Income Tax Appellate Tribunal - Delhi
Legato Systems India (P) Ltd. vs Income Tax Officer on 30 November, 2004
Equivalent citations: (2005)93TTJ(DELHI)828
ORDER
B.R. Jain, A.M.
1. These two appeals by assessee are directed against the order dt. 15th Dec., 2003, of the CIT(A), New Delhi. Since the facts and circumstances of the case and the issue involved in both the appeals are identical, these appeals are decided to be disposed by a composite order.
2. The first ground of appeal for asst. yr. 2000-01 relates to the validity of initiation of reassessment proceeding under Section 147 r/w Section 148 of the IT Act, 1961. Briefly, the facts are that the assessee-company was registered with the Registrar of Companies, New Delhi and Haryana on 10th Nov., 1994, in the name of ORP Systems (P) Ltd. and later on changed its name to M/s Legato Systems India (P) Ltd. w.e.f. 12th July, 1999. The company was registered under STPI as a new undertaking w.e.f. 6th July, 1995. The assessee-company was engaged in the development and export of computer software. The AO noticed that upto the asst. yr. 1999-2000, the company was claiming the deduction under Section 80HHE. For the asst. yr. 2000-01 the return of income was filed declaring nil income on the ground that income computed at Rs. 1,52,65,475 was exempt under Section 10A of the Act. The return was processed under Section 143(1)(a) of the Act. The AO after having recorded the reasons issued the notice under Section 148 on 13th Sept., 2002. The AO recorded the reasons that the income of the assessee from computer software under Section 10A of the Act was allowed without examining the same and, therefore, deduction under that section was wrongly allowed.
3. The assessee challenged the-validity of notice issued under Section 148 of the Act before the first appellate authority. The assessee contended that it had declared the income correctly and, therefore, there was no question of escapement of income in that particular case. This was only a case of change of opinion on the part of the AO and despite requests the AO did not furnish the reason for reopening the assessment. The learned CIT(A) observed that on perusal of the assessment record it would appear that the reasons for issue of notice under Section 148 was made known to the assessee. This would be seen from the submissions made by the assessee. Therefore, the omission on the part of the AO to communicate the reasons for issuance of notice under Section 148 in writing to the assessee was at best a procedural infirmity. During the hearing the copy of the said recorded reasons was also furnished to the Authorised Representative of the assessee. Another contention raised by the learned counsel for the assessee is that the assessee had furnished all the material facts for claiming deduction under Section 10A of the Act and the AO after having considered the same has passed the order under Section 143(1)(a) of the Act. The reasons recorded for issue of notice under Section 148 of the Act are nothing but a change of opinion which is not permissible under the law. Thus, the notice issued under Section 148 is not legally sustainable. In this regard a reliance has been made to the decision reported in the case of CIT v. Kelvinator of India Ltd. (2002) 26 ITR 1 (Del)(FB).
4. On the other hand, the learned Departmental Representative has submitted that no assessment under Section 143(3) of the Act has been made prior to issue of notice under Section 148 of the Act. The return has been processed under Section 143(1)(a) of the Act. It would thus be correct to state that the notice under Section 148 has been issued merely on the basis of change of opinion. He has further submitted that proviso to Section 147 does not apply to the instant case inasmuch as the return was processed on 23rd March, 2001, and the notice has been issued on 13th Sept., 2002. He has further submitted that Expln. 2(b) to Section 147 applies to the facts of the instant case. Thus, he has submitted that the AO has correctly invoked the jurisdiction under Section 147/148 of the Act.
5. We after having heard the parties find no merit in the arguments of the learned counsel for the assessee. The Hon'ble jurisdictional High Court in the case of Kelvinator of India Ltd. (supra) has, inter alia, held that an order of assessment can be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of Section 143. When a regular order of assessment is passed in terms of Sub-section (3) of Section 143, a presumption can be raised that such an order has been passed on an application of mind. It is well known that a presumption can also be raised to the effect that in terms of Clause (e) of Section 114 of Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind that would itself confer jurisdiction upon the AO to reopen the proceeding without anything further; the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefits of its own wrong. Hence, it is clear that Section 147 of the Act does not postulate conferment of power upon the AO to initiate the reassessment proceedings upon a mere change of opinion.
