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Bansal Impex Vs. Commissioner of Income Tax - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(2008)115TTJ(Delhi)906
AppellantBansal Impex
RespondentCommissioner of Income Tax
Excerpt:
.....deduction under section 80-ia/ib of the act is to be reduced and on the balance amount of business profit, deduction under section 80hhc is to be computed. as the ao has allowed the deduction under section 80hhc, and section 80-ib on the profit shown by the assessee, meaning thereby without reducing therefrom the deduction allowed under section 80-ib, the cit held that order of the ao was erroneous insofar as prejudicial to the interest of the revenue. accordingly, the assessee was asked to show why the assessment made by the ao should not be enhanced.subsequently, the order under section 263 was passed, wherein in addition to revise computation of deduction under section 80-ib, the cit also declined deduction in respect of income from depb credits, on the plea that assessee was not.....
Judgment:
1. This is an appeal filed by the assessee against the order of learned CIT, Moradabad dt. 31st March, 2005 for asst. yr. 2001-02, in the matter of order passed under Section 263 of the IT Act, 1961.

The CIT, Moradabad (hereinafter referred to as the learned CIT) has erred both in relation with the facts and features of the case of the appellant/assessee firm as well as in relation with the law (read with the relative ruling pronounced by the competent Courts) while initiating impugned proceedings under Section 263 vide notice dt. 27th Jan., 2005 and while issuing order under Section 263 dt.

31st March, 2005 wherein: (1) Deductions under Sections 80HHC and 80-IB have been directed to be restricted by provisions of Sub-section (9A) of Section 80-IA which was non-existent in law, whereby desiring deduction under Section 80HHC to be computed/allowed with reference to resultant 'Income from business' after reducing deduction under Section 80-IB. that too without discussing and/or countering the merits or otherwise of the arguments especially the rulings of the competent Courts cited and relied upon by the appellant/assessee firm in its reply dt. 28th March, 2005, whereas factually the order under Section 143(3)(i) dt. 21st April, 2003 was issued after selective scrutiny process under Section 143(2)(i) specifically for deduction under Section 80-1B. (2) Deduction under Section 80-IB has been directed to be not admissible on duty drawback and incentives, that too without granting any opportunity not to talk of reasonable, as also without raising said issue in the impugned notice under Section 263.

(3) Deduction under Section 80HHC has been directed to be not admissible on the fictional premise that profits from export business are not positive (after reducing export incentives), which defies the stipulated formulae under the said section, that too without granting any opportunity, not to talk of reasonable, as also without raising said issue in the impugned notice under Section 263.

(4) Therefore, the impugned notice, proceedings as well as order under Section 263 are bad in law, and therefore, prayed to be quashed as void ab initio.

(5) The appellant prays for grant of permission to add/alter/insert/ modify/rectify/withdraw suitably any part of the grounds of appeal at any time before or during the course of hearing of this appeal.

3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in the business of manufacture and export of handicrafts. It filed its return at nil wherein deduction was claimed under Sections 80HHC and 80-IB of the IT Act, 1961. In the course of assessment under Section 143(3), the AO stated that besides claim of deduction under Section 80HHC, the assessee had for the first time claimed deduction under Section 80-IB. Since this claim of deduction was not supported by any documentary evidence, the AO stated that it appears to be inadmissible. Accordingly, notice under Section 143(2) was issued. The AO further stated that necessary documents were filed in support of claim of deduction under Section 80-IB. After discussing with the assessee, the AO stated that the claim of deduction under Section 80-IB appears to be admissible, hence allowed. The assessment was completed at nil income as shown by the assessee. There was no discussion in the assessment order as to computation of deduction under Section 80-IB of the Act as well as Section 80IIHC of the Act. Subsequently, CIT issued notice under Section 263 of the Act wherein he stated that AO has accepted the claim of deduction under Sections 80-IB and 80HHC of the Act on the figures mentioned by the assessee. As per CIT, the deduction under Section 80HHC is to be allowed on the business profit after reducing therefrom deductions allowed under Section 80-IB of the Act. He referred to the provisions of Sub-section (13) of Section 80-IB and Sub-section (9A) of Section 80-IA of the Act, according to which for computing deduction under these sections, the portion of profit on which the assessee has claimed deduction under Section 80-IA/IB of the Act is to be reduced and on the balance amount of business profit, deduction under Section 80HHC is to be computed. As the AO has allowed the deduction under Section 80HHC, and Section 80-IB on the profit shown by the assessee, meaning thereby without reducing therefrom the deduction allowed under Section 80-IB, the CIT held that order of the AO was erroneous insofar as prejudicial to the interest of the Revenue. Accordingly, the assessee was asked to show why the assessment made by the AO should not be enhanced.

