Income Tax Appellate Tribunal - Mumbai
Sonal Garments vs Joint Cit, Special Range 33 on 21 April, 2004
Equivalent citations: [2005]95ITD363(MUM)
ORDER
Deduction under section 80HHChe income of assessee was assessed under section 143(3) and deduction under section 80HHC was allowed. However, the CIT invoked section 263 and held that where there was negative profit deduction under section 80HHC could not be allowed and export incentive should be excluded.
Held: Even if there was negative profit, which was computed as per clauses (a) to (c) of section 80HHC, the same had to be increased by 90 per cent of incentives referred to in clauses (iiia) to (iiic) of section 28 for the purpose of allowing deduction under section 80HHC.
Income Tax Act, 1961 s.263 Income Tax Act, 1961 s.80HHC Revision under section 263--ERRONEOUS AND PREJUDICIAL ORDERTreatment of depreciation while computing deduction under section 80HHCThe CIT invoked section 263 and held that while computing deduction under section 80HHC deduction for depreciation would be allowed and could not be excluded. Assessee contended that it was optional for him to claim depreciation and non-consideration of the same while computing deduction under section 80HHC did not render the assessment erroneous and prejudicial to the interest of revenue.
Held: While computing deduction under section 80HHC, the depreciation allowance could not be excluded.
Income Tax Act, 1961 s.263 Income Tax Act, 1961 s.80HHC Revision under section 263--MERGER DOCTRINEComputation of deduction under section 80HHC being subject matter of appeal before CIT(A) Held: CIT could not revise the assessment under section 263, in respect of issue of computation of deduction under section 80HHC as the same was subject-matter of appeal before the CIT(A) and who had also given certain finding on that aspect as the same was merged with the order of first appellate authority.
Income Tax Act, 1961 s.263 Income Tax Act, 1961 s.80HHC In the ITAT Mumbai Bench B I.P. Bansal, J.M. & A.K. Garodia, A.M. ORDER I.P. Bansal, J.M.
1. This is an appeal filed by the assessee and is directed against the order of CIT dated 19-3-2001 passed under section 263 for the assessment year 1996-97.
2. Grounds of appeal read as under :
1. The learned CIT (Administration) has erred in passing order under section 263 stating that assessment order passed by assessing officer was erroneous and prejudicial to the interest of revenue and erred directing assessing officer to recompute the assessees total income by allowing depreciation and not allowing deduction under section 80HHC.
2. The Learned CIT(Administration) has erred in not considering that assessing officer hadmade deleted enquiries before passing assessment order and therefore assessment order was not erroneous or prejudicial to revenue and therefore the same cannot be revised.
3. The learned CIT(Administration) has erred in overlooking learned assessing officer had called for detailed computation statement of depreciation statement and after considering that by allowing deduction of depreciation the tax payable would be lower and therefore decided not to allow depreciation and therefore the learned CIT(Administration) cannot pass order under section 263 asking assessing officer to allow the depreciation and re-compute assessed income and disallow the deduction under section 263 and further erred in not following judgment of Bombay High Court and Supreme Court and further erred in not considering that the amendment of section 32(1) of allowing depreciation by proposed Finance Bill, 2001 is not retrospective.
4. The learned CIT(Administration) has erred in not considering that for the assessment year 1997-98 the learned CIT(A) has held with case of appellant that if there is a loss under computation under a section 80HHC(3) the same should be ignored and deduction should be allowed under proviso to section 80HHC and if learned CIT(Administration) differs on the said point he cannot be pass an order under section 263.
5. The learned CIT(Administration) has seriously erred in applying judgment of ITAT in the case of IPCA Laboratories as the facts and issue involved in that case are completely different and not applicable to the case of appellant firm.
6. The learned CIT(Administration) has erred in ignoring that the issue of deduction under section 80HHC was considered by the CIT(A) for this year and therefore the subject matter which was before CIT(A) cannot be made the subject-matter of revision under section 263 by CIT(Administration) and therefore the learned CIT(A) had no jurisdiction under section 263 since the order of assessing officer had merged in order of CIT(A) on the point of deduction under section 80HHC.
