Every loss of revenue due to AO order cannot be treated as prejudicial to revenue interest

We have observed, the AO while completing the assessment has called for complete details of calculation of deduction u/s 10A and 10AA of the Act. We have referred to the enquiries made by the AO in this regard in the earlier paragraphs of this order. 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 in para-4 of his order that the 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. We also are of the view that the AO was fully conscious of the issue where provision of section 10A and 10AA of the Act 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 of the Act. In fact perusal of the order of assessment u/s 143(3) of the Act shows that the AO has disallowed the expenses claimed by the 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 of the Act 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 16.07.20 13 wherein it has been mentioned that provision of section 10A and 10AA of the Act 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 of the Act 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 of the Act. Apart from the above we find that the Hon;ble Supreme Court in the case of CIT vs Yokogawa India Ltd. (supra) has taken the view that the provision of section 10A and 10AA of the Act 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) of the Act and seeking to restrict the deduction u/s 10A and 10AA of the Act to the extent of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained.

Every loss of revenue due to AO order cannot be treated as prejudicial to revenue interest

For the reasons given above we are of the view that the order of AO was neither erroneous nor prejudicial to the interest of the revenue and the conditions precedent for exercise of jurisdiction u/s 263 of the Act are absent in the present case. The principles laid down by the Hon’ble Supreme Court in the context of exercising of jurisdiction u/s 263 of the Act in the case of Malabar Industrial Co. Ltd. 243 ITR 83 as well as CIT vs Max India Ltd. 294 ITR 292 is that every loss of revenue as a consequence of the order of AO cannot be treated as prejudicial to the interest of the revenue. When the AO adopted one course permissible under law and it is resulted in any loss of revenue or where two views are possible and the AO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the AO is unsustainable in law. The above proposition of law if applied to the facts of the present case would show that the condition precedent for exercise of jurisdiction u/s 263 of the Act, are absent.

Full Text of the ITAT Order is as follows:-