2011 (1) TMI 1375 - AT - Income Tax

Allowability of deduction u/s 80-IA - Carry forward of losses relating to the industrial undertaking which are already absorbed against other income - brought forward against the profit of the current year while allowing the deduction u/s 80-IA - HELD THAT - The issue relating to computation of s. 80-IA deduction that it has to be computed after deduction of the notional brought forward losses and depreciation of business even though they have been allowed set off against other income in earlier years has been dealt by the Special Bench in the case of ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 4, AHMEDABAD. VERSUS GOLDMINE SHARES AND FINANCE (P.) LIMITED. 2008 (4) TMI 405 - ITAT AHMEDABAD and decided the issue against the assessee. While delivering this order, the Special Bench considered all the arguments what the assessee has placed in the instant case - The Tribunal also considered the judgment in the case of COMMISSIONER OF INCOME-TAX VERSUS MEWAR OIL AND GENERAL MILLS LTD. 2003 (10) TMI 12 - RAJASTHAN HIGH COURT and observed that this case has not noticed the non obstante provisions of s. 80-I(6)/80-IA(5) and, therefore, there is no discussion on this point in that decision. It would similarly, therefore, be not of any help to present case. The judgment of Special Bench in the case of Goldmine Shares Finance (P) Ltd. is squarely applicable to the facts of the present case and applying the ratio laid down by this order of the Special Bench of this Tribunal, the issue is decided against the assessee relating to allowability of deduction under s. 80-IA that in terms of provisions of under s. 80-IA(5) of the IT Act, the profit from the eligible business for the purpose of determination of the quantum of deduction under s. 80-IA of the Act has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years. Revision u/s 263 - Jurisdiction/power of CIT to invoke the provisions of s. 263 when the original assessment was completed u/s 143(3) of the Act and all the relevant informations at the point of s. 80-IA are furnished before the AO - HELD THAT - The prejudicial to the interest of Revenue appearing s. 263 is conjunction with the expression erroneous and that every loss of revenue as a consequence of an order of the AO cannot prejudice to the interest of Revenue. In case, where the AO adopts one of the courses permissible in law where two views are plausible the CIT cannot exercise his power under s. 263 to defer with the AO even if there has been a loss of revenue. On the other hand, when the AO takes a view which is patently unsustainable, the CIT can exercise his powers where the loss of revenue results as a consequence of the view taken by the AO. It is also clear that while passing the order under s. 263, the CIT has to examine not only the assessment order but also the entire facts on the record. Further, when a regular assessment is made it has to be presumed that it has been passed upon proper application of mind when he has made proper enquiry before passing assessment order. The ITO is not only the adjudicator but also an investigator. In the facts of the present case, the AO has not applied his mind to the provisions of s. 80-IA(5). No additional facts were necessary before the AO to come to the conclusion that deduction under s. 80-IA is wrongly computed. The AO not examined the facts before him. The order passed by the AO is very cryptic. There is no discussion or methodology of computation of deduction under s. 80-IA. It cannot be said that the AO is aware of any of the Tribunal orders on the issues involved. The order of the AO is erroneous for want of proper enquiry. He has not recorded reasons for accepting the return of the assessee as submitted by it on the impugned issue. The AO without making any enquiry accepted the claim of the assessee without recording any reasons at all. The assessment order is silent about the issue raised by the CIT - In this case, the failure of the AO to make an enquiry with regard to the claim of the assessee and to record such a reason, why he is taking particular view, makes the assessment order erroneous and prejudicial to the interest of the Revenue. As such, there is no merit in the arguments of the assessee s counsel against observation made by CIT in his order under s. 263. Appeal dismissed.

Summary

Issues Involved:
1. Computation of deduction under Section 80-IA.
2. Invocation of provisions under Section 263 by the CIT.

Issue-wise Detailed Analysis:

1. Computation of Deduction under Section 80-IA:

The primary issue raised by the assessees was whether losses related to the industrial undertaking, which were already absorbed against other income, should be notionally brought forward and set off against the profit of the current year while allowing the deduction under Section 80-IA.

The assessees contended that the notionally brought forward unabsorbed business losses or depreciation of the eligible business unit need not be set off against the income earned by the unit for the assessment years. They argued that Section 80-IA(5) should be read with Sections 80-IA(8), (9), and (10), which do not suggest any adjustment for past losses already absorbed. They supported their argument by citing various judgments, including CIT v. Mewar Oil & General Mills Ltd., Mohan Breweries & Distilleries Ltd. v. Asstt. CIT, Rangamma Steels & Malleables v. Asstt. CIT, and Velayudhaswamy Spinning Mills (P) Ltd. v. Asstt. CIT, which held that past losses already absorbed should not be brought forward for computing the deduction under Section 80-IA.

In contrast, the Departmental Representative argued that as per Section 80-IA(5), the income of any eligible business unit should be computed as if it is the only source of income of the assessee during the relevant years. They relied on the Special Bench decision in Asstt. CIT v. Goldmine Shares & Finance (P) Ltd., which held that the profit from the eligible business for the purpose of determining the quantum of deduction under Section 80-IA must be computed after deducting the notional brought forward losses and depreciation of the eligible business, even if they were set off against other income in earlier years.

The Tribunal, after considering the arguments and the relevant case laws, decided the issue against the assessees. It held that in terms of Section 80-IA(5), the profit from the eligible business must be computed after deducting the notional brought forward losses and depreciation, even if they were allowed set off against other income in earlier years.

2. Invocation of Provisions under Section 263 by the CIT:

The second issue was whether the CIT was justified in invoking the provisions under Section 263 for the assessment years 2001-02, 2002-03, and 2003-04. The assessees argued that the assessments were completed under Section 143(3) after furnishing all the required information, and the CIT could not invoke Section 263 for making a roving enquiry. They contended that the AO had followed one possible view on the issue, and therefore, the order was not erroneous.

The Tribunal examined the arguments and the material on record. It noted that "prejudicial to the interest of Revenue" in Section 263 is in conjunction with the expression "erroneous." It held that when the AO adopts one of the permissible courses in law, the CIT cannot exercise his power under Section 263 even if there is a loss of revenue. However, if the AO takes a view that is patently unsustainable, the CIT can exercise his powers where the loss of revenue results from the view taken by the AO.

In this case, the Tribunal found that the AO had not applied his mind to the provisions of Section 80-IA(5) and had not examined the facts before him. The assessment order was cryptic, with no discussion or methodology of computation of deduction under Section 80-IA. The AO had not made any enquiry or recorded reasons for accepting the assessee's claim. The Tribunal concluded that the AO's failure to make an enquiry and record reasons made the assessment order erroneous and prejudicial to the interest of the Revenue. Therefore, the CIT was justified in invoking the provisions under Section 263.

Conclusion:

The Tribunal dismissed all the appeals of the assessees, holding that the computation of deduction under Section 80-IA must consider the notional brought forward losses and depreciation, and the CIT was justified in invoking the provisions under Section 263 due to the AO's failure to make proper enquiries and record reasons.