Income Tax Appellate Tribunal - Delhi
Mkr Frozen Food Exports Ltd.,, vs Assessee on 16 February, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'H' DELHI
BEFORE SHRI K.G. BANSAL AND SHRI GEORGE MATHAN
ITA No. 2411(Del)/2004
Assessment year: 1998-99
MKR Frozen Food Exports Ltd., Income-tax Officer,
80, M.M. Janpath, New Delhi. Vs. Ward 6(1), New Delhi.
(Appellant) (Respondent)
Appellant by : Shri Salil Aggarwal &
Shri Gautam Jain, Advocate
Respondent by : Smt. Surbhi Verma Garg, Sr. DR
ORDER
PER K.G. BANSAL : AM This appeal emanates from the order of the CIT(Appeals)-IX, New Delhi, passed on 22nd April, 2004 in Appeal No. 214/2003-04 and it pertains to assessment year 1998-99. The corresponding assessment order was framed by the Income-tax Officer, Ward 6(1), New Delhi, on 31.12.2003 under the provisions of section 147 of the Income-tax Act, 1961 ('the Act' for short). The assessee has taken up four grounds in the appeal, in which making of the assessment u/s 147 and taxation of interest income under the head "income from other sources" were challenged. Ground nos. 2,3 and 4 regarding the merits of taxation of interest income were substituted by one ground vide letter dated 16.2.2009, which reads that the ld. CIT(Appeals) has erred both on 2 ITA No. 2411(Del)/2004 facts and in law in upholding the action of the AO for taxation of interest income of Rs. 16,49,441/- under the head "income from other sources", instead of holding that the same was eligible for set off against the expenditure incurred on interest of Rs. 19,60,038/- while computing the profits of business of 100% Export Oriented Unit ('EOU' for short) of the assessee company. The assessee also moved an additional ground vide letter dated 15.11.2007 to the effect that the order of assessment framed by the AO is without jurisdiction as no notice u/s 143(2) of the Act was issued and served after the assessee had filed the return of income in pursuance of notice u/s 148.
1.1 In regard to the additional ground, it was submitted by the ld. counsel for the assessee that all the facts are available on file and it is purely a question of law. It was stressed that no new fact is required to be brought on record. Therefore, it was argued that the ground should be admitted in view of the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. ('NTPC' for short ) Vs. CIT (1998) 229 ITR 383. The ld. DR opposed the ground by submitting that such a notice had been issued to the assessee, as can be seen from the assessment record. We have considered the facts of the case and 3 ITA No. 2411(Del)/2004 rival submissions. It becomes clear from the submissions of the ld. counsel that all the facts are available on record and no new fact is required to be found for giving a finding on this ground. In the case of NTPC, the Hon'ble Supreme Court mentioned at page 387 that the view that the Tribunal has to confine itself only to issues arising out of the appeal before the CIT(Appeals) takes too narrow a view of the powers of the Tribunal. Undoubtedly, the Tribunal will have the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. Thus, it is clear that the Tribunal can entertain a new ground, more particularly when it is only a question of law although the discretion is vested in the Tribunal in this regard. In view of this, the ld. counsel was required to state as to why such a ground was not taken before the ld. CIT(Appeals) or this fact was not mentioned before the AO in the course of assessment proceedings u/s
147. It was submitted that the assessee was unaware of the correct position of law in this behalf, which became clear only after insertion 4 ITA No. 2411(Del)/2004 of clause (b) to the proviso to section 148 by Finance Act, 2006, retrospectively with effect from 1.10.1991. We have considered this submission also. There is no evidence on record by way of affidavit etc. to support the aforesaid submission of the ld. counsel. Further, the additional ground was taken up 15 months after the aforesaid Finance Act was enacted and there is no explanation on record for the delay thereafter. Nonetheless, since it is purely a question of law to be decided on the basis of facts available on record, the ground is admitted for adjudication in the interest of justice.
2. Ground no. 1 is that the ld. CIT(Appeals) erred in upholding the reopening of the assessment u/s 147 of the Act. It was prayed that the assessment made thereafter may be cancelled.
2.1 The facts in this regard are that the return of income was filed on 28.11.1998 declaring nil income. The same was processed u/s 143(1)(a) on 26.4.1999 at nil income as declared. An order u/s 154 was passed on 28.5.1999, in which the income was assessed at Rs. 16,49,441/-, being interest on the fixed deposits. This order was rectified u/s 154 on 21.10.1999 assessing the income at nil by holding 5 ITA No. 2411(Del)/2004 that there was no evidence on record to deny exemption u/s 10B on the interest income. This rectification order was made on the basis of two letters dated 4.10.1999 and 7.10.1999 filed by the assessee to the effect that the assessee is an EOU. Thereafter, the AO recorded reasons for making assessment u/s 147 on 17.3.2003, which read as under:-
"M K R Frozen Food Exports Ltd.- A.Y: 1998-99 17.3.2003 The assessee is engaged in the business of Export of Frozen Foods and meals. The profit from business is claimed exempt u/s 10B. During the year under consideration the assessee received interest of Rs.. 16,49,441/-, which is adjusted against interest paid by assessee. The method shown by assessee is not correct. The assessee should have credited all interest income and debited interest paid by it. The interest income cannot be formed as part of export turnover for the purpose of deduction u/s 10B. Therefore, the interest received on FDR's is to be assessed as income from other sources. In view of above, I have reason to believe that income of Rs. 16,49,441/- has escaped assessment. Letter to Addl. CIT,Range-6 soliciting approval u/s 151 for issue of notice u/s 148 is issued."
2.2 Approval to issue notice u/s 148 was also obtained from the Additional Commissioner of Income-tax and such approval was recorded in the note-sheet on 21.03.2003.
