FORTALEZA DEVELOPERS, MUMBAI V. C.I.T.15, MUMBAI

ITA 2648/MUM/2012

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8718 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 18-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 19-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A P SINGH
• Keywords: Depreciation; Maximum Marginal Rate; Reassessment proceedings
• Section: 143(3); 80IB; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F, MUMBAI BEFORE SHRI I.P.BANSAL,JUDICIAL MEMBER & SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.2648/MUM/2012(A.Y. 2007-08) M/S. FORTALEZA DEVELOPERS, 601, COMMERCE HOUSE, 140, NAGAINDAS MASTER ROAD, FORT, MUMBAI - 400 001. PAN:AAAJF0056B (APPELLANT) VS. THE COMMISSIONER OF INCOME TAX - 15, MUMBAI. (RESPONDENT) APPELLANT BY : SHRI. VIJAY MEHTA RESPONDENT BY : SHRI A.P.SINGH DATE OF HEARING : 18/09/2012 DATE OF PRONOUNCEMENT : 1 2/10/2012 ORDER PER I.P.BANSAL, J.M THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST ORDER DATED 27/3/12 FOR ASSESSMENT YEAR 2007-08 PASSED UNDER SECTION 263 OF THE INCOME TAX ACT,1961 (THE ACT) BY THE LD. CIT-15, MUMBAI. THE GROUNDS OF APPEAL READ AS UNDER: BEING AGGRIEVED BY THE ORDER OF THE COMMISSIONER O F INCOME TAX- 15, THIS APPEAL PETITION IS SUBMITTED ON THE FOLLOWING GROUN DS WHICH MAY CONSIDERED WITHOUT PREJUDICE TO ONE ANOTHER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID. CIT HAS ERRED IN PASSING THE ORDER U/S. 263 OF THE ACT WHICH IS BAD IN LAW AND WITHOUT JURISDICTION. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID. CIT HAS ERRED IN HOLDING THE ASSESSMENT ORDER TO BE ERR ONEOUS AND ALSO PREJUDICIAL TO THE INTERESTS OF THE REVENUE AND ER RED IN DIRECTING THE LD.AO TO RECOMPUTE THE INCOME OF THE APPELLANT ON THE BAS IS OF PROVISIONS CONTAINED IN CLAUSE 7 OF THE AOP AGREEMENT DATED 29 .04.2003. ITA NO.2648/MUM/2012(A.Y. 2007-08) 2 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD.CIT ERRED IN PASSING ORDER U/S.263 WITHOUT APPRECIATING THE APPE LLANTS SUBMISSION THAT IN VIEW OF MATTER REGARDING DEDUCTION UNDER SECTION 801B(10) BEING SUBJECT MATTER OF APPEAL BEFORE THE LEARNED CIT(A), THE ORD ER OF THE LD.AO ON THE ISSUE OF DEDUCTION UNDER SECTION 8OLB(1O) AS A WHOL E HAD MERGED WITH THAT OF THE ORDER OF THE LEARNED CIT(A) AND IN VIEW OF T HE STATUTORY BAR IN EXPLANATION TO S. 263(1) , REVISIONARY POWER U/S.26 3 CANNOT BE INVOKED. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT HAS ERRED, WHILE HOLDING THAT THE ASSESSMENT ORDER IS PREJUDICIAL TO THE INTEREST OF THE REVENUE, IN OBSERVING THAT THE ENT IRE AMOUNT OF RS. 15.11 CRORE WOULD BE ASSESSABLE IN THE HANDS OF M/S SANAN D PROPERTIES PVT. LTD. THE LEARNED CIT FAILED TO APPRECIATE THAT HE CAN NO T DECIDE THE TAXABILITY OF ANY AMOUNT IN THE HANDS OF THIRD PARTY WHILE ADJUDI CATING THE CASE OF THE APPELLANT 2. THE ASSESSEE IS AN AOP EARLIER ASSESSED VIDE ASS ESSMENT ORDER DATED 18/12/2009 PASSED UNDER SECTION 143(3)(II) OF THE A CT. THE CONSTITUTION OF THE AOP IS AS UNDER: 1) M/S RAVI RAJ KOTHARI AND COMPNAY. 2) M/S. SANANAND PROPERTIES PVT. LTD. 2.1 THE RETURN OF INCOME WAS FILED AT AN INCOME O F RS.4,13,610/- AFTER CLAIMING DEDUCTION UNDER SECTION 80 IB(10) OF THE A CT AMOUNTING TO RS.14,54,47,283/-. NOTING THE FACT THAT ASSESSEE D ID NOT FULFILL THE CONDITIONS LAID OUT UNDER SECTION 80 IB(10) THE AO HAD DISALLOWED THE CLAIM MADE UNDER SECTION 80 IB(10) AND HAD ASSESSED THE A SSESSEE AT AN INCOME OF RS.14,63,04,860/-. THE DENIAL OF CLAIM VIDE AFOREM ENTIONED ASSESSMENT ORDER WAS AGITATED IN APPEAL FILED BEFORE THE LD. C IT(A) AND THE SAID APPEAL OF THE ASSESSEE WAS DECIDED BY LD. CIT(A) VIDE ORDER D ATED 25/3/2010, A COPY OF THIS ORDER HAS BEEN FILED BY THE ASSESSEE IN ITS PAPER BOOK AT PAGES 38 TO 62. THE MAIN GROUND RAISED BY THE ASSESSEE IN THE SAID APPEAL WAS REGARDING DISALLOWANCE OF DEDUCTION UNDER SECTION 8 0 IB(10). IT WAS CONTENDED THAT THE ASSESSEE HAS FULFILLED ALL THE C ONDITIONS LAID DOWN IN SECTION 80 IB(10), THEREFORE, THE CLAIM OF 80 IB(10 ) HAS WRONGLY BEEN DENIED. IN PARA 8.6 LD. CIT(A) HAS RECORDED A FINDING THAT ASSESSEE HAS FULFILLED ALL ITA NO.2648/MUM/2012(A.Y. 2007-08) 3 THE CONDITIONS LAID DOWN IN SECTION 80 IB(10) AND A SSESSEE IS ENTITLED TO CLAIM THE SAME. HE DIRECTED THE AO TO ALLOW THE CL AIM OF THE DEDUCTION OF RS.14,54,47,283/-. THE AFOREMENTIONED ORDER OF LD. CIT(A) WAS CHALLENGED BY REVENUE BY WAY OF AN APPEAL WHICH HAS BEEN DECID ED BY THIS TRIBUNAL VIDE ITS ORDER DATED 25/4/2012 IN ITA NO.4327/M/10, A CO PY OF WHICH HAS BEEN PLACED ON RECORD. THE TRIBUNAL AFTER DELIBERATING THE CONTENTIONS OF BOTH THE PARTIES HAS COME TO A CONCLUSION THAT THE ASSES SEE HAS FULFILLED THE CONDITIONS LAID DOWN IN SECTION 80 IB(10), THEREFOR E, THE DEDUCTION CANNOT BE DENIED AND THERE WAS NO REASON TO INTERFERE WITH T HE ORDER OF LD. CIT(A). IN THIS MANNER THE APPEAL FILED BY THE REVENUE WAS DIS MISSED BY THE TRIBUNAL.. 2.2 HOWEVER, LD. CIT VIDE NOTICE DATED 21/3/2012 I.E. DURING THE PENDENCY OF THE APPEAL BEFORE THE ITAT, ASKED THE A SSESSEE TO SHOW CAUSE AS TO WHY THE ASSESSMENT ORDER PASSED BY THE AO SH OULD NOT BE SET ASIDE AS THE ORDER PASSED BY THE AO IS PRIMA FACIE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. THE REASON FOR INITIATION OF SUCH PROCEEDINGS HAVE BEEN ENUMERATED IN PARA 2 OF THE IMPUGNED ORDER. LD. CI T NOTED FROM THE TERMS AND CONDITIONS OF AOP AGREEMENT, WHICH WAS DATED 2 9/4/2003 AND REFERENCE WAS MADE TO CLAUSE(7) OF THE SAID AGREEME NT. ACCORDING TO LD. CIT THE SAID CLAUSE STATED THAT M/S. SANANAND PROPERTIE S PVT. LTD. (SPPL) WAS TO RECEIVE 35% OF THE SALE PROCEEDS OF THE PROJECT AND OUT OF THE BALANCE 65% OF THE RECEIPTS, ALL THE EXPENDITURE FOR THE PURPO SE OF AOP WAS TO BE MET WITH AND THE NET BALANCE REMAINING THEREAFTER WAS THE SHARE OF INCOME OF M/S.RAVI RAJ KOTHARI & COMPANY(RRKC). ACCORDING T O LD. CIT, THE MANNER OF ALLOCATION OF REVENUE HAS PROVIDED THE ASSESSEE UNDUE BENEFIT IN THE SHAPE OF HIGHER CLAIM OF DEDUCTION U/S. 80 IB (10). IN CONTRADICTION OF CLAUSE - 7 OF THE AGREEMENT DATED 29/04/2003, THE ASSESSEE INSTEAD OF FIRST REDUCING 35% OF REVENUE AND CLAIMING DEDUCTION UNDE R SECTION 80 IB(10) ON THE BALANCE AMOUNT HAS CLAIMED DEDUCTION ON THE ENT IRE REVENUE. IN OTHER WORDS, THE SHARE OF 35% OF THE GROSS REVENUE PERTA INING TO SPPL WAS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80 IB(10). TH E SAME WAS TAXABLE IN THE ITA NO.2648/MUM/2012(A.Y. 2007-08) 4 HANDS OF SPPL WITHOUT HAVING THE BENEFIT OF DEDUCTI ON UNDER SECTION 80 IB(10). BY GRANTING DEDUCTION IN RESPECT OF ENTIRE REVENUE, THE AO HAS COMMITTED AN ERROR BY ACCEPTING THE METHOD OF ALLOC ATION ADOPTED BY THE ASSESSEE IN ITS ACCOUNTS WHICH MADE THE ASSESSMENT ORDER ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTEREST OF REVENUE. 