Income Tax Appellate Tribunal - Chandigarh
Ind Sphinx Precision Ltd. vs Commissioner Of Income Tax on 10 November, 2006
Equivalent citations: [2007]293ITR17(CHD), (2007)110TTJ(CHD)471
ORDER
M.A. Bakshi, Vice President
1. We find it convenient to dispose of these two appeals of the assessee relating to asst. yrs. 2000-01 and 2001-02 by this consolidated order. The dispute involved in both these appeals is relating to validity of the orders passed by the CIT, Shirnla, H.P., under Section 263 of the IT Act, 1961. The impugned orders are both dt. 12th April, 2004. We have heard the parties and perused the records.
2. The facts for both the assessment years are similar. We first take up the appeal for asst. yr. 2000-01 and our decision shall apply mutatis mutandis to asst. yr. 2001-02. For asst. yr. 2000-01, the assessee had filed the return of income on 28th Nov., 2000 declaring income of Rs. 23,51,870 after claiming deduction under Section 80HHC of Rs. 21,07,522 and deduction under Section 80G of Rs. 14,128. Similarly, return for asst. yr. 2001-02 was filed on 25th Oct., 2001 declaring income of Rs. 53,39,230 after claiming deduction under Section 80HHC of Rs. 62,08,242 and deduction under Section 80G of Rs. 41,273. The AO after making detailed inquiries had made an assessment under Section 143(3) vide order dt. 30th Oct., 2002. On examination of the records, the CIT Shimla was of the view that the orders passed by the AO under Section 143 and 154 are erroneous insofar as prejudicial to the interests of the Revenue. He accordingly issued show-cause notice to the assessee as to why action under Section 263 may not be taken and the assessment order passed by the AO set aside. The assessee filed objections but of no avail. The CIT passed the order under Section 263 setting aside the assessment order and directing the AO to make fresh order after carefully looking into all the relevant points and affording reasonable opportunity of being heard to the assessee.
3. Assessee is aggrieved and is in appeal before us. We have heard the parties and perused the records. It is observed from the impugned order passed under Section 263 that the CIT had pointed out an error in the calculation of deduction under Section 80HHC and an error in calculation of income under Section 115JB, wrong credit of Modvat, wrong claim of deduction under Section 80G, wrong calculation of interest under Sections 234B and 234C.
4. The assessee is engaged in the manufacturing of PCB drills and PCB Raster Bits and its sales are mostly export sales. It has been pointed out by the CIT that the assessee had receipts of Rs. 36,45,148 on account of inspection and regrinding charges received from domestic customers taken into account in the gross total income as business profits. According to the CIT, the above sum cannot be said to be the income derived from exports and thus the same was not to be taken into consideration for computation of deduction under Section 80HHC as business profits. The CIT has referred to Clause (baa) of Explanation to Section 80HHC and held that the job work charges received by the assessee were to be excluded from the profits and gains of business for the purpose of computation of deduction under Section 80HHC. The order passed by the AO has been held to be erroneous and prejudicial to the interests of the Revenue.
5. Similarly, for the purpose of computation of deduction under Section 115JA, the assessee, according to the CIT, had claimed excess deduction of export profits. The CIT has pointed out under Section 115JA/JB, the amount to be allowed as a deduction from book profits under Clause (viii) of Section 115JA(2) and 115JB(2)(iv) are the profits eligible for deduction as per Clause (a), (b) or (c) of Section 80HHC(3). The CIT has also referred to the provision of Sub-section (3) of Section 80HHC which provides for reduction to the extent of 90 per cent of the proportionate export incentive. According to the CIT, the reduction admissible under Clause (iv) of Section 115JB(2) is only with reference to the deduction computed under Clause (a), (b) or (c) of Sub-section (3) of Section 80HHC and it does not refer to the amount referred to in proviso to Sub-section (3) of Section 80HHC. The reference to the Board's circular made by the assessee during the course of hearing before the CIT has been held to be inapplicable. According to the CIT, the decision of Kerala High Court in the case of CIT v. G.T.N. Textiles Ltd. (Ker), relied upon Jay the assessee, is not applicable to the facts of this case.