6. Thus, it would appear that according to the Hon'ble jurisdictional High Court an order of assessment would be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of Section 143 of the Act. Hence, it is only when an order under Section 143(3) has been passed, the presumption could be raised that order has been passed on an application of mind. An opinion can be said to be formed only when there is application of mind with reference to material on record and relevant provisions of statute and, therefore, if in earlier proceeding, no such opinion is formed and there is escapement of income, then it cannot be contended that reassessment proceeding are initiated on a mere change of opinion. A mere acceptance of return in a routine manner under Section 143(1)(a) of the Act would not lead to an inference that opinion was formed by the AO in respect of issues involved in the assessment. In the instant case, since the original assessment order was made under Section 143(1)(a) of the Act, a notice issued under Section 148 of the Act, cannot be said to have been issued on mere change of opinion. This view finds force from the recent decision of this Bench in the case of ITO v. Honey Enterprises (2004) 82 TTJ (Del) 987 : (2004) 89 ITD 301 (Del). We, therefore, hold that the notice issued under Section 148 of the Act is a legal one.
7. The first common issue relates to the confirming/sustaining the denial of exemption to the assessee under Section IDA of the Act amounting to Rs. 1,52,65,474 in asst. yr. 2000-01 and Rs. 2,89,26,490 in asst. yr. 2001-02.
8. Briefly stated, the facts are that the assessee-company is engaged in the development and export of software and was registered with the Registrar of Companies, Delhi and Haryana on 10th Nov., 1994, in the name of ORP Systems (P) Ltd. and later on changed its name to Legato System India (P) Ltd. w.e.f. 12th July, 1999. The assessee-company is registered under STPI as a new undertaking w.e.f. 6th July, 1995. During the year under consideration the assessee claimed exemption of income-tax pertaining to export of computer software under Section 10A of the Act. The AO however noticed that upto asst. yr. 1999-2000 the assessee was claiming deduction under Section 80HHE of the Act. The assessee-company changed its stand of claiming deduction under Section 80HHE to exemption of income under Section 10A of the Act simply to avoid the payment of income-tax on the export of software. While referring to provisions of Section 10A(1) of the Act, the AO observed that it would appear that these specific provisions have been inserted in the Act to permit the establishment of new units in the free trade zones. The assessee is not entitled to the benefit under Section 10A on the old units. The reason for claiming exemption under Section 10A in the assessment year is that the assessee started production/manufacture of computer software in the approved software technology park in this year.
The AO noticed that upto asst. yr. 1999-2000 the assessee opted to claim deduction under Section 80HHE. He observed that for the benefit envisaged under Section 10A, he has to file declaration to this effect along with the return of income before due date of filing the return for first assessment year. In this connection he has referred to Section 10A(8) of the Act. He further mentioned that the intention of the legislature is to enable the assessee to choose one mode for claiming the exemption/reduction out of profits on export of computer software. Thus, he has held that the assessee is not entitled to exemption under Section 10A of the Act, in respect of profit (on) export of computer software amounting to Rs. 1,52,65,474. He has further held that exemption under Section 80HHE is also denied to the assessee as there is no claim under Section 80HHE and the assessee had also not complied with the relevant provisions of Section 80HHE of the Act.
9. On appeal, the learned CIT(A) while referring to the provisions contained in Sub-section (5) of Section 80HHE has observed that the expression 'such profits' in Sub-section (5) can only refer to profits of the nature specified in Sub-section (1). Otherwise, reading the provisions with the definition of "previous year" in Section 3 and 'assessment year' in Clause (9) of Section 2, no other interpretation would be appropriate. Thus, he has held that assessee having claimed reduction under Section 80HHE in respect of export derived by the unit in STPI, he is precluded from claiming deduction from such profit under any provisions of the Act either for the same year or for any further assessment.
10. As regards the allowability of deduction under Section 80HHE of the Act in respect of profits earned on export of computer software, the learned CIT(A) observed that as stated in the assessment order, the claim of the assessee was for exemption under Section 10A of the Act. This was considered by the AO and deduction under Section 80HHE was denied for the reasons stated in the order. The law does not enjoin any duty on AO to explore whether assessee's income qualifies for exemption/deduction under any other provisions of the Act.
11. Before us, the learned counsel has submitted that the assessee fulfils all the conditions, which have been laid down for the purpose of claiming exemption under Section 10A of the Act. The mere fact that the assessee in the immediately preceding assessment years had claimed deduction under Section 80HHE would not act as an estoppel in claiming deduction under Section 10A in the relevant previous year. It is well known that the application of doctrine of estoppel in tax proceeding is not applicable to the successive assessments. According to the learned counsel the AO and the CIT(A) have misinterpreted the law and have denied the claim of exemption under Section 10A. He has further submitted that the issue whether only the new units would be entitled to claim exemption under Section 10A has been put to rest by Circular No. 694, dt. 23rd Nov., 1994, of CBDT [(1995) 211 ITR 26 (St)]. He has further submitted that if on the given set of facts, the assessee is entitled to claim relief under two distinct provisions then the assessee is legitimately entitled to the benefit of that provision which enables a larger benefit to him. In this connection he has referred to the discussion in the case of C.S. Mathur v. CBDT (1999) 235 ITR 769 (Del). He has further pointed out that AO has made reliance upon Section 10A(8) whereas Sub-section (8) of Section 10A was not in existence during the relevant previous year as the same came into existence w.e.f. 1st April, 2001. He has further submitted that even otherwise, on the given facts and circumstances of the case, the said provisions would not disentitle the assessee in claiming deduction under s, 10A of the Act, since the assessee had not filed any such declaration under Section 10A(8). He has further submitted that Section 80HHE(5) prohibits double deduction. In other words, deduction which has been claimed in respect of a given profit, cannot be a subject-matter of another deduction in the previous year or any other year. In the instant case, the deduction has been claimed in respect of profits of different assessment years and, therefore, same profit has not been the subject-matter of more than one deduction for the same or any other assessment year.