Subsequently, the order under Section 263 was passed, wherein in addition to revise computation of deduction under Section 80-IB, the CIT also declined deduction in respect of income from DEPB credits, on the plea that assessee was not having positive profit from the business as defined in Clause (baa) of Explanation to Section 80HHC(3) of the Act. He found that the assessee has suffered loss of Rs. 53.91 lacs; this loss cannot be converted into profit by adding 90 per cent of export incentives as per proviso to Section 80HHC(3)(c) of the Act.

After referring to the decision of Hon'ble Supreme Court in case of IPCA Laboratory Ltd. v. Dy. CIT , he declined deduction of export incentives, in view of assessee having negative income. Accordingly, the CIT held that order passed by the AO was erroneous insofar as prejudicial to the interest of Revenue, the same was cancelled and AO was directed to make fresh assessment de novo after providing reasonable opportunity of being heard.

4. Aggrieved by the above order of the CIT under Section 263, the assessee approached us for further adjudication. It was argued by learned Authorised Representative that CIT has directed for restricting deduction under proviso to Sub-section (9A) of Section 80-IA which was non-existence in law. He referred certain decisions of the Tribunal in which deduction was allowed under Section 80-IB without reducing the deduction allowed under Section 80HHC out of the eligible business profit. He also relied on the decision of Hon'ble Supreme Court in case of Madideep Engg. & Packaging (India) (P) Ltd. 163 ITR 337 [sic-correct citation is Jt. CIT v. Mandideep Eng. & Pkg. Ind. (P) Ltd. and the decision of Hon'ble Allahabad High Court in case of CIT v. Lucky Laboratories Ltd. (2006) 200 CTR (All) 305 : (2005) 149 Taxman 273 (All. Reliance was also placed on the decision of the Tribunal, Delhi Bench in the case Dy. CIT v. Eltek Sgs (P) Ltd. (2006) 10 SOT 178 (Del) and Tribunal Bangalore Bench in the case Mittal Clothing Co. v. Dy. CIT (2005) 4 SOT 626 (Bang).

5. In support of the proposition that mere brief order of the AO cannot turn it to be erroneous and prejudicial to the interest of the Revenue, he relied on the decision of the Tribunal, Delhi Bench in Motilal Bimalchand Jain (HUF) v. CIT (2006) 201 CTR (Del) 150 : (2006) 150 Taxman 13 (Del), wherein it was held that writing an order in detail may be a legal requirement, but order not fulfilling this requirement cannot be said to be erroneous and prejudicial to the interest of Revenue. Reliance was also placed on the decision of the Tribunal, Delhi Bench in case of Eureka Sales Corporation v. Asstt. CIT (2005) 1 SOT 490 (Del), in support of the proposition that wherein in earlier years deduction under Section 80HHC was allowed on export profit as computed by the assessee as per mode specified in Section 80HHC(3)(b) of the Act which was a possible view, assessment order adopting such possible view in the year under consideration could not be said to be erroneous, therefore, CIT has no jurisdiction to invoke Section 263 of the Act.

6. On the other hand, learned Departmental Representative relied on the various decisions referred by CIT in his order under Section 263 and submitted that AO has not applied his mind nor given any reasoning for allowing claim of deduction under Section 80-IB without referring to Sub-section (13), which has rendered the order of the AO erroneous and prejudicial to the interest of Revenue. Accordingly, he supported the order passed by the CIT under Section 263 of the Act.

7. We have considered the rival contentions, carefully gone through the orders of the authorities below and also deliberated on various case law referred by CIT in his order under Section 263 as well as cited by the learned Authorised Representative during the course of hearing before us in the context of factual matrix of the case. A bare reading of provisions of Section 263 makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue.

If one of them is absent--if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue--recourse cannot be had to Section 263(1).

There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO. However an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act.

Understood in its ordinary meaning it is of wide import and is not confined to loss of tax.