7. The learned CIT(Administration) has seriously erred in twisting law by stating that depreciation should be allowed and by that the loss should be computed under section 80HHC(3) and deduction should be denied under proviso to section 80HHC should not be allowed."
3. Briefly stated facts are that the assessee is in the business of export of garments and entire turnover of the assessee is export turnover. The return of income was filed on 20-11-1986 declaring total income of Rs. 18,22,077, which includes long term capital gain of Rs. 10,04,167. The income of assessee was assessed at Rs. 24,83,625 vide assessment order dated 30-3-1999 under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act). In the said assessment the long-term capital gain was worked out at Rs. 12,61,751, the business income was worked out at Rs, 12,21,874 after allowance of deduction under section 80HHC. Deduction of Rs. 6,76,18,748 under section 80HHC has been computed by the assessing officer in the assessment order vide paragraph 5. For the sake of convenience paragraph 5 is reproduced below :
"5. As regards deduction under section 80HHC, the same is computed as under, after excluding unrealized sale proceeds from export turnover.
The total turnover is taken as certified in the tax audit report by the auditor. The contention of the assessee that the total turnover also should be reduced by the unrealized export receipts is not accepted :
I. Total turnover :
A. export sales at FBO value :
Rs.
Rs.
Export turnover (c and f value) 67,55,12,263 Less : export freight 1,49,59,478 66,06,22,785 Less : unrealized upto to 30-9-1996 47,47,005 6,55,71,35,780 B. Less : unrealized upto 30-9-1996 47,47,005 66,06,22,745 II. Incentive under section 28(iiia), (iiib) and (iiic)
(a) duty drawback 7,18,68,987
(b) cash incentive 7,35,544
(c) Prem. on sale of imp. Licence 3,36,500
(d) Prem. on sale of quota 10,42,777 7,40,23,303 90% of incentive of Rs. 7,40,23,304 ...
6,66,20,977 III. Exemption under section 80HHC :
A. under proviso to section 80HHC(3) 90% of incentive x export turnover total turnover 6,66,20,977 x 65,54,35,749 6,61,34,228 66,46,22,785 B. under section 80HHC(3)(b) (Manufacturing) Profit of the business under section 4A-exp (baa) Profit of the business As per statement 6,88,40,622 Less :
90% of incentive Rs.
6,66,20,977 90% of brokerage commission Int. on FD 4,36,767 Rent 1,59,950 Misc.
Incomes 44,649 Int. on loan 1,43,599 7,84,965 7,06,468 6,73,27,445 15,13,177 In proportion to export turnover :
Profit of business x Export turnover Total turnover 15,13,177 x 65,54,35,750 = Rs.
14,80,520 66,46,22,745 Profit except under section 80HHC Rs.
6,76,18,748"
4. Profits as per statement of income was computed at Rs. 6,88,40,622 which includes routine disallowances which were added to profit as per profit and loss account of Rs. 6,70,68,878. The deduction under section 80HHC was claimed by the assessee at Rs. 6,80,22,712. The computation of deduction as claimed by the assessee under section 80HHC is as follows :
"I. Total turnover :
(a) export turnover 67,55,82,263 66,06,22,785 Less : export freight 12,49,59,478 10,82,277
(b) sale of quota rights 66,17,05,062 II. Incentive under section 28(iiia), (iiib) and (iiic)
(a) duty drawback 7,18,68,987
(b) cash incentive 7,35,544
(c) Prem. on sale of imp. Licence 3,36,500
(d) Prem. on sale of quota 3,36,500 7,29,41,031 90% of incentive ...
6,56,46,927 III. Exemption under section 80HHC :
A. under proviso to section 80HHC(3) 90% of incentive x export turnover total turnover 6,56,46,927 x 66,06,22,785 6,55,39,554 66,17,05,062 B. under section 80HHC(3)(b) (Manufacturing) Profit of the business under section 4A-exp (baa) Profit of the business As per statement 6,88,40,622 Less :
90% of incentive 6,56,46,927 90% of Rs.
Rs.
Rs.
brokerage Nil commission Nil Int. on FD 4,36,767 Rent 1,59,950 Misc.
