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Lotus Gums and Chemicals Vs. Income Tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Jodhpur
Decided On
Judge
Reported in(2008)116TTJ(Jodh.)542
AppellantLotus Gums and Chemicals
Respondentincome Tax Officer
Excerpt:
.....12th june, 2006 contending that as per amendment in section 80hhc and section 28(iiid), it is the profit on transfer of the depb scheme under the export and import policy that is to be considered as profit. if profit is there, then only the profit component has to be considered and if the loss has been sustained, then nothing short of deduction is permissible as per the plain and simple language of the relevant section. furthermore, the face value of depb is the recoupment of customs duty. incidence of import content of material essentially goes to reduce the cost of material but the same in no manner represents profit on transfer of depb. the same, therefore, is not required to be excluded by invoking expln. (baa) below section 80hhc(4) of the act. the revenue's stand proposing.....
Judgment:
1. This appeal by the assessee is against the order dt. 17th Sept., 2007 of the learned CIT{A), Jodhpur.

2. Grounds in appeal raised by the assessee in this appeal read as under: 1. The learned CIT(A) has erred in law and in facts in sustaining the impugned order before him made under Section 154 of the Act by the AO as the same was bad in law and bad in facts and also without jurisdiction of the AO framing the impugned order, amongst other, the action was also beyond the purview and powers of Section 154 of the Act.

2. The learned CIT(A) has erred in law and in facts in sustaining the action of the AO in considering the entire sale proceeds of DEPB as an income of the appellant for reworking the deduction under Section 80HHC claimed by the appellant. As a matter of law, it is the notional profit element has to be taken into account and considered for the purpose. Thus the AO's action of making addition of Rs. 32,87,526 was erroneously and unjudicially confirmed by the learned CIT(A). The Tribunal may please cancel the same by allowing the appeal.

3. Briefly stated the facts of the case are that assessment in this case was completed under Section 143(1) of the Act on 17th Feb., 2003 at a total income of Rs. 43,25,970. On perusal of return, the AO noticed that the assessee has received a sum of Rs. 52,18,296 as premium on sale of Duty Entitlement Pass Book (DEPB) credit. It was also found that the export turnover of the assessee exceeded Rs. 10 crores. A show cause notice under Section 154 of the Act was issued on 30th May, 2006 asking the assessee as to why deduction allowed under Section 80HHC on DEPB should not be withdrawn in view of Taxation Laws (Amendment) Act, 2005. In response thereto, the assessee furnished a written reply on 12th June, 2006 contending that as per amendment in Section 80HHC and Section 28(iiid), it is the profit on transfer of the DEPB Scheme under the export and import policy that is to be considered as profit. If profit is there, then only the profit component has to be considered and if the loss has been sustained, then nothing short of deduction is permissible as per the plain and simple language of the relevant section. Furthermore, the face value of DEPB is the recoupment of customs duty. Incidence of import content of material essentially goes to reduce the cost of material but the same in no manner represents profit on transfer of DEPB. The same, therefore, is not required to be excluded by invoking Expln. (baa) below Section 80HHC(4) of the Act. The Revenue's stand proposing withdrawal or reduction of the deduction of the entire transfer value of DEPB is thus misconceived and is contrary to law. The AO also had issued another notice under Section 154 of the Act dt. 24th July, 2006 requiring the assessee to explain as to why deduction allowed under Section 80HHC on DEPB should not be withdrawn in view of Taxation Laws (Amendment) Act, 2005, which was materially the similar notice as was issued originally on 30th May, 2006. This notice also stood replied by the assessee vide its letter dt. 5th Aug., 2006, inter alia contending that the reply furnished through its letter dt. 10th June, 2006 may be considered as reply to this notice. It, however, further stated that the assessee is not required legally to place on record the amount of profit or loss assessed on the sale of DEPB licence as the issue involved is a highly debatable one, though he enclosed a statement showing profit on sale of DEPB licence at Rs. 4,06,911 (copy of calculation thereof is not brought on record of Tribunal). Challenging the validity of notice on the ground that the same is bad in law and that the issue is a debatable one, he requested him to withdraw the notice so issued.