8. Applying the scope of Section 263 to the facts and circumstances of the instant case we found that while passing the order the AO has not applied the correct provisions of the Act as prevailing during the relevant assessment year under consideration. From the record, we found that in the instant case assessment was framed by the AO under Section 143(3) dt. 21st April, 2003, wherein assessee's claim for deduction under Sections 80HHC and 80-IB was allowed on the veiy same figure as claimed by the assessee. Return of income at nil was accepted without discussing the allowability of assessee's claim under Section 80-IB which was filed for the first time. The AO has also not discussed assessee's allowability with respect to various incentives received by him, while computing deduction under Section 80HHC. The order of the AO appears to be non-speaking and is silent on these aspects. Thus it can be said that order of the AO was erroneous insofar as prejudicial to the interest of Revenue. Now we will discuss the merits of the order passed by CIT under Section 263:. From the record, we found that in the return of income, the assessee has claimed deduction under Sections 80-IB and 80HHC on the business income of Rs. 14.43 lacs. The AO has allowed the deduction so claimed. The CIT in his order under Section 263 observed that as per provisions of Section 80-IA(9) and Section 80-IB(13), deduction under Section 80HHC is to be computed on the eligible business profit after reducing therefrom the portion of profit on which deduction has been availed by the assessee under this section.

9. As per provisions of Section 80-IA(9)/80-IB(13), where any amount of profit of an undertaking is claimed and allowed under this section, the deduction to the extent of such profit and gains shall not be allowed under any other provisions of this chapter under the head 'C-Deduction in respect of certain incomes', and shall in no case exceed the profit and gains of such eligible business of undertaking.

10. Under Section 80-IA of the Act, deduction is allowable in respect of profit and gains from industrial undertaking engaged in infrastructure development etc., equal to 100 per cent of profit and gains derived from such business for ten consecutive assessment years.

Sub-section (9) provides for computation procedure which clearly provides that deduction to the extent of such profit and gains shall not be allowed under other provisions of Chapter VI-A on which the assessee has claimed and allowed deduction under Section 80-IA. There exists no ambiguity in the mandate of the statute in the context of Section 80-IA(9). The subscription of section makes it very clear that where any amount of profit and gains is claimed and allowed under Section 80-IA for any assessment year, deduction to the extent of such profit and gains shall not be allowed under any other provisions of Chapter VI-A. The condition laid down in Sub-section (9) is a mandatory condition for availing the deduction. As per Sub-section (13) of Section 80-IB, the provisions of Sub-section (5) and sub Sections (7) to (12) of Section 80-IA shall apply to the eligible business under this section. Thus, in view of the specific restrictions provided under Section 80-lA(9), the definition of business profit as contained in Clause (baa) to Section 80HHC(ivc) has to be constituted in the light of restrictions.

11. Most of the case law cited by the learned Authorised Representative are in the context of provisions of Section 80-1 and not under Section 80-IA of the Act. As there was no such restrictions in Section 80-1, the various Benches of the Tribunal as well as High Courts have consistently taken the view that while computing deduction under Section 80-I, eligible profit is not to be reduced by any other deduction claimed and allowed under Chapter VI-A. In the case of Mandideep Engg. & Packaging (I) (P) Ltd. (supra) decided by Hon'ble Supreme Court on which heavy reliance was placed by the learned Authorised Representative, we found that controversy was with respect to deduction claimed under Section 80-1 and not under Section 80-IA of the Act wherein it was held that both the provisions of Sections 80HHC and 80-IA are independent of each other, therefore, new industrial unit can claim deduction under both the sections on gross total income independently. Furthermore, other cases relied on by the learned Authorised Representative have been dealt with by the Tribunal, Special Bench in case of Asstt. CIT v. Rogini Garments in ITA No. 963/Mad/2005 vide order dt. 27th April, 2007 [reported at (2007) 111 TTJ (Chennai)(SB) 274], wherein it was held that there is no ambiguity in Section 80-IA to the effect that deduction claimed and allowed under Section 80-IA should be deducted from the profits and gains of business before computing relief under Section 80HHC of the Act. The Hon'ble Rajasthan High Court in case of CIT v. Ruchi Ram & Sons clearly held that Sub-section (9A) has been inserted in Section 80-IA w.e.f. 1st April, 1999, therefore, while dealing with the asst. yr. 1995-96, this restriction was held to be not applicable.