6 ITA No. 2411(Del)/20042.3 The ld. counsel submitted that issuance of notice u/s 148 in this case did not require the approval of the Additional CIT. However, it was argued that signatures appended to the reasons recorded and supplied to the assessee were different from the signatures in the assessment order. Thus, his case was that the reasons were not recorded by the AO and the notice u/s 148 is required to be cancelled on this very ground. In reply, the ld. DR submitted that the argument of the ld. counsel is totally misconceived for the simple reason that the AO had not only recorded the reasons on 17.3.2003 but also had taken approval of the Additional Commissioner on or before 21.3.2003. Coming to the difference in signatures, it was her case that the assessment order carried full signatures while the recorded reasons were initialed by the AO.
2.4 We have considered the submissions made by both the parties in this behalf. We have also perused the signatures on assessment order and in the reasons recorded by the AO. On prima facie perusal of these two signatures, we are of the view that they have been made by the same person, being full in the assessment order and in initial in the recorded reasons. However, we qualify our aforesaid observation 7 ITA No. 2411(Del)/2004 by stating that we are not handwriting experts and it is only our prima facie view. The ld. DR had also mentioned that the AO had obtained approval of the Additional Commissioner before 21.3.2003 and, thus, there is no scope or occasion to argue that the note was not initialed by the AO. We agree with her in this matter because such an approval could not have been obtained without forwarding the reasons to the Additional Commissioner although, as mentioned earlier, such an approval was not required in law. Notwithstanding the aforesaid observation, we also mention that all acts done in discharge of official duty are assumed to be done in regular course unless proved otherwise, and the onus of such proof is on the party which disputes the fact. Apart from making only a verbal submission, no evidence was brought on record by way of opinion of hand-writing expert, report of hand-writing expert, record from the additional CIT etc. Therefore, we have no reason whatsoever to agree with the ld. counsel that this note was not initialed by the AO. Further, only initialing the note is sufficient for the purpose of the Act so as to assume jurisdiction. Therefore, this argument is dismissed.
8 ITA No. 2411(Del)/20042.5 Coming to validity of issuance of notice u/s 148, it was submitted that the AO had processed the return of income at nil income. Thereafter, the income was revised u/s 154 to Rs. 16,49,441/- on 28.5.1999. The income was finally reduced to nil on 21.10.1999. Nothing happened between 21.10.1999 and 17.3.2003 as no further material came to the possession of the AO. Therefore, the notice was issued merely on change of opinion, which is not permissible in law. In this connection, reliance was placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Kelvinator of India Ltd. (2002) 256 ITR 1. This decision of the Hon'ble Delhi High Court was affirmed by the Hon'ble Supreme Court in CIT Vs. Kelvinator of India Ltd. (2010) 320 ITR
561. In this very connection, reliance was also placed on the decision of Hon'ble Delhi High Court in the case of Techspan India (P) Ltd. & Another Vs. ITO (2006) 283 ITR 212. It was further submitted that the AO has used the sentence "The interest income cannot be formed as part of export turnover for the purpose of deduction u/s 10B" in the reasons. Admittedly, interest income and export turnover are two different species of income and, therefore, this sentence shows that the AO did not apply his mind while recording the reasons. It was also submitted that section 10B(4) was amended by Finance Act, 2001, with 9 ITA No. 2411(Del)/2004 effect from 01.04.2001 for the purpose of computing the profits derived from export of articles or things or computer software in a manner similar to the manner provided in section 80HHC. This amendment is not applicable to the case of the assessee as the assessment pertains to assessment year 1998-99. The concept of the turnover was brought in this section by the aforesaid amendment. Prior to that, such a concept was not there. Therefore, the law of a wrong year has been applied while recording reasons, which cannot be done, as held by Hon'ble Bombay High Court in the case of Siemens Information Systems Ltd. Vs. ACIT & Others (2007) 293 ITR 548. It was also submitted that in deciding whether jurisdiction was properly assumed for issuance of notice u/s 148, the only thing to be seen is the reasons recorded before issuing the notice. When these reasons are examined, it is found that they could not have led to "reason to believe" that the income has escaped assessment.
2.6 In reply, the ld. DR relied on the decision of Hon'ble Supreme Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500, in which it was inter-alia held that there cannot be formation of any opinion when a return is processed u/s 143(1)(a) 10 ITA No. 2411(Del)/2004 and, thus, there is no question of change of opinion when reasons are recorded for making assessment u/s 147. It was further submitted that there were other reasons for reopening the assessment, as mentioned by the ld. CIT(Appeals) in his order. In the order for assessment year 2001-02, the AO took a stand that interest received by the assessee from the fixed deposits was taxable under the residuary head and, thus, deduction u/s 10B was not applicable to such income. This view was confirmed by the CIT(Appeals) in order dated 3.3.2003 in Appeal no. 112/2002-03. This order of the ld. CIT(A) constituted information for the AO on the basis of which he recorded reasons for this year on 17.3.2003. In the light of these facts, it was argued that the reopening was justified in the light of the decision of Hon'ble Supreme Court in the case of Indian & Eastern Newspaper Society Vs. CIT (1979) 119 ITR 997 and Kalyanji Mavji &Company Vs. CIT (1976) 102 ITR 287.
2.7 In the rejoinder, the ld. counsel submitted that the factum of receipt of the appellate order for assessment year 2001-02 has not been mentioned in the reasons. The order passed by the AO u/s 154 on 21.10.1999 shows the application of mind as it was mentioned that as per 11 ITA No. 2411(Del)/2004 record there is no evidence to deny exemption u/s 10B to the assessee.