2.3 IN RESPONSE TO AFOREMENTIONED SHOW CAUSE NOTICE THE ASSESSEE HAS FILED A WRITTEN SUBMISSION WHICH IS DATED 27/3/2012 . IT WAS SUBMITTED THAT ACCORDING TO SECTION 167B(2) AND SECTION 86 OF THE ACT, THE SHARE OF PROFIT RECEIVED BY THE MEMBERS OF AOP ARE NOT LIABLE TO BE TAXED INSTEAD THE PROFIT EARNED AOP IS LIABLE TO BE TAXED AT THE MAXIMUM MA RGIN RATE. REFERENCE WAS MADE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ITO VS. CH. ATCHAIAH, 218 ITR 239 , WHEREIN IT HAS BEEN HEL D THAT IF A PARTICULAR INCOME IS INCOME OF THE AOP IN LAW, ONLY THE AOP I S TO BE ASSESSED IN RESPECT OF SUCH INCOME. IT WAS SUBMITTED THAT WHIL E FRAMING THE ASSESSMENT UNDER SECTION 143(3) THE AO HAD PROPERLY SCRUTINIZE D THE AGREEMENT AND AFTER APPLYING THE MIND ON CLAUSE (7) HE HAS FRAM ED THE ASSESSMENT. THE CLAIM OF ASSESSEE UNDER SECTION 80 IB(10) WAS REJE CTED BY THE AO. THE APPEAL WAS FILED BY THE ASSESSEE AND THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. REFERENCE WAS MADE TO EXPLANATION ( C) TO SECTION 263 OF THE ACT ACCORDING TO WHICH, WHERE ANY ORDER PASSED BY T HE AO WAS MADE SUBJECT MATTER OF ANY APPEAL, THE POWERS OF LD. CIT UNDER S ECTION 263 OF THE ACT IS EXTENDED ONLY TO THE MATTERS WHICH HAD NOT BEEN CON SIDERED AND DECIDED IN THE APPEAL. IT WAS SUBMITTED THAT QUANTIFICATION O F DEDUCTION UNDER SECTION 80 IB(10) WAS THE SUBJECT MATTER OF APPEAL BEFORE L D. CIT(A), THEREFORE, THE IMPUGNED ASSESSMENT ORDER COULD NOT BE SUBJECTED T O PROCEEDINGS UNDER SECTION 263 AS THE ASSESSMENT ORDER HAD MERGED WITH THE APPELLATE ORDER. REFERENCE WAS MADE TO THE FOLLOWING DECISION. I) REMEX CONSTRUCTIONS/REMEX ELECTRICALS VS. FIRST ITO & ORS(987) 166 ITR 18 (BOM) II) CIT VS. GOODRICKE GROUP LTD. (1994) 116 CTR (CA L) 625 ITA NO.2648/MUM/2012(A.Y. 2007-08) 5 III) CIT VS. METHOD TRADING INVESTMENT LTD. (2001) 165 CTR (CAL) 541. IV) CIT VS. NIRMA CHEMICALS WORKS (P) LTD. (2009) 3 009 ITR 67 (J&K) V) RANK JEWELLERS VS. ADDL. CIT & ANR. (2010) 328 ITR 148 (BOM) ETC. 2.4 IT WAS FURTHER SUBMITTED THAT PROPOSED ACTION WILL REDUCE THE DEDUCTION UNDERSECTION 80 IB(10), HOWEVER, THE ASSE SSABLE INCOME WILL BE MUCH LESS THAN THE INCOME ASSESSED BY THE AO. THUS THE ASSESSMENT ORDER CANNOT BE SAID TO BE PREJUDICIAL TO THE INTEREST OF REVENUE. REFERENCE IN THIS REGARD WAS MADE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MALABAR INDUSTRIAL COMPANY LTD. VS. CIT, 243 ITR 83 (SC) TO CONTEND THAT UNLESS THE ORDER PASSED BY THE AO IS ERRONEOUS AS W ELL AS PREJUDICIAL TO THE INTEREST OF REVENUE, POWERS UNDER SECTION 263 CANNO T BE EXERCISED. RELIANCE WAS ALSO PLACED ON THE DECISION OF HONBLE DELHI HI GH COURT IN THE CASE OF CIT VS. HONDA SIEL POWER PRODUCT LTD., 194 TAXMANN 175 WHEREIN IT HAS BEEN HELD THAT IN A CASE WHERE AO ADOPTS ONE OF THE COURSES ADMISSIBLE IN LAW AND WHERE THERE TWO VIEWS ARE POSSIBLE, CIT C ANNOT EXERCISE POWER UNDER SECTION 263 OF THE ACT. 2.5 LD. CIT AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND REFERRING TO CLAUSE(7) OF THE AFOREMENTIONED AGREEMENT HAS CO ME TO A CONCLUSION THAT ASSESSEE HAS WRONGLY DISTRIBUTED THE PROFITS WHICH ARE NOT IN ACCORDANCE WITH CLAUSE (7) OF THE AGREEMENT. ACCORDING TO AGR EEMENT, BEFORE COMPUTING THE INCOME OF AOP, 35% OF THE GROSS RECEIPTS WERE R EQUIRED TO BE PAID TO SPPL. HOWEVER, IN THE BOOKS OF ACCOUNTS, THE ASSES SEE HAS FIRST ADJUSTED ALL THE EXPENDITURE INCURRED BY THE AOP AGAINST THE GR OSS RECEIPTS AND THEREAFTER NET BALANCE HAS BEEN TRANSFERRED TO THE MEMBERS AND THIS ACTION OF THE ASSESSEE IS NOT IN ACCORDANCE WITH CLAUSE(7) OF THE AGREEMENT. THEREFORE, LD. CIT HELD THAT THE ORDER PASSED BY TH E AO IS ERRONEOUS. HE REFUTED THE CLAIM OF THE ASSESSEE THAT ACCORDING TO THE PROPOSED ACTION, TO BE TAKEN UNDER SECTION 263 THE ASSESSABLE INCOME WILL BE SUBSTANTIALLY LOWER THAN INCOME COMPUTED BY THE AO. HE OBSERVED THAT B Y ADOPTING THIS ITA NO.2648/MUM/2012(A.Y. 2007-08) 6 METHOD THE ASSESSEE DID NOT PAY ANY TAX AS IT CLAIM ED UNDER SECTION 80 IB(10). THE MEMBERS OF THE AOP ALSO DID NOT PAY AN Y TAX AS ALLOCABLE INCOME IS ONLY AFTER CLAIM OF DEDUCTION UNDER SECTI ON 80 IB (10). ACCORDING TO LD. CIT THE AMOUNT TO BE RECEIVED BY SPPL, IF D ISTRIBUTED ACCORDING TO CLAUSE(7) OF THE AGREEMENT, WILL NOT ENJOY ANY EXE MPTION AS THE SAME IS NOT IN THE SHAPE OF SHARE OUT OF THE INCOME OF AOP BUT IT IS OUT OF THE SALE PROCEEDS. THEREFORE, LD. CIT IS OF THE VIEW THAT T HE ENTIRE AMOUNT OF RS.15.11 CRORES RECEIVED BY SPPL WILL BE ASSESSABLE TO TAX IN ITS HAND WHICH WILL BE BENEFICIAL TO THE REVENUE, THEREFORE, ASSE SSMENT ORDER PASSED BY AO BECOMES PREJUDICIAL TO THE INTEREST OF REVENUE. 2.6 SO FAR AS IT RELATES TO THE CONTENTION OF THE A SSESSEE THAT ASSESSMENT ORDER HAD MERGED WITH THE APPELLATE ORDER, THEREFOR E, SECTION 263 COULD NOT BE INVOKED, LD. CIT HAS ALSO REJECTED THIS CLAIM ON THE GROUND THAT SUBJECT MATTER OF ORDER PASSED UNDER SECTION 263 OF THE ACT IS ENTIRELY DIFFERENT FROM THE SUBJECT MATTER OF APPEAL FILED BY THE ASSESSEE BEFORE CIT(A). THE ISSUE OF ALLOCATION OF 35% OF SALE PROCEEDS OF THE ASSESSEE AOP TO ITS MEMBER SPPL WAS NOT SUBJECT MATTER OF APPEAL, THEREFORE, S UCH CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE. IN THIS MANNER LD. CIT HAS SET ASIDE THE ASSESSMENT ORDER WITH A DIRECTION TO THE AO TO RECO MPUTED THE INCOME OF THE ASSESSEE ON THE BASIS OF CLAUSE (7) OF THE AOP AG REEMENT DATED 29/4/2003. HE ALSO DIRECTED THE AO THAT AFTER COMPLETION OF T HE REASSESSMENT PROCEEDINGS IN THE CASE OF THE ASSESSEE, THE AO HOL DING JURISDICTION OVER THE CASE OF SPPL SHOULD ALSO BE INTIMATED TO ENABLE HI M TO TAKE CORRECTIVE ACTION IN THE CASE OF SPPL. 2.7 THE ASSESSEE IS AGGRIEVED WITH THE AFOREMENTIO NED DIRECTIONS OF LD. CIT AND HAS FILED AFOREMENTIONED GROUNDS. 