Pune ITAT Rules on Limits of Section 263 Powers in 10AA & 80JJAA Deduction Dispute

Background of the Dispute

The appeal before the ITAT Pune arose from a revisionary order passed under Section 263 of the Income Tax Act 1961 for AY 2020-21, in the case of Digital Risk Mortgage Services LLC Vs ACIT. The assessee, a United States incorporated company with a branch office in Pune, challenged the action of the Commissioner of Income Tax (IT&TP), Pune [“CIT(IT&TP)”] in setting aside a completed scrutiny assessment under Section 143(3) r.w.s. Section 144C.

The assessee had:

  • Filed its return for AY 2020-21 under Section 139(1) on 12.02.2021, declaring income of Rs. 17,82,17,280/-.
  • E-filed Form 3CEB (for transfer pricing), tax audit report, and Form 56F.
  • Claimed deductions under Section 10AA (SEZ unit) and Section 80JJAA (employment generation).
  • Faced a complete scrutiny assessment, where the Assessing Officer (AO) ultimately assessed income at Rs. 18,89,75,632/-, while allowing the claims under Section 10AA and Section 80JJAA.

Subsequently, the CIT(IT&TP) invoked Section 263, alleging that the AO had not made adequate or meaningful enquiries before allowing these deductions and that, therefore, the assessment order was both erroneous and prejudicial to the interests of the Revenue. The assessee appealed against this revisionary order before the Tribunal.

Grounds Raised by the Assessee

The assessee attacked the Section 263 order broadly on the following lines:

  1. Lack of jurisdiction under Section 263: The notice and the order did not satisfy the basic statutory requirements, particularly the dual condition that the assessment must be both “erroneous” and “prejudicial to the interests of the revenue”.

  2. Assessment not erroneous or prejudicial: The AO had completed a full scrutiny under Section 143(3) r.w.s. Section 144C after comprehensive verification of the claims under Section 10AA and Section 80JJAA. Hence, there was no error that caused prejudice to Revenue.

  3. Proper enquiry by AO: The AO had already examined all the aspects now raised in the Section 263 proceedings. Once proper verification was undertaken and a plausible view adopted, the order could not be branded as erroneous.

  4. Contravention of Malabar Industrial Co. Ltd. principle: The assessee contended that the CIT(IT&TP) had failed to show how the assessment order was simultaneously “erroneous” and “prejudicial”. Invoking CBDT Circular No. 14/2014 in the impugned year and characterising the case as one of “lack of enquiry” was unjustified when all material facts and evidence had been filed and accepted during scrutiny.

  5. Allowed deductions cannot be reopened via Section 263 in absence of specific defects: The assessee asserted that exemptions/deductions under Section 10AA and Section 80JJAA, already allowed after detailed verification, could not be used as a ground for revision merely because the CIT(IT&TP) desired more verification or had a different view.

Factual Matrix: Business and Claims

Nature of the Assessee

  • The assessee is a non-resident company incorporated in the USA.
  • It operates in India through a branch – Digital Risk Mortgage Service LLC, India, based in Pune.
  • The Indian branch provides off-shore services to the Head Office and other group entities and constitutes a permanent establishment (PE) in India.

Claims During Assessment

For AY 2020-21, the assessee:

  • Claimed deduction under Section 10AA in respect of its SEZ unit.
  • Claimed deduction under Section 80JJAA for additional employees.

The case was selected for complete scrutiny, explicitly covering the issue:

“Deduction claimed for industrial undertaking u/s 80IA/80IB/80IC/80IE/80ID/80IBA/10A/10AA.”

During scrutiny, the AO:

  • Issued notice under Section 143(2) dated 29.06.2021.
  • Followed up with detailed questionnaires under Section 142(1).
  • Later, issued a specific show-cause notice dated 28.01.2022 focused on the Section 10AA claim.
  • Received detailed replies, including:
    • Unit-wise details.
    • Employee-wise data.
    • Salary particulars.
    • Working days.
    • Movement of employees (including transfer to SEZ unit).

After considering these, the AO accepted the deductions under Section 10AA and Section 80JJAA.

Basis of the Section 263 Revision

The CIT(IT&TP) proceeded under Section 263, primarily on two issues:

  1. Deduction under Section 10AA
  2. Deduction under Section 80JJAA

The key observations of the CIT(IT&TP) were:

Alleged Deficiencies in Section 10AA Examination

The CIT(IT&TP) claimed that the AO:

  • Did not carry out a “comprehensive and meaningful enquiry” into the eligibility of the Section 10AA claim.
  • Failed to call for or examine critical details like:
    • Number of technical employees shifted from the old unit to the SEZ unit.
    • Total technical manpower at the SEZ unit at year end.
    • Proportion of redeployed employees vis-à-vis new hires, in the context of CBDT Circular No. 14/2014.
  • Did not seek supporting documentation such as appointment letters and PF records.