2.8 We have considered the facts of the case and submissions of both the parties. The first issue in this case is-whether, there was application of mind by the AO at the time of processing the return of income or passing order u/s 154 on 21.10.1999? In the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra), it was held that "intimation" and "assessment" are two different concepts. No opportunity of being heard is to be given to the assessee while processing the return u/s 143(1)(a) as the AO has to proceed to accept the return and make only permissible adjustments. Therefore, there is no formation of opinion when a return is processed u/s 143(1)(a). The subsequent orders passed by the AO u/s 154 on 28.5.1999 and 21.10.1999 have to be examined in the light of the fact that income determined on processing of the return was sought to be revised. What could not be done u/s 143(1) could also not be done u/s 154 while rectifying that order. Therefore, order was passed on 21.10.1999 as rectification made on 28.5.1999 was beyond the scope of adjustments, as it could not be u/s 143(1)(a). Merely mentioning that there is no evidence to deny exemption u/s 10B does not lead to an inference that there was application of mind for the 12 ITA No. 2411(Del)/2004 simple reason that in the context of what has been stated earlier, there could have been no application of mind as the processing of the return was made in accordance with law. Therefore, we are of the view that the order dated 21.10.1999 cannot lead to an inference that the AO considered the matter and allowed deduction u/s 10B in respect of interest income. Having held so, the facts of the case are now in pari-materia with the facts of the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra), in which it was inter-alia held that if the AO has reason to believe that the income escaped assessment, he will be justified in doing so in respect of income determined u/s 143(1)(a), and the concept of "change of opinion" will not stand in his way if the condition of "reason to believe" is satisfied. With these preliminary remarks, we may examine other submissions of rival parties by taking into account the case law under existing and the pre-existing provisions in the matter.
2.9 The relevant law applicable in the case of Indian & Eastern Newspaper Society (supra) has been extracted by the Hon'ble Court on page 1000, which reads as under:-
"147. If-
(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment 13 ITA No. 2411(Del)/2004 year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recomputed the loss or the depreciation allowance, as the case may be, for the assessment year concerned....."
The law applicable in the case of the assessee reads as under:-
" If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned, (hereinafter in this section and in sections 148 to 153 referred to as the relevant assessment year):
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose 14 ITA No. 2411(Del)/2004 fully and truly all material facts necessary for his assessment, for that assessment year."
3.10 On comparative reading of the pre-existing law and the present law, it will become clear that the provisions contained in clause (a) and clause (b) of section 147 were re-stated in the section and the first proviso, albeit with some changes. We are not concerned with the position of law contained in clause (a) of section 147 earlier and proviso to section 147 now for the simple reason that there is no allegation of omission or failure on the part of the assessee and regular assessment has not been made u/s 143(3). The law contained in section 147(b) earlier and section 147 now is similar except that the present law dispenses with the requirement of "information". Both the provisions contain the expression "reason to believe". None of the provisions contains any mention about the expression "change of opinion", which prima-facie appears to be applicable only when there has been an allegation that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment in a case where assessment was made u/s 143(3). As mentioned earlier, the earlier law contains additional condition of "information". The provision contained in section 34(1)(b) of 1922 Act was similar in contents to the provision contained in section 147(b) of the 1961 Act. 15 ITA No. 2411(Del)/2004 Therefore, if this case can stand the test laid down in Kalyanji Mavji & Co. and Indian & Eastern Newspaper Society (supra), there will be no reason to come to a conclusion that assumption of jurisdiction in this case was bad in law. In the case of Kalyanji Mavji & Co.(supra) a reference was made to the decision of Hon'ble Bombay High Court in the case of CIT Vs. H. Holck Larsen (1972) 85 ITR 461, in which following observations were made:-
"What is obligatory in order to apply section 34(1)(b) is that he must have "information" in his possession in consequence of which he has reason to believe that the income has escaped assessment or is under-assessed, etc. The distinction really consists in a change of opinion unsupported by subsequent information on the one hand and a change of opinion based on information subsequently obtained, on the other. In the former class of cases, the assessment proceedings are attempted to be reopened without the discovery of an error and without receiving any information as to fact or law........ Such a reopening is based on a 'mere' change of opinion and is without jurisdiction........In the latter class of cases, the reopening is based on information leading to the requisite belief and is, therefore, within the jurisdiction of the officer."
3.11 The Hon'ble Supreme Court, on the basis of aforesaid observations, mentioned that the decision is really based on the question whether it is open to the ITO to change his opinion subsequently on same material and re-open the original assessment. We are no doubt inclined to agree with the view expressed by Chandrchud J., in the 16 ITA No. 2411(Del)/2004 aforesaid case, but as this question is not free from difficulty as there is some divergence of judicial opinion on the subject, we would refrain from giving any definite decision on this point, particularly when in the view we take in the instant case, this point does not really arise for determination, which is really based on another principle, namely, that the information was derived by the ITO from fresh facts and clearly covered by principles laid down in A. Raman & Company (1968) 67 ITR 11. Thus, the appeal of the assessee was dismissed. It may be mentioned by us here that in that case the information was received by the ITO in the course of assessment proceedings of the subsequent year, on the basis of which re-assessment proceedings were initiated u/s 34(1)(b). The information was of fact, namely, that the money borrowed on which interest was paid and claimed was not wholly utilized for the purpose of business but also diverted to the partners. On comparison of the facts of these cases, it will be seen that the information was derived by analysis of the existing facts