Facts of the Case

The assessee, M/s Avalon Business Associates, had claimed deduction under Section 10B of the Income Tax Act, 1961 for its Export Oriented Unit (EOU) for the Assessment Year 2011–12. The Assessing Officer accepted the assessee’s claim and allowed the deduction after considering the applicability of Section 10B.

Subsequently, the Principal Commissioner of Income Tax invoked revisional jurisdiction under Section 263 on the ground that the approval granted to the assessee’s unit did not conform to the requirements prescribed under the CBDT Circular dated 09.03.2009, particularly regarding ratification by the Board of Approval under the EOU Scheme.

Aggrieved by the revisional order, the assessee challenged the same before the Delhi High Court.

Issues Involved

  1. Whether the invocation of revisional jurisdiction under Section 263 by the Commissioner was legally justified?
  2. Whether approval granted by the Development Commissioner alone was sufficient for claiming deduction under Section 10B?
  3. Whether ratification by the Board of Approval was mandatory in view of the CBDT Circular dated 09.03.2009?
  4. Whether earlier departmental circulars delegating approval powers could override the later CBDT Circular?

Petitioner’s Arguments (Assessee’s Contentions)

  • The assessee argued that the Assessing Officer had correctly allowed the claim under Section 10B after due verification.
  • Reliance was placed on CIT v. Enable Exports (P.) Ltd., where the Delhi High Court had recognized the validity of such approvals.
  • It was contended that the approval granted by the Development Commissioner was sufficient in itself for claiming the deduction.
  • The assessee also relied on earlier governmental circulars and Press Note No. 5 of 1997 issued by the Department of Electronics, which delegated powers for automatic post-approval amendments.
  • It was argued that the subsequent judgment in CIT v. Valiant Communications Ltd. did not consider the earlier circulars and therefore should not prevail.

Respondent’s Arguments (Revenue’s Contentions)

  • The Revenue argued that the approval granted by the Development Commissioner was incomplete unless ratified by the Board of Approval.
  • It relied upon the CBDT Circular dated 09.03.2009, which clarified that such approvals would be valid only upon ratification by the Board of Approval under the EOU Scheme.
  • Therefore, the original assessment order allowing deduction without ensuring such ratification was erroneous and prejudicial to the interests of the Revenue, justifying action under Section 263.

Court Findings / Observations

The Delhi High Court observed that the decision in Enable Exports (P.) Ltd. itself had considered the CBDT Circular dated 09.03.2009. The Court noted that the circular clearly provided that approval granted by the Development Commissioner would be valid only when ratified by the Board of Approval.

The Court held that the Commissioner’s invocation of revisional powers under Section 263 could not be faulted, since the issue of mandatory ratification directly affected the correctness of the assessment order.

However, the Court left open the question as to whether earlier circulars delegating powers to the Development Commissioner could dispense with the requirement of further ratification after the 2009 circular. The Court clarified that such contentions could still be examined independently by the Income Tax Authorities on merits.

Court Order / Final Decision

The Delhi High Court upheld the exercise of revisional jurisdiction under Section 263 and dismissed the appeal filed by the assessee.

However, it granted liberty to the assessee to raise the contention regarding delegated powers and exemption from ratification before the Income Tax Authorities for independent consideration.

Important Clarification

This judgment clarifies that for claiming deduction under Section 10B, approval granted by the Development Commissioner for a 100% Export Oriented Unit cannot automatically be treated as final unless it satisfies the requirement of ratification by the Board of Approval as per the CBDT Circular dated 09.03.2009.

It also establishes that failure by the Assessing Officer to verify this condition can make the assessment order vulnerable to revision under Section 263.

Sections Involved

  • Section 10B – Deduction in respect of profits and gains from 100% Export Oriented Undertakings
  • Section 263 – Revision of orders prejudicial to Revenue
  • CBDT Circular dated 09.03.2009 (F.No.178/19/2008)

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:6293-DB/SRB25102017ITA8922017.pdf

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