4. The AO, however, taking note of the amendment made retrospectively by Taxation Laws (Amendment) Act, 2005 opined that there was mistake apparent from record which he decided to rectify after considering the assessee's reply. He also found that there is no purchasing cost or any other cost in earning the benefit of DEPB. The assessee himself has claimed the deduction under Section 80HHC of the Act by treating the sale of premium as profit but after the amendment the assessee has changed its stand so as to say that the amount so earned is not profit.

He accordingly amended the assessment and withdrew the entire amount of premium on DEPB taking it to be profit on transfer of DEPB and determined total income at Rs. 76,13,496.

5. The learned CIT(A) found that rectification has been carried out within the powers vested under Section 154 of the Act. Since in order to find out whether there is a mistake apparent on record, the AO has to look to the amended law and not the law that was in force at the time when original order was made. Reliance was placed on the judgment rendered by the Hon'ble apex Court in the case of M.K. Venkatachalam, ITO v. Bombay Dyeing & Manufacturing Co. Ltd. .

Similar view was again pronounced by the Hon'ble Supreme Court in the case of LAC of Agrl. IT v. V.M. Ravi Namboodiripad .

The Hon'ble Supreme Court further affirmed the above view in its decision in the case of Basappa & Bros. v. Dy. CCT 35 STC 1 (SC); CTO v. Venkateshwara Oil Mills 32 STC 660; International Cotton Corporation (P) Ltd. v. CTO 35 STC 1; CWT v. Sheela Devi Goel ; CWT v. Lalchand Singhai ; CIT v. Kelvin Jute Co. Ltd. ; Sahu Govind Prasad v. WTO and CIT was inconsistent with the provisions of subsequent amended law made applicable with retrospective effect from 1st April, 1998 it was held that there was mistake which the AO could rectify under Section 154 of the Act. He also found that in view of Taxation Laws (Amendment) Act, 2005 deduction under Section 80HHC on DEPB is not allowable, particularly when there is no cost of acquisition in respect of DEPB and in fact it was merely an incentive given by the Government for promoting exports. In the return of income filed, the appellant has himself treated the entire amount of DEPB as its profit and after amendment he cannot be allowed to change its stand and terming the issue as debatable. Finding no merit in the grounds in appeal, he dismissed the appeal of the assessee.

6. The learned Counsel for the assessee while assailing the order of the learned CIT(A) contends that the learned CIT(A) has fallen in error in upholding the decision of the assessing authority to make rectification even, though the same was bad in law and the issue was highly debatable which could not have been rectified consequent to processing of return under Section 143(1) of the Act. Reliance has been placed on the judgment of the Hon'ble Supreme Court in the case of T.S.Balaram, ITO v. Volkart Bros. and Ors. . The Taxation Laws (Amendment) Act, 2005 has carried out an amendment by inserting proviso clauses below Sub-section (3) of Section 80HHC with retrospective effect from 1st April, 1998 and also under Expln. (baa) whereby for the purpose of 'profits of business', the profits as computed under the head profits and gains of business or profession have also to be reduced by 90 per cent of any sum referred to in Clause (iiic), Clause (iiid) and Clause (iiie) of Section 28 of the Act. This amendment was made applicable with retrospective effect from 1st April, 1998. Furthermore, Clause (iiid) of Section 28 has also been inserted by Taxation Laws (Amendment) Act, 2005 with retrospective effect from 1st April, 1998 which reads as under: any profit on the transfer of the DEPB Scheme being Duty Remission Scheme, under the export and import policy formulation and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992; It was further contended that a perusal of notice under Section 154 of the Act will reveal that the AO sought to withdraw the whole amount realized on transfer of DEPB whereas the section introduced with retrospective effect from 1st April, 1998 only speaks of the profit on transfer of DEPB Scheme and as such, there was no scope of there beihg any mistake apparent from record which could be rectified under Section 154 of the Act. If was further stated that the expression used in Clause (iiid) of Section 28 is 'any profit' which has so been done expressly because wherever the Parliament intended to tax whole receipt, it has so provided as will be clear from the language of Clause (iiic) of Section 28 where any duty of customs or excise repaid or repayable as drawback to any person has been taken as income for the purpose of s, 28 of the Act.