in a subsequent year in the case of Kalyanji Mavji & Co.. However, in this case information of law has been received from an authority competent under the Act to pronounce law, namely, the CIT(Appeals) in an succeeding year. In the case of Indian & Eastern Newspaper 17 ITA No. 2411(Del)/2004 Society (supra), the Hon'ble Court mentioned that the information could be of fact or of law. However, when it is an information of law, it must emanate from a formal source, competent to pronounce the state of law. The audit party is not such a formal source. However, it is clear to us that the CIT(Appeals) is an authority under the Income-tax Act, which is entrusted with the work of determining facts and position of law in dispute before him. Such quasi-judicial authority had pronounced that the income by way of interest was required to be taxed under the head "Income from other sources". The AO, after receipt of this order, initiated assessment proceedings u/s 147. The case of Indian & Eastern Newspaper Society (supra) supports his action even under the more stringent provision which contained additional requirement of "information". In such a circumstance, there is no reason to hold that the assumption of jurisdiction was bad in law. The assumption of jurisdiction by the AO in this case finds direct support from the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra). At pages 511 and 512, the Hon'ble Court mentioned that the scope and effect of section 147 as substituted with effect from 1.4.1989 are substantially different from the provisions as they stood prior to such substitution. Thereafter, the court mentioned 18 ITA No. 2411(Del)/2004 about pre-existing clauses (a) and (b), which we have already dealt with. It was also mentioned that for assumption of jurisdiction u/s 147(a) two conditions were required to be satisfied -(i) the AO must have reason to believe that income chargeable to tax has escaped assessment; and
(ii) such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. However, under the substituted section only first condition will suffice. In other words, if the AO has reason to believe that income has escaped assessment, it confers jurisdiction to re-open the assessment. However, both the conditions are to be satisfied if the case falls within the ambit of the first proviso. At page 508, the Hon'ble Court also observed that the words "intimation" and "assessment" are different in as much as in assessment the AO is free to make any addition after granting opportunity to the assessee. No addition is permissible in the intimation and no opportunity is to be granted to the assessee. Therefore, intimation being no assessment, there is no question of change of opinion. It may be mentioned here that in this and succeeding years the AO had granted deduction to the assessee u/s 10B in respect of interest income. However, he took a different stand in assessment year 2001-02 and held that interest on 19 ITA No. 2411(Del)/2004 fixed deposits was to be taxed under the residuary head. This order was confirmed by the CIT(Appeals) on 3.3.2003 in Appeal No. 112/2002-
03. The AO did not take any action u/s 147 on passing assessment order for assessment year 2001-02, but waited for the order of CIT(Appeals) in the matter before recording his note u/s 147 on 17.3.2003. These background facts cannot be ignored while deciding whether jurisdiction was validly assumed by him for issuing notice u/s
148. Once his altered stand was fortified by the order of the ld. CIT(Appeals), he recorded the note to the effect that interest income of Rs. 16,49,441/- has escaped assessment. In other words, he had information of law in his possession that the aforesaid income has escaped assessment. Thus, according to us, he was justified in doing so.
3.12 The ld. counsel took some objections in this regard. The first one is that the note was recorded on the basis of law which was not applicable to this year. We are of the view that this argument is misplaced. The law, as it existed, allowed the deduction of profits and gains derived from an EOU from export of articles or things or computer software. The AO has clearly mentioned that interest on fixed 20 ITA No. 2411(Del)/2004 deposits is to be taxed under the residuary head. The intent of the use of expression that interest income cannot be formed as part of export turnover was that earning of interest income cannot be equated with profits and gains derived from export of articles or things or computer software. Therefore, we do not agree with him that the AO invoked provisions of the law applicable with effect from assessment year 2001-
02. Accordingly, it is further held that the ratio of the decision in the case of Siemens Information Systems Ltd. (supra) is not applicable to the facts of this case. On the contrary, he recorded the note on the basis of law as it existed for assessment year 1998-99.
3.13 It was also the submission of the ld. counsel that in deciding this issue, it is not open to the revenue to refer to reasons other than those recorded by the AO and for this purpose he relied on the decision of Hon'ble Allahabad High Cjourt in the case of Jamna Lal Kabra Vs. ITO (1968) 69 ITR 461. The Hon'ble Court mentioned that the aforesaid consideration acquires importance when the question is raised as to what were the reasons on the basis of which the ITO invoked jurisdiction u/s 147(a) and it is not permissible in this connection to refer to reasons other than those recorded by him in pursuance of section 148(2). It 21 ITA No. 2411(Del)/2004 was further mentioned that in the reasons it is not stated that the action u/s 147(a) is being taken because the assessee did not file a return of income or that he did anything justifying the conclusion that he omitted or failed disclose fully and truly all material facts necessary for his assessment. An attempt is being made by filing an affidavit to support the validity of the reasons which cannot be done as the revenue must confine to the reasons recorded by the ITO only. In this case, the AO had clearly recorded that the interest income was liable to be assessed under the residuary head as it did not form part of profits and gains derived from export turnover. The reasons are quite clear, which lead a reasonable person to have reason to believe that the income had escaped assessment. The background facts only go to support his reasons and are not intended to supplant the reasons. Even if subsequent orders of the AO and the ld. CIT(Appeals) are ignored, the facts do lead to a prima facie inference that interest income was wrongly considered as profits and gains of business of export. The AO was not required to prove his case to the hilt at that point of time. What is required at the time of recording reasons is that there should be some reason which has a live nexus with the formation of the belief. These ingredients exist in this case. Therefore, we do not find any 22 ITA No. 2411(Del)/2004 force in the argument of the ld. counsel as the facts of the case of Jamna Lal Kabra are quite distinguishable.
