Assessment order is neither erroneous nor prejudicial to the interests of the Revenue when two views are possible – SC

Section 263 of the Income-tax Act, 1961 provides revisional power to Principal Commissioner (Pr. CIT) or Commissioner (CIT) if he is of the opinion that an order passed by the AO is erroneous and prejudicial to the interests of the revenue. Among other issues, the issue whether or not an order is erroneous is always a matter of contention between the Assessee and the department.

The Pr. CIT/CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

Let us refer to the case of CIT v. Max India Ltd. (2007), where the issue under consideration was whether the jurisdictional pre-conditions in section 263 i.e., the assessment order being erroneous and prejudicial to the interests of the revenue were fulfilled in the present case or not

Facts of the Case:

• Assessee was eligible for claiming deduction under section 80HHC of the Income Tax Act as it was engaged in export of goods.
• At one stage of computation of such deduction it had incurred a loss which it ignored for further computation.
• In the assessment order passed by the AO this position stood accepted.
• Commissioner exercised revisionary jurisdiction under section 263 of the said Act and directed the AO to set off the loss and hence compute the income eligible for deduction at a lower amount.
• According to him, ignoring the loss in the computation of deduction had rendered the assessment order to be erroneous insofar as it was prejudicial to the interests of the revenue.
• Subsequently, by Finance Act, 2005 with retrospective effect from 01.04.1992, a proviso was inserted below section 80HHC(3) of the said Act to provide that the loss has to be set off.
• The Tribunal and the High Court had held the assumption of revisionary jurisdiction by the Commissioner to be invalid.

What is deduction under Section 80HHC?

Under the provisions of section 80HHC of the Income-tax Act, 1961, 100% deduction is allowed to exporters in respect of profits derived from export of goods or merchandise. As a measure to provide incentive to supporting manufacturers selling goods or merchandise to an export house/trading house for export, the benefit of deduction under section 80HHC was extended with effect from 1st April, 1989 to such supporting manufacturers. The essential ingredients of section 80HHC are as follows:

• The assessee should be an Indian company or a person (other than a company) resident in India
• He should be engaged in the business of export out of India of any goods or merchandise (other than mineral oils, minerals and ores)
• The deduction is also available to a supporting manufacturer who has sold his goods or merchandise to an export house/trading house provided the export house/trading house has issued a disclaimer certificate in respect of the “export turnover” in Form No. 10CCAB.
• Under the existing provisions, deduction under section 80HHC is allowed if the sale proceeds are receivable in convertible foreign exchange.
• With effect from the assessment year 1991-92, the deduction under this section shall be allowed only if the sale proceeds are received in or brought into India within a period of six months from the end of the relevant previous year. However, in case of genuine hardship, the Chief Commissioner or the Commissioner may allow further time for the remittance of foreign exchange if he is satisfied that the assessee was unable to bring the foreign exchange within the period of six months for reasons beyond his control.
• While allowing further period in this regard, the Chief Commissioner or the Commissioner shall record reasons for the same in writing;
• The deduction shall be of the profits derived by the assessee from the export of goods or merchandise.

Observations of the Supreme Court (SC)

• Relying on earlier judgment in the case of Malabar Industrial Co. Ltd. v. CIT (2000) (SC), the Court held that when the AO adopted one of the courses permissible in law and it had resulted in loss of revenue; or where two views were possible and the AO has taken one view with which the Commissioner did not agree it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view was unsustainable in law.
• It was further observed that existence of two views had to be seen when the Commissioner passed the revision order.
• For existence of two views reference had also been made to the fact that section 80HHC stood amended several times.
• Based on the above, it was held that it was not permissible to the Commissioner to exercise revisionary jurisdiction under section 263 of the Income-tax Act when, at the time of passing the revision order, two views were possible on an issue and the AO had adopted one of the views

In simple words, Assessment order is neither erroneous nor prejudicial to the interests of the Revenue when two views are possible. Two views should exist at the time when the revision order is passed

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