7. The assessee's counsel also relied upon the articles placed at assessee's paper book pp. 7, 13 and 14. It was contended that the article at p. 7 of assessee's paper book reported in 283 ITR (Journal) 8 is by Shri P.S. Gopalakrishnan who has clearly established that there is a cost element involved in the DEPB entitlement. The rate pre-determined by the Director General of Foreign Trade, based on specific data collected by him, is the attributed cost of the DEPB, because it neutralizes the customs duty paid on the import content of the product manufactured/purchased for export. Profits arising on transfers alone are covered by amended provisions. Sale proceeds of DEPB do not fall under Clause (iiid) of Section 28. The foundation for the deduction under Section 80HHC is the profits of the business. But the IT Department seems to be under the impression that the whole proceeds of the transfer represent profits which ignores the principles of duty drawback scheme as cost element is not visible separately but is merged in the cost of purchase of the imported components. Likewise the articles placed at assessee's paper book p. 13 clearly show that the face value of DEPB, being recoupment of customs duty, incidence of import content of material essentially reduces the cost of material and in any case does not represent profit on transfer of DEPB. Accordingly, the amount thereof is not required to be excluded for the purpose of Section 80HHC of the Act. Had the legislature intended to exclude the entire sales value of DEPB, the words used in Clause (iiid) of Section 28 would have been 'value realized on transfer of DEPB', rather than 'profit on transfer of DEPB'. It was, therefore, contended that the issue became debatable and as such the order being bad in law needs to be quashed.

8. On the other hand, the learned Departmental Representative supports the findings reached by the authorities below and the mistake having been rectified within the powers vested under Section 154 of the Act, the learned CIT(A) cannot be said to have committed any error in upholding the decision of the assessing authority. The assessee, in his reply at paper book pp. 5 and 6 has clearly admitted that there are profits on transfer of DEPB licences, though he agreed at a different amount of Rs. 4,60,911 only. That being so, the assessee cannot be allowed to say that the order passed under Section 154 of the Act is bad in law. As regards the quantum of profit, there being no cost attributable to the acquisition of DEPB licences, the whole amount of sale was to be taken as profit and 90 per cent thereof was to be excluded as per amended provisions of the Act which were applicable retrospectively. The case laws referred to by the learned Authorised Representative are not with respect to profit on transfer of DEPB but the same relate to transfer of licences and shall not be applicable to him whereas the Chandigarh Bench of the Tribunal in Asstt. CIT v.Parker Cycle Industries (2006) 104 TTJ (CM) 983 has entertained a view that the sale proceeds have to be excluded by taking same as 'profits of business' and thus there being no merit in the grounds raised by the assessee the same need to be rejected.

9. We have heard the parties and have also carefully perused the material on record within the meaning of Sub-rule (6) of Rule 18 of ITAT Rules, 1963 and also with reference to precedents cited at Bar.

Sub-section (1) of Section 154 of the IT Act, 1961 (hereinafter referred to as 'the Act') empowers an IT authority to rectify any mistake apparent from record. Clause (a) empowers him to amend any order passed under the provision of the Act, while Clause (b) contained below Sub-section (1) of Section 154 of the Act empowers him to amend any intimation or deemed intimation under Sub-section (1) of Section 143 of the Act which can be so done with a view to rectify any mistake apparent from record.

10. The facts on record reveal that from its income from business, the assessee had excluded the amount received by it on transfer of DEPB which formed part of its profits of business as computed under the head "Profits and gains of business or profession" in terms of Expln. (baa) below Sub-section (4) of Section 80HHC of the Act when it filed its return of income for the year under consideration and that came to be processed under Section 143(1) of the Act on 17th Feb., 2003 as there was no express clause in that regard in the statute at that time.