3. AFTER NARRATING THE FACTS LD. AR TOOK US THROUGH CLAUSE(7) OF THE AFOREMENTIONED AGREEMENT WHICH HAS ALSO BEEN REPROD UCED IN PARA-6 OF THE ITA NO.2648/MUM/2012(A.Y. 2007-08) 7 ORDER PASSED BY LD. CIT. COPY OF THIS AGREEMENT IS PLACED BY THE ASSESSEE IN THE PAPER BOOK AT PAGES 26 TO 35. FOR THE SAKE OF COMPLETENESS CLAUSE (7) OF THE AGREEMENT IS ALSO REPRODUCED BELOW. SHARING OF REVENUE AND INCOME: ALL AGREEMENTS FOR SALE OF RESIDENTIAL UNITS IN THE HOUSING PROJECT UNDER TAKEN BY THE AOP SHALL BE ENTERED INTO ONLY BETWEEN THE AUTHORIZED SIGNATORIES OF THE A O P AND THE RESPECTIVE PURCHASERS OF THE HOUSING UNITS. THE MEMBERS OF THE AOP HEREBY AGREE THAT NEITHER OF THEM, WILL DURING THE VALIDITY OF THIS A GREEMENT EXECUTE ANY INDEPENDENT OR SEPARATE AGREEMENT ON THEIR OWN WITH ANY PROSPECTIVE PURCHASER. ALL THE PAYMENTS RECEIVABLE FROM THE PUR CHASERS TOWARDS THE ABOVE SHALL BE RECEIVED ONLY IN THE NAME OF THE AOP , I.E., FORTALEZA DEVELOPERS AND THE SAID AMOUNTS RECEIVED FROM THE P URCHASERS OF THE HOUSING UNITS AS AFORESAID SHALL BE DEPOSITED ONLY IN THE BANK ACCOUNT IN THE NAME OF THE A OP I.E., FOR TALEZA DEVELOPERS. OUT OF THE AFORESAID AMOUNTS RECEIVED FROM THE PURC HASERS OF THE HOUSING UNITS ( REPRESENTING THE GROSS SALE PROCEEDS OF THE UNITS INCLUSIVE OF THE VALUE OF LAND) SPPL SHALL BE ENTITLED TO, AS ITS SHARE OF REVENUE/INCOME, AN AMOUNTING COMPRISING OF 35% OF SUCH RECEIPTS. IT IS HEREBY AGREED AND UNDERSTOOD BETWEEN THE PARTIES HERETO, THAT SPPL MA Y ACTUALLY WITHDRAW SUCH SHARE OF REVENUE/INCOME TO WHICH IT IS ENTITLE D AS PER THE UNDERSTANDING BETWEEN THE PARTIES FROM TIME TO TIME . OUT OF THE BALANCE 65% OF THE AFORESAID RECEIPTS RE PRESENTING THE GROSS SALE PROCEEDS), ALL REQUIRED AND RELEVANT EXPENDITURE FO R THE PURPOSES OF THE BUSINESS OF THE AOP SHALL BE MET WITH AND WHATEVER NET BALANCE REMAINS THEREAFTER, SHALL BE DETERMINED AS THE SHARE OF REV ENUE/INCOME OF RKC. RKC WILL BE AT LIBERTY TO ACTUALLY WITHDRAW ITS SHARE O F REVENUE/INCOME AS WORKED OUT HEREIN ABOVE FROM TIME TO TIME. THE ABOVE ARRANGEMENT OF SHARING OF REVENUE AND INC OME IS RESTRICTED TO THE PRESENT HOUSING PROJECT DEVELOPED BY AOP ON LAND AD MEASURING 31026.90 SQ. METRS ( APPROX. 7.76 ACRES) ON FINAL PLOT NO. 7 2, YERAWAD TPS AND BEARING S.NO.210 (PART) SITUATED AT VILLAGE YERAWADS, TALUK A HAVELI, DIST. PUNE. HOWEVER, FOR ANY OTHER PROJECT TO BE DEVELOPED BY T HIS AOP IN FUTURE THE SHARING OF REVENUE AND INCOME SHALL BE DECIDED MUTU ALLY BY THE PARTIES HERETO FROM TIME TO TIME. 3.1 READING FROM THE ABOVE CLAUSE IT WAS SUBMITTED BY LD. A.R THAT ACCORDING TO AFOREMENTIONED TERM SPPL WAS ENTITLED TO RECEIVE 35% OF THE GROSS SALES PROCEEDS OF THE UNITS TO BE SOLD BY THE AOP INCLUSIVE OF THE VALUE OF THE LAND. HE SUBMITTED THAT IT IS A MANNER OF SHARING OF THE PROFIT. THE ITA NO.2648/MUM/2012(A.Y. 2007-08) 8 LAND UPON WHICH THE PROJECT WAS TO BE DEVELOPED WA S OWNED BY SPPL AND THE ASSESSEE HAD EXPERTISE IN CONSTRUCTION AND DEVE LOPMENT ACTIVITY, THEREFORE, OUT OF THE BALANCE OF 65%, AFTER EXCLUDI NG EXPENSES INCURRED FOR THE PROJECT, THE BALANCE PROFIT WAS TO BE RETAINED BY THE OTHER MEMBER OF THE AOP NAMELY RAVI RAJ KOTHARI & COMPANY (RRKC). HE S UBMITTED THAT LD. CIT HAS WRONGLY OBSERVED IN PARA-7 THAT IN THE BOO KS OF ACCOUNT THE ASSESSEE HAS FIRST ADJUSTED ALL EXPENDITURE OF THE AOP AGAINST THE GROSS RECEIPTS AND THEREAFTER NET BALANCE IS TRANSFERRED TO TWO MEMBERS. LD. A.R SUBMITTED THAT THIS FINDING OF LD. CIT IS FACTUALL Y INCORRECT. TO SUBSTANTIATE LD. A.R REFERRED TO PAGE 16 OF THE PAPER BOOK, WHER E THE WORKING OF PROFIT DISTRIBUTION HAS BEEN SUBMITTED. THE SAID WORKING IS REPRODUCED BELOW: 1 SANAND PROPERTIES PRIVATE LIMITED(SSPPL) BASIC FLAT COST 35% OF ABOVE TO SPPL LESS : CAPITAL INVESTMENT PROFIT FOR THE FINANCIAL YEAR 2006-07 _____________________________ 431,768,917.00 151,119,120.95 113,106,696.00 3,093,838.00 116,200,534.00 34,918,586.95 ============ 2. RAVIRAJ KOTHARI & CO BASIC FLAT COST 65% OF ABOVE ADD. MSEB & INCIDENTAL CHARGES PROFIT FOR THE FINANCIAL YEAR 06-07 LESS : DEVELOPMENT CHARGES 431,768,917.00 280,649,796.05 11,826,666,00 292,476,462.05 184,850,281.83 ________________ 107,626,180.22 ============ 3.2 REFERRING TO THE AFOREMENTIONED WORKING IT WAS SUBMITTED BY HIM THAT THE TOTAL REVENUE WAS A SUM OF RS.43,17,68,917/-, 3 5% OF THE TOTAL REVENUE AMOUNTING TO RS.15,11,19,120.95 WAS ALLOCATED TO SP PL. A SUM OF RS. 11,62,00,534/- WAS ALREADY CREDITED TO THE ACCOUNT OF SPPL ON ACCOUNT OF ITA NO.2648/MUM/2012(A.Y. 2007-08) 9 LAND WHICH IS SPECIFICALLY STATED IN CLAUSE(7) AND THE BALANCE AMOUNT OF RS.3,49,18,586.95 HAS BEEN CONSIDERED THE PROFIT O F SPPL. SIMILARLY OUT OF TOTAL REVENUE 65% REMAINING AMOUNT IS A SUM OF RS .28,06,49,796.05. IN ADDITION THERETO MSEB AND INCIDENTAL CHARGES WERE TO THE TUNE OF RS. 1,18,26,666/-. THUS TOTAL PROFIT AFTER ALLOCATING 35% OF THE GROSS RECEIPTS OF FLATS CAME TO RS. 29,24,76,462.05. OUT OF THE SAI D AMOUNT THE DEVELOPMENT CHARGES INCURRED IN THE YEAR UNDER CONSIDERATION AR E TO THE TUNE OF RS.18,48,50,281.83 AND AFTER REDUCING THE SAME PROF IT SHARE OF RRKC REMAINED AT RS. 10,76,26,180.22. THEREFORE, LD. AR SUBMITTED THAT THE ALLOCATION HAS BEEN DONE IN ACCORDANCE WITH CLAUS E (7) OF THE AGREEMENT AND LD. CIT IS FACTUALLY INCORRECT IN OBSERVING TH AT ALLOCATION IS NOT DONE BY THE ASSESSEE AS PER CLAUSE(7) OF THE AGREEMENT. 3.3 LD. A.R SUBMITTED THAT THE VIEW TAKEN BY LD. CIT IS NOT IN THE SPIRIT OF LAW AS DEDUCTION UNDER SECTION 80 IB(10) IS INTENDED TO GIVE BENEFIT TO AN UNDERTAKING DEVELOPING AND BUILDING HOUSING P ROJECTS APPROVED BEFORE 31/3/2008 BY A LOCAL AUTHORITY @100% OF THE PROFIT S PROVIDED THE CONDITION LAID DOWN IN THAT SECTION ARE FULFILLED. HE SUBMIT TED THAT RRKC AT ITS OWN ALONE CANNOT CONSTITUTE THE UNDERTAKING AS THE LAND WAS CONTRIBUTED BY SPPL. HE SUBMITTED THAT UPON SCRUTINY OF ALL THE D OCUMENTS AND EVIDENCES, IT HAS BEEN FOUND AND HELD THAT AOP IS ELIGIBLE FO R DEDUCTION UNDER SECTION 80IB(10) AND HAS FULFILLED ALL THE CONDITIONS LAID DOWN IN SECTION 80 IB(10). THE ALLOCATION OF PROFIT IS ALSO IN ACCORDANCE WITH CLAUSE(7) OF THE AGREEMENT AND ASSESSEE HAS NOT DEVIATED IN ALLOCATING THE PR OFIT IN ACCORDANCE WITH CLAUSE (7) OF THE AGREEMENT. THUS LD. A.R SUBMITT ED THAT LD. CIT IS FACTUALLY INCORRECT IN OBSERVING THAT ALLOCATION OF PROFIT HAS BEEN DONE BY THE ASSESSEE CONTRARY TO CLAUSE (7) OF THE AGREEMENT. 3.4 LD. A.R FURTHER SUBMITTED THAT LD. CIT IS AL SO WRONG IN INVOKING SECTION 263 AS THE ORDER PASSED BY THE AO CANNOT BE SAID EITHER TO BE ERRONEOUS OR PREJUDICIAL TO THE INTEREST OF REVENUE . HE SUBMITTED THAT IT HAS ITA NO.2648/MUM/2012(A.Y. 2007-08) 10 BEEN SHOWN THAT ALLOCATION OF PROFIT IS IN ACCORDAN CE WITH CLAUSE(7), THEREFORE, THE AO DID NOT COMMIT ANY ERROR, AND THU S ORDER PASSED BY THE AO CANNOT BE SAID TO BE ERRONEOUS. HE SUBMITTED THAT FOR INVOCATION OF POWER UNDER SECTION 263, IT IS WELL SETTLED THAT THE TWI N CONDITIONS AS LAID DOWN IN THAT SECTION ARE REQUIRED TO BE FULFILLED SIMULTANE OUSLY AND THE ORDER IN RESPECT OF WHICH THESE POWERS ARE SOUGHT TO BE INVO KED SHOULD NOT ONLY BE ERRONEOUS BUT ALSO PREJUDICIAL TO THE INTEREST OF R EVENUE. 