[2010] 5 taxman 105 (Hyd. - ITAT) (sec 263) : Every loss of revenue as a consequence of an order of Assessing Officer, cannot be treated as prejudicial to the interests of the revenue

Every loss of revenue as a consequence of an order of Assessing Officer, cannot be treated as prejudicial to the interests of the revenue

• When an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.

 

[2010] 5 taxmann.com 105 (Hyd. - ITAT)

ITAT, HYDERABAD BENCH 'A', HYDERABAD

Inventaa Chemical Ltd.

v.

ACIT

ITA No. 328/Hyd/2006

May 26, 2010

FACTS

the assessee herein is a Public Limited Company in which the public are not substantially interested, carrying on business of manufacture and sale of Chemicals. For the assessment years 2002-03, the assessee company filed return of income on 31.10.2002 admitting total income of Rs. NIL. The book profit for the purpose of Sec.115JB was admitted at Rs. NIL. The assessment was completed u/s 143(3) on 29.3.2004 and the total income was determined at Rs. Nil. after adjustments of the brought forward loss. The book profit was also determined at Rs. Nil. For the purpose of arriving at the book profit, the assessee deducted unabsorbed depreciation as per the books at Rs.1,86,11,743/-. After the assessment was completed, the CIT, Hyderabad-II issued a notice u/s 263 of the Act requiring the assessee to explain as to why the assessment should not be revised by withdrawing deduction towards unabsorbed depreciation. The assessee filed a detailed reply before the CIT-II, Hyderabad. It was explained that there was loss as per the books of account and such loss is allowable as a deduction for the purpose of arriving at the book profit. The CIT, rejected the contention of the assessee and passed an order u/s 263 on 16.2.2006. According to CIT, the unabsorbed depreciation of Rs.1,86,11,743/- for the assessment year 2001-02 should not be allowed as a deduction for the purpose of arriving at the book profit for the assessment year 2002-03. Accordingly passed order u/s 263.

 

HELD

A bare reading of Sec. 263 of the IT Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the ITO is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely (i) the order of the assessing officer sought to be revised is erroneous and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent if the order of the ITO is erroneous but is not prejudicial to the Revenue of if it is not erroneous but is prejudicial to the Revenue recourse cannot be had to sec. 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the assessing officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer, cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial in the interests of the Revenue unless the view taken by the ITO is unsustainable in law. This view of ours fortified by the judgement of Hon'ble Supreme Court in the case of Malabar Industries Company Ltd. (243 ITR 83).

 

RELEVANT EXTRACTS:

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11.1 A bare reading of Sec. 263 of the IT Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the ITO is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely (i) the order of the assessing officer sought to be revised is erroneous and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent if the order of the ITO is erroneous but is not prejudicial to the Revenue of if it is not erroneous but is prejudicial to the Revenue recourse cannot be had to sec. 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the assessing officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer, cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial in the interests of the Revenue unless the view taken by the ITO is unsustainable in law. This view of ours fortified by the judgement of Hon'ble Supreme Court in the case of Malabar Industries Company Ltd. (243 ITR 83).

 

12. In the present case, as seen from the arguments of the assessee's counsel, there are various decisions available at the time of completing assessment which are in favour of the assessee on the impugned issues. In the case of Starchik Specialties Ltd. Vs. DCIT (2004) (90 ITD 34 (Hyd), DCIT Vs. Govind Rubber (P) Ltd. (2004) (89 ITD 457) (Mum), Tushako Pumps Ltd. Vs. ACIT (2005) 2SOT 556 (Mum) and in the case of CIT Vs. Syncome Formulations (I) Ltd. (106 ITD 193) (Mumbai Special Bench) wherein it was held that the deduction u/s 80HHC deserves to be computed by taking into consideration book profit and cannot be restricted to the profits of the business as computed under the normal provisions of the IT Act. Similar view has been taken by Co-ordinate Bench in the case of DCIT Vs. M/s Glenmark Laboratories Ltd. in ITA No.4155/Mum/07 vide order dated 9.11.2007 for the assessment year 2004-05 and also by Hon'ble Madras High Court in the case of CIT Vs. K.G. Denim Ltd. (180 Taxman 590).

 

12. 1 In this circumstance, we are of the opinion, that the assessing officer's decisions are based on various judicial pronouncements though decision of the assessing officer is prejudicial to the Revenue, it cannot be treated as erroneous. In view of this, in our opinion, the CIT cannot invoke the provisions of Sec. 263 to set right the errors committed by the assessing officer.

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