Hyderabad Chemicals Supplies Ltd. v. Assistant Commissioner of Income-tax, Income Tax Appellate Tribunal, Judgment, Law, casemine.com

Citation Codes

Equivalent Citations

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Case Number

ITA NOS. 352/HYD./2005 AND 40 & 41/HYD./2006

Attorney(S)

A.V. Raghuram

Judges

G.C. GuptaCHANDRA POOJARI

Acts

s. 250 r/w s. 143(3) of the IT Act
s. 80-IA(5) of the IT Act,
s. 143(3) of the IT Act

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Smart Summary

Factual and Procedural Background

This order concerns multiple appeals by assessees arising from income-tax assessments and subsequent scrutiny by the Commissioner of Income Tax (CIT). Two appeals (ITA Nos. 352/Hyd/2005 and 1479/Hyd/2008) were filed against different orders of the CIT(A) relating to assessments framed under s. 143(3) of the Income Tax Act for the assessment years 2002-03 and 2005-06. Five other appeals (ITA Nos. 40, 41, and 42–44/Hyd/2006) challenged orders passed by the CIT under s. 263 of the Act for assessment years 2001-02, 2002-03 and 2003-04.

The assessees are companies engaged in manufacture and trading of agro-chemicals and in power generation, distribution and sale. The central factual dispute concerns computation of deduction under s. 80-IA of the Act for eligible industrial undertakings (notably a windmill unit begun on 31st March 1999). The assessees had earlier absorbed certain unabsorbed business losses and depreciation against other income in earlier years. In subsequent assessments the Assessing Officer (AO) either denied s. 80-IA deduction (for some years) on the ground that notional brought forward losses and depreciation must be deducted in computing eligible profits under s. 80-IA(5), or accepted the assessee's position without applying that provision (in other years), prompting the CIT to invoke s. 263 and set aside the AO's orders with directions for recomputation and verification.

The Tribunal heard both sides and delivered a consolidated order dismissing the appeals, addressing (a) whether notional brought forward unabsorbed losses/depreciation already absorbed against other income must be notionally brought back for computing s. 80-IA deduction, and (b) whether the CIT was justified in invoking s. 263 to set aside assessment orders completed under s. 143(3).

Legal Issues Presented

Whether, for the purpose of computing deduction under s. 80-IA of the Income Tax Act, profit from an eligible business must be computed after deduction of notionally brought forward unabsorbed losses and unabsorbed depreciation of the eligible business unit even when those losses/depreciation have already been set off against other income in earlier years (i.e., effect and scope of s. 80-IA(5)).
Whether the CIT was justified in invoking s. 263 of the Income Tax Act to set aside assessment orders completed under s. 143(3) where the AO had accepted the assessee's claim (and whether the AO's order was 'erroneous' and 'prejudicial to the interests of revenue' within the meaning of s. 263).

Arguments of the Parties

Assessee's Arguments (Authorized Representative)

The notionally brought forward unabsorbed business losses or depreciation of an eligible business unit need not be set off against the unit's income for the assessment year in which s. 80-IA deduction is claimed, particularly where such past losses/depreciation have already been absorbed against other income in earlier years.
Section 80-IA(5) should be read as ensuring that the eligible industrial undertaking is treated as a separate undertaking for purposes of computing the eligible profits (so as to avoid overlapping incomes), but it does not contemplate notional restoration of past losses which have already been absorbed.
If Parliament intended past losses to be notionally carried forward for this purpose, it would have provided expressly (as it had in other provisions, e.g., earlier s. 80J); the general Chapter VI provisions on set‑off should not be mixed with Chapter VI-A provisions unless expressly incorporated.
The assessee relied on several authorities (e.g., CIT v. Mewar Oil & General Mills Ltd., M. Pallonji & Co., Mohan Breweries & Distilleries Ltd., Rangamma Steels & Malleables, Velayudhaswamy Spinning Mills) to support the view that notional restoration of already-absorbed past losses is not required.
With respect to s. 263, the assessee contended that assessments under s. 143(3) had been completed, all relevant information furnished, and the AO had adopted a permissible view — consequently the CIT should not exercise s. 263 to make a roving inquiry when the AO followed one of the possible legal views.