Subsequent thereto, there has been an amendment by the Direct Tax Laws (Amendment) Act, 2005 with retrospective effect from 1st April, 1998 in Section 80HHC of the Act as well as in Section 28 of the Act whereby the assessees who had their export turnover exceeding Rs. 10 crores during the previous year, the profit computed under Clause (a) or Clause (b) of Sub-section (3) of Section 80HHC or after giving effect to the first proviso contained thereunder was to be increased by the amount which bears 90 per cent of any sum referred to in Clause (iiid) of Section 28 in same proportion as the export turnover bears to the total turnover of the business carried on by him. This was so inserted by further proviso clause below Sub-section (3) of Section 80HHC of the Act. Amendment was also made in Expln. (baa) below Section 80HHC of the Act by substituting Clauses (iiic), (iiid) and (iiie) in place of existing Clause (iiic) of Section 28 in the Act for the purposes of 'profits of business'. The profits of the business are defined under Clause (baa) below Sub-section (4) of Section 80HHC of the Act. The newly inserted Clause (iiid) below Section 28 reads as under: any profit on the transfer of the DEPB Scheme being Duty Remission Scheme, under the export and import policy formulation and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992; 11. All the aforesaid amendments were inserted with retrospective effect from 1st April, 1998. The AO through his notice dt. 30th May, 2006 as well as notice dt. 24th July, 2006 sought to amend the intimation given under Section 143(1) of the Act for the year under consideration made on 17th Feb., 2003 for the reason of amendment made by the Taxation Laws (Amendment) Act, 2005. As per this amendment, the income from business that is to be charged to income was to include any profit on transfer of DEPB in terms of Clause (iiid) of Section 28 of the Act. Furthermore, 90 per cent of such profits on transfer of DEPB were to be reduced from the profits of business as computed under the head 'Profits and gains of business or profession' in terms of Expln.

(baa) below Section 80HHC of the Act and in the case of assessees having turnover exceeding Rs. 10 crores, the deduction under Section 80HHC was to be given by having resort to further proviso clause inserted below Sub-section (3) of Section 80HHC of the Act. The assessee's claim in the return under Section 143(1) was accepted which was not conforming to the amended provisions. The particulars of mistake proposed to be rectified were to withdraw the deduction allowed under Section 80HHC of the Act on DEPB received by the assessee. Under the peculiar facts of this case, it can be seen that at the time when the AO invoked action under Section 154 of the Act, he found that there was a mistake of law committed by him at the time of processing the return under Section 143(1) of the Act on 17th Feb., 2003. The mistake of law was so because at the time when he invoked his powers under Section 154 of the Act an amendment has been brought in the statute with retrospective effect from 1st April, 1998 so as to cover the year under consideration as well. There can be no doubt to the effect of the retrospective operation of the amended Act as the amendments inserted by the Taxation Laws (Amendment) Act, 2005, in Section 80HHC as well, as under Section 28 of the Act would, for all legal purposes have to be deemed to have been included in the Act as from 1st April, 1998 and the assessee's income having been accepted under Section 143(1) of the Act.

Without having considered such an amendment constituted a mistake of law apparent from the record which gave jurisdiction under Section 154 of the Act to the extent permissible under law since what the AO was doing is that he was exercising his powers under Section 154 of the Act for such mistake of law which was apparent from record. If the mistake of fact can be rectified, we see no reason as to why mistake of law which was apparent from record by virtue of amendment made by the Taxation Laws (Amendment) Act, 2005 with retrospective effect from 1st April, 1998 could not be rectified under Section 154 of the Act, of course the rectification has to be done within the scope of scheme of the Act. This view finds support from the judgment rendered by the Hon'ble apex Court in the case of M.K. Venkatachcdam v. Bombay Dyeing & Manufacturing Co. Ltd. (supra).

