2006 (11) TMI 236 - AT - Income Tax

Erroneous And Prejudicial Order - Validity Of Revision Order Passed by CIT u/s 263 - error in the calculation of deduction u/s 80HHC and income u/s 115JB - whether the order passed by the AO can be said to be erroneous insofar as it is prejudicial to the interests of the Revenue - HELD THAT - In our considered view the foundation for assessment is the assessment order passed by the AO who is the quasi-judicial authority. The order of the AO is subject to appeal to the CIT(A). The order of the AO is also subject to the revision by the CIT u/s 263 as well as u/s 264. It is therefore necessary that the AO considers every fact for and against with due care and give his finding in a manner which would clearly indicate what were the questions which arose for determination and what is the evidence pro and contra in regard to each issue and the findings recorded on such evidence. The order of the AO is silent on the issues raised by the CIT in his order u/s 263. It is only with reference to the questionnaires issued by the AO and the replies furnished by the assessee that it comes to light that the AO had made inquiry in regard to the issues raised by the CIT u/s 263. But what is the decision of the AO much less what is the basis of such decision is not indicated in the assessment order. Such an order passed by the AO in our considered view would fall within the category of an erroneous order being a non-speaking order. It is pertinent to mention that where the AO is enquiring about the facts and the assessee furnishes evidence the AO may accept the evidence as sufficient in support of the claim. So however when a legal issue is involved and/or the interpretation of the relevant provisions of the Act is involved it is imperative upon the AO to indicate the reasons for interpreting the provisions of the Act in a particular manner. In this case the AO as pointed out earlier has not given reasons much less valid reasons for taking the view contrary to the view expressed by the Tribunal. Therefore the order of the AO is not only erroneous for accepting the explanation of the assessee but not basing the order on any reasons much less valid reasons in regard to legal issue involved. It is also pertinent to mention that the power of the CIT u/s 263 can be exercised as pointed out earlier if twin conditions are satisfied. One of the conditions required for exercising the power u/s 263 is that the order of the AO is erroneous. In this case the view taken by the AO is the view canvassed by the assessee. No reasons have been given by the AO for accepting the claim accepted in regard to interpretation of law. Computation of deduction for the purpose of s. 115JA - The sub-section provides for reduction to the extent of the profits eligible for deduction u/s 80HHC computed under cl. (a) (b) or (c) of sub-s. (3) or sub-s. (3A). The words in the manner have been omitted from the language of above quoted sub-section. It is therefore evident that after the assessment what is to be reduced from the profits and gains of business as per the books of account is the amount of deduction u/s 80HHC computed under the relevant provisions of the Act. So a plain reading of cl. (viii) gives the indication that the AO had wrongly accepted the claim of the assessee. The AO did not notice the distinction between s. 115J and s. 115JA. The AO has not given any reasons for accepting the claim of the assessee which was calculated in the manner as provided u/s 115J. No reasons have been assigned to hold that sub-cl. (viii) of s. 115JA was different from cl. (iii) of s. 115J. We are therefore of the considered view that the order of the AO was erroneous insofar as it was prejudicial to the interests of the Revenue in regard to computation of deduction u/s 115JA also. The CIT has also referred to certain other alleged mistakes such as wrong allowance of MAT credit wrong claim of deduction u/s 80G etc. The assessee has given explanations in regard to these issues and we are satisfied that there is no error committed by the AO in regard to small issues raised by the CIT. So however in regard to calculation of deduction u/s 80HHC and in regard to computation of profits for the purpose of s. 115JA we are of the view that the order passed by the AO was erroneous insofar as it was prejudicial to the interests of the Revenue. The CIT was accordingly justified in setting aside the assessment order and directing the AO to make assessment afresh in accordance with law. Since the CIT has asked the AO to decide the issue afresh in accordance with law the law will take its own course in passing of the fresh order by the AO. The issues have got to be decided in accordance with law and assessee has the right to appeal against the order of the AO. The order of CIT is again subject to appellate jurisdiction of the Tribunal High Court etc. We make it clear that our order will not prejudice the outcome of such proceedings. We have confined ourselves to the validity of order u/s 263 passed by the CIT. We on the basis of material on record are satisfied that the order passed by the CIT u/s 263 is within his powers and there is no infirmity in his order to the extent indicated above. We accordingly uphold his order for asst. yr. 2000-01. As indicated earlier our decision for asst. yr. 2000-01 shall apply mutatis mutandis to the appeal for asst. yr. 2001-02 as well. In the result the appeals of the assessee for both the assessment years are dismissed.

Summary

Issues Involved:
1. Validity of the orders passed by the CIT under Section 263 of the IT Act, 1961.
2. Calculation of deduction under Section 80HHC.
3. Calculation of income under Section 115JB.
4. Wrong credit of Modvat.
5. Wrong claim of deduction under Section 80G.
6. Wrong calculation of interest under Sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Validity of the Orders Passed by the CIT under Section 263:
The core issue in both appeals was the validity of the CIT's orders under Section 263 of the IT Act, 1961. The CIT held that the orders passed by the AO under Sections 143 and 154 were erroneous and prejudicial to the interests of the Revenue. The CIT issued show-cause notices to the assessee, and despite objections, passed the orders setting aside the assessment and directing the AO to make a fresh assessment. The Tribunal upheld the CIT's orders, stating that the AO's orders were non-speaking and lacked reasons, thus falling within the category of erroneous orders.

2. Calculation of Deduction under Section 80HHC:
The CIT pointed out an error in the calculation of the deduction under Section 80HHC. Specifically, the CIT noted that the assessee had included receipts from inspection and regrinding charges from domestic customers in the gross total income as business profits, which should have been excluded as per Clause (baa) of the Explanation to Section 80HHC. The Tribunal agreed with the CIT, stating that the AO had failed to apply his mind and did not record specific findings on this issue, rendering the order erroneous and prejudicial to the interests of the Revenue.

3. Calculation of Income under Section 115JB:
The CIT observed that the assessee had claimed an excess deduction of export profits under Section 115JA/JB. The CIT clarified that the reduction admissible under Clause (iv) of Section 115JB(2) should be with reference to the deduction computed under Clause (a), (b), or (c) of Sub-section (3) of Section 80HHC. The Tribunal found that the AO had not given reasons for accepting the assessee's claim, which was contrary to the law, thus making the order erroneous.

4. Wrong Credit of Modvat:
The CIT noted a mistake in the allowance of Modvat credit. The Tribunal, however, observed that the issue was covered in favor of the assessee by the Supreme Court's decision in CIT vs. Indo Nippon Chemicals Co. Ltd. and thus did not find the AO's order erroneous on this account.

5. Wrong Claim of Deduction under Section 80G:
The CIT pointed out a wrong claim of deduction under Section 80G. The Tribunal, however, was satisfied with the assessee's explanation and did not find any error in the AO's order regarding this issue.

6. Wrong Calculation of Interest under Sections 234B and 234C:
The CIT also noted errors in the calculation of interest under Sections 234B and 234C. The Tribunal did not specifically address this issue in detail but upheld the CIT's overall order, directing the AO to reassess the matter.

Conclusion:
The Tribunal upheld the CIT's orders under Section 263 for both assessment years, finding that the AO's orders were erroneous and prejudicial to the interests of the Revenue, particularly regarding the calculation of deductions under Sections 80HHC and 115JB. The appeals of the assessee were dismissed.