Revenue's Arguments (Departmental Representative)

As per s. 80-IA(5), the income of an eligible business unit must be computed "as if it is the only source of income" of the assessee for the initial assessment year and for all subsequent assessment years for which deduction is claimed; this creates a statutory fiction that requires notional adjustment of earlier unabsorbed losses/depreciation for quantification of eligible profits.
The Department relied principally on the Special Bench decision in Asstt. CIT v. Goldmine Shares & Finance (P) Ltd. (Ahd)(SB) (2008) which, according to the Department, squarely holds that the fiction in s. 80-IA(5) applies for the initial and subsequent years and requires computation treating the eligible undertaking as the sole source of income.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Mewar Oil & General Mills Ltd. (2004) 271 ITR 311 (Raj)	Held that recomputation was not required where there was no carry forward of allowable deductions (depreciation/development rebate) to be absorbed against income of the current assessment year.	The Tribunal observed that this decision did not notice the non-obstante provisions of s. 80-I(6)/80-IA(5) and therefore was not helpful in the present case; it did not follow this authority as decisive on the point.
Asstt. CIT v. Goldmine Shares & Finance (P) Ltd. (2008) 113 ITD 209 (Ahd)(Special Bench)	Held that the statutory fiction in s. 80-IA(5) applies to the initial assessment year and every subsequent assessment year for which deduction is to be computed; income of the eligible unit must be computed as if it were the sole source of income for those years.	The Tribunal treated the Special Bench decision as directly applicable and binding for purposes of this case, and applied its ratio to hold that notional brought forward losses and depreciation must be deducted in computing s. 80-IA deduction.
M. Pallonji & Co. (P) Ltd. v. Jt. CIT (2006) 105 TTJ (Mumbai) 136 : 6 SOT 287 (Mumbai)	Held that notional adjustment is not called for and not contemplated in the claim of deduction under s. 80-IA in that case (i.e., supported assessee's contention there).	The Tribunal noted this authority was relied on by the assessee but did not accept it as controlling on facts here; the Special Bench decision was held to be more directly applicable to the statutory wording at issue.
Mohan Breweries & Distilleries Ltd. v. Asstt. CIT (2008) 114 TTJ (Chennai) 532 : 116 ITD 241 (Chennai)	Held that where an assessee first claims deduction under s. 80-IA in a given year, that year is to be treated as the initial year and depreciation and loss of earlier years cannot be notionally carried forward to be set off for computing s. 80-IA deduction.	The Tribunal observed that the Mohan Breweries decision concerned circumstances (option in respect of which years to be treated) different from the present facts; accordingly it was not considered decisive for the present case.
Rangamma Steels & Malleables v. Asstt. CIT (2010) 132 TTJ (Chennai) 365	Held that where an assessee opts for an initial year, the conditionality under s. 80-IA(5) applies from that initial year and losses of prior years could not be adjusted against eligible income.	The Tribunal noted this authority but treated it as distinguishable or not controlling on the facts where the assessee had claimed deduction from the first year; it did not adopt it as the decisive view in this case.
Velayudhaswamy Spinning Mills (P) Ltd. v. Asstt. CIT (2010) 38 DTR (Mad) 57	Held that losses and depreciation of years earlier than the initial assessment year which have already been absorbed against profits of other businesses cannot be notionally brought forward and set off against eligible business profit for computation under s. 80-IA.	The Tribunal noted this decision but, in its analysis, preferred the Special Bench decision in Goldmine Shares & Finance (P) Ltd. as more persuasive for the issues before it; it did not adopt Velayudhaswamy as determinative for the present facts.

Court's Reasoning and Analysis

The Tribunal conducted a two-part analysis: (A) interpretation and application of s. 80-IA(5) as to whether notional brought forward losses/depreciation must be deducted in computing the eligible profit; and (B) whether the CIT was justified in exercising powers under s. 263 to set aside assessments completed under s. 143(3).