Incomes 44,649 Int. on loan 1,43,599 7,84,965 90% of 7,84,965 7,06,468 6,63,53,395 24,87,227 In proportion to export turnover :
24,87,227 x 66,06,22,785 24,83,158 66,17,05,062 1,51,31,177 x 65,54,35,750 Rs.
14,80,520 66,46,22,745 Profit except under section 80HHC Rs.
6,80,22,712"
The above computation made by the assessing officer was challenged in an appeal filed before CIT(A) on 29-4-1999. The CIT(A) has decided the said appeal vide his order dated 7-7-1999. It was contended in the appeal that assessing officer erred in reducing a sum of Rs. 47,87,005 being CIF value of goods as against the FOB value of goods amounting to Rs. 42,85,486 while computing the export sales of the assessee. The CIT(A) found merit in this claim and directed the assessing officer to reduce from export turnover a sum of Rs. 42,85,486 in place of a sum of Rs. 47,87,005 as reduced by assessing officer. It was also agitated that amount of Rs. 47,87,005 should not have been excluded at all from total turnover computed for the purpose of section 80HHC. This contention was not accepted by the CIT(A). On 20-10-2000, the assessee was issued with a show-cause notice under section 263 by the CIT, Mumbai-City-VIII. The CIT took note of the fact that in the original computation of income the profits of business were computed without claiming there from current depreciation allowable under section 32 of the Act. A revised statement of income, revised computation of income and deduction under section 80HHC were submitted during the course of assessment proceedings after consideration of depreciation of Rs. 68,78,020 and thus, deduction under section 80HHC was reduced from Rs. 6,80,22,712 to Rs. 6,19,62,602. Thus, CIT concluded that while passing assessment order, the assessing officer ignored the revised statement of income and computed total income as. per details furnished in the original return of income. According to show cause notice, if the business profit is taken into consideration as computed in the revised statement, the resultant profit of business as computed under section 80HHC will be at a loss of Rs. 53,64,843. The computation in this regard has been made in show-cause notice as follows :
"profit under section 80HHC 4A-exp (baa) Profit of the business as per statement Rs.
6,19,62,602 Less :
90% of incentive Rs.
6,66,20,977 brokerage-
Nil commission-
Nil int. on FD Rs.
4,36,767 Rent Rs.
1,59,950 Misc. Incomes Rs.
44,649 Int. on loan Rs.
1,43,599 Rs.
7,06,468 Rs.
6,73,27,445 Rs.
53,64,843"
Thus, CIT concluded in the show cause notice that where there is no positive profit arrived from the export activity at the first stage, i.e., of computing formula itself then the question of going to second stage increasing the profit as per proviso to section 80HHC(3) does not arise, per say. He further mentioned that non-claim of depreciation by the assessee was with a sole intention to show positive profit from export activity. The assessing officer was wrong in not reducing the depreciation from profits. Thus, the assessing officer did not make proper inquiries required in the circumstances of the case. It was incumbent on the part of assessing officer to further investigate the facts stated in the revised computation, which he failed to do so. Thus, assessment order was erroneous as well as prejudicial to the interest of revenue. Against the show-cause notice, the impugned order under section 263 has been passed. In the order passed under section 263, the profits from the activities of export business is worked at negative figure of Rs. 1,24,30,285. For the sake of convenience the calculation mentioned in the order under section 263 is reproduced below :
"Net profit as per .....
Rs.
6,70,68,878 P and L account Add : depreciation to be considered separately Rs.
30,10,494 Less : depreciation as per rules) (as per revised statement of the assessee) Rs.
68,78,020 (-) Rs.
38,67,526 Profit from business Rs.
6,32,01,352 Less : Export incentives :
Rs.
7,29,41,031 Other income Rs.
26,90,606 Rs.
7,56,31,637 Profits from activities of export business (-) Rs.
1,24,30,285"
For the reasoning mentioned in show-cause notice, the CIT held that profit for the purpose of section 80HHC should be computed after excluding export incentive and after allowing current years depreciation as assessee has incurred loss from its export business, deduction under section 80HHC was erroneously allowed by the assessing officer in the assessment order which cause prejudice to the interest of revenue. Thus, CIT has directed the assessing officer to re-compute the income of assessee by disallowing deduction under section 80HHC. The assessee is aggrieved hence in appeal before us.
