Star India Ltd vs. ACIT (ITAT Mumbai)

S. 263: AO’s acceptance of Jurisdictional High Court view may be “erroneous & prejudicial” to interests of Revenue

The AO passed an assessment order on 24.3.2006 in which he allowed deduction u/s 80HHF without setting off the brought forward losses. The CIT passed a revision order u/s 263 on 19.10.2007 in which he claimed that the loss had to be set-off in terms of the judgement dated 11.3.2004 of the Supreme Court in IPCA Laboratories 266 ITR 521. The assessee claimed that the action of the AO was in line with the judgement dated 24.7.2000 of the Bombay High Court in Shirke Construction 246 ITR 429 which held the field till it was overruled on 17.5.2007 (291 ITR 380 (SC)). It was pointed out that even after the SC ruling in IPCA, there were Tribunal judgements (Infocon International 2 SOT 444) which had followed Shirke Construction and held that s. 80HHF deduction was available without set-off of the losses. It was argued that (i) the law prevailing on the date of the assessment order had to be seen as per G. M. Stainless Steel 263 ITR 255 (SC) and in any event (ii) there were two views possible and the AO’s view could not be termed erroneous as per Malabar Industrial 243 ITR 83 (SC). HELD by the Tribunal upholding the revision:

(i) For the purpose of examining validity of revision proceedings, the legal position prevailing at the time the revision powers are exercised by the CIT has to be seen and not the position prevailing at the time the assessment order was passed. In G.M. Stainless Steel 263 ITR 255 (SC) the law at the date of assessment and the date of revision was the same though it was made clear that the law at the date of revision had to be seen (Max India Ltd 295 ITR 282 (SC) followed);

(ii) The argument that the AO’s view was a “possible view” and therefore revision is not permissible as per Malabar Industrial Co is not acceptable because the AO’s view should not only be “possible view” but also a view which is not “unsustainable in law”. A view contrary to the law laid down by the Supreme Court is unsustainable in law even though it may have been a “possible view” at the stage of passing the assessment order;

(iii) The argument that the AO was bound to follow the jurisdictional High Court’s order in Shirke Construction 246 ITR 429 till it was overruled is not acceptable because the AO, being part of the revenue machinery, should follow judicial decisions as long as he can do so without sacrificing the legitimate interests of the revenue. If the AO does not raise demands on issues which have been decided in favour of the assessee by the jurisdictional High Court, even though the department is in appeal against the same, the interests of the revenue will be prejudiced and remain unprotected. While the AO is bound by the higher judicial authorities and has to loyally execute the directions contained in those orders, he is not prevented from taking the same stand, as he took in those assessments though he cannot collect the demand.