Calcutta High Court
Som Dutt Builders Pvt. Ltd vs Commissioner Of Income Tax on 19 May, 2011
Author: K. J. Sengupta
Bench: Kalyan Jyoti Sengupta
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ITA 16 of 2006
In The High Court At Calcutta
Special Jurisdiction (Income Tax)
Original Side
Present:
The Hon'ble Justice Kalyan Jyoti Sengupta
And
The Hon'ble Justice Kanchan Chakraborty
Som Dutt builders Pvt. Ltd.
Vs.
Commissioner of Income Tax
Judgment on: 19.5.2011.
K.J. Sengupta, J.:-
This appeal is against the judgment and order dated 27th October 2005,
passed by the Income Tax Appellate Tribunal, 'C' Bench, Kolkata in Income Tax
Appeal No. 2027/Kol./2004 for the assessment year 1998-99. The instant appeal
was admitted on the following questions of law:
"Whether on the facts and in the circumstances of the case, the Tribunal
misdirected itself in law and adopted a wholly erroneous approach in upholding
the initiation of reassessment proceedings in the instant case in respect of the
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Assessment year 1998-99 through the impugned notice dated 10.03.2003 issued
by the Assessing Officer under Section 148 of the Income Tax Act, 1961?
Whether the finding of the learned Tribunal that the action of the Assessing
Officer in initiating the impugned reassessment proceedings in the instant case
for the Assessment year 1998-99, was not a case of change of opinion, was
wholly arbitrary and against the facts and evidences on record, unreasonable
and/or otherwise perverse?
Whether the Tribunal misdirected itself in law and misconstrued the
provisions of Section 80HHB of the said Act in holding that the Assessee
Company was not entitled to the deduction under the said section in respect of
the contract receipts representing the profits and gains derived from and arising
out of the foreign project executed in Iraq and assessed to tax in its hands in the
Assessment Year 1998-99, and whether the findings recorded by the learned
Tribunal in this respect are wholly arbitrary, baseless, against the facts and
evidences on record, unreasonable and/or otherwise perverse?
Whether the findings of the learned Tribunal that the Appellant Assessee
Company was not maintaining separate accounts in respect of profits derived
from the business of execution of foreign project and that it did not seek
permission of the Reserve Bank of India or such other Competent Authority
allowing extension of time for repatriation of convertible foreign exchange beyond
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six months of the relevant previous year, were wholly arbitrary, baseless, against
the facts and evidences on record, unreasonable and/or otherwise perverse?"
The appellant assessee company being one of the large engineering
construction companies executes various civil construction works in India and
abroad. The appellant filed the returns for the assessment year 1998-99
originally on 30th November 1998, declaring its total assessing income at Rs.
5,45,79,843 together with consolidated final audited accounts in the form of
balance-sheet, profit and Loss Account, Schedules of the Account and Annual
Reports of the said year. In the return the appellant had claimed deduction under
Section 80HHB of the said Act in the sum of Rs. 4,58,36,000/- being 50 per cent
of the profits and gains derived by it from the business of execution of a foreign
project in Iraq. While seeking deduction under the aforesaid Section it was
explained that foreign project was executed by it in Iraq during the year 1979-82
under Engineering Projects India Ltd, which company was allotted the said
Project by way of sub-contract by M/s. Mitsubishi Corporation Japan (MC) and
M/s. Pacific Consultants International, Japan (PCI), the principal contractors
having been awarded civil, electrical and mechanical works of the said project by
the Ministry of Culture and Information, Government of Iraq.
The Engineering Projects India Ltd., (EPI) a public sector undertaking,
wholly owned and controlled by the Government of India, had allotted the
execution of civil construction work forming part of the said foreign project to the
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appellant asessee in terms of the contract dated 24th December, 1978. The said
works could be completed on 2nd June, 1982 in lieu of 1st March 1982 however
valid extension was granted. The appellant petitioner executed works worth Iraqi
Dinar ID 23,20,000/- which was subsequently revised to Iraqi Dinar 24,74,500.
Fifty percent of the said amount was payable in Iraqi Dinars in Iraq, and
remaining 50 per cent in US dollars outside Iraq. The dispute between MC and
PCI on the one hand and Appellant assessee company being Indian firm on the
other hand regarding wrongful adjustments/ appropriation of monies held by
MC and PCI under the said foreign project, arose, and consequently, the
arbitration proceedings were initiated in London.
On 15th January 1985 the Appellant assessee company executed a
memorandum of understanding agreeing to share the benefits and liabilities
accruing and/or arising in pursuance of the said arbitration in the ratio of 77
per cent and 23 per cent respectively. Claims and counter claims were raised
before the Arbitrator in London by the parties to the arbitration. Ultimately, a
lump sum consent award for Us $ 4.15 million, in full and final settlement of all
the claims of the parties, was made by the Arbitrator in favour of E.P.I.L. Out of
this amount, US $ 1.835 million was paid by MC PCI directly to EPIL and the
remaining US $ 2.315 million was kept in a joint bank account E.P.I.L. and SDB
opened with Syndicate Bank New Delhi in August 1994. The proceeds of the
convertible foreign exchange, US $2.315 million being Rs. 7,25,30,350 was
repatriated to India on 17th October, 1994 and credited to the said joint Bank
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account, and out of the same, a sum of Rs. 7,25,30,000 was invested in fixed
deposit on 21.10.1994 in the joint names of E.P.I.L. & S.D.B. with Syndicate
Bank. However, the said final accounts between E.P.I.L. and appellant could not
be settled and the disputes in between them, were also referred to arbitration,
and the learned Sole Arbitrator ultimately passed an award on 20th January,
1998 and thereby the appellant/petitioner was declared to be entitled to receive
from E.P.I.L. a net sum of Rs. 9,27,14,371, which amount was directed by the
learned Arbitrator to be paid to Appellant from the said joint bank account with
Syndicate Bank, New Delhi.