3.14 We may once more proceed to examine the argument of the ld. counsel in respect of "change of opinion", on which significant emphasis was laid by him. In the case of Kelvinator of India Ltd., the facts are mentioned in the decision of Hon'ble Delhi High Court that the assessment for assessment year 1987-88 was completed u/s 143(3) and thereafter it was re-opened with a view to bring to tax certain amounts aggregating to Rs. 43,91,603/- comprising of interest claim of Rs. 41.28 lakh, guest house expenses of Rs. 1.76 lakh, advertisement expenses of Rs. 83,303/- and club expenses of Rs. 4,300/-. The assessment was reopened u/s 147. The assessee objected to the reopening particularly on the ground that the Tribunal had allowed similar expenses for assessment year 1986-87 on appeal. The Hon'ble Court examined the provisions regarding reopening in the 1922 Act and in the 1961 Act. The Hon'ble Court also examined the reasons recorded by the AO and the affidavit filed by him. It transpired that the AO stated that he wrongly allowed the deductions in the original assessment and, therefore, he was of the opinion that income had escaped assessment. Admittedly, 23 ITA No. 2411(Del)/2004 nothing had happened between the completion of original assessment and formation of opinion by the AO. There was no change in law and no new material came on the record. No information was received. It was merely a case of fresh application of mind by the AO to the same set of facts. The court was of the view that the AO did not have jurisdiction to reopen the assessment. This finding was confirmed by the Hon'ble Supreme Court. The facts of this case are clearly distinguishable. In the first place, the assessment year involved in the case before the Hon'ble Court was assessment year 1987-88. In the second, nothing had happened in that case after original assessment while the AO in the case at hand had the benefit of his subsequent order and the decision of the ld. CIT(Appeals) in respect of correct head of income. Therefore, there were other reasons which justified the reopening of the assessment and taking a cue from the decision in the case of Kalyanji Mavji & Co. (supra), if there are other reasons, one may not go into the question of "change of opinion". The facts of the case of Techspan India (P)Ltd. (supra) are that in the assessment for assessment year 2001-02, the assessee claimed deduction u/s 10A of the Act. In the original assessment proceedings, a detailed enquiry was conducted by the AO for which a show cause notice was issued requiring the 24 ITA No. 2411(Del)/2004 assessee to indicate allocation of expenses to the software division and fulfillment division and even suggested allocation on a proportionate basis. The assessee made a detailed submissions in respect of allocation made by it. On examination of the details, a deduction of Rs. 4,86,62,452/- was allowed u/s 10A. Subsequently, a notice was issued u/s 148 on the ground that excess deduction has been allowed u/s 10A. The court reiterated the principle laid down in a number of cases, cited at page 228 that a mere change of opinion cannot be a basis for reopening the assessment. Thus, this ratio would be applicable only to cases where the AO has applied his mind and taken a conscious decision on a particular matter. It has no application where the order of assessment does not and by its very nature cannot address itself to the aspects which are the basis of reopening of the assessment. Thus, it is clear that the facts of that case are also distinguishable as assessment was made in that case after detailed scrutiny and u/s143(3). The Hon'ble Court clearly mentioned that the principle of "change of opinion"
will have no application where there was no formation of opinion at all and it seems to us that this part of the judgment applies even to an assessment made u/s 143(3). We have already held that processing u/s 143(1)(a) and an order u/s 154 thereon do not lead to inference of 25 ITA No. 2411(Del)/2004 application of mind. Therefore, there could be no question of change of opinion.
3.15 Thus, it is held that the ld. CIT(A) was right in holding that the AO properly assumed jurisdiction u/s 147 and consequently notice issued u/s 148 was valid in law. Therefore, ground no. 1 is dismissed.
4. The additional ground is that the AO did not have jurisdiction to make assessment u/s 143(3) read with section 148 as notice u/s 143(2) was neither issued nor served on the assessee after making of the return u/s 148.
4.1 The ld. counsel drew our attention to clause (b) of proviso to section 148, being in the nature of a validation provision, which provides that for making the assessment, re-assessment or re-computation of income, every notice served before the expiry of time limit for making the assessment shall be deemed to be a valid notice. It was his case that for making assessment u/s 147, it was obligatory on the part of the AO to issue and serve a notice u/s 143(2) before any variation could be made to the income returned u/s 148. Since the notice has neither been 26 ITA No. 2411(Del)/2004 issued nor served, the assessment framed u/s 143(3) read with section 147 is invalid. In order to support his case, reliance was placed on the decision in the case of Pawan Gupta (2009) 318 ITR 322 (Del) and Vandana Gogoi (2007) 289 ITR 28 (Gauhati), in which it was held that such a notice is essential for making assessment of undisclosed income after scrutiny u/s 158BC of the Act. It was argued that similar consideration is applicable in regard to assessment made u/s 147. We may briefly state the ratio of the case of Pawan Gupta (supra) as it is the judgment of the jurisdictional High Court. One of the questions before the Hon'ble Court was whether issuance/service of notice u/s 143(2) within the prescribed limit of time is a pre-requisite for framing the block assessment order under chapter XIV-B of the Income-tax Act, 1961? It was held that section 143(2) has been specifically incorporated in the scheme of block assessment proceedings and that cannot be ignored. Thus, concurring with the judgment in the case of Vandana Gogoi (supra), it was held that issuance of a notice u/s 143(2) is a pre-requisite for framing the block assessment order under chapter XIV-B. It was also held that if an assessment order is passed without complying with section 143(2) it would be invalid and not merely irregular. Further, reliance was placed on the decision of 27 ITA No. 2411(Del)/2004 Hon'ble Madras High Court in the case of Venkat Naicaen Trust & Another Vs. ITO & Another (2000) 242 ITR 151, in which it was held that when the assessee pleads that he has not been properly served with any notice, it is for the department to place the relevant material to substantiate its plea that the assessee was served with the proper notice. Our attention was also drawn to page 1 of the assessment order, where it is mentioned in paragraph 3 that thereafter a notice u/s 142(1) was issued to the assessee asking it to file various details. Thus, the case of the ld. counsel was that the notice was neither issued nor served on the assessee.
4.2 In reply, the ld. DR produced the case record maintained by the ITO and showed to us and the ld. counsel an office copy of notice u/s 143(2) dated 21.4.2003 issued to the assessee. This notice is available on page 31 of the case record. She also showed two other notices dated 11.11.2003, issued u/s 142(1). Our attention was also drawn to paragraph 1 of the assessment order which makes a mention that the case was selected for scrutiny and notice u/s 143(2)(ii) was issued, in response to which Shri Anil Kakkar, C.A., attended and made oral as well as written submissions. However, she was not able to bring on 28 ITA No. 2411(Del)/2004 record the out-ward dak register, which could prove the service of notice, on the ground that the matter is very old and such record is not traceable.