12. The contention of the assessee's counsel that the legislature in Clause (iiid) of Section 28 of the Act has used the expression 'any profit on the transfer of DEPB Scheme' and that makes the issue debatable in case the amount of receipt on the transfer of DEPB Scheme is treated as income for the purpose of Section 28 as well as profits of business for the purpose of Section 80HHC of the Act and as such, the debatable issue do not give jurisdiction to the assessing authority to make rectification under Section 154 of the Act in view of the judgment rendered by the Hon'ble apex Court in the case of T.S.Balaram, ITO v. Volkart Bros. (supra). Though agreeing that the debatable issues are outside the scope of jurisdiction in making rectification under Section 154 of the Act, we, however, do not find that under the peculiar facts of the appellant's case there can be any debate in the case of appellant inasmuch as no expenditure on transfer of DEPB Scheme is shown to have been incurred in the books of account maintained for the purpose of business carried on by the assessee on the basis of which it computed deduction under Section 80HHC of the Act. The rate of DEPB predetermined by the Director General of Foreign Trade for neutralizing burden of the customs duty paid on the import content of the product manufactured/purchased for export or the Government gave an incentive with the objective of (i) to double percentage share of global merchandise trade within the next five years and (ii) to act as an effective instrument of economic growth by giving a thrust to employment generation, may be relevant for allowing the credit under the DEPB Scheme, but the same would not govern/override the provisions of the IT Act. It is for the appellant to show that the cost so attributed was factually incurred or stands duly accounted for in the books of account to the DEPB Scheme account by reducing the same from the cost of inputs claimed for deducing profits and gains of business. On notional basis alone, the cost cannot be attributed to DEPB account so as to work out the profits on transfer after giving deduction of same expenditure in deducing profits and gains of business as well. Such attribution or allocation having not been done by the assessee and the whole amount paid towards input costs of material having separately been claimed as deductible expenditure in deducing the profits and gains of the business, the amount of receipt that the appellant received has necessarily to be taken as its profit on transfer of DEPB Scheme which constituted its income within the meaning of Sections 28 and 29 of the Act as also the appellant himself treated it as its profit in terms of uncontroverted findings reached by the authorities below. There being thus no debate as canvassed by the assessee appellant, we find it difficult to hold that the issue on the basis so canvassed can be debatable and decline to interfere with the decision on that basis.

13. Having come to the conclusion that there has been a mistake of law, we find that in the present case in appeal there was no order passed under IT Act that could be a subject-matter of amendment under Section 154(1)(a) of the Act. As the return of income was processed under Section 143(1)(a) of the Act, the AO though had powers to amend the intimation or deemed intimation under Section 143(1) of the Act but when we refer to the provisions of Section 143(1) of the Act, for the year under consideration, we find that there was no scope of making any adjustment or amendment in the returned income even if the appellant had claimed a deduction contrary to the provisions of law applicable at the relevant time. What he could do under Section 143(1) is only to specify the sums found payable in case tax or interest is found due on the basis of return filed by the assessee and in case there was any refund due on the basis of such return, the same has to be granted to the assessee. There was, thus, no scope of snaking any adjustment or amendment of the income disclosed through return made under Section 139 or in respect of notice under Section 142(1) of the Act even though the assessee in rectification proceedings had given in writing that the profit on sale of DEPB could at best be Rs. 4,60,911 only. In that view of the matter, the AO was precluded from making any amendment in the intimation under Section 143(1) of the Act even though there was a mistake of law or fact in claiming deduction under Section 80HHC of the Act, more so, when whatever cannot be done directly cannot legally be done indirectly also. This view finds support from the judgment rendered by the Hon'ble Allahabad High Court in the case of Anupam Sushil Garg v. CIT as under: There is another aspect of the matter that under the garb of rectification, the appellant cannot have an opportunity of review of the order passed earlier in the absence of any provisions for substantive review under the said provisions of law.

It is a settled proposition of law that what cannot be done 'per directum is not permissible to be done per obliquum, meaning thereby, whatever is prohibited by law to be done, cannot legally be affected by an indirect and circuitous contrivance on the principle of 'quando aliquid prohibetur, prohibetur at omne per quod devenitur ad illud'.In Jagir Singh v. Ranbir Singh observed that an authority cannot be permitted to evade a law by 'shift or contrivance'. While deciding the said case, the Supreme Court placed reliance on the judgment in Fox v. Bishop of Chester (1824) 2 B&C 635, wherein it has been observed as under: To carry out effectually the object of a statute, it must be construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous manner that which it has prohibited or enjoined.

Law prohibits to do something indirectly which is prohibited to be done directly. Similar view has been reiterated by the apex Court in M.C. Mehta v. Kamal Nath AIR 2000 SC 1997, wherein it has been held that even the Supreme Court cannot achieve something indirectly which cannot be achieved directly by resorting to the provisions of Article 142 of the Constitution, which empowers the Court to pass any order in a case in order to do 'complete justice'.

Applying the above principle, we hold that the AO could not have exercised his power under Section 154 of the Act to amend an Intimation under Section 143(1) of the Act with regard to a matter which he could not do or process under Section 143(1) of the Act itself. The learned CIT(A), therefore, is found to have erred in upholding the action of the assessing authority which we hereby set aside and allow the ground in appeal raised by the assessee.


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