The appellant actually received an aggregate sum of Rs. 9,27,20,576
comprising of contract receipts being the amount payable for execution of the
said foreign project at Rs. 7,25,30,350 and the interest for delayed payment of
the said amount in the aggregate sum of Rs. 2,01,90,226.
The said sum of Rs. 7,25,30,350 was credited by the appellant in the
Books of Account/ profit and loss account maintained/drawn project
wise/division-wise, for the financial year ending 31st March, 1998 under the
heading 'overseas other receipts', and the interest of Rs. 2,01,90,226 was
credited under the heading 'overseas other incomes.'
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The appellant thus claimed deduction under section 80HHB as allowable
under law to the extent of Rs. 4,58,36,000 being 50% of Rs.9,16,71896.00 after
deducting expenses of Rs. 10,48,680.
The Assessing Officer by assessment order dated 26th March 2001 on
hearing held that appellant/assessee was entitled to deduction under Section
80HHB of the said amount of Rs. 3,57,40,835, being 50 per cent of the net
contract receipts of Rs. 7,14,81,670 only, and that it was not entitled to any
deduction under the said Section 80HHB in respect of the income by way of
interest in the aggregate sum of Rs. 2,01,90,226 received by its on account of
delayed payment of the said contract receipts.
The appellant being aggrieved by the said original assessment order dated
26.03.2001 preferred appeal before the Commissioner of Income Tax (appeals)
against the portion disallowing deduction of the amount of interest under Section
80HHB. However he did not succeed, and order of assessing officer was affirmed
by the said appellate authority by order dated 13th May, 2002 which was
accepted by the appellant. The Revenue incidentally did not prefer any appeal
against the said order of the assessing officer allowing deduction under Section
80HHB as far as the principal amount received by the petitioner is concerned.
Thereafter on 10th March 2003 a notice was received by the appellant
purporting to initiate reassessment proceedings under Section 148 (2) of the said
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Act for the same assessment year. The reasons for reopening of the said
assessment which was taken to appeal to appellate authority is based on audit
query. Pursuant to the said notice the appellant filed its fresh return of total
income for the assessment year 1998-99 under protest contending inter alia, no
part of its income for the said year had escaped assessment nor any excess
deduction was granted to it, which it was not otherwise entitled in law. The
explanation offered by the appellant was not accepted by the Assessing Officer in
the reassessment proceeding.
After hearing it was held by him that the deduction allowed earlier was not
allowable as there was mistake apparently on the face of the record by reason of
the fact that the income accrued prior to introduction of Section 80HHB of the
said Act on completion of execution of works in Foreign Country. The accrual of
income was so held because the appellant/assessee has been maintaining
mercantile system of accounting and the assessee should have shown the
receivable amount of foreign exchange as per agreement minus expenditure as its
income for the assessment year 1982-83, since the project was completed in
March 1982. Section 80HHB was inserted in the Income Tax Act, with effect from
April 1983. The appellant thereafter approached the learned Tribunal, being
aggrieved by the impugned order of reassessment dated 22nd December 2003 and
the Commissioner of Income Tax did not accept the contention of the appellant
and upheld the decision of the Assessing Officer passed in reassessment
8
proceedings. The learned Tribunal on appeal being preferred also accepted both
the orders in reassessment proceedings.
Mr. Poddar, learned Senior Advocate appearing for the appellant in support
of the appeal contends that in this case reopening of the assessment is not
permissible under the law as it will appear from the order deciding to reopen
that the same is based on mere change of opinion. He has drawn our attention to
the paragraph 2.5 of the original assessment order and contends that there has
been complete discussion of all the facts vis-à-vis Section 80HHB of the Act.
All the relevant facts applicable to law was further cleared from the audit query
report by the Assessing Officer while passing the original assessment order.
These two documents clearly prove that an opinion was actually formed by the
Assessing Officer while passing original assessment order, consequently allowing
deduction under Section 80HHB. He submits that the above legal submission is
supported by two Supreme Court decisions in case of CIT v. M/s. Kelvinator of
India Ltd reported in (2010) 320 ITR 561 (SC) and M/s. Binani Industries Ltd.,
Kerela v. Assistant Commissioner of Commercial Taxes, VI Circle, Bangalore &
Ors. reported in (2007) 6 VST 783 and the decision of the Delhi High Court in the
case of Cariton Overseas Pvt. Ltd. v. Income Tax Officer reported in (2009) 318
ITR 295.