4.3 In the rejoinder, the case of the ld. counsel was that the revenue has to show not only the issuance of the notice but also its service on the assessee, as held in the case of Venkat Naicaen Trust & Another (supra).
4.4 We have considered the facts of the case and rival submissions. The additional ground in respect of non-issuance and non-service of notice u/s 143(2), moved by the assessee on 15.11.2007 for the first time before us, was admitted on the explicit representation of the ld. counsel that it is purely a question of law, for which no further fact is required to be brought on record or examined. The facts are that the assessee had filed the return of income on 28.11.1999 declaring nil income. As mentioned earlier, this order was subject matter of two revisions u/s
154. Thereafter, assessment proceedings u/s 147 were initiated by issuing notice u/s 148 on 21.3.2003. The assessee did not file any fresh return in response to this notice but submitted that original return filed 29 ITA No. 2411(Del)/2004 on 28.11.1998 may be taken a return u/s 148. The AO mentions about issuance of notices u/s 143(2)(ii) and 142(1). In regard to notice u/s 148 also, the AO mentions only about its issuance. The case of the ld. DR is that if other notices have been received by the assessee, there is no reason to come to a conclusion that notice u/s 143(2) has not been received by the assessee. The further facts are that this issue was never agitated either before the AO or the ld. CIT(Appeals). Thus, valuable time was lost during which either of the lower authorities could have verified facts during the course of assessment proceedings or soon thereafter in the appellate proceedings. The appellate order was passed on 22.4.2004 i.e., within about four months of the passing of the order u/s 147. The assessee also did not take up this issue while filing the appeal on 17.5.2004. The additional ground was taken on 15.11.2007, i.e., after lapse of about 3 years and 7 months. The ground is not supported by bringing any evidence on record. No affidavit has also been filed in this regard. Therefore, the question is whether the ground is based on factual reality or not? It is no doubt true that the onus of service of notice is on the revenue, as held in the case of Venkat Naicaen Trust & Another (supra). While the cases of Pawan Gulati and Vandana Gogoi (supra) were decided u/s 158BC, the 30 ITA No. 2411(Del)/2004 provision contained in proviso (b) makes it clear that a notice u/s 143(2) has to be served before completing assessment 147. Having not taken any step in this matter for a long period between the starting of assessment proceedings and ending with 14.11.2007, the ld. counsel now wants production of all the records to prove the service after lapse of a long period of time. Further, a portion of the additional ground regarding non-issuance of the notice is found to be false on examination of records, which was also shown to the ld. counsel. In the circumstances narrated above, it is clear that the ld. counsel wants revenue to do the impossible of bringing missing record of service of notice without doing anything being done on the part of the assessee. We are of the view that none of the parties can be forced do anything which is impossible. The tenor of the order, which speaks of issuance of notices u/s 148, 143(2) and 142(1) leads to an irresistible conclusion of fact that notice u/s 143(2) was served on the assessee in due course just as other notices were admittedly served on him. Therefore, on peculiar facts of this case, we are of the view that the notice has been served on the assessee. Otherwise, he has been given full opportunity of being heard under this section as well as section 142(1). Thus, this ground is also dismissed.
31 ITA No. 2411(Del)/2004
5. Coming to the merits, the substituted ground is that the ld. CIT(Appeals) erred in holding that interest income of Rs. 16,49,441/- was taxable under the head "income from other sources" and not eligible for set off against interest expenditure of Rs. 19,60,038/- while computing the profits of business of the EOU.
5.1 In this connection, the AO referred to the provision contained in section 10-B, which allows the deduction of profits and gains derived by the EOU in computing the total income. It was his case that the income was not derived from the EOU as the words "derived from"
are narrower in meaning, as held by the Hon'ble Supreme Court in the case of CIT Vs. Sterling Foods Ltd., (1999) 237 ITR 579. This finding was confirmed by the ld. CIT(Appeals) by relying on a number of cases and mentioning that there must be direct and proximate link between the EOU and the income for the latter to be termed as "profits derived" from the EOU.
5.2 Before us, the ld. counsel referred to the "Statement of Facts"
filed before the ld. CIT(Appeals), in which it is mentioned that the assessee earned interest income of Rs. 16,49,441/- from the bank and 32 ITA No. 2411(Del)/2004 paid interest of Rs. 19,60,038/- to the bank in respect of credit facility enjoyed by it. Thus, there was a resultant debit of Rs. 3,10,597/-, which was claimed as expenditure. There was a clear nexus between payment and earning of interest as the assessee was engaged in the business mentioned in section 10-B as it stood before 01.04.2001, under which "any profit and gains" derived by the EOU shall not be included in the total income of the assessee. The assessee was carrying on the business of EOU only. The own funds of the assessee were not sufficient to carry on the business and, thus, borrowings from the bank were necessitated. The interest expenditure was incurred for the purpose of business. As profits were earned, they were invested in the fixed deposits for earning interest income so as to reduce the interest burden of the business. In such a situation, there was a nexus between earning and paying of the interests. Therefore, interest received could not have been treated under the residuary head of income.