In the instant case before us, relevant asst. yr. is 2001-02, therefore, there is no reason for not applying the provisions of Sub-section (9) of Section 80-IA which is very much clear and unambiguous.

12. In view of the above discussion, keeping in view the decisions of the Rajasthan High Court and Tribunal, Special Bench as discussed hereinabove, we do not find any reason to interfere in the directions of CIT for allowing deduction under Section 80HHC of the Act on the amount of eligible profit, after reducing therefrom the deduction allowable under Section 80-IB. I 13. With reference to claim of deduction on duty drawback under Section 80-IA, Hon'ble Delhi High Court in case of CIT v. GB Exports Ltd. had held that duty drawback on exports flowing under the scheme formulated by the Government does not amount to profit and gains derived from industrial undertaking. This gain arises to the assessee on the scheme for refund of duty drawback. Therefore, deduction under Section 80-1 is not allowable on the amount of duty drawback. Similar view has been taken by Hon'ble Delhi High Court in case of CIT v. Ritesh Industries . In case of Nahar Exports Ltd. v. CIT , Hon'ble Punjab & Haryana High Court held that deduction under Section 80-IA is not eligible on income from sale of import licenses. Hon'ble Madras High Court in the case of CIT v. Jameel Leathers & Uppers held that cash assistance, duty drawback and import license nomination premium is not eligible for deduction under Sections 80HH and 80J of IT Act, 1961. No contrary decision of any High Court was brought to our notice by the learned Authorised Representative which supports the contention that duty drawback and other incentives are eligible for deduction under Section 80HH/80-I/80-IB of the Act. Keeping in view submission of learned Authorised Representative that CIT had not allowed proper opportunity to the assessee before directing the AO to decline deduction on such incentive, in the interest of justice we direct the AO to allow due opportunity to the assessee before deciding these issues de novo.

14. So far as allowability of deduction on DEPB credits, while computing deduction under Section 80HHC is concerned, in view of insertion of 5th proviso to Section 80HHC, we are inclined to agree with learned Authorised Representative that there is no merit in the action of CIT for directing the AO to decline deduction with respect to DEPB income.

15. We have considered rival contentions. With regard to learned CIT(A)'s action for not allowing deduction with reference to the incentive received by the assessee and claimed under proviso to Section 80HHC(3) we found that because of the insertion of 5th proviso to Section 80HHC(3) by Taxation Laws (Amendment) Act 2005, with retrospective effect from 1st April, 1998, the assessee cannot be declined deduction. The said amendment has now been introduced by Taxation Laws (Amendment) Act, 2005, which has received the assent of the President of India on 28th Dec, 2005. The following amendment was made with retrospective effect from 1st April, 1998: (A) after the proviso, the following provisos shall be inserted and shall be deemed to have been inserted, w.e.f. 1st day of April, 1998, namely: Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this Sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiid) or Clause (iiie), as the case may be, of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this Sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiid) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,-- (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this Sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiie) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,-- (a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme.

Explanation--For the purposes of this clause, 'rate of credit allowable' means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government; (B) after the fourth proviso as so inserted, the following proviso shall be inserted and shall be deemed to have been inserted w.e.f.

the 1 day of April, 1992, namely: Provided also that in case the computation under Clause (a) of Clause (b) or Clause (c) of this Sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of-- (a) any sum referred to in Clause (iiia) or Clause (iiib) or Clause (iiic), as the case may, or (b) any sum referred to in Clause (iiid) or Clause (iiie), as the case may be, of Section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee' (ii) in the Explanation occurring at the end, w.e.f. the 1st day of April, 1998-- (I) in the proviso to clause (books of accounts), for the word, brackets, figures and letter 'and (iiic)', the brackets, figures, letters and word '(iiic), (iiid) and (iiie)' shall be substituted and shall be deemed to have been substituted; (II) in Clause (baa), in Sub-clause (I), for the word, brackets, figures and letter 'and (iiic)', the brackets, figures, letters and word '(iiic), (iiid) and (iiie)' shall be substituted and shall be deemed to have been substituted'.

16. As this amendment was not in the statue book when CIT directed the AO to decline deduction with reference to such incentive under Section 80HHC, we therefore set aside this direction of CIT and direct the AO to give due cognizence to the above amended provision while recomputing deduction under Section 80HHC.17. In the result, the appeal of the assessee is allowed in part, in terms indicated hereinabove.


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