By TIOL News Service

KOLKATA, SEPT 08, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether the action of AO in allowing set off of profits of eligible unit with the losses of non-eligible unit at the stage of aggregation of gross income, is justified, and hence cannot be treated as incorrect application of law so as to invoke provision u/s 263. YES is the answer.

Facts of the case:

The assessee-company was engaged in the business of providing back office support services, which comprises of STPI, SEZ and non-SEZ units. For A.Y.2010-11, the Assessee filed its return showing a loss of Rs.14,30,54,165/-. While completing the assessment u/s 143(3) the AO allowed deduction u/s 10A and 10AA without setting off the loss of taxable unit considering that out of the four units, two units incurred loss of Rs.8,37,63,777/-. Consequent to the same, the CIT invoked provision of section 263 stating that the AO's view was erroneous and prejudicial to the interest of Revenue for two reasons i.e., (i) the deduction u/s 10A and 10AA was allowed without setting off of loss of units whose income was chargeable to tax, and (ii) deduction u/s 10A and 10AA ought to have been restricted to the total income computed under the head "income from business" of Rs.55,86,57,869/-. The CIT thus issued a show cause notice calling upon the Assessee to show cause as to why the AO's order should not be revised u/s 263. In response, the Assessee pointed out that in Circular No. 7 /DV /2013, it was explained that despite the placement of Sec 10A in Chapter III, those provisions were deduction provisions and therefore the set off of profits of the eligible unit with the loss of the non-eligible unit had to be done at the stage of aggregation of income and before allowing deduction under Chapter VIA of the Act.

The CIT however observed that the AO has failed to make necessary inquiry with regard to the existence of separate units and as to how the assessee has maintained its accounts viz., whether one account was maintained for all the units or separate accounts were maintained for separate units. The CIT has also observed that in exercise of his powers u/s 263, he can even go into a debatable issue. Thereafter he referred to the fact that since the AO had not examined all the facts and details while allowing excess carry forward loss to the assessee, there was wrong assumption of facts and incorrect application of law. The CIT accordingly set aside the order of AO passed u/s 143(3) and directed the AO to make a fresh verification and assessment.

Tribunal held that,

++ it is not disputed that the AO while completing the assessment has called for complete details of calculation of deduction u/s 10A and 10AA. In the light of the enquiries made by the AO in the course of assessment proceedings, we are of the view that the findings of CIT that AO did not make necessary enquiries regarding the existence of a single account for various units or separate accounts of various units and about the nature of work of separate units, cannot be sustained. The AO was fully conscious of the issue where provision of section 10A and 10AA were to be construed as deduction provision or exemption provisions and had in the course of assessment proceedings called for calculation of deduction u/s 10A and 10AA. In fact, perusal of the order of assessment u/s 143(3) shows that the AO has disallowed the expenses claimed by assessee by way of provision for leave encashment while arriving at the eligible provision of section 10A and 10AA units. It cannot therefore be said that there was any failure on the part of the AO for proper or adequate enquiries to claim deduction u/s 10A and 10AA before completing the assessment;

++ as far as the question whether section 10A and 10AA are deduction provisions or exemption provisions, is concerned, the first aspect which needs to be mentioned is that the issue was debatable and there are decisions of courts which have taken a view that the aforesaid provisions were exemption provision and will therefore not enter the computation of total income at all. These decisions have been rendered even after the CBDT Circular dated 16.07.2013, wherein it has been mentioned that provision of section 10A and 10AA were deduction provision though they are part of Chapter-III of the Act. In the light of the debate that existed when the order of the assessment was framed and when the impugned order u/s 263 was passed, it cannot be said that the view taken by the AO was an erroneous view. In fact the view taken by the AO was a possible view supported by decisions of courts. It cannot therefore be said that there was either incorrect assumption of fact or incorrect application of law so as to invoke the provision u/s 263;

++ further, we find that Supreme Court in the case of CIT vs Yokogawa India Ltd. has taken the view that the provision of section 10A and 10AA are deduction provisions but the stage of deduction would be while computing gross total income of eligible undertaking under Chapter-IV of the Act and not at the stage of computation of total income under Chapter-VI of the Act. The effect of the aforesaid decision would be that the provision of set off and carry forward as contemplated under Chapter-VI of the Act would not be attracted and therefore intra head set off sought to be done by the CIT by seeking to rely on the provision of section 70(1) and seeking to restrict the deduction u/s 10A and 10AA to the extent of gross total income as contemplated u/s 80A(2), cannot be sustained. For such reasons, we are of the view that the order of AO was neither erroneous nor prejudicial to the interest of Revenue and the conditions precedent for exercise of jurisdiction u/s 263 are absent in the present case. For such reasons, we quash the order u/s 263.

(See 2017-TIOL-1224-ITAT-KOL)