5.3 To support the aforesaid contention, reliance was placed on the decision of Hon'ble Bombay High Court in the case of CIT Vs. Puneet Commercial Ltd. (2002) 245 ITR 550, a case decided u/s 80HHC. It 33 ITA No. 2411(Del)/2004 was held that the assessee was engaged in the business of export and the whole of the profit was derived from this activity only. Therefore, the whole of the income, including the interest income, was deductible u/s 80HHC(3)(a). Further, reliance was placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Shri Ram Honda Power Equipment, (2007) 289 ITR 475, in which it was held that where surplus funds are parked with the bank and interest is earned thereon, it can be categorized as income from other sources only. Such income is outside the ring of profits and gains of business. There could also be another category of cases where the exporter is required to keep money in fixed deposits mandatorily in order to avail of credit facility. Interest earned on such deposits for the purpose of availing credit facility from the bank does have an immediate nexus with export business. The finding to the contrary will thus apply only if the AO had held that the interest income is business income. Reliance was also placed on the decision of Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. Vs. ITO (2009) 315 ITR 255. It was held that funds by way of share capital were raised specifically for acquiring land and development of infrastructure. Therefore, interest earned on such funds, primarily brought for infusing money in the 34 ITA No. 2411(Del)/2004 business, could not be treated as income from other sources. It was also held that the income was earned in the period prior to commencement of business, which was required to be set off against pre-operative expenses. Reliance was also placed on the decision of Hon'ble Delhi High Court in the case of Snam Progetti, spa Vs. Additional CIT (1981) 132 ITR 70, in which it was held that the whole situation is to be seen in such a case is whether the income is derived from the business activities. If it is so derived, then, the mere fact that it is to be taxed under a different section will make no difference. The assessee had not come from Italy to India for earning interest income from the bank but to carry on the business. Therefore, the interest income was also business income for the purpose of set off.
5.4 In reply, the ld. DR referred to the findings of the ld. CIT(Appeals), in which after considering various cases, it was mentioned that there should be a direct and proximate connection between the income and the EOU. In order to support his order, reliance was placed on the decision of Hon'ble Supreme Court of India in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172, in which it was held that interest earned by investing borrowed 35 ITA No. 2411(Del)/2004 funds prior to the commencement of business is taxable under the residuary head. Further, reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT Vs. Sterling Foods (1999) 237 ITR 579, in which it was held that the words "derived from"
mean to get, to trace from a source, arise from, originate in, show the origin or formation of. The source of import entitlement could not be said to be the industrial undertaking of the assessee, which in fact is the scheme of the Central Government which grants entitlements to the assessee. The aforesaid words mean that there should be a direct nexus between profits and gains and the industrial undertaking. Therefore, it was held that the incentive received by the assessee could not be said to be the income derived from the eligible industrial undertaking. Reliance was also placed on the decision of Hon'ble Madras High Court in the case of CIT Vs. Monarch Tools P. Ltd. (2003) 260 ITR 258, in which it was held that when surplus funds are invested in fixed deposits, interest income earned thereon is assessable as income from other sources. Reliance was also placed on the decision of Hon'ble Kerala High Court in the case of K. Ravindranathan Nair Vs. Dy. CIT (2003) 262 ITR 669, in which it was held that interest earned on fixed deposits was not the income derived from export business and, 36 ITA No. 2411(Del)/2004 therefore, it was not entitled to deduction u/s 80HHC. Reliance was also placed on the decision of Hon'ble Kerala High Court in the case of CIT Vs. G. Satheesh Nair (2003) 264 ITR 377, in which it was held that interest earned on term deposits placed with the bank will not partake the character of business income so as to allow deduction u/s 80HH. Such an income can only be categorized as income from other sources. It was also submitted that the assessee has accepted the decision of the lower authorities in assessment year 2002-03 and, therefore, principle of consistency demands that the ground of the assessee may be dismissed.
5.5 We have considered the facts of the case and rival submissions. Section 10-B, as it existed for the year under consideration, permitted a deduction of such profits and gains as are derived by an EOU from export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software. The rival parties have cited the cases decided under sections 80HH and 80HHC also for the interpretation of the term "profits and gains derived by an assessee from an EOU". Therefore, it may be of consequence to look 37 ITA No. 2411(Del)/2004 into the provisions contained in sections 80HH and 80HHC in this regard. Section 80HH allows a deduction where the gross total income of an assessee includes any "profits and gains derived from an industrial undertaking". On comparative reading of this provision with the provision contained in section 10B, it is clear that the provisions deal with the deduction of profits and gains derived from an EOU u/s 10B and profits and gains derived from an industrial undertaking in section 80HH. The corresponding provision u/s 80HHC is worded somewhat differently and it provides for allowance of a deduction to the extent of profits, referred to in sub-section (1B), derived by an assessee from the export of goods or merchandise. This section provides for the computation of the profits derived from such export in sub-section (3) and for this purpose clause (baa) and the Explanation below sub-section (4C) defines the term "profits of the business". Thus, the provision of this section is somewhat different from the provisions contained in sections 80HH and 10B although all these provisions do mention about profits derived from the EOU, industrial undertaking or export of goods or merchandise, as the case may be.
5.6 The facts of the case are that the assessee carries on the business of an EOU. For this purpose over-draft facilities were taken 38 ITA No. 2411(Del)/2004 from the bank to meet liquidity requirements. Subsequently when the assessee earned the profit, the money so generated was placed in fixed deposits with the bank. The case of the ld. counsel is that the deposits were placed with a view to reduce the interest liability and, therefore, interest income partakes the character of profits and gains of business. On the other hand, the case of the ld. DR is that there is no linkage between the borrowings from the bank and placing fixed deposits with the bank. The interest earned from the bank did not have direct or proximate connection with the business of export of the EOU. Therefore, interest so received was taxable under the residuary head. 5.7 In the case of Snam Progetti spa (supra), the Hon'ble Court mentioned that the question to be seen is whether interest income is also derived from the business activity. If it is so derived, then the mere fact that it is taxed under a different section will make no difference. In these circumstances, it was held that interest on bank deposits is also business income for the purpose of set-off of the carried forward losses. From the decision, it is clear that the assessee had not come to India for earning interest from the banks but to conduct business on a large scale. The court held interest income to be business 39 ITA No. 2411(Del)/2004 income only for the purpose of set off. The facts of case at hand are distinguishable because the question before us is not only whether interest income is business income for the purpose of set-off but whether interest income can be said to be derived from the EOU. 5.8 Coming to the case of Puneet Commercial Ltd. (supra), the case was decided by Hon'ble Bombay High Court u/s 80HHC(3). The AO proceeded on the footing that the interest income was business income but it was not income derived from export. Without going into the larger question raised by the ld. counsel for the department, the Hon'ble Court held that the entire business income has to be deemed to be profit derived from export of goods. The facts of this case are also distinguishable as admittedly the AO had considered interest income to be business income.