12. As regards the alternative claim of deduction under Section 80HHE, he has submitted that the assessee made the claim under Section 80HHE vide letter dt. 18th March, 2003. However, the said plea was ignored inasmuch as the impugned assessment order was passed back-dated on 14th March, 2003, without considering the plea of the assessee.
13. On the other hand, the learned Departmental Representative made reliance upon the orders passed by tax authorities.
14. We have heard the parties with reference to material on record and precedents referred. The assessee was registered under STPA as a new undertaking w.e.f. 6th July, 1995. In the earlier years, the appellant was allowed deduction of profits under Section 80HHE of the Act. The assessee has however opted to avail exemption of such profits under Section 10A of the Act in the year under consideration. The AO being of the view that it was an old unit of the assessee and the assessee having not opted to file declaration in terms of Section 10A(8) of the Act in the first assessment year, denied the exemption. The alternate claim of deduction under Section 80HHE of the Act was also denied.
15. The Finance Act, 1993, extended the tax holiday under Section 10A to industrial units in approved Electronic Hardware Technology Park (EHTP) or Software Technology Parks (STP). The CBDT issued a Circular No. 794, dt. 9th Aug., 2000, reported in (2000) 245 ITR (St.) 21 to explain the features of the new section vide para 15 thereto. At para 15.4 it has been explained that conditions for the applicability of these provisions include that the undertaking begins to manufacture or produce things or computer software during the previous year after the first day of April, 1994, in any STP. The AO has recorded a finding of fact that the assessee was registered as a STPI unit w.e.f. 6th July, 1995. On this count, the assessee was to be held as eligible for claim of exemption under Section 10A of the Act in the initial year though it is found to have claimed deduction of profits from this unit under Section 80HHE of the Act. Clause (iii) of Sub-section (6) of Section 10A does not place any restriction on the deduction on profits under Section 80HHE of the Act, though it places restriction on deduction to be allowed under Section 80HH, Section 80-I, Section 80-IA or Section 80-IB in relation to the profits and gains of the undertaking while computing the total income of the assessee for the previous year. It, therefore, cannot be held that the assessee is an old unit already in existence and not entitled to benefit of exemption under Section 10A of the Act. Perusal of Sub-section (8) of Section 10A reveals that the declaration required to be made is in respect of that year only for which the assessee does not desire application of provision of this section. In case the assessee did not file any such declaration in the first assessment year in which it was eligible to the exemption, the same cannot be a criteria to deny the exemption for the successive years. The principle of estoppel is not applicable in tax proceedings to the successive assessment as has also been laid down by the Hon'ble High Court of Delhi in CWT v. Meatless (P) Ltd. (1985) 156 ITR 569 (Del) and also by. Gujarat High Court in Anant Mills Ltd. v. CIT (1994) 206 ITR 582 (Guj) and Bombay High Court in Kantilal Chimanlal Shah v. CIT (1954) 26 ITR 303 (Bom).
16. Since the appellant in the past claimed deduction under Section 80HHE of the Act, we consider it imperative to examine the provisions contained under that section also. Sub-section (5) of Section 80HHE is relevant to examine this aspect. This sub-section reads as under :
"Where a deduction under this section is claimed and allowed in respect of profits of the business referred to in Sub-section (1) for any assessment year, no deduction shall be allowed in relation to such profits under any other provision of this Act for the same or any other assessment year."
The expression "such profits" used in this sub-section refers to those profits for a particular assessment year, for which a deduction under Section 80HHE is claimed and allowed. Sub-section (5) of Section 80HHE was inserted in the statute book with a view to avoid double deduction, inasmuch as, the profits calculated in accordance with Sub-section (1) of Section 80HHE for a particular assessment year cannot be claimed as a deduction for the same assessment year under any other provision of the Act or for any other assessment year. Similar provision placing restriction is contained in Section 80-IA also.
