2017 (7) TMI 822 - HC - Income Tax

Reopening of assessment - deductions under Section 80-IA - revision order u/s 263 - Held that - The Court is unable to accept the plea of the Revenue in the present case that (i) The Assessee here did not fulfill the eligibility condition for the initial AY i.e. 1997-98; and (ii) That notwithstanding that it may have fulfilled the eligibility conditions in the initial AY it nevertheless had to fulfill the such eligibility condition for every one of the ten consecutive AYs inclusive of the initial AY in order to be eligible for the deduction. In the present case the assessment was completed under Section 143(3) of the Act for AY 1998-99 onwards. There was no error as such committed by the AO in allowing the deductions under Section 80-IA since the correct interpretation of the said provision was open to debate. The twin conditions of (i) the order having to be erroneous and (ii) prejudicial to the interest of the Revenue cannot be said to have been be cumulatively satisfied in the present case. That the power under Section 263 cannot be exercised to revisit debatable issues is well settled. The re-opening of assessment under Section 147 of the Act was only on account of the orders passed by the CIT under Section 263 of the Act and for no other reason. This Court having held that there is no justification for the CIT to have invoked Section 263 of the Act the re-opening of the assessments under Section 147 of the Act in AY 1998- 99 which is the only year for which the question was framed was not justified.- Decided in favour of assessee.

Issues Involved:

1. Validity of re-opening of assessment under Section 147 of the Income Tax Act, 1961.
2. Eligibility for deductions under Section 80-IA of the Income Tax Act, 1961.
3. Invocation of Section 263 of the Income Tax Act, 1961.
4. Correctness of additions on account of differences in valuation of closing stock.
5. Correctness of deletion of proposed additions on interests receivables on outstanding.
6. Deletion of additions made by the Assessing Officer invoking provisions of Section 40(a)(i) of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of Re-opening of Assessment under Section 147:

For the Assessment Year (AY) 1998-99, the re-opening of assessment under Section 147 was invalidated by the ITAT. The re-opening was based on the order passed by the Commissioner of Income Tax (CIT) under Section 263, which was found to be unjustified. The court affirmed that the re-opening was not justified as there was no fresh material to warrant such action. The court concluded that the ITAT was correct in invalidating the re-opening of the assessment under Section 147.

2. Eligibility for Deductions under Section 80-IA:

The primary issue was whether the Assessee was eligible for deductions under Section 80-IA, which provides deductions for profits and gains from industrial undertakings. The court examined whether the Assessee met the eligibility conditions in the initial assessment year (AY 1997-98). It was found that the Assessee did fulfill the eligibility condition as the total investment in Plant & Machinery (P&M) was within the prescribed limit. The court held that once the eligibility condition is met in the initial year, the Assessee is entitled to the deduction for the subsequent ten years, regardless of changes in the status of the undertaking in later years. The court affirmed the ITAT's decision to uphold the deductions claimed by the Assessee under Section 80-IA for the relevant assessment years.

3. Invocation of Section 263:

The court examined the invocation of Section 263 by the CIT, which allows revision of the Assessing Officer's (AO) order if it is erroneous and prejudicial to the interest of the Revenue. The court found that the AO's orders were not erroneous as the interpretation of Section 80-IA was debatable and the Assessee had met the eligibility conditions. The court emphasized that the power under Section 263 cannot be exercised to revisit debatable issues. Consequently, the court held that the invocation of Section 263 was not justified and affirmed the ITAT's decision that the CIT was not justified in invoking Section 263.

4. Correctness of Additions on Account of Differences in Valuation of Closing Stock:

For AY 2001-02, the CIT(A) directed the AO to make additions on account of differences in valuation of closing stock. The court referred to the decision in CIT v. Carborundum Universal Ltd., which explained that a change in the method of valuation of inventory should be applied consistently to both opening and closing stock to avoid distortions. The court held that the change in the method of valuation of closing stock was not a justification for invoking Section 263 and affirmed the ITAT's decision to reject the CIT(A)'s direction for additions.

5. Correctness of Deletion of Proposed Additions on Interests Receivables on Outstanding:

For AY 2001-02, the CIT(A) proposed an addition of ?70 lacs on account of interests receivables on outstanding. The court found that the ITAT was correct in allowing the deletion of this proposed addition, as the Assessee was adopting a mercantile system of accounting and the interest receivables were already accounted for appropriately. The court affirmed the ITAT's decision on this matter.

6. Deletion of Additions Made by the Assessing Officer Invoking Provisions of Section 40(a)(i):

For AY 2002-03, the AO made additions under Section 40(a)(i) for failure to deduct tax at source on payments made to a French company. The CIT(A) deleted the additions, observing that the payments were reimbursements and not royalties. The ITAT upheld this decision, and the court affirmed that the deletion of the additions was correct.

Conclusion:

The court dismissed the appeals filed by the Revenue, affirming the ITAT's decisions on all issues. The court also imposed costs of ?10,000/- in each of the appeals to be paid to the Assessee within four weeks.

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