5.9 In the case of Shri Ram Honda Power Equipment (supra), decided by the jurisdictional High Court, the main finding was that where surplus funds are placed with the bank in deposits, the interest income earned therefrom can only be categorized as income from other sources. However, it was also mentioned that there could be cases where placing 40 ITA No. 2411(Del)/2004 the deposits with the bank is a mandatory requirement for availing of credit facilities, in which case interest income may partake the character of business income. Therefore, if the AO has held interest income to be business income, the question cannot be reopened and netting will have to be allowed. We are of the view that prima facie the ratio of the case is against the assessee as the assessee has not proved that placing of deposits was mandatory for availing of overdraft facilities. His only case is that deposits were placed with the bank to reduce interest burden, which will happen in all such cases. That will not lead to an inference that interest income will be business income whenever interest is paid to the bank. Further, the AO has specifically held that interest income is liable to be taxed under the residuary head and, therefore, the case is not covered under the other category. 5.10 In the case of Indian Oil Panipat Power Consortium Ltd. (supra), the Hon'ble jurisdictional High Court had a totally different question to decide, namely, whether the Tribunal was right in holding that interest accrued on funds deployed with the bank could be taxed as income from other sources and not as a capital receipt liable to be set off against pre-operative expenses. It was held that the funds deployed by the 41 ITA No. 2411(Del)/2004 assessee were inextricably linked with the setting up of the plant and, therefore, interest earned thereon could not be treated as income from other sources. The facts of this case are also distinguishable as we are not dealing with a case where interest income is earned during the course of setting up of the business. It is the case of a going concern and interest has been earned after the business has been set up. In absence of requirement of proving that it was mandatory to keep deposits with the bank to avail of credit, the only conclusion which can be drawn is that profits generated in the course of business were found to be surplus and placed with the bank for earning interest. 5.11 The ld. counsel had also relied on the order of ITAT, Mumbai Bench in the case of Livingstones Jewellery (P) Ltd. Vs. Dy. CIT in ITA no. 187(Mum)/2007 for assessment year 2003-04, the summary of which was placed before us. In that case, it is seen from the summary that the decision was that all the profits which have nexus with the business of the undertaking will qualify for deduction. The facts stated in the summary are that the assessee had placed fixed deposits with the bank for obtaining credit facilities. Therefore, it was held that such interest had nexus with the business and, therefore, the interest income 42 ITA No. 2411(Del)/2004 was in the nature of business profits. The alternative scenario in the case of Shri Ram Honda Power Equipment (supra) deals with the similar issue and in the light of our finding in respect of that case as also in absence of full order in this case, we are of the view that the decision of Hon'ble Delhi High Court as well as decision in this case go against the assessee.
5.12 We may also deal with the cases relied upon by the ld. DR. The case of Tuticorin Alkali Chemicals and Fertilizers Ltd.(supra) dealt with earning of interest before setting up of the business. According to us, the ratio of this case is not applicable as no business income could be computed at all. In the case of Sterling Foods (supra), decided u/s 80HH, the Hon'ble Supreme Court held that the words "derived from"
are narrower in meaning and for availing deduction, it has to be shown that there is a proximate connection between the undertaking and the income. In absence of such a connection, it was held that export profits could not be termed as the profits derived from the industrial undertaking. We have already mentioned that the provision contained in this section is in pari-materia with the provision contained in section 10B. Therefore, this case provides the basis for coming to the 43 ITA No. 2411(Del)/2004 conclusion that interest earned on deposits placed with the bank is not business income as there is no proximate connection with the EOU in a situation where it is not shown that such deposits were necessary for availing of credit facilities. In the case of Monarch Tools (P) Ltd. (supra), it was held that when own funds are kept in deposits with the banks, interest thereon did not have any direct or proximate connection with the business. It was mentioned that interest received by a company, which carries business, from deposits and loans could only be taxed as income from other sources. The ratio of this decision is applicable to the instant case and it also follows that if it is not business income, the interest income cannot be said to have been derived from the EOU. In the case of K.Ravindranathan Nair (supra), decided u/s 80HHC, it was held that the interest income received on short-term deposits could be attributed to the export business, but it could not be said to be income derived from export business. We have mentioned earlier that section 80HHC is worded somewhat differently, nonetheless the provision does speak of profits and gains derived by the assessee from export of goods and merchandise. In the case of G. Satheesh Nair (supra), decided u/s 80HH, it was held that interest earned on bank deposits would not partake the character of business income, which has to 44 ITA No. 2411(Del)/2004 be assessed under the residuary head. We have already mentioned that the provision of sections 10-B and 80HH are analogous provisions and, therefore, the ratio of that case is applicable to this case.
5.13 The assessee has accepted such a finding in the subsequent year. Therefore, rule of consistency demands that a different view may not be taken in this year.
5.14 In a nutshell, it is held that the ld. CIT(Appeals) was right in holding the interest income to be taxable under the residuary head and not the income derived from the EOU. Therefore, the interest was not liable to be deducted from the total income of the assessee.
6. In the result, the appeal is dismissed.
The order was pro nounced in the open court on 12th March, 2010.
Sd/- sd/-
(George Mathan) (K.G.Bansal)
Judicial Member Accountant Member
Date of order:12th March, 2010.
SP Satia
45 ITA No. 2411(Del)/2004
Copy of the order forwarded to:-
1. MKR Frozen Food Exports Ltd., New Delhi.
2. ITO, Ward 6(1), New Delhi.
3. CIT(A)
4. CIT- , New Delhi.
5. DR, ITAT, New Delhi. Assistant Registrar.