INVOCATION OF SECTION 263 OF IT ACT ON GROUND OF DEDUCTION UNDER SECTION 80-IA WRONGLY ALLOWED BY AO

Where the AO after enquiry had taken a possible view of the matter, it was obligatory on the part of the Commissioner to show for the purposes of provision of section 263 that assessment order was erroneous and insofar as prejudicial to the interest of the revenue,it was for the Commissioner to show that repair charges, if any, received by the assessee were totally unconnected with the manufacturing activities carried on by the assessee and, therefore, could not form part of manufacturing receipt for purposes of section 80-1A,the onus was not on the assessee but clearly on the Revenue to show that a specified amount out of total receipt of the assessee, exemption under section 80-IA was wrongly allowed as exempt.AGRA BENCH, AGRA (THIRD MEMBER)November 18, 2008Id. -CIT as legally erroneous. In this connection, reference is invited to the following decisions:



ITAT,



Pal & Pal Electromechanical (P.) Ltd. V CIT (ITA No. 52/Agra/07) Dated:



RELEVANT EXTRACTS:





25. On the basis of above material, it is not possible to hold that assessee was carrying on mere repair of transformers and not any manufacturing activity. Assessee’s claim that it is manufacturing electromechanical parts and accessories like winding coils, insulation material etc. etc. from different material is clearly established on record. No dispute had been raised that above items manufactured by the assessee were different in shape and in commercial value from the raw material used to manufacture them. On account of above activity, the assessee claimed to be a manufacturer. The further claim of the assessee that in its case repair tantamount to manufacturer of transformers was also to be viewed in the light of facts and circumstances noted above. In case of damaged or burnt transformers, which were required to be replaced during warranty / guarantee period, the assessee had used only the old cabinet with lamination of transformers. All other items were new items manufactured by the assessee and put in the cabinet in a similar manner as was done in the case of Saraf Electicals P.Ltd. (supra). Facts in that case are similar to facts in the present case. However, the learned Commissioner totally ignored the detailed submissions of the assessee and failed to examine the case as pleaded before him. It failed to examine documents produced by the assessee including certificate of registration/ exemption issued by the Excise and Department of Industries. The learned C.I.T failed to see the implication of the sales-tax paid by the assessee. The above facts clearly established that parts, coils etc. manufactured by the assessee from the raw material were separately sold. The aforesaid sale could not represent repair receipts. The learned Commissioner was also in error in concentrating on the fact that ownership did not change hands without considering that ownership was merely of old cabinet with lamination of the burnt transformers. It was - not of the entire transformer,more particularly the parts introduced in the cabinet were independently and separately sold. There is further material on record to show that these parts are commercially saleable items. The entire case could not be thrown out on the ground that assessee in the profit and loss account has stated sale receipts including of repair charges. It is further not permissible to invoke S.263 to correct a minor error findings or observations in the assessment order. “Error” and prejudice to the revenue has to be shown with reference to record. The case set up by the assessee in reply that it was manufacturer of electromechanical parts accessories was totally ignored. The same was the position of evidence on record. The appellate Tribunal is/was required to hold the approach of





(i) In the case of CIT Vs Gabriel India Ltd., 203 ITR 108 (Bom), their Lordships held as under:-





“An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and, left to the Commissioner, he would have estimated the income dated a higher figure than the one determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of the Revenue^ But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, the order is erroneous is absent. Similarly, if an order is erroneous but not prejudicial to the interest of the Revenue, then also the power of suo motu revision cannot be exercised Am and every erroneous order cannot be subject-matter of revision because the second requirement also must be fulfilled.”



(ii) In the case of Malabar Industrial Co. Ltd. Vs Commissioner of Income Tax 243 ITR 83(SC), their Lordships held as under:-



“A bare reading of provisions of s. 263 makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The C1T has to be satisfied , of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous,and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent - if the order of the HO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue – recourse cannot be had to s. 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO,it is only when an order is erroneous that the section will be attracted” (underlined to emphasise)



26. The Id Judicial Member who passed a dissenting order here is herself the author of Her in the case of ITO Vs AMD Export Corporation (Kandla) Ltd. 381 (Del) wherein it is observed as under:-



” The provisions of the Act as well as the circulars of the Board would clearly show that the purpose of incorporating this section is to provide development and identified/identifi able backward areas of the State. The purpose is to encourage economic development and industrialisation of those areas. The object of s. 10A is to give fillip to a new industrial undertaking in the initial stage, the benefit cannot be taken away by imposing any restrictions which do not mention in the Act, This would be in consonance with the recognised principles of interpretation. The administrative authority or the court should not whittle down the plenitude of the exemption or relief granted by the legislation by laying stress on something which is not considered in that provision.”





28. On the facts of the case, the A.0 after enquiry had taken a possible view of the matter. It was, therefore, obligatory on the part of the Commissioner to show for the purposes of provision of Sec.263 that assessment order was erroneous and in so far as prejudicial to the interest of the Revenue. It was for the Id. Commissioner to show that repair charges, if any, received by the assessee were totally unconnected with the manufacturing activities carried on by the assessee and, therefore, could not form part of manufacturing receipt for purposes of Sec. 80-IA of the I. T. Act. The onus was not on the assessee but clearly on the Revenue to show that a specified amount out of total receipt of the assessee, exemption u/s 80IA was wrongly allowed as exempt. No such exercise was undertaken by the Id. Commissioner in spite of two innings provided to the Commissioner to show error and prejudice in the order of the A.O.





29. The aforesaid errors further crept in, in the proposed order of learned Judicial Member. In my considered opinion, the learned Judicial Member was not right in putting burden of proof on the assessee in proceedings u/s 263 and in not examining profit and loss account and balance sheet of the assessee and its claim that it was involved in the manufacture of electromechanical parts. The material available on record and discussed above, was also not examined in the light of the claim made by the assessee. The observations of the Id. Judicial Member in the proposed order are also not factually correct as noted above. In the light of above discussion, I am unable to agree with the reasoning given by the Id. Judicial Member in her proposed order my considered opinion, the Id. CIT was not justified in invoking provisions of Section 263 of the I.T. Act. I agree with the view taken by the Id. A.M. and answer both the questions referred to me in file negative