A. On s. 80-IA(5)

The Tribunal examined competing authorities and arguments presented by the parties. The Department relied principally on the Special Bench decision in Asstt. CIT v. Goldmine Shares & Finance (P) Ltd., which holds that the statutory fiction in s. 80-IA(5) applies to the initial assessment year and every subsequent assessment year for which the deduction is to be computed, and that income of the eligible unit must be computed as if it were the only source of income.
The Tribunal observed that some judgments cited by the assessee (for example, CIT v. Mewar Oil & General Mills Ltd.) failed to consider the non-obstante wording of the later provision (s. 80-I(6)/80-IA(5)) and therefore were of limited assistance. Similarly, other tribunal decisions relied upon by the assessee (M. Pallonji, Mohan Breweries, Rangamma, Velayudhaswamy) were considered but found either distinguishable on facts or not persuasive in light of the Special Bench's analysis.
Applying the ratio of the Special Bench in Goldmine Shares & Finance (P) Ltd., the Tribunal concluded that s. 80-IA(5) requires the profit from the eligible business to be computed after deduction of the notional brought forward unabsorbed losses and depreciation of the eligible business, even if those losses/depreciation had been set off against other income in earlier assessment years.

B. On exercise of power under s. 263

The Tribunal set out the legal principle that the power under s. 263 is to be exercised where an assessment order is "erroneous" and prejudicial to the interests of the Revenue — but that not every loss of revenue suffices. If the AO takes one of two tenable views, CIT should not interfere merely because another view would yield more tax. Conversely, where the AO's view is patently unsustainable or where the AO failed to make necessary inquiries or to apply his mind, the order is "erroneous".
Applying those principles to the present facts, the Tribunal found that the AO had not applied his mind to the applicability of s. 80-IA(5). The assessment order was described as cryptic, lacking any discussion or methodology of computation, and silent on the issue raised by the CIT. The AO had accepted the assessee's claim without recording reasons or making necessary enquiries (for example, verifying allocation of expenditure to the eligible undertaking).
Because the assessment order lacked proper enquiry and reasoning on the contested point, the Tribunal held the AO's order to be erroneous for want of proper enquiry and therefore prejudicial to the interests of Revenue; accordingly, the CIT's exercise of power under s. 263 was justified.

Holding and Implications

HOLDING: The Tribunal dismissed all the appeals of the assessees. It held that, in terms of s. 80-IA(5) of the Income Tax Act, the profit from the eligible business for the purpose of determination of the quantum of deduction under s. 80-IA must be computed after deduction of the notional brought forward unabsorbed losses and depreciation of the eligible business even though those losses and depreciation had been allowed as set-off against other income in earlier years.

Implications:

Direct effect on the parties: the assessee's claims for s. 80-IA deduction (to the extent based on ignoring notional restoration of past unabsorbed losses/depreciation) were rejected; the CIT's invocation of s. 263 to set aside the assessments was upheld because the AO's assessment orders were found to be erroneous for want of proper enquiry and reasoning.
Practical consequence in these proceedings: the AO was to verify and, where necessary, re-compute the eligible business income and properly allocate expenses not specifically relatable to the eligible undertaking, carrying forward and notionally adjusting unabsorbed losses/depreciation as directed by the CIT's order (as described in the factual background and the Tribunal's reasoning).
No broader novel principle was announced beyond application of the statutory interpretation of s. 80-IA(5) as informed by the Special Bench decision referred to; the Tribunal applied existing authorities in concluding against the assessee on both s. 80-IA computation and the correctness of the CIT's exercise of s. 263.

Result: All appeals of the assessees were dismissed.