3.5 LD. A.R FURTHER SUBMITTED THAT IF THE METHOD SU GGESTED BY LD. CIT IS ADOPTED THEN THE ASSESSEE WILL BE LIABLE FOR LESSER INCOME BEING 100% ELIGIBLE FOR DEDUCTION UNDER SECTION 80 IB (10) WHICH WOULD MEAN THAT THE ASSESSEE WILL BE ENTITLED FOR LESSER ASSESSABLE INCOME AND L ESSER DEDUCTION ULTIMATELY TO BE ASSESSED AT NIL INCOME. THEREFORE, LD. AR PL EADED THAT THERE IS NO PREJUDICE TO THE INTEREST OF REVENUE. HE SUBMITTED THAT LD. CIT IS CONSIDERING THE ORDER OF AO PREJUDICIAL TO THE REV ENUE FOR THE REASON THAT IT IS PREJUDICIAL TO THE INTEREST OF REVENUE IN THE C ASE OF SPPL. HE SUBMITTED THAT LOSS, IF ANY, TO THE REVENUE IN THE CASE OF SP PL CANNOT BE A GROUND FOR INVOKING SECTION 263 IN THE CASE OF THE ASSESSEE BE ING A DISTINCT AND SEPARATE ASSESSABLE ENTITY. 3.6 LD. A.R FURTHER SUBMITTED THAT THE ASSESSMENT ORDER PASSED BY THE AO ALSO CANNOT BE SAID TO BE PREJUDICIAL TO THE INT EREST OF REVENUE FOR THE REASON THAT AO DISALLOWED THE DEDUCTION UNDER SECTI ON 80 IB (10) IN ITS ENTIRETY . THE DEDUCTION WAS ALLOWED TO THE ASSESS EE IN AN APPEAL AND DEDUCTION HAS BEEN GIVEN TO THE ASSESSEE BY WAY OF ORDER PASSED FOR GIVING EFFECT TO APPEAL. THUS ASSESSMENT ORDER VIDE WHICH NO DEDUCTION WAS ALLOWED UNDER SECTION 80 IB(10) CANNOT BE SAID TO B E PREJUDICIAL TO THE INTEREST OF REVENUE AS DEDUCTION WAS DISALLOWED IN THE ENTIRETY. ITA NO.2648/MUM/2012(A.Y. 2007-08) 11 3.7 IT WAS FURTHER SUBMITTED BY LD. A.R THAT THE A SSESSMENT ORDER HAD ALREADY MERGED WITH THE APPELLATE ORDER DATED 25/3 /2010 PASSED BY CIT(A), THEREFORE, LD. CIT WAS DEBARRED FROM INVOKING THE POWERS UNDER SECTION 263 AS PER EXPLANATION (C) TO SECTION 263(1). HE SUBMI TTED THAT THE ONLY REASON FOR WHICH LD. CIT HAS CONSIDERED THE ASSESSMENT ORD ER AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE IS ALLEGED EXCESS CLAIM OF DEDUCTION UNDER SECTION 80 IB (10) IN THE HANDS OF THE ASSESS EE. HE SUBMITTED THAT ONCE DEDUCTION UNDER SECTION 80 IB(10) WAS SUBJECT MATTER OF APPEAL BEFORE CIT(A) THEN ENTIRE ISSUE OF 80 IB(10) WAS OPEN IN A PPEAL AND ACCORDING TO FOLLOWING DECISIONS. SO FAR AS IT RELATES TO DEDUC TION U/S. 80IB(10), THE ASSESSMENT ORDER HAD MERGED WITH THE APPELLATE ORD ER PASSED BY CIT(A). 3.7.1. SONAL GARMENTS VS. JCIT, 95 ITD 363(MUM), WH EREIN IT HAS BEEN HELD THAT WHERE COMPUTATION OF DEDUCTION UNDER SECTION 8 0 HHC WAS SUBJECT MATTER OF APPEAL BEFORE LD. CIT(A) WHO HAD GIVEN SO ME FINDING ON COMPUTATION OF DEDUCTION UNDER SECTION 80 HHC, ASSE SSMENT ORDER HAD MERGED WITH THE ORDER OF LD. CIT(A) AND LD. CIT COU LD NOT EXERCISE POWER UNDER SECTION 263. IN THE SAID CASE THE ASSESSEE W AS IN THE BUSINESS OF EXPORT OF GARMENTS AND THE ENTIRE TURNOVER OF THE A SSESSEE WAS EXPORT TURNOVER. THE ASSESSMENT WAS FRAMED UNDER SECTION 143(3) AFTER ALLOWING DEDUCTION UNDER SECTION 80 HHC OF THE ACT. AN APPE AL WAS FILED ON THE ISSUE OF DEDUCTION UNDER SECTION 80 HHC CLAIMING THAT AO HAS ERRED IN DEDUCTING CERTAIN AMOUNT FROM EXPORT TURNOVER WHICH WERE NOT RECEIVED WITHIN SIX MONTHS FROM THE CLOSE OF THE YEAR OVERLOOKING THE FACT THAT THE SAID SUM WAS CIF VALUE OF THE GOODS EXPORTED, WHEREAS THE F OB VALUE OF SUCH SALES SHOULD BE DEDUCTED FROM THE EXPORT TURNOVER. CIT (A) HAD ALLOWED THE APPEAL FILED BY THE ASSESSEE AND DIRECTED THE AO TO REDUCE FOB VALUE FROM THE EXPORT TURNOVER. THEREAFTER CIT INVOKED SECT ION 263 AND HELD THAT PROFIT FOR SECTION 80 HHC SHOULD BE COMPUTED AFTER EXCLUDING EXPORT INCENTIVE AND AFTER ALLOWING CURRENT YEARS DEPRECIA TION. AFTER DOING SO NO INCOME WILL BE LEFT IN EXPORT BUSINESS, THEREFORE, DEDUCTION UNDER SECTION 80 ITA NO.2648/MUM/2012(A.Y. 2007-08) 12 HHC WAS ERRONEOUSLY ALLOWED BY THE AO. IT WAS THE CONTENTION OF THE ASSESSEE THAT THE ISSUE REGARDING DEDUCTION UNDER S ECTION 80 HHC WAS CONSIDERED BY CIT(A), THEREFORE, THE ASSESSMENT O RDER HAD MERGED WITH THE ORDER OF CIT(A). ON THE OTHER SIDE IT WAS THE CO NTENTION OF THE REVENUE THAT THE ISSUE REGARDING DEPRECIATION AND EXPORT INCENT IVE HAVING NOT CONSIDERED BY CIT(A), THE ASSESSMENT ORDER CANNOT BE SAID TO HAVE MERGED WITH THE APPELLATE ORDER. THE TRIBUNAL HELD THAT THE MATTE R AS APPEARING IN EXPLANATION (C) TO SECTION 263 IS CERTAINLY A WORD OF WIDE IMPORT AND REPRESENTS A SUBJECT OR SITUATION THAT ONE NEEDS TO THINK ABOUT, DISCUSS OR DEAL WITH. A MATTER MIGHT HAVE MANY ASPECT A ND THE ABOVE MENTIONED TWO FACTORS MIGHT BE THE ASPECTS OF THE MATTER B UT NOT THE ENTIRE MATTER ITSELF. THE MATTER IN THE INSTANT CASE WAS DEDUC TION UNDER SECTION 80 HHC, THEREFORE, THE ASSESSMENT ORDER, SO FAR AS IT RELATES TO DEDUCTION UNDER SECTION 80 HHC HAD MERGED WITH THE ORDER OF LD. CI T(A). THUS IT WAS HELD THAT ORDER PASSED BY CIT UNDER SECTION 263 WAS NOT A VALID ORDER IN THE EYES OF LAW. 3.7.2 RELIANCE WAS ALSO PLACED ON THE DECISION OF M UMBAI ITAT IN THE CASE OF MARICO INDUSTRIES LTD. VS. ACIT, 312 ITR(AT) 259. IN THIS CASE ALSO SIMILAR PROPOSITION WAS LAID DOWN. IN THE SAID CASE POWERS UNDER SECTION 263 WERE INVOKED ON THE ISSUE REGARDING DEDUCTION UNDER SECT ION 80 IB, WHICH WAS THE SUBJECT MATTER OF APPEAL FILED BEFORE CIT(A) AND IT WAS HELD THAT SINCE DEDUCTION UNDER SECTION 80 IB WAS THE SUBJECT MATTE R OF APPEAL BEFORE CIT(A), THE ORDER OF AO HAD MERGED WITH THE ORDER O F CIT(A). 3.7.3 REFERENCE WAS ALSO MADE TO THE LATEST DECISIO N OF MUMBAI BENCHES DATED 14/09/2012 IN ITA NO.3024/MUM/2012 IN THE CA SE OF M/S. K. SERA SERA PRODUCTIONS VS. CIT (COPY OF ORDER PLACED ON R ECORD). IN THE SAID CASE ASSESSEE WAS ENGAGED IN THE BUSINESS OF PRODUCTION , FINANCE AND DISTRIBUTION OF CINEMATOGRAPH FILMS. THE AO WHILE MAKING THE ASSESSMENT ORDER HAD CALLED FOR FROM THE ASSESSEE THE COST OF PRODUCTION ALLOWABLE AS ITA NO.2648/MUM/2012(A.Y. 2007-08) 13 PER INCOME TAX RULE-9A AND AFTER CONSIDERING THE SU BMISSIONS OF THE ASSESSEE OUT OF RS.27.19 CRORES A SUM OF RS. 2.34 CRORES WAS DISALLOWED WHICH WAS MADE SUBJECT MATTER OF APPEAL BEFORE CI T(A). A REMAND REPORT WAS CALLED FOR BY THE CIT(A) AND ON THESE FACTS IT WAS HELD THAT THE ORDER OF AO HAD MERGED WITH THE ORDER PASSED BY CIT(A) ON THE ISSUE OF COST OF PRODUCTION ALLOWABLE AS PER RULE 9A OF THE IT RULES . THE CASE OF LD.CIT IN THAT CASE WAS THAT ENTIRE COST OF PRODUCTION OF A F ILM DARNA JAROORI HAI AMOUNTING TO RS.6,99,73,052/- WAS ALLOWED AND, HOWE VER, AS PER RULE-9A IF FILM IS RELEASED IN THE LAST QUARTER OF THE PREVIO US YEAR, THEN THE EXPENSES CLAIMED IN THAT PARTICULAR YEAR CANNOT EXCEED THE RECEIPTS. THEREFORE, CIT INVOKED POWER UNDER SECTION 263 OF THE ACT AND IT WAS HELD THAT SINCE COMPUTATION OF COST OF PRODUCTION ALLOWABLE AS PER RULE -9A WAS SUBJECT MATTER OF AN ORDER OF APPEAL AND ORDER WAS PASSED BY CIT(A), THE ASSESSMENT ORDER HAD MERGED WITH THE ORDER OF CIT (A) AND CIT COULD NOT INVOKE POWER UNDER SECTION 263 OF THE ACT. THUS IT WAS SUBMITTED BY LD. AR THAT ORDER PASSED BY CIT SHOULD BE HELD TO BE INVALID AND APPROPRIATE RELIEF SHOULD BE GRANTED TO THE ASSESSEE. 