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:*
*** ** ** ** ** ** **
** ** ** ** ***
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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