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Hyderabad Chemicals Supplies Ltd. v. Assistant Commissioner of Income-tax

ORDER

Chandra Poojari, Accountant Member - The first two appeals in ITA Nos. 352/Hyd/2005 and 1479/Hyd/2008 preferred by the assessee are directed against different orders passed by the CIT(A)-II and III, Hyderabad under s. 250 r/w s. 143(3) of the IT Act and pertains to the asst. yrs. 2002-03 and 2005-06.

2. There are other five appeals out of this—the first two appeals in ITA Nos. 40 and 41 by one assessee and other 3 appeals in ITA Nos. 42 to 44/Hyd/2006 are by another assessee which are directed against the different orders passed by the CIT, Hyderabad under s. 263 of the IT Act and pertain to the asst. yrs. 2001-02, 2002-03 and 2003-04.

3. The assessees herein raised common grounds in these appeals are that the CIT(A)/CIT erred in not accepting claim of the assessee that losses relating to the industrial undertaking which are already absorbed against other income need not be notionally brought forward against the profit of the current year while allowing the deduction under s. 80-IA. The assessees also raised ground in ITA Nos. 40 to 44/Hyd/2006 that the CIT(A) erred in cancelling the assessment when the original assessment was completed under s. 143(3) of the Act and all the relevant informations at the point of s. 80-IA are furnished before the AO. As such, it is not open to the CIT to invoke the provisions of s. 263 of the IT Act.

4. The assessee herein is a company which is carrying on its business in the manufacture and trading of agro-chemicals, generation, distribution and sale of power. In the asst. yrs. 2002-03 and 2005-06, assessment was framed under s. 143(3) of the Act wherein the claim of the assessee under s. 80-IA was denied on the reason that in view of the specific provisions of s. 80-IA(5) the profit from the eligible business for the purpose of determination of the quantum of deduction under s. 80-IA of the Act has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years. For the asst. yrs. 2001-02, 2002-03 and 2003-04, the original assessments have been completed under s. 143(3) of the IT Act while passing assessment order, the AO not considered the provisions of s. 80-IA(5) and bringing forward the unabsorbed losses and unabsorbed depreciation relating to the eligible business that have not been fully set off/adjusted against the income from the said undertaking for the earlier year(s) and setting them off against the income from such units in the subsequent year treating the undertaking as if they are only the business of the assessee for the purpose of quantification amount of the income that can be considered for deduction. It is also observed that the AO has not verified the details relating to the expenditure relatable to the earnings of income of the undertaking and has not verified thecorrectness of the income of the undertaking. In view of this, the CIT invoked the provisions under s. 263 of the Act in these assessment years i.e., 2001-02, 2002-03 and 2003-04 and set aside the order of the AO with a direction to the AO to work out the correct amount of depreciation and business losses of the earlier years relating to the undertakings to which the provisions of s. 80-IA (7) apply and to carry forward the same and set off against the income of the undertaking in the current year treating the undertaking as if they are only business of the assessee for the purpose of computing the deduction under s. 80-IA.

5. Regarding the quantification of the expenses of the undertaking, it was directed to the AO that he/she shall verify the correctness of the claim in this regard. In particular, he/she should allocate the expenses not particularly relatable to the existing alone in the rational manner to the new undertaking for determination of income of the undertaking. Against this the assessee is in appeal before us.

6. According to learned Authorized Representative, the notionally brought forward unabsorbed business losses or depreciation of eligible business unit need not be set off against the income earned by the unit for the assessment years.

7. He submitted that the assessee company started the windmill unit located at Kadavakallu near Tadipatyri, Anantapur District on 31st March, 1999. The assessee claimed deduction under s. 80-IA on this unit at Rs. 11,67,300. But the assessee company had losses for the asst. yrs. 1999-2000 and 2000-01 on this unit. It has shown a turnover of Rs. 12,85,783 towards this windmill and claimed expenses at Rs. 1,18,483 and arrived the figure of Rs. 11,67,300. The assessee set off the brought forward losses against the income of this windmill as per the provisions of s. 80-IA(5).