5. Shri Y P Trivedi, the learned counsel of the assessee narrated the above mentioned facts. He contended that as per decision of Honble Bombay High Court in the case of CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd.. (1989) 177 ITR 443 (Bom), and the decision of Honble Supreme Court in the case of CIT v. Mahendra Mills (2000) 243 ITR 56 (SC), it was optional for the assessee to claim current depreciation. The assessee did not claim depreciation according to such discretion. He further contended that amendment came by way of Explanation 5 to section 32 is prospective in nature and reference in this regard is made to the decision of Kerala High Court in the case of CIT v. Kerala Electric Lamp Works Ltd.. & Crompton Greaves Ltd. (2003) 261 ITR 721 (Ker). He contended that revised statement was submitted as assessing officer was required to submit the same. He, in this regard referred to pages 5 and 6 of the paper book, wherein it is mentioned that revised statement of income is submitted without prejudice. He further referred to the statement of income for the assessment year 1998-99, wherein the assessee did not claim current depreciation and department has accepted this position and no further order under section 263 has been passed. He contended that while framing the assessment under section 143(3), both the computations were before assessing officer. Detailed discussion had taken place. The assessing officer accepted the view of the assessee. The view point accepted by the assessing officer is possible view which has been accepted in the aforementioned decision of jurisdictional High Court and Apex Court that is in CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd.. (1989) 177 ITR 443 (Bom) and CIT v. Mahendra Mills (supra), respectively. Therefore, the learned counsel contended that the view taken by the assessing officer being one of the possible view, the assessment order does not become erroneous. For this proposition, he placed reliance on the following decisions :
(i) Amrit Steels Ltd.. v. Dy. CIT (2001) 79 ITD 498 (Del)
(ii) Blue Dart Express Ltd.. v. Joint CIT (2000) 75 ITD 414 (Mum)
(iii) CIT v. Gabrial India Ltd.. (1993) 203 ITR 108 (Mum)
(iv) CIT v. G.M. Mittal Stainless Steel (P.) Ltd.. (2003) 263 ITR 255 (SC) He further contended that the appeal was filed before CIT(A) with regard to computation of deduction under section 80HHC. Therefore, the assessment order had merged with the order of CIT(A) and thus also order under section 263 was not validly passed by the CIT. For this purposes he placed reliance on the following decisions :
(i) Sahara India Mutual Benefit Co. Ltd. v. Asstt. CIT (2002) 74 TTJ (All) 67
(ii) Smt. Sujata Grover v. Dy. CIT (2002) 74 TTJ (Del) 347
(iii) Siemens Ltd. v. Dy. CIT (IT Appeal No. 4393/Bom/1992, A.Y. 1987-88), dated 21-6-1999, Mumbai Bench A
(iv) CIT v. Farida Prime Tannery (2004) 135 Taxman 70 (Mad) He further argued that CIT was wrong in holding that since assessee did not have any profit under section 80HHC(1), the assessee is not entitled to get deduction under section 80HHC. For this proposition, the learned CIT has placed heavy reliance on the decision of IPCA Laboratories Ltd. v. Dy. CIT (2001) 251 1TR 401 (Bom). He contended that, this conclusion of CIT is notin accordance with law as case of IPCA Laboratories Ltd.. (supra) does not have any impact on the present facts of the case. He further argued that incentives are also profit derived from export activities and according to proviso to section 80HHC(3) profits computed as per clauses (a) to (c) of sub-section 3 of section 80HHC has to be further increased by the amount which is 90 per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28. Export incentive received by the assessee is mentioned in these clauses of section 28. He further contended that this issue has been considered by the Tribunal in various cases wherein even after considering the decision of IPCA Laboratories Ltd.. case (supra) it has been held that deduction under section 80HHC should be given without adjusting the export loss against the amount computed under the proviso to sub-section. Reference in this regard was made to the following decisions :
(i) Vishal Export Overseas Ltd.. (IT Appeal No. 1248/Mum/2002 order, dated 28-1-2003)
(ii) Themis Agencies v. Dy. CIT (IT Appeal No. 7809/Bom/1995, A Bench, order, dated 11-7-1996)
(iii) Special Bench E DecisionLalsons Enterprises v. Dy. CIT (2004) 89 ITD 25 (Del) He further, contended that even if the depreciation is allowed as per section 32, in view of the above mentioned decisions, the assessee is still entitled to get the benefit under section 80HHC. Therefore, the assessment order passed by the assessing officer cannot be said to be erroneous and therefore cannot be also prejudicial to the interest of revenue. He contended that whether depreciation is provided or not does not alter the assessable income of the assessee as the deduction under section 80HHC is allowable to the assessee. Thus, learned counsel of the assessee concluded that powers under section 263 have not been validly exercised by the CIT, therefore, the impugned order should be quashed.