4. ON THE OTHER HAND, IT WAS PLEADED BY LD. D.R THA T SO FAR AS IT RELATES TO ISSUE OF MERGER OF ORDER OF AO WITH THE ORDER OF LD. CIT(A), THE DECISION RELIED UPON BY AR SHOULD BE IGNORED IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RATILAL B ACHARILAL & SON, 282 ITR 457 (BOM) HE SUBMITTED THAT THIS DECISION WAS NOT C ONSIDERED IN THE AFOREMENTIONED DECISIONS OF THE ITAT. LD. DR SUBMIT TED THAT HONBLE BOMBAY HIGH COURT IN THAT DECISION HAS HELD THAT EFFECT OF AMENDMENT IN SECTION 263 BY THE FINANCE ACT, 1989 IS THAT TH ERE WILL BE NO MERGER ON THE PART OF THE ORDER WHICH WAS NOT SUBJECT MATTER OF A PPEAL. THEREFORE, HE SUBMITTED THAT THE DECISIONS RELIED UPON BY LD. AR BEING CONTRARY TO THE AFOREMENTIONED DECISION OF BOMBAY HIGH COURT SHOULD BE IGNORED. ITA NO.2648/MUM/2012(A.Y. 2007-08) 14 4.1 IT WAS SUBMITTED BY LD. CIT, DR THAT 35% OF THE GROSS RECEIPTS PAYABLE TO SPPL WERE IN THE NATURE OF OVERRIDING TITLE AND HENCE, THEY ARE REQUIRED TO BE DEDUCTED AT THRESHOLD BEFORE COMPUTING THE PROFI TS AND IN THIS MANNER THE DEDUCTION CLAIMED BY THE ASSESSEE WOULD COME D OWN TO RS. 10.58 CRORES AND THUS ASSESSE HAS CLAIMED MORE DEDUCTION AGAINST WHAT WAS AVAILABLE TO THE ASSESSEE. HE SUBMITTED THAT THIS WAS A UNIQUE CASE AND INVOCATION OF POWER UNDER SECTION 263 OF THE ACT WAS NECESSARY AS NO OTHER REMEDY WAS AVAILABLE WITH THE REVENUE AGAINST THE ACTION OF TH E ASSESSEE IN THE MANNER OF CALCULATING THE DIVISIBLE AMOUNT SO THAT IT HAD REDUCED THE ASSESSABLE INCOME IN THE HANDS OF ONE OF THE CONSTITUENT OF A OP. 4.2 IN THE REJOINDER LD. A.R DISTINGUISHED THE DECI SION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RATILAL BACHARIL AL & SON(SUPRA), HE SUBMITTED THAT IN THE SAID CASE THE ISSUE WAS REGAR DING WEIGHTED DEDUCTION UNDER SECTION 35B WHICH WAS ALLOWED AT RS.5,63,350/ - IN PLACE OF A SUM OF RS.8,90,676/- AS CLAIMED BY THE ASSESSEE. THE ASS ESSEE NEVER FILED ANY APPEAL AGAINST THE REDUCTION OF WEIGHTED DEDUCTION UNDER SECTION 35B OF THE ACT. THEREFORE, IT WAS HELD BY THE HONBLE BOMBAY HIGH COURT THAT THE ISSUE REGARDING 35B WAS NOT THE SUBJECT MATTER OF APPEAL, HENCE LD. CIT WAS RIGHT IN EXERCISING JURISDICTION UNDER SECTION 263 AS AO HAD WRONGLY ALLOWED WEIGHTED DEDUCTION ON RESORTMENT CHARGES WITHOUT G OING INTO THE DETAILS OF THESE CHARGES AND WITHOUT MAKING ANY ENQUIRY AS TO WHETHER THESE CHARGES WERE JUSTIFIED. THEREFORE, LD. AR SUBMITTED THAT THE DECISION RELIED UPON BY LD.DR IS NOT APPLICABLE TO THE PRESENT CASE AND DE CISIONS RELIED UPON BY HIM ARE VERY MUCH RELEVANT AND CANNOT BE IGNORED. 4.3 SO FAR AS IT RELATES TO ARGUMENTS OF LD. DR THA T 35% SHARE PAYABLE TO SPPL WAS IN THE NATURE OF OVERRIDING TITLE, IT WAS SUBMITTED BY LD. AR THAT IT IS NOT EVEN THE CASE OF LD. CIT. HE SUBMITTED THAT IF SUCH ARGUMENTS OF LD. DR IS ACCEPTED THEN IT WOULD MEAN THAT ASSESSEE AOP DOES NOT EXIST. THE AOP IS VERY MUCH IN EXISTENCE AND IT HAS BEEN ASS ESSED AS SUCH AND THE ITA NO.2648/MUM/2012(A.Y. 2007-08) 15 STATUS OF AOP HAS NOT BEEN OBJECTED EVEN BY LD. CIT . HE SUBMITTED THAT IT IS NOT EVEN THE CASE OF LD. CIT THAT WHY LAND COST IS REDUCED. HE SUBMITTED THAT LAND COST IS PART OF THE AGREEMENT AND ALLOCAT ION OF REVENUE BY THE ASSESSEE IS IN ACCORDANCE WITH CLAUSE-7 OF THE AG REEMENT. THUS LD. AR SUBMITTED THAT APPEAL OF THE ASSESSEE SHOULD BE ALL OWED. 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS IN THE LIGHT OF THE MATERIAL PLACED BEFORE US. THE ASSESSEE IN THE PRE SENT CASE IS AN AOP, WHICH IS AN INDEPENDENT AND DISTINCT ASSESSABLE EN TITY AND HAS BEEN DEFINED AS PERSON IN SECTION 2(31) OF THE ACT. A CCORDING TO SECTION 2(7) ASSESSEE MEANS A PERSON BY WHOM ANY TAX OR ANY OTHE R SUM OF MONEY IS PAYABLE UNDER THE INCOME TAX ACT, 1961. THE AOP WA S FORMED BY WAY OF AN AGREEMENT DATED 29/4/2003 BETWEEN SPPL AND RRKC . SPPL WAS HAVING SOLE DEVELOPMENT RIGHT AS OWNER OF THE LAND BEARING 37976.90 SQ. METERS SITUATED AT KALYANI NAGAR, PUNE OUT OF WHICH IT HAD BROUGHT 31026.90 SQ.MTS. AS CAPITAL AND THE SAID LAND WAS TO BE DE VELOPED AS A PROJECT FOR RESIDENTIAL BUILDING UNDER THE NAME FORTALEZA COM PRISING OF 354 RESIDENTIAL FLATS IN THREE PHASES OF 153,145 AND 56 FLATS. IT HAS FILED ITS RETURN OF INCOME AT A SUM OF RS. 4,13,610/- ON 29/10/07 AFTER CLAIMI NG DEDUCTION OF RS.14,54,47,283/- UNDER SECTION 80 IB (10) OF THE ACT, WHICH WAS COMPLETELY DISALLOWED BY THE AO ON THE GROUND THAT ASSESSEE DID NOT FULFILL THE CONDITIONS LAID DOWN IN SECTION 80 IB(10). THE DISALLOWANCE OF DEDUCTION UNDER SECTION 80 IB(10) WAS SUBJECT MATTER OF APPEA L FILED BY THE ASSESSEE BEFORE LD. CIT(A) AND THE ISSUE WAS DECIDED IN FAVO UR OF THE ASSESSEE. THE SAID ORDER OF THE LD. CIT(A) HAS BEEN CONFIRMED BY ITAT. LD. CIT HAS EXERCISED HIS POWER UNDER SECTION 263 IN RESPECT OF ASSESSMENT ORDER DATED 18/12/2009 VIDE WHICH DEDUCTION UNDER SECTION 80 I B(10) WAS COMPLETELY DENIED. THE MAIN REASONS STATED BY LD. CIT FOR I NVOKING SECTION 263 CAN BE SUMMARIZED AS FOLLOWS: (1) DURING THE COURSE OF SUBSEQUENT ASSESSMENT PRO CEEDINGS IN RESPECT OF ASSESSMENT YEAR 2008-09 AND 2009-10 IT WAS OBSERVED ITA NO.2648/MUM/2012(A.Y. 2007-08) 16 THAT ACCOUNT OF THE ASSESSEE AOP WERE NOT PREPARED IN ACCORDANCE WITH TERMS AND CONDITIONS OF THE AGREEMENT DATED 29 /4/2003, SPECIALLY AS PER CLAUSE-7 OF THE AGREEMENT ACCORDIN G TO WHICH M/S. SPPL WAS TO RECEIVE 35% OF THE SALE PROCEEDS OF THE PROJECT AND OUT OF BALANCE 65% OF THE RECEIPTS, ALL THE EXPENDITURE FOR THE PURPOSE OF AOP WAS TO BE MET WITH AND THE BALANCE REMAINI NG THEREAFTER WAS TO BE THE SHARE OF RRKC. THE ASSESSEE IN ITS IN THE ACCOUNTS HAD SET OFF ALL THE EXPENSES INCURRED BY THE AOP AG AINST THE GROSS RECEIPT AND BALANCE SURPLUS WAS CLAIMED BY THE ASSE SSEE AS DEDUCTION UNDER SECTION 80 IB(10) OF THE ACT. (2) IF THE ASSESSEE HAD DRAWN ITS ACCOUNTS AS PER C LAUSE -7 OF THE AGREEMENT THEN THE CLAIM OF DEDUCTION UNDER SECTION 80 IB(10) WOULD HAVE BEEN MUCH LOWER THAN DEDUCTION CLAIMED B Y IT ATRS.14,18,52,156/- FOR THE REASON THAT INCOME ASSE SSED IN THE HANDS OF SPPL, WHICH IS NOT ELIGIBLE FOR DEDUCTION, WOULD BE MUCH HIGHER THAN THE INCOME ASSESSED AS PER ACCOUNTS OF THE ASSESSEE. (3) BY ACCEPTING THE ACCOUNTS FILED BY THE ASSESSEE WHICH ARE NOT IN ACCORDANCE CLAUSE 7 OF THE AGREEMENT, THE ORDER P ASSED BY AO UNDER SECTION 143(3) OF THE ACT HAS BECOME ERRONEOU S AND PREJUDICIAL TO THE INTEREST OF REVENUE. 