6. In addition to the above mistakes alleged by the CIT, it has been held that there was mistake committed by the AO in allowing the claim of Modvat credit, excess credit of tax paid under MAT and allowance of deduction under Section 80G.
7. The assessment order was accordingly set aside and the AO was directed to frame the assessment afresh.
8. The assessee is in appeal before us. The learned Counsel for the assessee contended before us that order passed by the CIT under Section 263 is without jurisdiction. Our attention was invited to the show-cause notices issued by the CIT and it was pointed out that all the points raised by the CIT in the show-cause notice had been raised by the AO in the course of original assessment proceedings. Our attention was invited to the questionnaire issued by the AO on 12th June, 2002 in which a specific query was raised about the regrinding charges of Rs. 36,45,148 and the AO had also asked the assessee to show cause as to why the said amount should not be excluded for the purpose of calculation of deduction under Section 80HHC. It was further contended that the AO had also made inquiries about the calculation of income under Section 115JA/JB with reference to MAT, deduction under Section 80G, etc. It was further contended that a reply was filed to the AO in response to the questionnaires issued during the course of assessment proceedings and the AO had taken a view in favour of the assessee. The view taken by him is a possible view. It was pointed out that after framing of fresh assessment in pursuance to the order under Section 263, assessee had filed an appeal to the CIT(A) against the recalculation of deduction under Section 80HHC. It was pointed out that the CIT(A) has accepted the view canvassed by the assessee and held that the calculations made by the AO in pursuance to the direction of the CIT are not warranted. It was further contended that there is a difference of opinion in regard to the calculation of deduction under Section 80HHC. According to the learned Counsel, once a possible view has been taken by the AO in regard to deduction under Section 80HHC, the CIT has no power to set aside the same by holding the order to be erroneous insofar as prejudicial to the interests of the Revenue. It was contended that it is well-settled principle of law that if an AO takes a possible view, the CIT cannot substitute the same with his own view.
9. In regard to the second issue raised by the CIT pertaining to calculation of deduction under Section 80HHC for deduction from book profits, it was contended that the same is covered in favour of the assessee by decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT . It was further contended that the issue raised by the CIT relating to Modvat credit is also covered by the decision of the Supreme Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. in favour of the assessee.
10. In regard to the issue raised by the CIT about the wrong MAT credit claimed by the assessee, it was contended that assessee had not claimed any credit for MAT and the observations of the CIT in this regard are wrong. It was further contended that the assessee had claimed deduction under Section 80G as permissible in law and there was thus no justification for invoking the powers by the CIT under Section 263 of the IT Act, 1961 relating to this issue also. Reliance was placed on the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) and that of Punjab and Haryana High Court in the case of CIT v. Max India Ltd. , to support the contention that once an assessment was framed after due inquiry and a possible view was taken by the AO, the CIT is precluded to exercise his powers under Section 263. It was accordingly pleaded that the appeal of the assessee may be allowed by setting aside the order of the CIT.
11. The learned Departmental Representative, on the other hand, contended that the order passed by the AO was clearly contrary to the provisions of the Act. Our attention was invited to Expln. (baa) to Section 80HHC. It was contended that the Explanation specifically refers to exclusion of 90 per cent of the 'charges' recovered by the assessee from the profits of business for the purpose of calculation of deduction under Section 80HHC. the assessee had collected job charges to the tune of Rs. 36,45,148 and 90 per cent of the same was to be excluded from the profits of the business by virtue of Expln. (baa) to Section 80HHC. It was further contended that though the AO had raised the issue in the course of assessment proceedings by issuing a questionnaire, but he had failed to apply his mind in determining the deduction under Section 80HHC. It was further contended that the non-application of mind by the AO renders his order to be erroneous insofar as it is prejudicial to the interests of the Revenue. It was contended that the AO had not recorded specific finding expressing his opinion about the non-exclusion of job charges from the profits and gains of business. Reliance was placed on the decision of Punjab and Haryana High Court in the case of CIT v. Export House to support the contention that where the AO does not record a specific finding in regard to an issue, it would demonstrate the non-application of his mind. Reliance was placed on the decision of Punjab and Haryana High Court in the case of B.S. Bajaj and Sons v. CIT , wherein the AO had allowed deduction under Sections 80HH and 80J without application of mind and the CIT was held to be justified in cancelling the order under Section 263. Reliance was also placed on the decision of Tribunal, Chandigarh Bench, in the case of Biru Mal Pyare Lal v. Asstt. CIT (2002) 74 TTJ (Chd) 150 : (2001) 79 ITD 169 (Chd), wherein the AO had accepted the cash credits without calling for further details, the order under Section 263 was held to be valid. Reliance was also placed on the decision of Tribunal, Chandigarh Bench, in the case of Morinda Co-operative Sugar Mills Ltd. v. Dy. CIT (2001) 73 TTJ (Chd) 87 : (2001) 78 ITD 189 (Chd), wherein the AO had wrongly allowed the claim under Section 80P(a)(iii) and the CIT had cancelled the assessment under Section 263 and the same was upheld. Reliance was also placed on the decision of Mumbai Bench 'E' of the Tribunal in the case of Patel Cotton Co. Ltd. v. Asstt. CIT (1998) 64 ITD 273 (Mumbai), wherein the AO had wrongly allowed deduction under Sections 80HHC and 80HH, and the CIT had intervened by invoking provisions of Section 263 and the action was upheld. It was further contended that similarly Rajasthan High Court in the case of Diamond World v. CIT (2004) 267 ITR 467 (Raj) upheld the order of the CIT under Section 263 where the AO had wrongly allowed the claim of the assessee under Section 80HHC. It was contended that the Karnataka High Court upheld the order under Section 263 of the CIT where the AO had wrongly allowed deduction under Section 80HHC. Reliance was also placed on the decision of the Delhi Bench E of the Tribunal in the case of Honda Siel Power Products Ltd. v. Dy. CIT (2000) 69 TTJ (Del) 97 : (2001) 77 ITD 123 (Del), to support the contention that where the AO had passed the assessment order in a routine manner without proper application of mind, the CIT(A) was justified in invoking his powers under Section 263 of the Act. It was contended that the assessee had received job charges in respect of domestic sales and the same were to be excluded from the profits of business for the purpose of determination of deduction under Section 80HHC. Reliance was placed on the decision of the Tribunal, Chandigarh Bench, in the case of Asstt. CIT v. Jagraon Cycle Inds., Ludhiana ITA No. 640/Chd/2005 for asst. yr. 2001-02, to support the contention that for the purpose of computation of deduction under Section 80HHC, scrap sale or service charges were to be excluded from the turnover as well as from the profits of business. It was pointed out that the decision of the AO was contrary to the decision of the jurisdictional Tribunal and, therefore, the order passed by the AO was erroneous and prejudicial to the interests of the Revenue.
12. In regard to the second issue raised by the CIT, vide paras 9, 10 and 10.3 of the order, it was contended that the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT (supra), was inapplicable. It was contended that the decision of the High Court was with reference to the old provision of the Act and accordingly it was inapplicable to this case. Reliance was also placed on the decision of the Punjab and Haryana High Court in the case of Liberty Footwear Co. v. CIT , to support the contention that 90 per cent of the charges were to be excluded from business profits for the purpose of computation of deduction under Section 80HHC. It was accordingly pleaded that the appeal of the assessee may be dismissed.
13. The learned Counsel for the assessee in counter-reply relied upon the following decisions to support the contention that regrinding charges are part of business profits:
(i) CIT v. Rane (Madras) Ltd. ;
(ii) Asstt. CIT v. Herbal Isolates (P) Ltd. (2003) 79 TTJ (Cochin) 328.
It was contended that the debatable issues cannot be the basis for invoking provisions of Section 263. Reliance was placed on the following decisions:
(i) CIT v. G.M. Mittal Stainless Steel (P) Ltd. (2003) 179 CTR (SC) 553;
(ii) CIT v. Simon Carves Ltd. ;
(iii) CIT v. Arvind Jewellers .
It was accordingly pleaded that the order of the CIT under Section 263 may be cancelled.
14. Similar issue had also been raised for asst. yr. 2001-02. The CIT has set aside the assessment made by the AO for fresh decision.
15. For this year also, the parties advanced similar arguments as advanced for asst. yr. 2000-01.
16. We have given our careful consideration to the rival contentions. In this case, the AO had made assessment under Section 143(3) for asst. yr. 2000-01. A perusal of the questionnaire issued by the AO and the replies filed by the assessee placed on record undoubtedly reveal that the AO had raised the issue relating to calculation of deduction under Section 80HHC as well as income chargeable to tax under Section 115JA by way of questionnaire issued to the assessee and assessee had also replied to the queries raised by the AO. The AO has thereafter passed an order on 30th Oct., 2002. The question before us is as to whether the order passed by the AO can be said to be erroneous insofar as it is prejudicial to the interests of the Revenue. It is well-settled principle of law that to enable the CIT to exercise his powers under Section 263, twin conditions must be satisfied. These conditions are (i) that the order passed by the AO is erroneous and (ii) the said order is prejudicial to the interests of the Revenue. Their Lordships of the Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (supra) have elaborately laid down the principles relating to the powers of the CIT under Section 263. In this case, their Lordships held that if one of the two conditions required for exercise of power under Section 263 is absent, the recourse to Section 263 cannot be taken. Their Lordships of the Supreme Court further laid down the law that provisions of Section 263 cannot be invoked to correct each and every type of mistake or error committed by the AO. Their Lordships further laid down certain circumstances quoted hereunder on the basis of which powers under Section 263 could be exercised:
(i) An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous;
(ii) The order passed without applying the principles of natural just or without application of mind will also satisfy the requirement of the order being erroneous.
Their Lordships further held that the expression 'prejudicial to the interests of the Revenue' is to be understood in its ordinary 'meaning and that it is of wider import and is not confined to loss of tax. Their Lordships further held that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and the task is entrusted to the Revenue. If due to an erroneous order of the ITO the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. Their Lordships further explained that every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. Giving an example, their Lordships held, "when an ITO had adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law."
17. In this case, we have considered the impugned order under Section 263 in the light of the above broadly laid down principles of law. In this case, it has been' demonstrated before us by the learned Counsel for the assessee that the AO had made inquiries about the calculation of deduction under Section 80HHC. A specific query had been raised by the ITO about the regrinding/service charges. The assessee had explained its position by way of replies and the AO has not passed any order either in favour or against the assessee on the issue raised by him. Impliedly, the contentions advanced by the assessee have been accepted. On these facts, the issue arises as to whether the ITO can be said to have passed an erroneous order. At this stage, it will be necessary to point out that the AO is a quasi-judicial authority and every quasi-judicial authority is required to pass speaking orders in regard to any issue that may be relevant for determination of the taxable income. In the present case, undoubtedly, the AO had raised the issue and assessee had also filed the reply. Their Lordships of the Punjab and Haryana High Court in the case of CIT v. Vikas Chemi Gum India had emphasized the requirement of recording of reasons by the authorities. We hereunder quote the relevant portion:
The requirement of recording of reasons and communication thereof has been read as an integral part of the concept of fair procedure. The necessity of giving reasons flows from the concept of rule of law which constitutes one of the corner stones of our constitutional set up. The administrative authorities charged with the duty to act judicially cannot decide the matters on considerations of policy or expediency. The requirement of recording of reasons by such authorities is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. Another reason which makes it imperative for the quasi-judicial authorities to give reasons is that their orders are not only subject to the right of the aggrieved persons to challenge the same by filing statutory appeal and revision but also by filing writ petition under Article 226 of the Constitution. Such decisions can also be challenged by way of appeal under Article 136 of the Constitution of India. The High Courts have the power to issue writ of certiorari to quash the orders passed by a quasi-judicial authority/Tribunal. Likewise, in appeal, the Supreme Court can nullify such order/decision. These powers can be effectively exercised by the superior Courts only if the order under challenge contains reasons.
18. The Hon'ble Supreme Court in the case of Omar Salay Mohamed Sait v. CIT have also laid down the following principles of law in regard to the requirement for passing speaking orders:
The Tribunal is a fact-finding Tribunal and if it arrives at its own conclusions of fact, after due consideration of the evidence before it, the Court will not interfere. It is necessary, however, that every fact for and against the assessee must have been considered with due care and the Tribunal must have given its finding in a manner which would clearly indicate what were the questions which arose for determination, what was the evidence pro and contra in regard to each one of them and what were the findings reached on the evidence on record before it. The conclusions reached by the Tribunal should not be coloured by any irrelevant considerations or matters of prejudice and if there are any circumstances which require to be explained by the assessee, the assessee should be given an opportunity of doing so. On no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises; nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures or surmises, and if it does anything of the sort, its findings even though on questions of fact will be liable to be set aside by the Court.
19. Admittedly, the above principles of law have been laid down with regard to the orders passed by the Tribunal. So, however, in our considered view, the foundation for assessment is the assessment order passed by the AO who is the quasi-judicial authority. The order of the AO is subject to appeal to the CIT(A). The order of the AO is also subject to the revision by the CIT under Section 263 as well as under Section 264. It is, therefore, necessary that the AO considers every fact for and against with due care and give his finding in a manner which would clearly indicate what were the questions which arose for determination and what is the evidence pro and contra in regard to each issue and the findings recorded on such evidence. The order of the AO is silent on the issues raised by the CIT in his order under Section 263. It is only with reference to the questionnaires issued by the AO and the replies furnished by the assessee that it comes to light that the AO had made inquiry in regard to the issues raised by the CIT under Section 263. But, what is the decision of the AO much less what is the basis of such decision is not indicated in the assessment order. Such an order passed by the AO, in our considered view, would fall within the category of an erroneous order being a non-speaking order.
20. There are decisions of Tribunal, Chandigarh Bench in regard to calculation of deduction under Section 80HHC with respect to service charges, for instance, order dt. 2nd May, 2006 (copy on" record) in the case of Asstt. CIT v. Jagraon Cycle Industries, ITA No. 640/Chd/2005 (supra). If the view of Tribunal, Chandigarh Bench, is taken into consideration, then the calculation of deduction under Section 80HHC made by the assessee and accepted by the AO is wrong. If the AO had given reasons for accepting the claim of the assessee, he would, in law, be required to consider the decisions of the jurisdictional Tribunal. The assessee has drawn our attention to the decision of the Bombay Bench of the Tribunal as well as of the Hyderabad Bench of the Tribunal where a contrary view has been expressed. In our considered view, when the decision of the jurisdictional Bench of the Tribunal in favour of the Revenue is available and the AO does not follow the same, the order passed by the AO can be said to be erroneous causing prejudice to the interests of the Revenue. We are, therefore, satisfied that the CIT was within his jurisdiction to hold the order of the AO to be erroneous and prejudicial to the interests of the Revenue in regard to deduction under Section 80HHC.
21. We are conscious of the decision of the Punjab and Haryana High Court in the case of Hari Iron Trading Co. v. CIT , wherein their Lordships laid down the following principle of law:
A bare perusal of the aforesaid provision shows that the CIT can exercise powers under Sub-section (1) of Section 263 of the Act only after examining 'the record of any proceedings under the Act'. The expression 'record' has also been defined in Clause (b) of the Explanation so as to include all records relating to any proceedings available at the time of examination by the CIT. Thus, it is not only the assessment order but the entire record which has to be examined before arriving at a conclusion as to whether the AO had examined any issue or not. The assessee has no control over the way an assessment order is drafted. The assessee on its part had produced enough material on record to show that the matter had been discussed in detail by the AO. The least that the Tribunal could have done was to refer to the assessment record to verify the contentions of the assessee. Instead of doing that, the Tribunal has merely been swayed by the fact that the AO has not mentioned anything in the assessment order. During the course of assessment proceedings, the AO examines numerous issues. Generally, the issues which are accepted do not find mention in the assessment order and only such points are taken note of on which the assessee's explanations are rejected and additions/disallowances are made. As already observed, we have examined the records of the case and find that the AO had made full inquiries before accepting the claim of the assessee qua the amount of Rs. 10 lakhs on account of discrepancy in stock. Not only this, he has even gone a step further and appended an office note with the assessment order to explain why the addition for alleged discrepancy in stock was not being made.
22. It may appear that non-mentioning of the reasons for acceptance of the explanation of the assessee may not be a defect in the assessment order. So, however, in our considered view, the decision of the Hon'ble High Court has got to be read in the context in which it has been rendered. In the case of Hari Iron Trading Co. v. CIT (supra), the AO had made inquiry and collected material/explanation from the assessee. The said explanation was accepted by the AO. The reasons for accepting the explanation were not indicated in the assessment order. So, however, the AO had in the office note explained as to why the addition of Rs. 10 lakhs was not being made. The record also showed that purchases from various parties had been verified by the AO and certified copies of the statements from the parties placed on record.
23. In the present case, the defect in the order of the AO is not merely the acceptance of the explanation of the assessee but lack of reasons for taking the view in favour of the assessee. There is no evidence on record on the basis of which one can ascertain the reasons for taking the view in favour of the assessee and ignoring the decision of Tribunal, Chandigarh Bench, which is the jurisdictional Tribunal in this case.
24. It is also pertinent to mention that where the AO is enquiring about the facts and the assessee furnishes evidence, the AO may accept the evidence as sufficient in support of the claim. So, however, when a legal issue is involved and/or the interpretation of the relevant provisions of the Act is involved, it is imperative upon the AO to indicate the reasons for interpreting the provisions of the Act in a particular manner. In this case, the AO, as pointed out earlier, has not given reasons much less valid reasons for taking the view contrary to the view expressed by the Tribunal. Therefore, the order of the AO is not only erroneous for accepting the explanation of the assessee but not basing the order on any reasons much less valid reasons in regard to legal issue involved.
25. It is also pertinent to mention that the power of the CIT under Section 263 can be exercised, as pointed out earlier, if twin conditions are satisfied. One of the conditions required for exercising the power under Section 263 is that the order of the AO is erroneous. In this case, the view taken by the AO is the view canvassed by the assessee. No reasons have been given by the AO for accepting the claim accepted in regard to interpretation of law. In any case, the view canvassed by the assessee is contrary to the decision of the Tribunal and contrary to law. Therefore, in our considered view, the decision of Punjab and Haryana High Court in the case of Hari Iron Trading Co. v. CIT (supra) is inapplicable to the facts of the present case.
26. Before proceeding further, it may be relevant to refer to the following observations of the Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. :
It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, Courts must carefully try to ascertain the true principle laid down by the decision.
27. In the case of Hari Iron Trading Co. v. CIT (supra), the issue was relating to a question of fact. The assessee had furnished sufficient material to establish the claim. The AO had in the office note explained the reasons why the explanation of the assessee was accepted. In the present case, the issue is purely legal in nature. The AO, neither in the assessment order nor in the office note, placed on record the reasons for accepting the claim of the assessee in preference to the decision of the Tribunal, etc. It may be pertinent to mention that the CIT has the power to revise the order of the AO even when the latter has given reasons which are found to be contrary to law. The order of the AO without any reasons cannot be on a better footing than the order containing reasons which may not be sound. We are, therefore, of the considered view that such an order passed by the AO falls within the category of erroneous orders. Reference may also be relevant to the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (supra), wherein their Lordships held that an incorrect assumption of facts or incorrect application of law will satisfy the requirement of the order being erroneous. We are, therefore, of the considered view that the order of the AO was erroneous in regard to determination of the claim of the assessee under Section 80HHC.
28. The next issue is relating to computation of deduction for the purpose of Section 115JA. The assessee had claimed deduction on the basis of book profits in the manner as provided under Clauses (a), (b) and (c) of Sub-section (3) of Section 80HHC. The issue raised by the CIT in order under Section 263 is that reduction of book profits has wrongly been allowed by the AO insofar as the same was to be allowed to the extent of deduction allowed under Section 80HHC Circular No. 555 dt. 4th May, 1990, [(1990) 85 CTR (St) 1] and Circular No. 680 dt. 21st Feb., 1994 [(1994) 117 CTR (St) 215] and the decision of the Kerala High Court in the case of CIT v. G.T.N Textiles Ltd. (supra) to support the claim that reduction to be made from the book profits for the purpose of Section 115JA was to be made by deduction under Section 80HHC to be calculate with reference to the book profits in the manner as provided under Clause (a), (b) or (c) of Sub-section (3) or Sub-section (3A) of Section 80HHC. The CIT has pointed out that the said circulars and the decision of the Kerala High Court are with reference to Section 115J and the language of Section 115JA differs from the language of Section 115J. We have compared the language of the relevant provisions of the Act and find a distinction as rightly observed by the CIT:
115J. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(1A) Every assessee, being a company, shall, for the purposes of this section, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).
Explanation.:--For the purposes of this section, 'book profit' means the net profit as shown in the P&L a/c for the relevant previous year prepared under Sub-section (1A), as increased by--
(a) the amount of income-tax paid or payable, and the provision therefor; or
(b) the amounts carried to any reserves (other than the reserves specified in Section 80HHD or Sub-section (1) of Section 33AC, by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; or
(g) the amount withdrawn from the reserve account under Section 80HHD, where it has been utilised for any purpose other than those referred to in Sub-section (4) of that section; or
(h) the amount credited to the reserve account under Section 80HHD, to the extent that amount has not been utilised within the period specified in Sub-section (4) of that section; or (ha) the amount deemed to be the profits under Sub-section (3) of Section 33AC, if any amount referred to in Clauses (a) to (f) is debited or, as the case may be, the amount referred to in Clauses (g) and (h) is not credited to the P&L a/c, and as reduced by,--
(i) the amount withdrawn from reserves (other than the reserves specified in Section 80HHD) or provisions, if any such amount is credited to the P&L a/c:
Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or
(ii) the amount of income to which any of the provisions of Chapter HI applies, if any such amount is credited to the P&L a/c; or
(iii) the amounts as arrived at after increasing the net profit by the amounts referred to in Clauses (a) to (f) and reducing the net profit by the amounts referred to in Clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under Section 80HHC or Section 80HHD; so, however, that such amounts are computed in the manner specified in Sub-section (3) or Sub-section (3A) of Section 80HHC or Sub-section (3) of Section 80HHD, as the case may be; or
(iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956 (1 of 1956), are applicable.
(2) Nothing contained in Sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of Sub-section (2) of Section 32 or Sub-section (3) of Section 32A or Clause (ii) of Sub-section (1) of Section 72 or Section 73 or Section 74 or Sub-section (3) of Section 74A or Sub-section (3) of Section 80J.
115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997, but before the 1st day of April, 2001 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(2) Every assessee, being a company, shall, for the purposes of this section prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):
Provided that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956 (1 of 1956):
Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year failing within the relevant previous year.
Explanation.:--For the purposes of this section, 'book profit' means the net profit as shown in the P&L a/c for the relevant previous year prepared under Sub-section (2), as increased by--
(a) the amount of income-tax paid or payable, and the provision therefor; or
(b) the amounts carried to any reserves by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies;
if any amount referred to in Clauses (a) to (f) is debited to the P&L a/c, and as reduced by,--
(i) the amount withdrawn from any reserves or provisions, if any such amount is credited to the P&L a/c:
Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 (but ending before the 1st day of April, 2001) shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or
(ii) the amount of income to which any of the provisions of Chapter HI applies, if any such amount is credited to the P&L a/c; or
(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.
Explanation.:--For the purposes of this clause, the loss shall not include depreciation; or
(iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or
(v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in Sub-section (4) and Sub-section (5) of Section 80-IB, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under Sub-section (4) or Sub-section (5) of Section 80-IB; or
(vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined in the Explanation to Sub-section (4) of Section 80-IA and subject to fulfilling the conditions laid down in that Sub-section; or
(vii) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under Sub-section (1) of Section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
Explanation.:--For the purposes of this clause, 'net worth' shall have the meaning assigned to it in Clause (ga) of Sub-section (1) of Section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or
(viii) the amount of profits eligible for deduction under Section 80HHC, computed under Clause (a), (b) or (c) of Sub-section (3) or Sub-section (3A), as the case may be, of that section, and subject to the conditions specified in Sub-sectios (4) and (4A) of that section;
(ix) the amount of profits eligible for deduction under Section 80HHE, computed under Sub-section (3) of that section.
(3) Nothing contained in Sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of Sub-section (2) of Section 32 or Sub-section (3) of Section 32A or Clause (ii) of Sub-section (1) of Section 72 or Section 74 or Sub-section (3) of Section 74A.
(4) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.
It is observed from Clause (iii) of Section 115J that reduction is provided with reference to deduction under Section 80HHC to be computed in the manner specified in Sub-section (3) or Sub-section (3A) of Section 80HHC, etc. It is thus clear that legislature intended _ to allow deduction with reference to the book profits to the extent the assessee would be entitled to deduction under Section 80HHC which was to be calculated in the manner as provided under that section. It is clear from the language of the section that actual deduction permitted to the assessee under Section 80HHC was not to be reduced from the book profits, but the deduction was to be calculated with reference to the book profits as attributable to export profits to be computed in the manner under Section 80HHC. So, however, there is vital distinction in Section 115JA(viii) reproduced above. The Sub-section provides for reduction to the extent of the profits eligible for deduction under Section 80HHC computed under Clause (a), (b) or (c) of Sub-section (3) or Sub-section (3A). The words "in the manner" have been omitted from the language of above quoted Sub-section. It is, therefore, evident that after the assessment what is to be reduced from the profits and gains of business as per the books of account is the amount of deduction under Section 80HHC computed under the relevant provisions of the Act. So, a plain reading of Clause (viii) gives the indication that the AO had wrongly accepted the claim of the assessee. The AO did not notice the distinction between Section 115J and Section 115JA. The AO has not given any reasons for accepting the claim of the assessee which was calculated in the manner as provided under Section 115J. No reasons have been assigned to hold that Sub-clause (viii) of Section 115JA was different from Clause (iii) of Section 115J. We are, therefore, of the considered view that the order of the AO was erroneous insofar as it was prejudicial to the interests of the Revenue in regard to computation of deduction under Section 115JA also.
29. The CIT has also referred to certain other alleged mistakes such as wrong allowance of MAT credit, wrong claim of deduction under Section 80G, etc. The assessee has given explanations in regard to these issues and we are satisfied that there is no error committed by the AO in regard to small issues raised by the CIT. So, however, in regard to calculation of deduction under Section 80HHC and in regard to computation of profits for the purpose of Section 115JA, we are of the view that the order passed by the AO was erroneous insofar as it was prejudicial to the interests of the Revenue. The CIT was accordingly justified in setting aside the assessment order and directing the AO to make assessment afresh in accordance with law.
30. Before winding up, it may be pertinent to mention that it was brought to our notice that the CIT in fresh proceedings has decided both the issues in favour of the assessee. In our considered view, since the CIT has asked the AO to decide the issue afresh in accordance with law, the law will take its own course in passing of the fresh order by the AO. The issues have got to be decided in accordance with law and assessee has the right to appeal against the order of the AO. The order of CIT is again subject to appellate jurisdiction of the Tribunal, High Court, etc. We make it clear that our order will not prejudice the outcome of such proceedings. We have confined ourselves to the validity of order under Section 263 passed by the CIT. We, on the basis of material on record, are satisfied that the order passed by the CIT under Section 263 is within his powers and there is no infirmity in his order to the extent indicated above. We accordingly uphold his order for asst. yr. 2000-01.
31. As indicated earlier, our decision for asst. yr. 2000-01 shall apply mutatis mutandis to the appeal for asst. yr. 2001-02 as well.
32. In the result, the appeals of the assessee for both the assessment years are dismissed.