2011 (6) TMI 18 - HC - Income Tax

Revision - Deduction u/s 80IB - Order of the tribunal - It also filed Audit Report in Form No.10CCB wherein it was mentioned that the operation of the assessee company commenced in Financial Year 1995-96 and the initial assessment year from which deduction is being claimed was Assessment Year 1996-97 - The year of commencement of operation would be relevant to find out as to whether the assessee would be entitled to deduction under Section 80IB of the Act for the Assessment Year 2005-06 as only on that determination it would be known whether the instant year is the 10th year or the 11th year - it is clear that twin conditions laid down for exercising revisionary jurisdiction under Section 263 of the Act stood satisfied inasmuch as the lack of inquiry/investigation resulted in allowing the deduction which could be erroneous and prejudicial to the interest of Revenue if it was the 11th year from the year when the operation commenced - Decided against the assesee Tinkering an issue by the ITAT - the conjoint and accumulative reading of the order in its entirety would clearly show that the CIT had not conclusively determined that the year of commencement of the business was Financial Year 1994-95 - Once it is found that the invocation of the provisions of Section 263 of the Act was proper and valid such an order passed by the CIT could not have been tinkered with by the Tribunal by going into the merits of this issue CIT while exercising powers under Section 263 of the Act sets aside the order of the AO on merits as well and gives his categorical finding on the issue involved naturally the Tribunal will be within its right to examine as to whether the decision on the said issue was proper or not and for this purpose the Tribunal itself would be entitled to examine the issue on merits - where the issue was not examined by the AO and on this ground CIT revised the order without giving his own findings but directing the AO to do the necessary exercise it was not proper for the Tribunal to decide the same converting itself to a Court of first instance and deciding the factual aspect on which neither AO nor CIT(A) had returned any findings - Issue to be decided by AO.

Summary

Issues Involved:
1. Validity of the order passed by the CIT under Section 263 of the Income Tax Act.
2. Entitlement of the assessee for deduction under Section 80IB of the Income Tax Act for the assessment year 2005-06.
3. Scope of ITAT's jurisdiction in examining the merits of the disputes while assessing the validity of the CIT's order under Section 263.

Detailed Analysis:

1. Validity of the order passed by the CIT under Section 263 of the Income Tax Act:

The primary issue revolves around the validity of the CIT's order under Section 263 of the Income Tax Act, directing the AO to reassess whether the assessee commenced its operations in FY 1994-95 or FY 1995-96. The CIT observed that if the operations started in FY 1994-95, then the assessee would not be entitled to deduction under Section 80IB for the AY 2005-06 as it would be the 11th year, beyond the permissible 10 consecutive years for such deductions. The CIT noted that the AO had not applied his mind to this aspect, leading to a lack of inquiry/investigation, which could be erroneous and prejudicial to the interest of Revenue. The Tribunal, however, set aside the CIT's order, concluding that the operations commenced in FY 1995-96, making AY 2005-06 the 10th year for the deduction. The High Court found that the CIT had not conclusively determined the year of commencement but had directed verification, thus justifying the invocation of Section 263 for reassessment.

2. Entitlement of the assessee for deduction under Section 80IB of the Income Tax Act for the assessment year 2005-06:

The Tribunal's decision to allow the deduction under Section 80IB for AY 2005-06 was based on its finding that the operations commenced in FY 1995-96. The High Court, however, held that this determination was premature as the AO had not initially examined this issue. The CIT's order did not conclusively state the year of commencement but required verification of records. Therefore, the High Court concluded that the Tribunal erred in holding that the assessee was entitled to the deduction without the AO first verifying the commencement year. The matter was remanded back to the AO for fresh assessment limited to this issue.

3. Scope of ITAT's jurisdiction in examining the merits of the disputes while assessing the validity of the CIT's order under Section 263:

The High Court emphasized that the Tribunal exceeded its jurisdiction by deciding on the merits of the year of commencement of operations. The Tribunal should have confined its review to the propriety of the CIT's invocation of Section 263, which was based on the AO's lack of inquiry. The Tribunal's role was to assess whether the CIT's direction for reassessment was justified, not to determine the factual issue of the commencement year. The High Court cited precedents indicating that when the CIT remits a matter for further inquiry without conclusive findings, the Tribunal should not decide the merits but should focus on the validity of the CIT's order.

Conclusion:

The High Court allowed the appeal, restoring the CIT's order and directing the AO to reassess the admissibility of the deduction under Section 80IB for AY 2005-06. The AO's reassessment is limited to verifying the year of commencement of operations, without reopening the entire assessment. The Tribunal's decision on the merits was set aside, reinforcing the need for proper inquiry by the AO as initially directed by the CIT.