Delhi HC Questions Dept’s U-Turn on Denying 80IA Benefit in 4th Year of Tax Assessment

The Delhi High Court has ruled that the Principal Commissioner of Income Tax (PCIT) erroneously invoked jurisdiction under Section 263 of the Income Tax Act and made a mistake by reversing course in the fourth assessment year. This led to the denial of the benefits provided by Section 80IA of the Income Tax Act.

Justices Rajiv Shakdher and Girish Kathpalia, sitting on the bench, noted that the PCIT failed to present any evidence on record demonstrating that the migration from Internet Protocol-Virtual Private Network (IP-VPN) to National Long Distance-International Long Distance (NLD-ILD) license resulted in the creation of a new and distinct “undertaking” under Section 80IA(4)(ii).

The respondent, engaged in the business of offering telecommunications and related support services such as virtual private networks, global management networks, and internet services to customers both within and outside India, had initially declared a nil total income by availing deductions under Section 80IA and book profit. Subsequently, the assessee filed a revised return of income, which underwent due processing under Section 143(1).

The assessee’s filed income return underwent scrutiny, prompting the issuance of a notice under Section 143(2). Given the international transactions with associated enterprises exceeding Rs. 15,00,00,000, a reference under Section 92CA(1) was made to the Transfer Pricing Officer (TPO) in Mumbai to determine the arm’s length price. The TPO, exercising authority under Section 92CA(3), made an upward adjustment to the arm’s length price for the international transaction in the assessment year 2010–11. Subsequently, a draft order proposing the addition of this amount was issued under Section 92CA(4), leading the assessee to raise objections before the Dispute Resolution Panel (DRP).

The DRP addressed the objections, instructing the TPO to reassess the arm’s length price. Consequently, on December 30, 2014, the TPO provided a revised calculation of the adjustment. The Assessing Officer then assessed the assessee’s income by making additions due to adjustments in the arm’s length price and deductions under Section 80IA.

The Principal Commissioner of Income Tax (PCIT) exercised revisional jurisdiction under Section 263, issuing a show cause notice to the assessee dated March 15, 2017. In the subsequent order under Section 263, the PCIT asserted that the assessee was not eligible for any deduction under Section 80IA(4)(ii).

The department argued that the Principal Commissioner of Income Tax (PCIT) was justified in utilizing revisional powers under Section 263. According to their stance, the assessment order under Section 143(3) was deemed erroneous and prejudicial to the revenue’s interest in the opinion of the PCIT.

Contrarily, the assessee contended that the exercise of revisional powers was inappropriate, as it was based solely on a difference of opinion between the assessing officer and the PCIT. The department had granted deductions under Section 80IA to the assessee in the three previous assessment years. Therefore, there was no valid reason to make a reversal in the fourth year by invoking revisional jurisdiction.

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The court determined that the respondent/assessee had consistently been eligible for deductions under Section 80IA since Assessment Year 2007-08. The appellant/assessee’s decision to reverse this benefit in Assessment Year 2010-11, especially by invoking Section 263 of the Act, was deemed unjustifiable.