2009 (2) TMI 270 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the order passed u/s 263 of the IT Act, 1961.
2. Consideration of the merits of the arguments before dropping reassessment proceedings.
3. Allowability of deduction u/s 80HHC r/w s. 80-IA(9) of the IT Act.

Summary:

1. Legality of the order passed u/s 263 of the IT Act, 1961:
The CIT invoked the provisions of s. 263 and set aside the orders dropping the reassessment proceedings, directing the AO to complete the reassessment proceedings after allowing an opportunity to the assessee. The CIT held that the orders passed by the AO were erroneous and prejudicial to the interests of the Revenue. The Tribunal noted that the power under s. 263 can be exercised by the CIT only if the order is erroneous and prejudicial to the interests of the Revenue. The Tribunal concluded that the AO had taken one of the possible views, and the CIT's action to impose his view amounted to a change of opinion, which is not permissible under s. 263. The Tribunal annulled the orders passed by the CIT under s. 263, holding them illegal.

2. Consideration of the merits of the arguments before dropping reassessment proceedings:
The AO issued a notice u/s 148 initiating reassessment proceedings on the ground that income had escaped assessment. The assessee requested the AO to drop the reassessment proceedings, which the AO did by way of an entry on the order sheet. The CIT observed that the AO had not considered the merits of the arguments of the assessee before dropping the reassessment proceedings. The Tribunal found that the AO had made inquiries and examined the records, and the decision to drop the reassessment proceedings was based on the submissions made by the assessee. The Tribunal held that merely because the AO did not discuss the inquiry and its outcome in the order does not mean the order was erroneous.

3. Allowability of deduction u/s 80HHC r/w s. 80-IA(9) of the IT Act:
The CIT noted that the AO had not examined the quantum of deduction allowable u/s 80-IA(9), which mandates that the deduction shall not exceed the profits and gains of the undertaking. The assessee contended that the AO had duly applied his mind and taken one of the possible views, supported by the decision of the Hon'ble Madras High Court in the case of SCM Creations vs. Asstt. CIT. The Tribunal agreed with the assessee, stating that the view taken by the AO was one of the possible views and could not be regarded as unsustainable in law. The Tribunal emphasized that the CIT cannot substitute his subjective view in place of the findings of the AO unless the view taken by the AO is unsustainable in law.

Conclusion:
The Tribunal annulled the orders passed by the CIT under s. 263, holding that the CIT was not correct in law in taking action under s. 263 and that the orders passed were illegal. The appeals filed by the assessee in both assessment years were allowed.