2007 (5) TMI 350 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction and validity of the CIT's order under section 263.
2. Excessive allowance of deduction under section 80HHC.
3. Examination of the CIT's jurisdiction in revising the assessment order.
4. CIT's authority in making inquiries beyond the show-cause notice.
5. Deduction admissibility under section 80-IB.
6. Deduction admissibility under section 80HHC.
7. Treatment of duty drawback and subsidy from DIC.
8. Treatment of interest on FDRs.

Detailed Analysis:

1. Jurisdiction and Validity of the CIT's Order under Section 263:
The assessee contended that the CIT's order dated 30th March 2005 was beyond jurisdiction, bad in law, and void ab initio. The CIT exercised revisionary powers under section 263, holding that the assessment order dated 31-3-2003 was erroneous and prejudicial to the interests of the Revenue. The CIT's action was challenged on the grounds that the prerequisite conditions for invoking section 263 were not satisfied.

2. Excessive Allowance of Deduction under Section 80HHC:
The CIT found that the Assessing Officer (AO) had incorrectly allowed the deduction under section 80HHC without reducing the amount of deduction allowable under section 80-IB. The CIT directed that the deduction under section 80HHC should only be computed on the reduced profit after deducting the amount allowable under section 80-IB. This was in line with the decision of the ITAT Special Bench in the case of Rogini Garments.

3. Examination of the CIT's Jurisdiction in Revising the Assessment Order:
The CIT was criticized for substituting his opinion with that of the AO, which is not permissible in law. The CIT's action was deemed to have exceeded his jurisdiction by revising the assessment order dated 31-3-2003, which was passed after detailed examination and proper application of mind by the AO.

4. CIT's Authority in Making Inquiries Beyond the Show-Cause Notice:
The CIT was alleged to have made fishing and roaming inquiries subsequent to the notice under section 263, which is not permissible in law. The CIT's action in exercising revisionary powers under section 263 on issues other than those stated in the show-cause notice dated 18-1-2005 was also challenged.

5. Deduction Admissibility under Section 80-IB:
The CIT determined that the Duty Drawback and Subsidy from DIC were not eligible for deduction under section 80-IB. The CIT also held that the deduction under section 80-IB was not admissible on FDR interest amounting to Rs. 18,784. The assessee argued that these items were eligible for deduction under section 80-IB, citing various judicial decisions in support.

6. Deduction Admissibility under Section 80HHC:
The CIT determined that the deduction admissible under section 80HHC was Nil against the claimed deduction of Rs. 13,12,805. The CIT held that the appellant was not entitled to deduction under section 80HHC in view of the loss under clause (a) of sub-section (3) of that section. The CIT also held that the subsidy from DIC and interest on FDRs should be excluded while computing 'profit of the business' in terms of Explanation (baa) to section 80HHC.

7. Treatment of Duty Drawback and Subsidy from DIC:
The CIT held that duty drawback and subsidy from DIC were not eligible for deduction under sections 80-IB and 80HHC. The assessee argued that these items were eligible for deduction, citing judicial precedents. The Tribunal noted the conflicting views on this issue and directed the AO to recompute the deduction under section 80HHC in accordance with the amended provisions introduced by the Taxation Laws (Amendment) Act, 2005.

8. Treatment of Interest on FDRs:
The CIT held that interest on FDRs should be excluded while computing 'profit of the business' in terms of Explanation (baa) to section 80HHC. The Tribunal referred to the decision of the Delhi High Court in the case of CIT v. Shri Ram Honda Power Equip., which laid down principles for determining the nature of interest income. The Tribunal directed the AO to follow these principles and recompute the deduction under section 80HHC and 80-IB accordingly.

Conclusion:
The Tribunal upheld the CIT's direction to recompute the deductions under sections 80HHC and 80-IB, considering the amended provisions and judicial precedents. The appeal of the assessee was allowed in part, with specific directions to the AO to recompute the deductions in accordance with the Tribunal's observations.