17. The expression "such profits" was a matter of deliberation before the Hon'ble Calcutta High Court in the case of CIT v. Belliss & Morcom (I) Ltd. (1982) 136 ITR 481 (Cal). The said matter was with reference to the allowability of deduction to priority industries under Section 80-I of the Act. The Hon'ble Calcutta High Court held that the expression "such profits" must relate to the quality of the profits or descriptive of the profits.
Black's Law Dictionary, 7th Edn., defines the word "such" as, "of this or that kind".
Gamer's Dictionary of Modern Legal Usage, 2nd Edn., defines the word "such" as, "as an adjective when reference has previously been made to a category of persons or things".
K.J. Aiyar, Judicial Dictionary, 13th Edn., defines the word "such" as under :
The word "such" always refers to someone else and is generally and naturally refers to its last antecedent. The normal meaning of "such" is similar to that precedes.
18. Taking guidance from the aforesaid definition(s) and applying the same in the context of provisions of Section 80HHE of the Act, the phrase "such profits" appearing in Sub-section (5) of Section 80HHE suggests profits of the business in relation to which a deduction is allowable under this section for a given assessment year, the last antecedent in the given context refers to profits derived which are eligible for the purposes of computing the total income of an assessee for a particular assessment year. In other words, no deduction shall be allowed under any other provision for the same or any other assessment year in respect of the profits of the business in relation to which a deduction is allowed under this section. Therefore, if deduction has been claimed in respect of eligible profits derived by the assessee from such business for a particular assessment year as enunciated in Sub-section (1) of the said section, then the assessee is not entitled to claim any deduction under any other provision for the same or any other assessment year in respect of profits which have already been a subject-matter of deduction computed under Section 80HHE of the Act.
19. Upon a harmonious reading of the entire provision, our considered view, therefore, is that the expression "such profits" as appearing in Sub-section (5) refers to the profits of a particular assessment year and the section does not place restriction to shift for the claim of deduction or exemption under any other provision in respect of profits for which no deduction has been claimed and allowed in the previous year. Since both the sections, i.e., Section 80HHE and Section 10A entitle the benefit, the assessee would legitimately be entitled to the benefit of that provision of law which enables a larger benefit being earned by him. This finds support from the decision of the Supreme Court in Collector of Central Excise v. Indian Petro Chemicals (1997) 11 SCC 318 and also by the Hon'ble High Court of judicature at Delhi in the case of C.S. Mathur v. CBDT (supra). We, therefore, do not find any justification in the action of the learned CIT(A) to uphold that the assessee being an old unit and once having claimed deduction under Section 80HHE was not entitled to claim exemption under Section 10A from the profits of its unit. However, the AO in the assessment order has not dealt with the submissions made by the appellant that it has carried out all the requisites envisaged in the scheme of Section 10A before denying the exemption. We, therefore, set aside the orders of the authorities below on this point and restore the matter back to the file of the AO with a direction to allow exemption under Section 10A in both the years in case the assessee is found to have satisfied all other requisites envisaged in the scheme of Section 10A of the Act. In case the exemption under Section 10A cannot be allowed for the reasons of not satisfying the requisites, the claim of deduction under Section 80HHE shall be allowed after providing opportunity to meet the requisites.
20. The last ground in both the appeals relates to sustenance of assessment of interest income as income from other sources, instead of claim of the assessee as income from business.
21. The assessee's counsel contends that the interest income for Rs. 71,691 for asst. yr. 2000-01 and Rs. 1,91,967 in asst. yr. 2001-02 were earned on fixed deposit receipts which were kept as margin money with the bank for availing the facility of letter of credit. Such interest income is inextricably linked with the business and as such, the authorities below were not justified in assessing such interest income as income from other sources by denying the claim of its being income from business. Reliance has been placed on the decisions of Bombay High Court in the case of CIT v. Punit Commercial Ltd. (2000) 245 ITR 550 (Bom) and also in the case of CIT v. Nagpur Engg. Co. Ltd. (2000) 245 ITR 806 (Bom).
22. On the other hand, the learned Departmental Representative supports the orders of the authorities below and contends that the income for interest has not been derived from business. The immediate source of the income is FDRs for which specific head has been provided in the statute, according to which such income has to be assessed under the head "income from other sources".
23. We have heard the parties with reference to material on record. The authorities below have not recorded any finding as to whether the FDRs were taken with a specific purpose to keep the same as security/margin money with the bank for availing letter of credit for the purpose of business of the assessee. We, therefore, set aside the orders of the authorities below and restore the matter back to the file of the AO to find out the correct facts and arrive at a decision afresh having regard to the decisions rendered in the case of Punit Commercial Ltd. (supra) and Nagpur Engg. Co. Ltd. (supra).
24. In the result, the appeal for the asst. yr. 2000-01 stands partly allowed and for the asst. yr. 2001-02 stands fully allowed for statistical purposes only.