5.1 THE ABOVE REASONS HAVE FURTHER BEEN EXPLAINED I N THE ORDER PASSED BY LD. CIT. ACCORDING TO LD. CIT SPPL IS NOT ENTITL ED TO ANY DEDUCTION U/S. 80 IB (10) AND ENTIRE AMOUNT RECEIVED BY IT OF RS. 15.11 CRORES IS ASSESSABLE IN THE HANDS OF SPPL WHICH WILL BE BENEFICIAL TO THE REVENUE AND, THEREFORE, THE ORDER PASSED BY AO HAS BECOME PREJUDICIAL TO TH E INTEREST OF REVENUE. THESE FINDINGS OF LD. CIT ARE RECORDED IN PARA 8 OF THE IMPUGNED ORDER. 5.2 LD. CIT HAS FURTHER REJECTED THE CONTENTION OF THE ASSESSEE REGARDING MERGER OF ASSESSMENT ORDER WITH THE APPELLATE ORDER PASSED BY LD. CIT(A). ITA NO.2648/MUM/2012(A.Y. 2007-08) 17 5.3 AGAINST THE AFOREMENTIONED OBSERVATIONS OF LD. CIT, THE MAIN CASE OF THE ASSESSEE IS THAT LD. CIT IS FACTUALLY WRONG IN STATING THAT THE ACCOUNT OF THE ASSESSEE HAVE NOT BEEN PREPARED IN ACCORDANCE W ITH CLAUSE-7 OF THE AGREEMENT. CLAUSE-7 OF THE AGREEMENT AS WELL AS TH E MANNER IN WHICH ASSESSEE HAS DISTRIBUTED THE REVENUE ARE ALREADY REPRODUCED IN THE ABOVE PART OF THE ORDER. A PLAIN READING OF CLAUSE-7 WIL L REVEAL THAT OUT OF THE AMOUNT RECEIVED FROM PURCHASERS OF THE HOUSING UNIT WHICH ARE DESCRIBED AS REPRESENTING THE GROSS SALES OF UNITS INCLUSIVE OF VALUE OF LAND, SPPL SHALL BE ENTITLED TO ITS SHARE OF REVENUE/INCOME AS AM OUNT COMPRISING OF 35% OF SUCH RECEIPTS. SPPL WAS ALSO AUTHORIZED TO WITHD RAW SUCH SHARE OF REVENUE FROM TIME TO TIME. OUT OF BALANCE OF 65% O F THE AFORESAID RECEIPTS ALL REQUIRED AND RELEVANT EXPENDITURE FOR THE PURPO SE OF BUSINESS OF AOP WERE TO BE MET AND WHATEVER NET BALANCE REMAINS TH EREAFTER SHALL BE DETERMINED AS THE SHARE OF REVENUE/INCOME OF RRKC WHICH IS ALSO AT LIBERTY TO ACTUALLY WITHDRAW SUCH SHARE. SUCH ARRANGEMENT WAS APPLICABLE ONLY TO THE LAND ADMEASURING 31,026.90 SQ.METERS CONTRIB UTED BY SPPL. AGAINST THE ABOVE CLAUSE THE DISTRIBUTION OF THE ASSESSEE A MONGST ITS MEMBERS IS AS UNDER:- TOTAL PROCEEDS OF THE FLATS ARE RS.43,17,68,917/ -, 35% OF WHICH COMES TO RS.15,11,19,120.95. AFTER DEDUCTING COST O F LAND OF RS.11,62,00,534/-, WHICH WAS CREDITED TO THE ACCOUN T OF SPPL THE BALANCE OF RS.3,49,18,586.95 WAS CONSIDERED AS PROF IT OF SPPL. SIMILARLY 65% OF THE GROSS PROCEEDS OF FLATS COMES TO RS.28,06,49,796.05 TO WHICH A SUM OF RS.1,18,26,666 /- ADDED ON ACCOUNT OF RECEIPTS OF MSEB AND INCIDENTAL CHARGES AND THE AMOUNT AVAILABLE AFTER DEDUCTING PROFIT PAYABLE TO M/S. SP PL REMAINED AT RS. 29,24,76,462.05. FROM THIS AMOUNT THE EXPENSES INC URRED AS DEVELOPMENT CHARGES AMOUNTING TO RS.18,48,50,281.83 HAVE BEEN REDUCED FROM THE BALANCE 65% AND THE REMAINING AMO UNT OF RS. 10,76,26,180.22 IS CONSIDERED AS PROFIT OF RRKC. ITA NO.2648/MUM/2012(A.Y. 2007-08) 18 ( FOR FIGURES REFERENCE CAN BE MADE TO PARA NO. 3. 1 OF THIS ORDER.) 5.4 AGAINST THE ABOVE MENTIONED CALCULATION ADOPTED BY THE ASSESSEE IN ITS ACCOUNTS, IT IS THE CASE OF LD. CIT THAT A SUM OF R S. 15.11 CRORE (35% OF THE GROSS RECEIPTS OF RESIDENTIAL UNITS) SHOULD STRAI GHTWAY BE REDUCED FROM GROSS RECEIPTS AND INCOME ASSESSEE AOP SHOULD BE AR RIVED AT ON THE BALANCE RECEIPTS. IN OTHER WORDS, THE ELIGIBLE AMOUNT FOR DEDUCTION UNDER SECTION 80 IB(10) IN THE HANDS OF AOP SHOULD BE THE NET INCOME COMPUTED ON 65% OF THE GROSS RECEIPT OF RESIDENTIAL UNIT AND IF THE INCOME IS COMPUTED IN THIS MANNER THEN SPPL WILL BE REQUIRED TO PAY TAX ON THE ENTIRE RECEIPT OF RS.15.11 CRORES WITHOUT HAVING THE BENEFIT OF DEDUC TION UNDER SECTION 80 IB(10); THE AOP WILL ALSO BE ENTITLED FOR LESSER DE DUCTION THAN WHAT HAS BEEN CLAIMED/ALLOWED TO IT. 5.5 WE HAVE CAREFULLY CONSIDERED THE VERSION OF LD. CIT IN THE LIGHT OF MATERIAL AVAILABLE ON OUR RECORD. WE HAVE CAREFULL Y GONE THROUGH THE CLAUSE-7 OF THE AGREEMENT AND THE DISTRIBUTION OF R EVENUE BY THE ASSESSEE IN ITS ACCOUNTS. THE DISTRIBUTION OF THE REVENUE IN T HE ACCOUNT OF THE ASSESSEE IS IN ACCORDANCE WITH INTENT AND PURPOSE OF CLAUSE -7 OF THE AGREEMENT. ACCORDING TO CLAUSE-7 OF THE AGREEMENT SPPL IS ENTI TLED TO 35% SHARE OF THE GROSS SALE PROCEEDS OF THE UNITS INCLUSIVE OF THE V ALUE OF THE LAND. ACCORDING TO DISTRIBUTION IN THE ACCOUNT OF THE ASSESSEE SPP L HAS RECEIVED RS.15.11 CRORE WHICH IS 35% OF GROSS SALE PROCEEDS OF THE UN IT AMOUNTING TO RS.43.17 CRORES. A SUM OF RS.11.62 CRORE IS CREDITED TO THE ACCOUNT OF SPPL ON ACCOUNT OF LAND ETC. AND RS.3.49 CRORE IS CONSIDER ED AS PROFIT SHARE OF SPPL. OUT OF BALANCE 65%, AFTER INCLUDING THE MSEB AND IN CIDENTAL CHARGES AND REDUCING THE DEVELOPMENTAL CHARGES A SUM OF RS. 10. 76 CRORE HAS BEEN CONSIDERED AS PROFIT SHARE OF RRKC. THEREFORE, THE DISTRIBUTION OF PROFIT MADE BY THE ASSESSEE BETWEEN ITS MEMBERS IS IN ACCORDAN CE WITH CLAUSE 7 OF THE AGREEMENT. THE INTERPRETATION OF CLAUSE-7 SOUGHT TO BE ADOPTED BY LD. CIT WILL BE AGAINST THE VERY INTENT AND PURPOSE FOR W HICH THE ASSESSEE AOP HAS ITA NO.2648/MUM/2012(A.Y. 2007-08) 19 BEEN FORMED AND IF SUCH INTERPRETATION IS ADOPTED I T WILL TANTAMOUNT TO DENIAL OF EXISTENCE OF AOP WHICH IS NOT EVEN THE CA SE OF LD. CIT. IT HAS ALREADY BEEN POINTED OUT THAT AOP IS A SEPARATE AN D DISTINCT ASSESSABLE ENTITY AND IS ALSO ENTITLED TO CLAIM THE DEDUCTIONS PERMITTED UNDER THE INCOME TAX ACT PROVIDED IT FULFILL THE CONDITIONS LAID DOWN IN THE SECTION GOVERNING THAT DEDUCTION. THE ASSESSEE AOP IN THE PRESENT CASE HAS BEEN ASSESSED AS AOP AND FOUND TO HAVE FULFILLED THE CON DITION LAID DOWN IN SECTION 80 IB(10) AND HAS BEEN HELD TO BE ELIGIBLE FOR SUCH DEDUCTION. THE QUANTUM OF DEDUCTION UNDER SECTION 80 IB (10) WILL DEPEND ON THE INCOME EARNED FROM ELIGIBLE PROJECT. THE QUANTUM OF DEDU CTION WILL NOT DEPEND UPON THE MODE OF DISTRIBUTION OF SHARES AMONGST THE MEMBERS OF AOP AS INCOME OF AOP IS TAXABLE AT MAXIMUM MARGINAL RATE . THEREFORE, MANNER IN WHICH THE AOP DISTRIBUTE ITS PROJECT HAS NO BEARING OVER ELIGIBLE QUANTUM OF