6. On the other hand, the learned Departmental Representative pleaded that grant of depreciation is not at the option of assessee. It was mandatory for the assessing officer to consider current depreciation while computing deduction under section 80HHC. He in this regard referred to Explanation (bad) to section 80HHC wherein profit of the business has been defined as profits of the business as computed under the head "Profit and gains of business or profession". The profit under the head "Profit and gains of business or profession" includes sections 30 to 43D and section 32 of the Act is part thereof, therefore depreciation has to be considered for computing profit of the business within the meaning of section 80HHC. He contended that section 80HHC has been held to be a separate code by the jurisdictional High Court. Thus, he pleaded that the case law relied upon by the learned counsel of the assessee has no application to the facts of the present case.
7. He further contended that as per decision of Honble jurisdictional High Court in the case of Indian Rayon Corpn. Ltd. v. CIT (2003) 261 ITR 98 (Bom), it has been held that depreciation cannot be excluded while computing profits derived from industrial undertaking for computing deduction under Chapter VI-A. Referring to the said decision, he contended that there is a distinct dichotomy between the cases of computation of normal income de hors Chapter VIA and computation of taxable income where the assessee claims the benefit of deduction under Chapter VI-A. He contended that section 80HHC is a section comprised in Chapter VI-A. Therefore, the ratio of said decision is fully applicable to the present case as well.
8. He further referred to the decision of the Tribunal in the case of Mandhana Exports (P.) Ltd.. v. Asstt. CIT (2002) 82 ITD 306 (Mum), wherein it has been held that the position has been changed after omission of section 34 by the Taxation Law (Amendment) and Miscellaneous Provision Act with effect from 1-4-1988. After the omission of section 34, there does not remain any condition of furnishing of the information to be eligible to claim depreciation. Thus, while computing the income under the head "Profits and gains of business" section 32, which allow depreciation has to be considered. In this regard, he also placed reliance on the unreported decision of the Bombay Tribunal in the case of Royal Cushion Vinyl Products Ltd.. v. Dy. CIT (IT Appeal No. 76/Mum/1999, dated 9-2-2004), for assessment year 1995-96.
9. With regard to the contention of learned counsel of the assessee that order of assessing officer has merged with order of CIT(A), therefore, proceedings under section 263 were invalid, the learned Departmental Representative pleaded that Explanation (c) to section 263(l) permits such action by CIT. He contended that the issue which was raised before CIT(A) was entirely a different issue and the same was regarding quantification of section 80HHC whereas the present assessee is not at all entitled to get deduction under section 80HHC there being no profit from export activity as such so as to make assessee entitled for deduction. This issue was never adjudicated by CIT(A), therefore, the assessment order cannot be said to be merged with the order of CIT(A). For this purpose, he relied on the decision of Honble Supreme Court in the case of CIT v. Shri Arbuda Mills Ltd. (1998) 231 ITR 50 (SC).
10. He further contended that powers under section 263 can be invoked even in a case where the issue is debatable. For this purpose, he placed reliance on the decision in the case of CIT v. M.M. Khambhatwala (1992) 198 ITR 144 (Guj).
11. He further contended that as per decision of Honble Madras High Court in the case of Jeyar Consultant & Investment (P) Ltd. v. CIT (2003) 259 ITR 250 (Mad), deduction under section 80HHC cannot be claimed in absence of business profit. Thus, the learned Departmental Representative pleaded that power under section 263 has been rightly invoked by CIT, therefore, order under section 263 should be upheld.