8. Further, he submitted that the real intention behind sub-s. (5) s. 80-IA is to ensure that the industrial undertaking which is eligible for deduction has to be treated as separate industrial undertaking for initial assessment year and subsequent assessment year to arrive at right quantum of profits that are eligible for deduction i.e., that there is no overlapping of any other income of the undertaking or other undertakings and even if there is any reorganization of that unit subsequent to the claim, the profits of the undertaking should be arrived treating it as a separate unit. Sec. 80-IA(5) has to be read with s. 80-IA(8), (9) and (10). The other provisions which give detailed instructions as to the manner of computation no where suggest any adjustment for past losses already absorbed.

9. He submitted that s. 80-IA(5) has to be read with s. 80-IA(9) and (10) the other provision which give detailed instructions as to manner of computation, nowhere suggests any adjustment with regard to past losses already absorbed.

10. He submitted that if loss is intended to be set off against the profits in a succeeding year, the law would have certainly provided for the same as explicitly as it had done under s. 80J, now deleted. It is because of the Department from normal rule that assessment for each year is distinct and separate is made by specific provisions either under s. 80J, earlier or ss. 70 to 80 dealing with set off losses in Chapter VI. There cannot be mixing up of the section in this chapter with Chapter VI-A except where the concept of set off is specifically incorporated or a cross-reference is made thereto.

11. According to the learned Authorised Representative, s. 80-IA nowhere in explicit terms provides that past losses already absorbed needs to be notionally brought back while working out deduction under s. 80-IA for the current year.

12. He relied on the judgment of Rajasthan High Court in the case of CIT v. Mewar Oil & General Mills Ltd. (2004) 186 CTR (Raj) 141 : (2004) 271 ITR 311 (Raj) and submitted that on similar facts the Hon'ble High Court did not uphold the set off of past losses already absorbed in the purported interpretation of analogous provisions. He submitted that in the case of M. Pallonji & Co. (P) Ltd. v. Jt. CIT (2006) 105 TTJ (Mumbai) 136 : (2006) 6 SOT 287 (Mumbai) notional adjustment is not called for and not contemplated in the claim of deduction provided in s. 80-IA and therefore the assessee's claim had to be allowed on the basis of profit of the windmill project, unfettered by any notional amount of unabsorbed depreciation pertaining to the preceding assessment year.

13. Further, he submitted that the amount allowed in earlier years for depreciation on wind mills was set off against the business income under s. 70 of the Act. That s. 80-IA does not have that past losses have to be brought forward to curtail the benefit. According to the learned Authorised Representative the deduction under s. 80-IA being a beneficial provision intended for the encouragement of the industries has to be construed liberally and only income for the year has to be taken into account for computation of deduction under s. 80-IA without setting off of any brought forward losses shall be when the earlier years' losses already absorbed by the income from the other unit of the assessee company. Finally, he drew our attention to the following judgments :

1. CIT v. Mewar Oil & General Mills Ltd. ( supra) wherein it was held :
"That the question of rectification would have been germane only if there had been carry forward of unabsorbed depreciation and unabsorbed development rebate or any other unabsorbed losses of the previous year arising out of the priority industry and whether it was required to be set off against the income of the current year. In view of the finding that there was no carry forward of allowable deduction under the head depreciation or development rebate which needed to be absorbed against the income of the current asst. yr. 1984-85, recomputation of income for the purpose of computing permissible deduction under s. 80-I for the new industrial undertaking was not required. There was no error apparent on the face of the record which could be rectified."
2. Mohan Breweries & Distilleries Ltd. v. Asstt. CIT (2008) 114 TTJ (Chennai) 532 : (2008) 3 DTR (Chennai)(Trib) 477 : (2009) 116 ITD 241 (Chennai) wherein it was held that :
"Assessee having claimed deduction under s. 80-IA for the first time in asst. yr. 2004-05, this will be the year in which the undertaking has to be treated as a separate sole source of income within the meaning of s. 80-IA(5) and, therefore, depreciation and loss of earlier years cannot be notionally carried forward to be set off against income of that year for computing deduction under s. 80-IA."
3. Rangamma Steels & Malleables v. Asstt. CIT (2010) 132 TTJ (Chennai) 365 : (2010) 43 DTR (Chennai)(Trib) 137 wherein it was held that :
"The assessee has option to opt for initial year and the deduction under s. 80-IA shall have relevance to that initial year only and conditionality under s. 80-IA(5) shall be applicable from such initial year and therefore losses pertaining to year(s) prior to the year in which the assessee opted to claim deduction could not be adjusted against the eligible income."
4. Velayudhaswamy Spinning Mills (P) Ltd. v. Asstt. CIT (2010) 38 DTR (Mad) 57 wherein it was held that losses and depreciation of the years earlier to the initial assessment years which have already been absorbed against the profit of other business cannot be notionally brought forward and set off against the eligible business profit computing under s. 80-IA.

