IB on duty drawback and incentives:
The CIT directed that deduction u/s 80-IB is not admissible on duty drawback and incentives without granting any opportunity to the assessee. The Tribunal referred to various High Court decisions, including the Delhi High Court in CIT vs. GB Exports Ltd. and Ritesh Industries, which held that duty drawback does not amount to profit derived from industrial undertaking. The Tribunal directed the AO to allow due opportunity to the assessee before deciding these issues de novo.

3. Admissibility of deduction u/s 80HHC on export incentives:
The CIT directed that deduction u/s 80HHC is not admissible on export incentives, based on the fictional premise that profits from export business are not positive after reducing export incentives. The Tribunal disagreed with the CIT, citing the insertion of the 5th proviso to s. 80HHC by the Taxation Laws (Amendment) Act 2005, which allows for such deductions. The Tribunal set aside the CIT's direction and instructed the AO to consider the amended provisions while recomputing the deduction u/s 80HHC.

4. Validity of proceedings and order u/s 263:
The assessee argued that the proceedings and order u/s 263 were bad in law and should be quashed as void ab initio. The Tribunal found that the AO's order was indeed erroneous and prejudicial to the interest of the Revenue, justifying the CIT's invocation of s. 263. The Tribunal emphasized that an incorrect application of law satisfies the requirement of the order being erroneous.

5. Permission to modify grounds of appeal:
The appellant prayed for permission to add, alter, insert, modify, or rectify any part of the grounds of appeal at any time before or during the course of the hearing. The Tribunal did not specifically address this issue in the judgment.

Conclusion:
The appeal of the assessee was allowed in part, with directions to the AO to provide reasonable opportunity to the assessee and to recompute the deductions u/s 80HHC considering the amended provisions.