12. In reply, the learned counsel submitted that reliance by learned Departmental Representative on the decision of Jeyar Consultant & Investment (R) Ltd..s case (supra) has been misplaced as the decision relates to a period prior to insertion of proviso to section 80HHC(3). After insertion of proviso to section 80HHC(3), the position of law has been changed. He further contended that on the issue of merger, Explanation (c) to section 263 has been taken care in the decisions relied upon by him. Thus, learned counsel pleaded that order passed under section 263 should be quashed.
13. We have carefully considered the rival submissions in the light of material placed before us. The validity of order under section 263 has been challenged by the assessee on following grounds :
(1) The claim of depreciation is at the option of the assessee according to various decisions relied upon in this regard; therefore, non-consideration thereof while computing the profit under section 80HHC was a view in accordance with law and thus, assessment order cannot be considered to be an erroneous.
(2) The order of assessing officer has merged with the order of CIT(A) as a specific ground in respect of section 80HHC was taken and the same was decided by CIT(A). Once the assessment order has merged with appellate order, powers under section 263 could not be exercised.
(3) On merits, a wrong view has been taken by CIT that it was a condition precedent that there should be a positive profit from export activities. According to assessee, it is not necessary that there should be a positive profit from export activity. Even if there is a loss in export activity, the same has to be adjusted against the 90% sum of export incentive as described in proviso to section 80HHC(3).
14. As ragards the submission that claim of depreciation was at the option of the assessee, therefore, the Assessment order cannot be considered to be erroneous, we find that this contention is not acceptable for the reason that section 80HHC is a part of Chapter VI-A of Income Tax Act, 1961. According to the decision of Honble jurisdictional High Court in the case of Indian Rayon Corpn. Ltd.. (supra), where the assessee claims the benefit of deduction under Chapter VI-A, the profits and gains have got to be computed as per provisions of sections 29 to 43A and it is not open to assessee to disclaim depreciation allowance. This has so been held because Chapter VI-A has been considered as an independent code by itself for computing this special type of deduction. Therefore, it has been held that one must first calculate the gross total income from which one must deduct a percentage of income contemplated under Chapter VI-A. Therefore, one cannot exclude depreciation allowance while computing such profits derived from export activities. This view is also adopted by coordinate Benches of Mumbai Tribunal in the cases of Mandhana Exports (P.) Ltd.. (supra) and Royal Cushion Vinyl Products Ltd.. (supra). Therefore, we find no force in this contention of the assessee. We find that the case law relied upon by learned counsel in this regard has no application to the present case as the period considered by Honble Bombay High Court and Supreme Court in the cases of Shri Someshwar Sahakari Sakhar Karkhana Ltd.. (supra) and Mahendra Mills (supra) respectively is prior to omission of section 34 of the Act. Therefore, case-law relied upon in this regard is not relevant to the present case, as for the period with which we are concerned, section 34 is not on the statute book.
15. Now coming to the contention regarding merger of the assessment order with the order of CIT(A). It will be relevant to give the chronology of the events. Assessment in the present case was framed vide assessment order dated 30-3-1999 passed under section 143(3) of the Act. Against the said assessment order an appeal was filed by the assessee on 29-4-1999 before CIT(A). In the grounds of appeal, the assessee agitated the computation of section 80HHC done by assessing officer on the ground that assessing officer erred in deducting a sum of Rs. 47,87,005 from export turnover not received within six months from the close of the year overlooking the fact that sum of Rs. 47,87,005 is C.I.F. value of goods exported whereas F.O.B. value of such sales amounting to Rs. 42,85,486 which should be deducted from export turnover. The second ground taken was that the said sum being not recovered and excluded from the export turnover should have also been excluded from total turnover. Apart from this, other grounds were taken in regard to chargeability of interest under various provisions of the Act. The said appeal has been decided by the CIT(A) vide his order dated 7-7-1999. The CIT(A) has allowed the first ground of assessee and directed the assessing officer to reduce a sum of Rs. 42,85,486 from expert turnover being F.O.B. value. Thus, he allowed first ground and the second ground was not accepted and was dismissed. Thus, it is clear that computation of deduction under section 80HHC was agitated in the appeal filed before the CIT(A) and CIT(A) has given directions to assessing officer to recompute the said deduction. On these facts, the assessee has claimed that assessment order had merged with the order of CIT(A) so far as it relates to deduction under section 80HHC and therefore, the powers under section 263 have been wrongly exercised by CIT.
