By TIOL News Service

AHMEDABAD, FEB 15, 2017: THE ISSUE IS - Whether the subsequent re-assessment proceedings will not obviate the bar of limitation prescribed u/s 263(2) on an unconnected issue. YES is the answer.

Facts of the case:

The assessee-firm is a 100% Export oriented undertaking. The assessment was originally completed u/s 143(3) wherein certain additions were made. The case was thereafter reopened by issuance of notice u/s 148 and reassessment order u/s 143(3) r.w.s.147 was passed. As per the reasons recorded by the AO, the case of the assessee was reopened questioning eligibility of deduction u/s.10B on export of Copper Claded Glass Epoxy Laminates/Sheets (CCGL). While computing the assessed income u/s 147, the AO denied the deduction u/s 10B in respect of "incremental turnover subsidy" of Rs.42,70,068/-.The AO vide order u/s 154 rectified the alleged mistake by restoration of subsidy amount in the profits of the business for the purpose of computation of deduction u/s 10B. The CIT found the aforesaid order passed u/s 147 and subsequent order u/s 154 to be erroneous in so far as prejudicial to the interests of the Revenue and accordingly issued show-cause notice u/s 263. The CIT alleged error on two counts namely (i) set off of unabsorbed depreciation of Rs.87,46,089/- pertaining to AY 2002-03 was wrongly allowed and therefore directed the AO to withdraw the excess allowance of set off towards impugned unabsorbed depreciation (ii) the CIT also found fault with the AO in granting rectification u/s 154 towards incremental subsidy claim purportedly on the premise that this subsidy was not integral to foreign remittance and therefore not amenable to deduction u/s 10B. He accordingly, cancelled the order of the AO passed u/s 154 and with a direction to pass fresh order keeping in view the directions given in the order u/s 263. The order under section 147 was also directed to be modified for withdrawal of set off towards unabsorbed depreciation.

On Appeal, the ITAT held that,

++ the set off was duly claimed in the original assessment order was admitted in full. Thus, the set off of unabsorbed depreciation claimed rightly or wrongly was not subject matter of reassessment at all. Hence, it is manifest that cause of action u/s 263 will arise, if any, with reference to original assessment proceedings only. The subsequent re-assessment proceedings will not obviate the bar of limitation prescribed u/s 263(2) on an unconnected issue. Thus, in so far as alleged wrong set off of unabsorbed depreciation against the business income of the current year is concerned, the issue is clearly time barred due to lapse of statutory time limit with reference to the original assessment order. Hence, the jurisdiction of CIT to invoke the revisional power in respect of claim of set off is time barred and cannot be sustained;

++ in so far as the second alleged error namely wrongly acceptance of eligibility of incremental subsidy for the determination of deduction u/s 10B is concerned, the re-assessment proceedings were initiated for correct determination of deduction u/s 10B and incremental subsidy being integral part thereto, the action of the CIT has to be seen with reference to the reassessment order which is within the limitation and therefore the action of the CIT cannot be assailed on the ground of bar of limitation; the CIT has to demonstrate the "error" in the impugned order which has caused prejudice to the interests of the Revenue. The AO has denied the incremental subsidy u/s 10B in the re-assessment proceedings which was reversed in section 154. Both these orders have been subjected to revision u/s 263. When the issue of eligibility of incremental subsidy for the purpose of deduction u/s 10B is seen in the light of the CBDT Circular and the judicial precedent, it is difficult to hold that the AO committed "error" per se in accepting the stand of the assessee. In the absence of error, the CIT could not have proceeded u/s 263. Thus, the action of the CIT u/s 263 is without authority of law in so far as the second issue is concerned.

(See 2017-TIOL-121-ITAT-AHM)