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2012 (4) TMI 267 - HC - Income TaxReturn of income claiming deduction u/s 80I, 80IA and 80HH AO accepted the claim with little variation - CIT issued a notice under Section 263 mentioning that research expenditure incurred by the assessee is inextricably linked with the business of the assessee and business in those products which are manufactured in the units entitled to a deduction under Sections 80I, 80IA and 80HH - Tribunal set aside the order passed by the CIT holding that the jurisdiction under Section 263 has not been invoked properly - Held that - As a result of an erroneous order passed by an Assessing Officer, where the Revenue is losing tax lawfully payable by an assessee, the order is prejudicial to the interests of the Revenue -there was a complete failure on the part of the AO to apply his mind to the issue of whether the expenditure which was claimed should be allocated as between the units in respect of which the deduction had been claimed and on whether there was a direct or proximate nexus - jurisdiction under Section 263 was in order and that the Tribunal was not justified in interfering with the order passed by the Commissioner. Tribunal is right in holding that the entire cess can be claimed against taxable income? - the composite income derived from sale of tea grown and manufactured by the assessee cess payable on green tea leaves is allowable as a business expenditure in computing the composite income under Rule 8 of the Income Tax Rules,1962.
Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act. 2. Allocation of cess on green leaves. 3. Allocation of agency commission. 4. Allocation of interest. 5. Allocation of research and development (R&D) expenditures. Issue-wise Detailed Analysis: 1. Jurisdiction under Section 263 of the Income Tax Act: The core issue was whether the Tribunal was correct in setting aside the Commissioner of Income Tax's (CIT) order under Section 263, which questioned the assessment order's correctness and its prejudicial nature to the Revenue. The High Court emphasized that for Section 263 to be invoked, the CIT must demonstrate that the assessment order was both erroneous and prejudicial to the Revenue. The Supreme Court's ruling in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax was pivotal, establishing that an incorrect assumption of facts or law, lack of application of mind, or failure to follow principles of natural justice could render an order erroneous. The High Court found that the Assessing Officer (AO) had not properly examined the nexus between R&D expenditures and the eligible units, thus justifying the CIT's invocation of Section 263. 2. Allocation of Cess on Green Leaves: The Tribunal's decision on the allocation of cess on green leaves was upheld. Rule 8 of the Income Tax Rules, 1962, was cited, which mandates that income from the sale of tea grown and manufactured should be computed as business income, with 40% deemed taxable. The High Court agreed with the Tribunal that the cess should be treated as a business expenditure, referencing the Calcutta High Court's decision in the assessee's own case, which allowed the cess as a deductible business expense. 3. Allocation of Agency Commission: The High Court found no justification in the CIT's order for invoking Section 263 concerning the allocation of agency commission. The assessee had already allocated the agency commission in computing the profits of the eligible units. The CIT did not provide sufficient reasons to challenge this allocation. 4. Allocation of Interest: Similarly, the High Court found no grounds for the CIT's invocation of Section 263 regarding the allocation of interest. The assessee had demonstrated that the eligible units were funded through internal accruals rather than borrowed funds, and the CIT did not provide contrary evidence. 5. Allocation of Research and Development (R&D) Expenditures: The High Court disagreed with the Tribunal's setting aside of the CIT's order on R&D expenditures. The Tribunal had erroneously assumed that the AO had applied his mind to the issue. The High Court found that the AO had not adequately examined whether the R&D expenditures had a direct nexus with the eligible units. The CIT's invocation of Section 263 was deemed appropriate, as the AO's failure to consider this crucial issue rendered the assessment order erroneous and prejudicial to the Revenue. Conclusion: The High Court disposed of the appeal by affirming the Tribunal's decision on the allocation of cess on green leaves, agency commission, and interest, but upheld the CIT's order under Section 263 regarding the allocation of R&D expenditures. The Tribunal's setting aside of the CIT's order on this issue was found unjustified. The appeal was accordingly disposed of with no order as to costs.
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