2025 (3) TMI 221 - AT - Income Tax

Revision u/s 263 - Allowability of deduction u/s. 10AA challenged - AO s decision to allow deductions under Section 10AA on disallowance made u/s 14A - HELD THAT - PCIT himself has given a finding in the notice that disallowance u/s. 10AA of the Act was made in the earlier years for A.Y. 2013-14 to A.Y. 2016-17 which was allowed by the ITAT however the Department has not accepted the decision and filed appeal before the Hon ble Bombay High Court which is currently sub-judice before the Hon ble Court. Therefore once the Tribunal has taken a view in favour of the assessee on the issue of deduction u/s. 10AA merely because the Revenue has filed an appeal before the Hon ble Bombay High Court against the order of the Tribunal which is pending for decision the order of the AO cannot be held to be erroneous although it may be prejudicial to the interest of the Revenue. Disallowance made by the AO u/s. 14A was allowed by him as deduction u/s. 10AA in light of the decision of Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT Therefore once the AO has allowed the claim of deduction u/s. 10AA on the enhanced disallowance u/s. 14A which is in consonance with the decision of the Hon ble Jurisdictional High Court the order cannot be held to be erroneous although it may be prejudicial to the interest of the Revenue. Thus PCIT in our opinion is not justified in assuming jurisdiction u/s. 263 as order is certainly not erroneous lthough it may be prejudicial to the interest of the Revenue. Since the twin conditions are not satisfied in the instant case set aside the order of ld. PCIT and the grounds raised by the assessee are allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment revolve around the jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961. The issues include:

1. Whether the order passed by the Assessing Officer (AO) allowing deductions under Section 10AA was erroneous and prejudicial to the interest of the Revenue, thereby justifying revision under Section 263.

2. The appropriateness of the AO's decision to allow deductions under Section 10AA on disallowance made under Section 14A, in light of existing legal precedents.

3. Whether the PCIT's invocation of Section 263 was justified given the Tribunal's previous rulings in favor of the assessee for earlier assessment years and the pending appeal before the High Court.

4. The adequacy of the AO's inquiry and verification process regarding the deductions claimed under Section 10AA.

ISSUE-WISE DETAILED ANALYSIS

1. Deduction under Section 10AA

- Relevant Legal Framework and Precedents: Section 10AA provides deductions for units in Special Economic Zones. The PCIT referenced Section 263, which allows revision of orders that are erroneous and prejudicial to the Revenue. The precedents cited include Malabar Industrial Co. Ltd. vs. CIT, which clarifies when an order is considered erroneous.

- Court's Interpretation and Reasoning: The Tribunal noted that the AO had allowed the deduction under Section 10AA based on the Tribunal's previous decisions in the assessee's favor for earlier years. The Tribunal found that the AO's order was not erroneous as it aligned with existing legal precedents.

- Key Evidence and Findings: The AO had accepted the deduction under Section 10AA after considering the Tribunal's rulings for earlier years. The PCIT argued that the AO failed to verify the deduction properly, but the Tribunal noted that the AO's decision was consistent with legal precedents.

- Application of Law to Facts: The Tribunal applied the principle that for Section 263 to be invoked, both conditions of error and prejudice must be met. Since the AO's order was consistent with Tribunal decisions, it was not erroneous.

- Treatment of Competing Arguments: The Tribunal considered the PCIT's argument that the AO's order was prejudicial due to pending appeals. However, it held that mere pendency of an appeal does not render an order erroneous.

- Conclusions: The Tribunal concluded that the AO's order was not erroneous and thus, the PCIT's invocation of Section 263 was unjustified.

2. Deduction under Section 10AA on Disallowance under Section 14A

- Relevant Legal Framework and Precedents: The AO allowed deductions under Section 10AA on disallowance made under Section 14A, based on the decision in CIT vs. Gem Plus Jewellery India Ltd.

- Court's Interpretation and Reasoning: The Tribunal found that the AO's decision was consistent with the jurisdictional High Court's ruling in the Gem Plus case, which allowed such deductions.

- Key Evidence and Findings: The AO did not make any addition on this count due to the High Court's decision, which the Tribunal found to be a correct application of the law.

- Application of Law to Facts: The Tribunal held that since the AO's decision was in line with a binding High Court precedent, it was not erroneous.

- Treatment of Competing Arguments: The Tribunal rejected the PCIT's argument that the AO's lack of detailed inquiry rendered the order erroneous, emphasizing that the AO's reliance on a binding precedent was sufficient.

- Conclusions: The Tribunal concluded that the AO's decision to allow the deduction was not erroneous, as it was based on established legal precedent.

SIGNIFICANT HOLDINGS

- Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal stated, "The order is certainly not erroneous since the Tribunal in assessee's own case has consistently allowed the deduction u/s. 10AA from A.Y. 2013-14 to A.Y. 2016-17."

- Core Principles Established: For Section 263 to be invoked, both the conditions of the order being erroneous and prejudicial to the Revenue must be satisfied. Reliance on binding judicial precedents cannot be considered erroneous.

- Final Determinations on Each Issue: The Tribunal set aside the PCIT's order, holding that the AO's order was not erroneous and thus, the PCIT's invocation of Section 263 was not justified.