DEDUCTION UNDER SECTION U/S. 80IB (10) AS THE ELIGI BLE QUANTUM WILL BE GROSS RECEIPTS FROM THE PROJECT REDUCED BY EXPENSES INCUR RED ON THE PROJECT. IT IS NOT EVEN THE CASE OF LD. CIT THAT ASSESSEE AOP IS NOT ENTITLED TO GET THE BENEFIT OF DEDUCTION UNDER SECTION 80 IB (10). THE ONLY OBJECTION OF LD. CIT IS THAT DISTRIBUTION OF REVENUE IN THE ACCOUNT OF T HE ASSESSEE IS INAPPROPRIATE AND BY THIS MANNER ASSESSEE HAS BEEN BENEFITED BY L ARGER DEDUCTION IN PLACE OF SMALLER DEDUCTION AVAILABLE TO IT. IN OUR OPINI ON SUCH OBSERVATIONS OF LD. CIT ARE INCORRECT, FIRSTLY, ON THE GROUND THAT EVEN DISTRIBUTION OF REVENUE IN THE BOOKS OF ACCOUNT OF THE ASSESSEE CANNOT BE SAID TO BE CONTRARY TO THE PURPOSE AND INTENT DESCRIBED IN CLAUSE-7 OF THE AGR EEMENT. SECONDLY, THE ALLOWABILITY OR OTHERWISE OF DEDUCTION UNDER SECTIO N 80 IB(10) IS NOT DEPENDENT UPON THE MANNER IN WHICH THE PROFIT HAS B EEN DISTRIBUTED AMONG THE MEMBERS OF AOP BUT IT DEPEND UPON THE FULFILLME NT OF THE CONDITIONS LAID DOWN IN THAT SECTION AND ALSO THE DEDUCTION IS AVAI LABLE TO AN UNDERTAKING AND NOT TO THE INDIVIDUAL CONSTITUENT OF AN UNDERTA KING. 5.6 WE HAVE ALSO NOT FOUND ANY FORCE IN THE SUBMIS SION LD. D.R THAT 35% SHARE ALLOCABLE TO SPPL WAS IN THE NATURE OF OVER RIDING TITLE. CLAUSE-7 OF ITA NO.2648/MUM/2012(A.Y. 2007-08) 20 THE AGREEMENT WHICH HAS BEEN SOUGHT TO BE INTERPRET ED BY LD. CIT DR IN THIS MANNER DOES NOT INDICATE THAT 35% OF THE GROSS REVE NUE TO BE SHARED BY SPPL WAS IN THE NATURE OF OVERRIDING TITLE, THERE FORE, THIS ARGUMENT OF LD. CIT DR HAS TO BE REJECTED AND IT IS TO BE HELD TH AT 35% SHARE RECEIVED BY SPPL WAS NOT IN THE NATURE OF OVERRIDING TITLE TO T HE REVENUE BUT IT IS ONLY SHARE OF PROFIT OF SPPL. 5.7 IN VIEW OF ABOVE DISCUSSION IT IS HELD THAT THE IMPUGNED ASSESSMENT ORDER IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE I NTEREST OF REVENUE ON ACCOUNT OF ALLOCATION OF PROFIT BETWEEN MEMBERS AS PER ACCOUNTS OF THE ASSESSEE AS ALLOCATION OF PROFIT IN THE ACCOUNTS OF THE ASSESSEE IS IN ACCORDANCE WITH CLAUSE-7 OF THE AGREEMENT AND MANNE R OF ALLOCATION OF PROFIT IN THE ACCOUNT CANNOT ALTER THE QUANTUM OF DEDUCTIO N AVAILABLE TO AOP UNDER SECTION 80 IB(10). 6. MOREOVER, THE SUM AND SUBSTANCE UPON WHICH LD. CIT HAS INVOKED SECTION 263 OF THE ACT IS THE QUANTUM OF DEDUCTION UNDER SECTION 80 IB(10) OF THE ACT. ACCORDING TO LD. CIT, BY MANNER ADOPTE D BY THE ASSESSEE IN ITS ACCOUNTS, THE ASSESSEE HAS ERRONEOUSLY GET EXCESS D EDUCTION UNDER SECTION 80 IB (10) OF THE ACT, THEREFORE, THE ORDER OF AO I S ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTEREST OF REVENUE. IT HAS ALR EADY BEEN MENTIONED THAT IN THE ASSESSMENT ORDER AO DID NOT ALLOW THE CLAIM OF THE ASSESSEE UNDER SECTION 80 IB(10), THEREFORE, THERE IS NO QUESTION OF ASSESSMENT ORDER BEING ERRONEOUS OR PREJUDICIAL TO THE INTEREST OF REVENUE . LD. CIT IS CONSIDERING THE ALLOWANCE OF DEDUCTION UNDER SECTION 80 IB(10) AFTE R THE APPEAL EFFECT IS GIVEN TO THE ASSESSMENT ORDER. IT IS NOT EVEN THE CASE OF LD. CIT THAT HE IS INVOKING POWER UNDER SECTION 263 OF THE ACT IN RES PECT OF ORDER GIVING THE EFFECT TO THE APPEAL. THUS, THE APPLICATION OF S ECTION 263 TO THE IMPUGNED ASSESSMENT ORDER IS AGAINST THE PROVISIONS OF LAW. THEREFORE, ALSO ORDER UNDER SECTION 263 HAS TO BE SET ASIDE. ITA NO.2648/MUM/2012(A.Y. 2007-08) 21 6.1 NOW COMING TO THE ISSUE OF MERGER. FOR THIS PURPOSE RELIANCE HAS BEEN PLACED BY THE LD. A.R OF THE ASSESSEE ON THE A FOREMENTIONED THREE DECISIONS OF CO-ORDINATE BENCHES OF MUMBAI ITAT WH ICH HAVE BEEN DISCUSSED IN DETAILS IN PARAS 3.7.1 TO 3.7.3 OF THI S ORDER. THE BASIS OF THESE DECISIONS IS THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF OIL INDIA LTD. VS. CIT, 138 ITR 836. IN THE AFOREMEN TIONED CASE FOLLOWING THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF OIL INDIA LTD. VS. CIT (SUPRA), IT HAS BEEN HELD THAT THE WORD MATTER IS WORD OF WIDE IMPORT AND REPRESENTS A SUBJECT OR SITUATION THAT NEED TO BE THINK ABOUT, DISCUSSED OR DEAL WITH. IT WAS HELD BY HONBLE CALCUTTA HIGH COURT THAT IF AN ASSESSMENT IS SUBJECT MATTER OF APPEAL THEN ANY GRO UND WHICH WAS HELD IN FAVOUR OF ASSSEE CAN ALSO BE HELD AGAINST HIM THOUG H THE APPEAL WAS PREFERRED BY THE ASSESSEE. SUCH JURISDICTION OF AA C IS UNDISPUTABLE AND ONCE THE APPEAL HAS BEEN PREFERRED BEFORE THE AAC O N ANY ASPECT OF THE QUANTUM, THE LD. CIT CANNOT ASSUME JURISDICTION OTH ERWISE AN ANOMALOUS POSITION WOULD ARISE. REFERENCE IN THIS REGARD C AN BE MADE TO THE FOLLOWING QUESTION REFERRED TO THEIR LORDSHIP OF HONBLE CALC UTTA HIGH COURT: 1. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE APPELLATE TRIBUNAL WAS CORRECT IN HOLDING THAT THE ISSUE OF D ISALLOWANCE UNDER SECTION 40(A)(V) WAS NOT THE SUBJECT-MATTER OF AN ORDER BY THE APPELLATE ASSISTANT COMMISSIONER AND HENCE THE COMMISSIONER OF INCOME- TAX HAD THE JURISDICTION UNDER SECTION 263 ON THIS ISSUE? IN RESPONSE TO THE ABOVE QUESTION THE OBSERVATIONS OF THEIR LORDSHIP ARE REPRODUCED BELOW: UPON THIS THE THREE QUESTIONS AS MENTIONED HEREIN BEFORE HAVE BEEN REFERRED TO THIS COURT. THE FIRST QUESTION IS DIREC TED TO THE ASPECT WHETHER AFTER THE APPELLATE ORDER WAS PASSED BY THE AAC OR AN APPEAL HAD BEEN PREFERRED, THE COMMISSIONER HAD JURISDICTION IN THE FACTS AND CIRCUMSTANCES OF THIS CASE UNDER SECTION 263 OF THE ACT. NOW, IT IS WELL SETTLED THAT BEFORE AN APPEAL BEFORE THE AAC CERTAIN ORDERS ARE APPEALABLE . IT IS ALSO WELL SETTLED THAT IN AN APPEAL PREFERRED BEFORE THE AAC THE WHOL E ASSESSMENT IS OPEN FOR REVIEW BY THE AAC. HE IS BOTH THE APPELLATE AS WELL AS THE ADJUDICATING AUTHORITY. BUT HIS JURISDICTION IS LIMITED TO THE A PPEAL PREFERRED BEFORE HIM. ITA NO.2648/MUM/2012(A.Y. 2007-08) 22 THERE ARE CERTAIN ORDERS WHICH ARE NOT APPEALABLE B EFORE THE AAC BUT CERTAIN TYPES OF ALLEGATIONS CAN BE TAKEN UP IN AN APPEAL B Y SEPARATE APPEALS. APART FROM THOSE TWO CASES IF AN ASSESSMENT IS THE SUBJEC T-MATTER OF APPEAL THEN ANY GROUND WHICH WAS HELD IN FAVOUR OF THE ASSESSEE CAN ALSO BE HELD AGAINST HIM THOUGH THE APPEAL WAS PREFERRED BY THE ASSESSEE . THIS JURISDICTION OF THE AAC IS INDISPUTABLE. IN THIS CASE THE QUESTION IS W HETHER THE QUANTUM OF ALLOWANCE OR DISALLOWANCE OR DEPRECIATION WAS THE S UBJECT-MATTER OF APPEAL OR NOT. IT IS TRUE THAT WHETHER DEPRECIATION SHOULD BE CALCULATED ON THE BASIS OF 12 MONTHS OR IT SHOULD BE CALCULATED ON THE BASI S OF 11 MONTHS WAS NOT A SPECIFIC ASPECT WHICH WAS AGITATED BEFORE THE MC NO R DID HE