14. The learned Departmental Representative submitted that as per the provisions of s. 80-IA(5), the income of any eligible business unit shall be computed as if it is only source of income of the assessee during the previous year relevant to the initial assessment years and to very subsequent assessment years upto and including assessment years for which the said benefit is to be computed. According to Departmental Representative the income of the unit eligible for deduction under s. 80-IA only is to be computed before granting deduction under s. 80-IA as if that it is only source of income. She relied on the order of the Tribunal Special Bench in the case of Asstt. CIT v. Goldmine Shares & Finance (P) Ltd. (2008) 116 TTJ (Ahd)(SB) 705 : (2008) 9 DTR (Ahd)(SB)(Trib) 282 : (2008) 113 ITD 209 (Ahd)(SB) wherein it was held that :

"The second aspect of the matter is that the fiction is created for all the years eligible for the deduction i.e., the initial year (the first year of the deduction) and all subsequent and succeeding years. It is not only for a particular year as is evident from the language used in s. 80-IA(5), it is for initial assessment year and every subsequent assessment year upto and including the assessment year for which the determination is to be made. There was no merit in the contention of the assessee that the fiction was for that year alone or that the concept of initial year was dispensed with in the new provision in view of s. 80-IA(1) of the old provision and s. 80-IA(2)(iv) (b) sub-ss. (5), (6) and (7). Instead of defining the concepts separately by cl. (b) to sub-s. (12) of the pre-amended s. 80-IA, the sub-s. (2) itself has contained the provisions of the Explanation by providing the period of deduction and the year from which it is to start. Even otherwise the plain reading of the work 'initial year' means the year in which the manufacture or production or other activity begins."

15. We have heard both the parties and perused the materials available on record. In our opinion, the issue relating to computation of s. 80-IA deduction that it has to be computed after deduction of the notional brought forward losses and depreciation of business even though they have been allowed set off against other income in earlier years has been dealt by the Special Bench in the case of Asstt. CIT v. Goldmine Shares & Finance (P) Ltd. (supra) and decided the issue against the assessee. While delivering this order, the Special Bench considered all the arguments what the assessee has placed before us. The Tribunal also considered the judgment in the case of Mewar Oil & General Mills Ltd. (supra) and observed that this case has not noticed the non obstante provisions of s. 80-I(6)/80-IA(5) and, therefore, there is no discussion on this point in that decision. It would similarly, therefore, be not of any help to us. The Tribunal also considered the decision cited by the assessee in the case of Mohan Breweries & Distilleries Ltd. (supra) and observed that what it decided in that case is that the deduction is allowed under s. 80-IA for 10 out of 15 years at the option of the assessee which means any ten years not necessarily the beginning of 10 years. Finally it was observed that this case has no relevance in deciding the issue in this case of the assessee because the assessee itself had claimed deduction in the return starting from first year. The same is applicable in the case of Rangamma Steels & Malleables v. Asstt. CIT (supra ) and Velayudhaswamy Spinning Mills (P) Ltd. v. Asstt. CIT (supra ). Further, judgment of High Court though not of the jurisdictional High Court, prevails over an order of the Special Bench even though it is from the jurisdictional Bench of the Tribunal. However, where the judgment of the non-jurisdictional High Court, though the only judgment on the point, has been rendered without having been informed about certain statutory provisions that are directly relevant, it is not to be followed. In our opinion, judgment of Special Bench in the case of Goldmine Shares & Finance (P) Ltd. (supra) is squarely applicable to the facts of the present case and applying the ratio laid down by this order of the Special Bench of this Tribunal, we incline to decide the issue against the assessee relating to allowability of deduction under s. 80-IA that in terms of provisions of under s. 80-IA(5) of the IT Act, the profit from the eligible business for the purpose of determination of the quantum of deduction under s. 80-IA of the Act has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years.

16. Regarding invoking of provisions under s. 263, the argument of the assessee's counsel is that the assessments for the asst. yrs. 2001-02, 2002-03 and 2003-04 have been completed under s. 143(3) of the IT Act and the assessees have furnished all the information as required for the purpose of assessment and the CIT cannot invoke the provision under s. 263 for the purpose of making roving enquiry and the order of the AO is not erroneous as he has followed one possible view on the issue. We have carefully gone through the argument of the assessee's counsel and also perused the material on record. In our opinion, prejudicial to the interest of Revenue appearing s. 263 is conjunction with the expression 'erroneous' and that every loss of revenue as a consequence of an order of the AO cannot prejudice to the interest of Revenue. In case, where the AO adoptsone of the courses permissible in law where two views are plausible the CIT cannot exercise his power under s. 263 to defer with the AO even if there has been a loss of revenue. On the other hand, when the AO takes a view which is patently unsustainable, the CIT can exercise his powers where the loss of revenue results as a consequence of the view taken by the AO. It is also clear that while passing the order under s. 263, the CIT has to examine not only the assessment order but also the entire facts on the record. Further, when a regular assessment is made it has to be presumed that it has been passed upon proper application of mind when he has made proper enquiry before passing assessment order. The ITO is not only the adjudicator but also an investigator. He cannot remain passive in face of an order when it calls for further enquiry. He has to ascertain the truth of the facts stated by the assessee. It is incumbent on the part of the AO to make further investigation of the facts stated by the assessee when circumstances would make that such an enquiry is prudent. The word 'erroneous' in s. 263 includes failure to make such an enquiry by the AO. The assessment order becomes erroneous because such an enquiry is not made and not because there is anything wrong with the facts stated therein or assumed to be correct. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of being erroneous. An order passed by the AO without application of his mind is said to be an erroneous order. In the facts of the present case, we find that the AO has not applied his mind to the provisions of s. 80-IA(5). No additional facts were necessary before the AO to come to the conclusion that deduction under s. 80-IA is wrongly computed. The AO not examined the facts before him. The order passed by the AO is very cryptic. There is no discussion or methodology of computation of deduction under s. 80-IA. It cannot be said that the AO is aware of any of the Tribunal orders on the issues involved. The order of the AO is erroneous for want of proper enquiry. He has not recorded reasons for accepting the return of the assessee as submitted by it on the impugned issue. The AO without making any enquiry accepted the claim of the assessee without recording any reasons at all. The assessment order is silent about the issue raised by the CIT. He has not examined the merit of the claim of the assessee. We cannot say that he has taken one of the permissible views in accordance with law. He has not taken any view, except accepting the view of the assessee on the issue. In this case, the failure of the AO to make an enquiry with regard to the claim of the assessee and to record such a reason, why he is taking particular view, makes the assessment order erroneous and prejudicial to the interest of the Revenue. As such, we are of the opinion that there is no merit in the arguments of the assessee's counsel against observation made by CIT in his order under s. 263.

17. In the result all the appeals of the assessees are dismissed.

Hyderabad Chemicals Supplies Ltd. v. Assistant Commissioner of Income-tax

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (Authorized Representative)

Revenue's Arguments (Departmental Representative)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Hyderabad Chemicals Supplies Ltd. v. Assistant Commissioner of Income-tax

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