He assails the orders passed by all the revenue authorities contending
that the reasons recorded therein are nothing new and were already known to
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the Assessing Officer previously and the same were part of the original
assessment proceedings. Hence, Revenue is not competent to change opinion on
reappraisal/reappreciation of the facts on record, based upon the audit objection
as the same is wholly without jurisdiction and unjustified in law, more
particularly in the light of well settled proposition of law that final decision
taken in the course original assessment proceedings by both the Assessing
Officer and the Appellate Authority cannot be the subject matter of the re-
adjudication, reappraisal or review. This position of law has been settled in the
following judgments of the Supreme Court and various High Courts which are as
follows:
Indian & Eastern Newspaper Society v. CIT (1979) 119 ITR 996.
CIT v. Lucas TVS LTD (2001) 249 ITR 306(SC)
IMC Ltd. v. JCIT (2003) 261 ITR 731(Cal)
Transworld International Inc. v. JCIT (2005) 273 ITR 242(Del.)
Asian Paints Ltd. v. Deputy Commisioner of Income Tax reported in (2009)
308 ITR 195
Gemini Leather Stores v. Income Tax Officer (1975)100 ITR 1 (SC).
In the instant case Revenue had not pointed out any new fact which was
not known earlier. The Revenue had taken different views while reopening
original assessment orders. This is legally impermissible as laid down in the case
of Indian & Eastern Newspaper Society v. CIT (1979) 119 ITR 996.
10
He further submits with the authority of two Supreme Court decisions in
case of Commissioner of Income Tax v. Rao Thakur Narayan Singh reported in
(1965) 56 ITR 234 and in the case of Oil India Ltd. v. CIT reported in (1982) 138
ITR 836 that original assessment order otherwise cannot be changed and/or
reopened as the doctrine of merger would be applicable in this case. The original
assessment order had already merged with the appellate order of CIT (A). On
merit he contends that the conditions for allowing deduction under Section
80HHB of the said Act are fully satisfied in this case as the total income of the
Assessee included inter alia a sum of Rs. 7,14,81,670/- as profits and gains
derived by it from the execution of said foreign project and this was received by it
in terms of the Indian award dated 20th January 1998. He submits that the year
in which completion of execution of the overseas project is wholly irrelevant for
allowing deduction under Section 80HHB and this aspect of the matter has been
accepted by the learned Tribunal by its previous order dated 27th March 2009 in
respect of the returns for assessment year 2003-04 filed by the assessee. On
comparative study of the other Sections of the Act it will appear carrying out of
the activity has no co-relation with the benefit of deduction under Section
80HHB. He submits that what is relevant is the fact whether gross total income
of the assessee concerned in any year includes any profit or gains derived from
business of foreign project or any work therein. If these conditions are satisfied
deduction under that Section has got to be allowed. He also submits time
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mentioned in the said Section has no relevancy as regard carrying out of fiscal
activity of the execution of the overseas project.
He contends that in this case income accrued only when the disputes were
finally settled by the award dated 20th January 1998 with the financial year
ending on 31st March 1998 corresponding to the assessment year 1998-99.
He submits that the income is said to have accrued or arisen to the
assessee only when he acquires a legally enforceable right to receive the amount,
or, compulsorily the said amount has become legally due to him from his debtor.
Merely raising of claim based on execution of a contract, work or job does not
create any legally enforceable right to receive the same. He has referred to the
following decisions in this connection.
CIT v. Bharat Petroleum Corporation Ltd. reported in (1993) 202 ITR 492.
CIT v. Hercules Trading Corporation reported in (1982) 143 ITR 504.
Swadeshi Cotton and Flour Mills Pvt. Ltd. v. CIT reported in (1964) 53 ITR
134.
He submits, therefore, that the appeal should be allowed and all the
judgments of the Revenue authorities below should be set aside and original
order of assessment should be restored.
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Mr. Som appearing for the Revenue contends on the other hand that in
this case the assessing officer is justified in reopening the case as in the original
assessment order under Section 143 (3) of the said Act no opinion was expressed
by the Assessing Officer on the question of accrual of income that is to say right
to receive the income from the foreign contract in the context of execution of the
contract and certificate to that effect by the foreign principal vis-à-vis non-
expression of views on points in earlier order. This ground was not taken before
the CIT (Appeal) as such there was no occasion to form any opinion, as in the
appeal CIT was limited to the point of disallowance of deduction of the amount of
interest of Rs. 2 Crores.
He contends that there has been substantial change in Section 147 in the
year 1989 and legal implication of change has been discussed in a decision of
Delhi High Court reported in (2009) ITR 295 (Carlton Overseas Pvt. Ltd. v. ITO).
He submits that scope of Section 147 is much wider and can be applied, even if
an assessee had disclosed fully and truly all material facts. He contends that
only precondition for invoking Section 147 is escapement of income. Proviso to
Section 147 does not apply to the fact and situation of this case.
He referring to the decision of the Supreme Court in case of CIT vs. PVS
Beedies Pvt. Ltd. reported in (1999) 237 ITR 12 (SC) submits that when
apparently legal mistake is found to have been committed by the A.O. reopening
of assessment is legally permissible.
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He contends that the said Section 80HHB was introduced with effect from
1st April 1983 that is from Assessment Year 1983-84 admittedly Iraq contract
was completed in the assessment year 1982-83 so ex facie Section 80HHB is not
applicable in the instant case.
He urges that Section 80HHB requires fulfillment of three conditions
namely maintenance of separate accounts for foreign project, certificate from an
accountant showing amount to have been debited from the profit and loss
account and credited to foreign project reserve account to be utilized by the
assessee during the period of 5 years. Convertible foreign exchange is brought
within six months from the date of previous year.
He contends that record shows that the authorized representative before
the Assessing Officer admitted that the assessee neither maintained separate
accounts nor permission of Reserve Bank of India for extension of time beyond
six months for bringing foreign exchange was obtained. The learned Tribunal and
learned CIT (Appeal) found clearly that that no separate account was maintained.
In view of concurrent findings of fact this Hon'ble Court should not disturb the
impugned judgment and order. Therefore, accrual of income has to be accepted
in this case when the contract work was completed and on completion of the
same right to receive income arises. This position of law has been settled in the
decision of full Bench of this Court in P. G. Sahoo's case (reported in 307 ITR
14
243) placing reliance on the decision of the Supreme Court in case of Union of
India vs. M/s. L. K. Ahuja & Co. reported in AIR 1988 SC 1172 and 82 ITR 835.
He further submits that sheer fact of pendency of Arbitration does not
suspend chargeabililty of tax on income as it was accrued when the work is
completed.
After hearing the learned counsel for the parties and considering the
records it appears to us in order to decide the appeal on the aforesaid formulated
points as rightly pointed out by Mr. Poddar following core issues are involved in
this matter:-
1. Whether on the facts and circumstances of this case initiation of re-
assessment proceedings based on change of opinion on the question of
applicability of Section 80(HHB) of the Income Tax Act, 1961 is legally
permissible?
2. If the aforesaid point is decided in negative then whether the actual
receipt of the amount arising out of the works executed pursuant to the
foreign contract can be treated to be accrual of income for the purpose
of giving deduction under Section 80(HHB) of the said Act although, the
assessee maintains mercantile system of accounting?
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3. Whether even if it is accepted that actual receipt of the income is
treated for the purpose of assessment of tax conditions mentioned in
the said section are fulfilled to allow deduction or not?
The first question assumes importance. From the records we find that by the
original assessment order Assessing Officer allowed a sum of Rs.3,57,40,835/-
being the 50% of the contract receipt as per award of Rs. 7,14,81,670/-. It
appears from the order the Assessing Officer had taken note of the fact that the
said amount was received after the award in the Arbitration was passed. It is
also recorded specifically the assessee's receipt was in pursuance of the contract
with the Ministry of Culture and Information, Government of Iraq. It has been
further recorded that the said amount was credited by the assessee in its
accounts in the previous year 1998-99. After recording the Assessing Officer
held :-
"Accordingly, the assessee would be entitled to deduction under Section 80(HHB)
of Rs.3,57,40,835/-. At the same time the amount of interest of Rs.2.01 crores
owing to late receipt of the said amount was disallowed and it was not treated to
be the income from the aforesaid contract."
In our view the Assessing Officer has in the original assessment order
consciously formed an opinion after noting and recording of materials, and facts
that the assessee was entitled to deduction under the said section, particularly
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when amount of interest accrued on the said principal amount was disallowed.
Before the CIT (Appeal) when appeal was taken amongst other against
disallowance of Rs.2.01 crores has decided and CIT (Appeal) formed opinion in
the manner as follows:-
"Under the second ground of appeal the appellant objected to withholding
50% of the deduction under Section 80(HHB) on account of interest of
Rs.2,01,90,220/- received by the appellant allegedly on delayed payment in
respect of the TV and radio projects executed by the appellant in Iraq. Such
amount of interest was settled by an arbitration through an arbitration award
dated 20th January, 1998 in favour of the appellant on the ground that interest
had been credited."
"I have considered the submission. The case cited by AR in 195 ITR page
81 does not apply to the facts of our case. In fact, in this the AOs power to
consider receipt and grant relief in relation to production attributable to such
use for rendering of services is recognized. The appellant's claim is that the
composite receipt in the award should be taken as the receipt from the foreign
project and deduction under Section 80HHB should be allowed on the entire
award, including interest. I am unable to agree with the appellant that interest
awarded by Arbitrator is consequent upon the foreign project undertaking. The
award is in relation to delayed payments and would not have been allowable in a
similar award also where the project would have been a domestic one on the
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principle of natural justice. In this case the execution of construction project was
entitled to certain contract receipts under a contractual obligation which was not
paid within time resulting in the operation of a clause of the mutual contract
calling for intervention of the Arbitrator in any case or a dispute.
The award by the Arbitrator gave rise to the interest which was not as a
result of execution of construction contract. The interest was like compensation
for the delay.....................I therefore agree with the Assessing Officer (wrongly
mentioned as Appellant) and reject the ground of appeal."
Thus, it appears from the two decisions of two authorities in the original
assessment proceedings that both the authorities have formed opinion on the
allowability of the deduction in the order of Assessing Officer directly and
indirectly by the appellate order. It is true in two decisions reasoning as to
allowability have not been recorded by any of the authorities.
We are of the view that just because reasoning was not given it cannot be
said that these decisions are not based on no opinion for which reopening of
earlier assessment is called for.
A large number of decisions have been cited at the bar by both the sides to
establish the legal principle that mere change of opinion cannot form the basis
for reopening completed assessment even after amendment of Section 147.
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Those decisions are as follows:-
1. India Steamship Co. Ltd. v. JCIT reported in (2005) 275 ITR 155 (Cal)
2. Transworld International Inc. v. JCIT reported in(2005) 273 ITR 242 (Del),
3. CIT v. Foramer France reported in (2003) 264 ITR 566 (SC),
4. Simplex Concrete Piles (India) Ltd. v. DCIT reported in (2003) 262 ITR 605
(Cal),
5. IMC Ltd. v. JCIT reported in (2003) 261 ITR 731 (Cal),
6. Mercury Travels Ltd. v. DCIT reported in (2002) 258 ITR 533 (Cal),
7. CIT v. Kelvinator of India Ltd. reported in (2002) 256 ITR 1 (Del)(FB),
8. CIT v. Siva Traders reported in (2002) 255 ITR 77 (Ker),
9. Garden Silk Mills Pvt. Ltd. v. DCIT reported in (1999) 237 ITR 668 (Guj),
10. Saradbhai M. Lakhani v. ITO reported in 231 ITR 779 (Guj).
All the decisions in our view were rendered following the same principle as
indicated above on the relevant facts and circumstances mentioned in those
cases. We think that recent pronouncement of the Supreme Court in case of
Commissioner of Income Tax v. Kelvinator of India limited reported in (2010) 320
ITR 561 (SC) has clearly stated the position of law as regard applicability of
Section 147 after amendment of 1989. We could do no better than to quote the
exact wordings of Their Lordships "Therefore, post - 1st April, 1989, power to
re-open is much wider. However, one needs to give a schematic interpretation to
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the words "reason to believe" failing which, we are afraid, Section 147 would give
arbitrary powers to the Assessing Officer to re-open assessments on the basis of
"mere change of opinion", which cannot be per se reason to reopen. We must
also keep in mind the conceptual difference between power to review and power
to re-assess. The Assessing Officer has no power to review; he has the power to
re-assess. But re-assessment has to be based on fulfillment of certain
precondition and if the concept of "change of opinion" is removed, as contended
on behalf of the Department, then, in the grab of re-opening the assessment,
review would take place. One must treat the concept of "change of opinion" as an
in-built test to check abuse of power by the Assessing Officer. Hence, after 1st
April, 1989, Assessing Officer has power to re-open, provided there is "tangible
material" to come to the conclusion that there is escapement of income from
assessment. Reasons must have a live link with the formation of the belief. Our
view gets support from the changes made to Section 147 of the Act, as quoted
hereinabove."
In the context of the aforesaid earlier Gujarat High Court decision in case
of Gruh Finance Ltd. V. Joint Commissioner of Income Tax (Asst.) reported in
(2000) 243 ITR 482 cited by Mr. Some needs consideration. In this judgment it is
held that at the time of first assessment if no conscious consideration of the
material is made and a mistake has been committed by Assessing Officer, then it
is a case of "reason to believe" within the meaning of Section 147 of the Act and
in that case it may call for reopening of assessment. To put differently if on
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conscious consideration of materials then available, decision is taken
reassessment under Section 147 of the Act is not permissible.
It seems to us that Gujarat High Court has made distinction where
reassessment is permissible.
This decision in our view in this case clearly helps the assessee's case as
factually we find that the earlier Assessing Officer in original assessment order
and that of in appeal the Appellate Authority on consideration of all the materials
and relevant facts formed opinion to hold that the assessee is entitled to
deduction under Section 80(HHB).
In view of the aforesaid discussion and the latest Supreme Court judgment
(supra) we hold that in this case attempt has been made under Section 147 to
review the original assessment order. We also hold that there could not be any
reason or occasion or escapement of any income as all materials and facts were
placed before the Assessing Officer earlier. We are of the view as appropriately
pointed out by Mr. Poddar that doctrine of merger in this case applies for against
the original assessment order the Revenue could have preferred appeal on the
question of allowance of deduction under Section 80(HHB), even in the appeal
preferred by the assessee against disallowance of deduction of amount of interest
earned on account of delayed payment of principal amount the aforesaid point
could have been agitated by the Revenue. Therefore, on acceptance of the
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original assessment order by the Commissioner of Income Tax (Appeal) the
deduction in relation to principal amount has become final and binding.
Doctrine of merger has been applied by the Supreme Court in fiscal matters long
time back in this connection. It would be useful to rely on the observation of the
Supreme Court in case of C.I.T. v. Rao Thakur Narayan Singh reported in (1965)
56 ITR 234 (SC). At page 238 of the report Justice Subba Rao speaking for the
Bench observed as follows:-
"The Income-tax Act is a self-contained one. It creates a hierarchy of
tribunals with original, appellate and revisional jurisdictions. Section 31 gives,
inter alia, right of appeal against some orders of the Income-tax Officer to the
Appellate Assistant Commissioner; section 33 provides for a further appeal to the
Income-tax Appellate Tribunal; and sub-section (6) of section 33 says that save
as provided in section 66 orders passed by the Appellate Tribunal on appeal shall
be final. Section 66 provides for reference to the High Court on question of law;
and section 66A provides for appeals in certain cases to the Supreme Court. It is
clear from the said provisions that the order of the Tribunal made within its
jurisdiction, subject to the provisions of section 66 of the Act, is final. Therefore,
the decision of the Tribunal in respect of the subject-matter under appeal before
it is final and cannot be reopened by the assessee or the department."
The Division Bench of this Court in case of Oil India Limited v. C.I.T
reported in (1982) 138 ITR 836 (Cal), at page 840 of the report has been pleased
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to reiterate the question of finality of any order passed by Revenue Officers.
Therein it has been stated as follows:-
"Now, it is well settled that before the AAC certain orders are appealable. It
is also well settled that in an appeal preferred before the AAC the whole
assessment is open for review by the AAC. He is both the appellate as well as the
adjudicating authority. But his jurisdiction is limited to the appeal preferred
before him. There are certain orders which are not appealable before the AAC
but certain types of allegations can be taken up in an appeal by separate
appeals. Apart from those two cases if an assessment is the subject-matter of
appeal then any ground which was held in favour of the assessee can also be
held against him though the appeal was preferred by the assessee."
We are, therefore conclude when no action was taken against the order of
the Commissioner of Income Tax (Appeal) by the Revenue in relation to original
Assessment order this issue has become final and binding as far as the said
assessment year is concerned. On that ground it was not open for the Auditor
for that matter Assessing Officer to reopen under Section 147/148 of the said Act
the settled issue on the quasi judicial side.
We are constrained to observe that if the decisions which have reached its
finality and which in quasi judicial process could have been rectified by due
process of law and subsequent attempt is made to resort to extra judicial process
23
after decision is rendered same is tantamount to sheer abuse of the power and
action without authority. Now coming to the merit of the case as argued by both
the learned counsels this Court needs to examine whether deduction was allowed
correctly or not.
We, therefore, set out the said section 80(HHB) of the said Act to the extent
of relevancy as follows:-
"Deduction in respect of profits and gains from projects outside India.
80HHB. (1) Where the gross total income of an assessee being an Indian
company or a person (other than a company) who is resident in India includes
any profits and gains derived from the business of-
(a) the execution of a foreign project undertaken by the assessee in
pursuance of a contract entered into by him, or
(b) the execution of any work undertaken by him and forming part of a
foreign project undertaken by any other person in pursuance of a
contract entered into by such other person,
with the Government of a foreign State or any statutory or other public authority
or agency in a foreign State, or a foreign enterprise, there shall, in accordance
with and subject to the provisions of this section, be allowed, in computing the
24
total income of the assessee, a deduction from such profits and gains of an
amount equal to-
..............................................................
.............................................................. and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year; Provided that the consideration for the execution of such project or, as the case may be, of such work is payable in convertible foreign exchange. (2) For the purpose of this section,-
(a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder;
(b) "foreign project" means a project for-
(i) the construction of any building, road, dam, bridge or other structure outside India;
(ii) the assembly or installation of any machinery or plant outside India;
25
(iii) the execution of such other work (of whatever nature) as may be prescribed.
(3) The deduction under this section shall be allowed only if the following conditions are fulfilled, namely:-
(i) the assessee maintains separate accounts in respect of the profits and gains derived from the business of the execution of the foreign project, or, as the case may be, of the work forming part of the foreign project undertaken by him and, where the assessee is a person other than an Indian company or a co-operative society, such accounts have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant;
(ii) an amount equal to such percentage of the profits and gains as is referred to in sub-section (1) in relation to the relevant assessment year is debited to the profit and loss account of the previous year in respect of which the deduction under this section is to be allowed and credited to a reserve account to be called the "Foreign Projects Reserve Account" to be utilised by the assessee during a period of five years next following for the purposes of his business other than for distribution by way of dividends or profits;26
(iii) an amount equal to such percentage of the profits and gains as is referred to in sub-section (1) in relation to the relevant assessment year is brought by the assessee in convertible foreign exchange into India, in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder, within a period of six months from the end of the previous year referred to in clause (ii) or, within such further period as the competent authority may allow in this behalf:
Provided that where the amount credited by the assessee to the Foreign Projects Reserve Account in pursuance of clause (ii) or the amount brought into India by the assessee in pursuance of clause (iii) or each of the said amounts is less than such percentage of the profits and gains as is referred to in sub-section (1) in relation to the relevant assessment year, the deduction under that sub-section shall be limited to the amount so credited in pursuance of clause (ii) or the amount so brought into India in pursuance of clause (iii), whichever is less. Explanation- For the purposes of clause (iii), the expression "competent authority" means the Reserve Bank of India or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign exchange.
(4) If at any time before the expiry of five years from the end of the previous year in which the deduction under sub-section (1) is allowed, the assessee utilises the 27 amount credited to the Foreign Projects Reserve Account for distribution by way of dividends or profits or for any other purpose which is not a purpose of the business of the assessee, the deduction originally allowed under sub-section (1) shall be deemed to have been wrongly allowed, and the Assessing Officer may, notwithstanding anything contained in this Act, recomputed the total income of the assessee for the relevant previous year and make the necessary amendment;
and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the previous year in which the money was so utilised. (5) Notwithstanding anything contained in any other provision of this Chapter under the heading "C.- Deductions in respect of certain incomes," no part of the consideration or of the income comprised in the consideration payable to the assessee for the execution of a foreign project referred to in clause (a) of sub- section (1) or of any work referred to in clause (b) of that sub-section shall qualify for deduction for any assessment year under any such other provision."
The said section admittedly has come into effect from 1st April, 1983, during currency of assessment year 1983-84. At the relevant point of time maximum extent of deduction was 50%. This section was in the statute book for a period of 5 years. Obviously, the aforesaid fiscal measure was taken to encourage the builder and contractor to spread over their overseas business in order to earn foreign exchange.
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Admittedly, Iraq Government awarded the contract and the contract was executed in the assessment year 1982-83. Therefore if the date of completion of construction work is reckoned deduction cannot be allowed. It is thus the basic issue as appropriately submitted by Mr. Som, when did the income accrue to the assessee? Is it the date of receipt or is it the date of completion of construction? The assessee-appellant admittedly maintained mercantile system of accounting hence, date of accrual would be the relevant in this case. As it is correctly pointed out by Mr. Som that accrual means right to receive, and this position of law has been settled in the Full Bench decision of this Court in P.G. Sahoo's case reported in 307 ITR 243. At page 261 of the report this judgment has considered following decisions of Supreme Court rendered in E.D. Sassoon's case reported in 26 ITR 27.
We think that the concept of accrual of income cannot be applied uniformly in all cases as it depends upon the nature of the case when it does accrue in real sense, not the possibility of being accrued. We shall discuss this issue with reference to various decisions little later. On careful reading benefit under the said section was allowable in two cases; namely execution of a foreign project undertaken by the assessee in pursuance of a contract entered into by him with the Government of a foreign State or any statutory or other public authority or agency in a foreign State. This is allowable in a case where the entire work is executable in foreign country or any work executed within the country but in connection with execution of foreign project. This would be clear from the 29 clarification of the words foreign project mentioned in the said section. The expression and meaning of "foreign project" has been stated that construction of any building, road, dam, bridge or other structure outside India; the assembly or installation of any machinery or plant outside India; the execution of such work (of whatever nature) as may be prescribed. The said benefit was applicable if the following amongst other conditions are fulfilled:
(i) maintenance of separate accounts, in respect of profits and gains derived from the business of the execution of foreign project, (ii) furnishing certificate along with returns of income, in prescribed form from an Accountant under the Act certifying deduction has been correctly claimed in accordance with the provisions of this section, (iii) An amount equal to such percentage of profits and gains as is referred to in sub-section (1) in relation to the relevant assessment year is debited to profit and loss account of the previous year in respect of which deduction under this section is to be allowed and credited to a reserve account such amount is brought by the assessee, in convertible foreign exchange into India.
The convertible foreign exchange is to be brought within a period of six months from the end of previous year referred to. Therefore, unless this amount is brought upon conversion of foreign exchange the benefit could not be available, and on conversion it has to be shown in the books of accounts. Thus it 30 logically follows that on actual receipt of the money this benefit is available irrespective of the question of accrual.
In this case, on fact it was found that convertible foreign exchange was brought in 1998 and within the stipulated time. We think that when a statutory provision requires in substance with specific mode of accounting for extending facility the books of account has to be maintained in that way. In other words, in order to get the said benefit of deduction actual receipt is the criteria not the accrual. We are thus unable to accept the contention of Mr. Som that accrual of income is the basis for getting benefit under this section.
While passing order of re-assessment the Assessing Officer observed that the assessee ought to have mentioned in the books of account in the same financial year in which the execution of the work was completed namely in March 1982. We think that right to receipt the amount does not crystallize with completion of construction works. In case of this nature the right to receive any amount crystallizes generally when the bills are raised and accepted or agreed to be paid, and not before that.
Particularly in this case, the situation is something different. It was on record produced before all the authorities that though the work was completed in March 1982 but the right to receive, crystallized when Indian award dated 20th January 1998 was passed. Admittedly, the assessee company was awarded sub- 31 contract by E.P.I.L. which was allotted the said project by way of sub-contract by M/s. MC, PCI, the Principal Contractors. From the record it appears that after completion of construction work in March 1982 the dispute arose between the MC and PCI on the one hand, and EPIL, and then appellant assessee on the other hand, regarding wrongful adjustments, appropriation of monies done by MC and PCI under the foreign project. Then in London the Arbitrator passed lump sum consent award in favour of EPIL. Out of this awarded amount a portion was paid by MC/PCI directly to EPIL and remaining was kept in a joint bank account of EPIL and appellant opened with the Syndicate Bank, New Delhi in August 1994. Thereafter disputes between EPIL and appellant was resolved by the learned Arbitrator on 21st August 1997. Thus it is clear that the right to receive crystallized on resolution of the dispute in arbitration.
The law has now been settled that income arises to a person (assessee) only when he acquires legally enforceable right to receive the amount, conversely the same amount becomes legally due and payable to him by his debtor or the same is credited in his favour. Any claim based on execution of a contract work or job does not create any legally enforceable right to receive the same.
In the case of Commissioner of Income Tax v. Bharat Petroleum Corporation Ltd. reported in 202 ITR 492 (Cal) the Division Bench of this Court at page 499 has been pleased to observe that " therefore, the claim until settled 32 and cleared was a mere claim and does not give rise to any right to receive the said additional claim."
At page 500 of the said report it is observed by Their Lordships as follows:-
"As the assessee was maintaining its accounts on the mercantile basis, until and unless the assessee has acquired a right to receive the said amount which it has claimed before the Government in clear violation of the directive of the Ministry of Petroleum, the said amount cannot be said to have accrued to the assessee or to have resulted in an accrual of income."
In the case of Commissioner of Income Tax v. Hercules Trading Corporation reported in 143 ITR 504 (Cal) the Division Bench at page 507 of the report has been pleased to observe that "the assessee's right to get compensation is very much in dispute. This is not a case where the assessee is entitled to get compensation but the quantum of compensation is in dispute. Here the entire right of the assessee to get compensation is under jeopardy. We are of the view that if the assessee's to get the compensation itself is being disputed and is in jeopardy the assessee cannot be assessed on the compensation amount on the basis of the mercantile system of accounting."
In this case observation of the Supreme Court in case of E.D. Sassoon & Company Ltd. v. CIT reported in 26 ITR 27 (SC) has been relied on. The 33 observation of the Supreme Court in this case is very apposite to record here also "but in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in praesenti, solvendum in futuro, it cannot be said that any income has accrued to him."
We think that the Supreme Court decision in case of CIT v. A. Gajapathi Naidu reported in 53 ITR 114 is absolutely an appropriate authority on the facts and circumstances of the present case. In this case the assessee company was maintaining its accounts as per mercantile system. It undertook the work of supplied stones during the year 1966-67 to 1968-69. A dispute arose regarding its claim of the assessees which are referred to Arbitration in the year 1972. The Arbitrator gave his award on November 5, 1976 and a fixed sum of Rs.2,32,000/- was payable to the assessee by way of a compensation. This compensation award treated as income of the accounting year which ended on March 31, 1977. On the aforesaid factual background the Supreme Court has been pleased to rule at page 536 of the report that the assessee could not have claimed this amount before the same has been awarded. Before award was made, the right to receive compensation has to be regarded as a inchoate right. Similar view was also 34 taken by Supreme Court in the case of CIT v. Swadeshi Cotton & Flour Mills Pvt. Ltd. reported in 53 ITR 134 (SC).
In view of the consistent pronouncement of High Authorities on this aspect we hold that the right to receive the amount has accrued only when the award was published by the Indian Arbitrator in favour of the assessee company and not before that. We therefore unable to accept the contention of Mr. Som that the right to get payment accrues the moment execution of work is completed in March 1982. If we accept this logic then it will lead to the absurdity for what amount of the claim is to be entered into books of account? When it is yet to be decided by the Arbitrator. It would have been possible in a case where there had been no dispute with regard to the claim and could be recovered on mere presentation of the bill and without any intervention of any adjudicating authority. Such claim would have been shown in the books of account as being an income. Before the dispute is settled by Arbitrator if any amount is shown as per the claim of the assessee it would amount to deciding the dispute by the party himself not by the Arbitrator.
The decisions of the Full Bench cited by Mr. Some in P.G. and Sawoo Pvt. Ltd. & Anr. v. ACIT (2008) 307 ITR 243 is wholly inappropriate in this case as it was the case relating to income from house property and we fail to understand how it would be applicable here. Similarly decision cited by Mr. Som of the Supreme Court in case of Babulal Narottamdas v. CIT reported in 187 ITR 473 35 (SC) has no manner of application in the instant case. In that case the issue was as to when the income by way of remuneration of Managing Director accrued and/or arose. Their Lordships held that the income accrued or arose at the end of each accounting year in terms of the resolution passed by the company, irrespective of the fact whether such remuneration was actually paid or not. In this case, the quantum of remuneration was not required to be decided by any judicial or quasi judicial authority and amount of salary was settled and fixed and payment thereby was almost a matter of certainty.
The decisions in case of Morvi Industries Ltd. v. CIT reported in 82 ITR 835 (SC) and in case of Bal Chand Bansal v. Union of India reported in AIR 1988 SC 1175 relied on by Mr. Som are not applicable in this case. Latter decision was rendered on the subject of subsistence of claim in relation to Arbitration proceeding and it is not an authority to support the accrual of income.
Therefore, we hold that the income accrued in this case only when it was awarded by the learned Arbitrator though the amount was received much later. Next aspect of the matter is whether the conditions mentioned in the said section have been fulfilled in this case or not. It has been observed that no separate accounts has been maintained in respect of the profits and gains derived from the business or execution of the foreign project as per admission made by representative of the assessee in the re-assessment proceedings. We have carefully gone through the recordings of the impugned order of re-assessment 36 and we nowhere find that any such admission having been made in this regard, rather it is clear from the order of the learned Tribunal that the separate accounts are maintained for this foreign project and this could be found from the record. We, therefore, uphold the argument of Mr. Poddar that the findings of learned Tribunal and the all the authorities below are perverse and based on patently misreading of the materials. We, therefore, allow the appeal and set aside all judgments and orders passed on re-assessment.
Thus original order of assessment is restored to its file. There will be no order as to costs.
(K. J. Sengupta, J.) I agree, (Kanchan Chakraborty, J.)