GIVE ANY DIRECTION ON THIS ASPECT OF THE MATTER BUT HE HAD T HIS ASPECT KEPT OPEN FOR ADJUDICATION BY HIM EVEN THOUGH NOT TAKEN BY THE AS SESSEE. THEN, ON THAT, HE COULD HAVE ALLOWED 5 PER CENT OR 2 PER CENT D EPRECIATION AND SHOULD HAVE DIRECTED THE ITO TO COMPUTE THE SAME ON SUCH B ASIS AS HE CONSIDERED FIT AND PROPER, NAMELY, 11 MONTHS OR 12 MONTHS ON T HE VIEW THAT THE EMPLOYEE OF THE ASSESSEE WAS ON LEAVE FOR ONE MONTH AND AS SUCH COULD NOT BE SAID TO BE ENTITLED TO THIS ACCOMMODATION, IF TH AT IS THE POSITION, THEN, IN OUR OPINION, ONCE THE APPEAL HAS BEEN PREFERRED BEF ORE THE AAC ON ANY ASPECT OF THE QUANTUM OF DEPRECIATION, THE COMMISSI ONER CANNOT ASSUME JURISDICTION, OTHERWISE AN ANOMALOUS POSITION WOULD ARISE. THE INCOME-TAX OFFICER HAS BEEN DIRECTED BY THE AAC TO FIX DEPRECI ATION AT A CERTAIN PERCENTAGE, INDICATED BY THE AAC, WITHOUT ANY FURTH ER DIRECTION THAT IT SHOULD BE CONFINED TO 11 MONTHS OR 12 MONTHS. BUT, NOW, IF FURTHER CONSIDERATION IS SUPERIMPOSED BY THE COMMISSIONER B Y RECTIFICATION MADE BY THE INCOME-TAX OFFICER AS A RESULT OF THE ORDER PAS SED BY THE COMMISSIONER UNDER SECTION 263 THEN THAT WOULD BE IN CONFLICT WI TH THE DIRECTION GIVEN BY THE AAC, THEN THAT ORDER, IN OUR OPINION, CANNOT BE THE SUBJECT- MATTER BEFORE THE AAC, THEN THAT ORDER, IN OUR OPINION, CA NNOT BE THE SUBJECT-MATTER OF AN ORDER OF REVISION BY THE COMMISSIONER. THIS P RINCIPLE, HOWEVER, COMES WHERE THE APPEAL DOES NOT LIE FROM THE ORDER OF TH E INCOME-TAX OFFICER AND BEFORE THE AAC WHERE DIFFERENT KINDS OF APPEAL ARE PROVIDED FOR IN THE SCHEME OF THE IT ACT. THIS PRINCIPLE WAS ENUNCIATED BY THE SUPREME COURT IN THE CASE OF CIT Y. AMRITLAL BHOGILAL & CO. [1958] 34 I TR 130. THIS WAS ALSO REITERATED IN THE DECISION IN THE CASE OF JEEWANLAL (1929) LTD V. ADDL. CIT[1977] 108 ITR 407 (CAL.) AND THE DECISION IN TH E CASE OF PREMCHAND SITANATH ROY V. ADDL CIT[1977] 109 ITR 751 (CAL.) T HE ALLAHABAD HIGH COURT REITERATED THE SAME PRINCIPLE IN THE CASE OF JJC SY NTHETICS LTD V. ADDL CIT [1976] 105 ITR 344. THEREFORE, IT APPEARS TO US THA T AS THE QUANTUM OF DEPRECIATION WAS THE SUBJECT-MATTER OF APPEAL THE C OMMISSIONER HAD NO JURISDICTION, IN THE FACTS AND CIRCUMSTANCES OF THI S CASE, TO ISSUE THE NOTICE UNDER SECTION 263 AND TO PASS ANY ORDER ON THIS ASP ECT OF THE MATTER. QUESTION NO. 1 THEREFORE, IN OUR OPINION, MUST BE A NSWERED IN THE NEGATIVE AND IN FAVOUR OF THE ASSESSEE. 6.2 APPLYING THE ABOVE PRINCIPLE ON THE FACTS OF TH E PRESENT CASE IT CAN BE HELD THAT ONCE DEDUCTION UNDER SECTION 80 IB(10) WA S SUBJECT MATTER OF APPEAL BEFORE LD. CIT(A), IT COVERED ALL ASPECTS OF THE MATTER RELATING TO ITA NO.2648/MUM/2012(A.Y. 2007-08) 23 DEDUCTION UNDER SECTION 80 IB(10) AND THE ORDER OF AO ON THAT ISSUE HAD MERGED WITH THE ORDER OF CIT(A). THEREFORE, ACCOR DING TO CLAUSE (C) OF EXPLANATION TO SECTION263(1), LD. CIT WAS DEBARRED FROM EXERCISING JURISDICTION U/S.263 AS THE SUBJECT MATTER OF THE A PPEAL WAS DEDUCTION UNDER SECTION 80 IB (10) OF THE ACT. THE DECISIONS OF ITAT MUMBAI IN THE AFOREMENTIONED THREE CASES AND THE DECISION OF HON BLE CALCUTTA HIGH COURT IN THE CASE OF OIL INDIA LTD. VS. CIT (SUPRA) SUPPO RT THIS VIEW. 6.3 SO FAR AS IT RELATES TO CONTENTION OF LD. DR TH AT IN VIEW OF DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RA TILAL BACHARIAL & SONS (SUPRA) THE AFOREMENTIONED THREE DECISIONS OF ITAT MUMBAI SHOULD BE IGNORED, WE FIND THAT THE SAID DECISION DOES NOT SU PPORT THE CASE OF THE REVENUE AS IT IS DISTINGUISHABLE. THE FACTS IN THE SAID CASE WERE THAT THE ASSESSEE FOR ASSESSMENT YEAR 1980-81 WAS ASSESSED BY AN ORDER DATED 23/02/1981. IN THE ASSESSMENT ORDER, THE ITO HAD ALLOWED WEIGHTED DEDUCTION UNDER SECTION 35B AT RS. 5,63,350/- AS AG AINST A SUM OF RS. 8,90,676/- CLAIMED BY THE ASSESSEE. THE ASSESSEE FILED AN APPEAL AGAINST THE SAID ASSESSMENT ORDER ON THE ISSUES OTHER THA N WEIGHTED DEDUCTION AND THE APPEAL WAS DECIDED BY LD. CIT(A) VIDE ORDER DAT ED 25/11/1981 AND ORDER OF AO WAS UPHELD. LD. CIT INVOKED SECTION 263 IN RESPECT OF ASSESSMENT ORDER DATED 23/2/1981. ACCORDING TO LD. CIT ASSESS EE WAS NOT ENTITLED TO DEDUCTION UNDER SECTION 35B WHICH WAS CLAIMED ON RE ASSORTMENT CHARGES AND AO WITHOUT GOING INTO THE DETAILS OF THESE CHAR GES AND ENQUIRY HAD ALLOWED WEIGHTED DEDUCTION UNDER SECTION 35B. T HE ASSESSEE FILED AN APPEAL AGAINST THE ORDER PASSED BY LD. CIT UNDER SE CTION 263. IT WAS SUBMITTED THAT SECTION 263 COULD NOT BE INVOKED SI NCE THE ASSESSMENT ORDER WAS THE SUBJECT MATTER OF APPEAL BEFORE LD. CIT(A) AND THUS THE ASSESSMENT ORDER HAD MERGED WITH THE ORDER OF APPE LLATE AUTHORITY. THE TRIBUNAL CAME TO THE CONCLUSION THAT CIT(A) HAVIN G EXPRESSED HIS VIEWS IMPLIEDLY APPLIED HIS MIND TO THE QUESTION OF GRAN T OF ALLOWANCE UNDER ITA NO.2648/MUM/2012(A.Y. 2007-08) 24 SECTION 35B, THEREFORE, ORDER HAD MERGED WITH THE ORDER OF CIT(A). ON THESE FACTS, IT WAS FOUND BY HONBLE HIGH COURT THA T SINCE ASSESSEE DID NOT PREFER ANY APPEAL AGAINST THE ISSUE OF WEIGHTED DED UCTION, THE ASSESSMENT ORDER DID NOT MERGE WITH ASSESSMENT. THUS, THE FACT S OF THAT CASE ARE ENTIRELY DIFFERENT. THE ASSESSEE HAD CLAIMED THE WEIGHTED DEDUCTION WHICH WAS ALLOWED TO HIM PARTLY AND ON THE REMAINING D ISALLOWANCE ASSESSEE DID NOT PREFER ANY GRIEVANCE IN THE APPEAL FILED B EFORE CIT(A). THEREFORE, WEIGHTED DEDUCTION UNDER SECTION 35B WAS NEVER SUBJ ECT MATTER OF APPEAL FILED BY THE ASSESSEE BEFORE CIT(A). THE FACTS IN THE PRESENT CASE ARE ENTIRELY DIFFERENT. IN THE PRESENT CASE DEDUCTION UNDER SECTION 80 IB(10) WAS DENIED IN ITS ENTIRETY AND THIS WAS MADE SUBJECT MA TTER OF APPEAL AND CIT(A) HAS HELD THAT ASSESSEE IS ENTITLED TO GET DE DUCTION UNDER SECTION 80 IB(10). THEREFORE, THE DECISION RELIED UPON BY LD. D.R IS NOT APPLICABLE TO THE PRESENT CASE. 6.4 IN VIEW OF THE ABOVE DISCUSSIONS, ON MERIT AS W ELL AS ON ISSUE OF MERGER WE HOLD THAT POWER UNDER SECTION 263 HAS BEE N WRONGLY INVOKED. THE ASSESSMENT ORDER PASSED BY AO WAS NEITHER ERRON EOUS NOR PREJUDICIAL TO THE INTEREST OF REVENUE. THE POWERS UNDER SECTION 263 HAVING BEEN INVOKED CONTRARY TO LAW, THE IMPUGNED ORDER PASSED BY LD. CIT IS QUASHED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 12 TH DAY OF OCT. 2012 SD/- SD/- (B.RAMAKOTAIAH ) (I.P.BANSAL) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 12 TH OCT. 2012 ITA NO.2648/MUM/2012(A.Y. 2007-08) 25 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.R F BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM.