M/S. ALLIED GLASSES,ROORKEE vs. PR. CIT, DEHRADUN

Briefly, the facts are, the assessee is a partnership firm engaged in the business of manufacturing and sale of toughened glasses. For the assessment year under dispute, the assessee filed its return of income on 24.09.2012 declaring nil income, after claiming deduction under section 80IC of the Act. Assessee’s case was selected for scrutiny. In course of assessment proceedings, the Assessing Officer enquired into assessee’s claim of deduction under section 80IC of the Act. After examining the documents furnished by the assessee and submissions made, the Assessing Officer found that certain interest income received during the year have been considered as part of business profits and deduction under section 80IC of the Act has been claimed on them. Being of the view that the interest income earned cannot be considered as part of the business profit, the Assessing Officer disallowed the deduction claimed under section 80IC of the Act in respect of interest income. Accordingly, he completed the assessment u/s. 143(3) of the Act. Post completion of assessment, learned PCIT received a proposal from Income-tax Officer ward 1, Roorkee for revising the assessment order u/s. 263 of the Act, reason being, deduction u/s. 80IC of the Act has been erroneously allowed on insurance claim of Rs.6,67,038/-. Based on such proposal, learned PCIT exercised his powers u/s. 263 of the Act by issuing a show cause notice to the assessee to explain why the assessment order should not be considered as erroneous and prejudicial to the interests of revenue for allowing deduction under section 80IC of the Act on insurance claim. Though, the assessee objected to initiation of proceedings under section 263 of the Act by submitting that the assessment order cannot be considered to be erroneous and prejudicial to the interest of revenue, however, learned PCIT was not convinced. Ultimately, he passed an order u/s. 263 of the Act setting aside the assessment order with a direction to Assessing Officer to disallow deduction under section 80IC of the Act.

Before us, the submission of learned counsel for the assessee is two-fold. Firstly, learned PCIT has not exercised the powers under section 263 of the Act independently, but at the behest of a subordinate authority. Secondly, at the time of assessment, the Assessing Officer has conducted full-fledged enquiry and after examining the issue at length has allowed the claim of deduction in respect of insurance charges. Whereas, learned Departmental Representative strongly relied upon the observations of learned PCIT and submitted that the insurance charges, being not directly derived from or attributed to the business of the assessee, cannot be considered for deduction under section 80IC of the Act. Further, he submitted, though a proposal was received from the ITO to initiate proceedings under section 263 of the Act, however, learned PCIT has exercised his powers after independent application of mind.

We have considered rival submissions and perused the materials on record. In so far as the first contention of learned counsel for the assessee that learned PCIT has initiated proceedings under section 263 of the Act at the behest of a subordinate officer, on examination of materials on record, it is observed that in the opening paragraph of the impugned order passed under section 263 of the Act, learned PCIT has clearly and categorically observed that a proposal was received from Income-tax Officer, Roorkee for initiating proceedings under section 263 of the Act. Thus, the trigger point of initiation of proceedings under section 263 of the Act is the proposal received from the Income-tax Officer. Keeping in perspective the aforesaid factual position, if we read section 263 of the Act, it becomes clear that learned PCIT or the Commissioner may call for and examine the record of any proceeding under this Act, and if on such examination, he finds that any order passed in such proceedings by the Assessing Officer is erroneous and prejudicial to the interests of the revenue, he may initiate proceedings under section 263 of the Act.

Thus, the words used in section 263 of the Act clearly indicate that the revisionary authority has to independently apply his mind to the materials on record before coming to a conclusion that the order sought to be revised is erroneous and prejudicial to the interests of revenue. The decision making process under section 263(1) of the Act has to be that of the revisionary authority and cannot be at the behest of some other subordinate authority. In the facts of the present appeal, it is abundantly clear that the exercise of powers under section 263 of the Act is not due to any independent application of mind by the revisionary authority, but at the behest of the Income-tax Officer. Had the ITO not sent any proposal for initiating proceedings under section 263 of the Act, it is quite probable, the revisionary authority may not have exercised his powers under section 263 of the Act. That being the factual and legal position, in our view, the exercise of powers under section 263 of the Act in the present case has to be declared invalid. In support of our conclusion, we rely upon the following decisions :

Having held so, for the sake of completeness, we deem it appropriate to deal with second contention of the assessee.

In the facts of the present appeal, there is no dispute regarding assessee’s eligibility to claim deduction u/s. 80IC of the Act. The doubt, if any, is with regard to a small part of the income, which, according to the assessee, has to be considered as business profit.

In view of our decision above, the additional ground raised by the assessee, having been reduced to mere academic interest, is not required to be adjudicated upon.