16. For the purpose of raising this contention, reliancehas been placed on the decisions mentioned in para 5 of this order. On the other hand, the learned Departmental Representative has placed reliance on Explanation (c) to section 263(1). For the sake of convenience, Explanation (c) to section 263(1) is reproduced below:-
"263(1)** ** ** ** Explanations (a) and (b)** ** **
(c) where any order referred to in this sub-section and passed by the assessing officer had been the subject-matter of any appeal (filed on or before or after the 1-6-1988), the powers of the Commissioner under this sub-section shall extend (and shall be deemed always to have extended) to such matters as had not been considered and decided in such appeal.)"
After 1-6-1988, the powers of CIT under section 263 have been extended in respect of matters, which had not been considered and decided in appeals filed against the assessment order. According to learned Departmental Representative, it was not a matter of dispute before CIT(A) that whether or not the assessee has an option to claim depreciation for the purpose of computing profit and gains of business. Therefore, it is the contention of the learned Departmental Representative that section 263 permits CIT to invoke his powers under that section. On the other hand, it is the claim of the assessee that once section 80HHC had been subject-matter of appeal before the CIT(A), then, the assessment order has merged with the order of CIT(A) and CIT cannot exercise his powers under section 263.
17. We have carefully considered the rival submissions. We find that there is a merit in the case of the assessee. It has been demonstrated by the above-mentioned chronology of events that computation of deduction under section 80HHC was a subject-matter of appeal before CIT(A). The CIT(A) has given some findings on the computation of deduction under section 80HHC. Therefore, the assessment order had merged with the order of CIT(A). Thus, under Explanation (c) to section 263(1), such action of CIT was not permissible. The word matter is certainly a word of wide import and represents a subject or situation that you need to think about, discuss or deal with. Thus, it is difficult to accept the submission of the learned Departmental Representative that the issue of depreciation being optional or the issue that assessee was at all entitled to deduction under section 80HHC or not was not a subject-matter of appeal filed by the assessee before CIT(A). A matter may have many aspects and the above-mentioned two factors may be the aspects of the matter but not entire matter itself. The matter in the present case is deduction under section 80HHC. For arriving at this conclusion, we have derived support from the decision of Honble Calcutta High Court in the case of Oil India Ltd.. v. CIT (1982) 138 ITR 836 (Cal). The following question was referred to their Lordships :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the issue of disallowance under section 40(a)(v) was not the subject-matter of an order by the Appellate Assistant Commissioner and hence the CIT had the jurisdiction under section 263 on this issue?"
In response to the above-mentioned question, the observations of their Lordships are reproduced below :
"Upon this the three questions as mentioned hereinbefore have been referred to this court. The first question is directed to the aspect whether after the appellate order was passed by the Appellate Assistant Commissioner or an appeal had been preferred, the Commissioner had jurisdiction in the facts and circumstances of this case under section 263 of the Act. Now, it is well settled that before an appeal before the Appellate Assistant Commissioner certain orders are appealable. It is also well settled that in an appeal preferred before the Appellate Assistant Commissioner the whole assessment is open for review by the Appellate Assistant Commissioner. 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 Appellate Assistant Commissioner 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. This jurisdiction of the Appellate Assistant Commissioner is indisputable. In this case the question is whether the quantum of allowance or disallowance or depreciation was the subject-matter of appeal or not. It is true that whether depreciation should be calculated on the basis of 12 months or it should be calculated on the basis of 11 months was not a specific aspect which was agitated before the Appellate Assistant Commissioner nor did he give any direction on this aspect of the matter but he had this aspect kept open for adjudication by him even though not taken by the assessee. Then, on that, he could have allowed 5 per cent or 2-1/2 per cent depreciation and should have directed the Income Tax Officer to compute the same on such basis as he considered fit and proper, namely, 11 months or 12 months on the view that the employee of the assessee was on leave for one month and as such could not be said to be entitled to this accommodation. If that is the position, then, in our opinion, once the appeal has been preferred before the Appellate Assistant Commissioner on any aspect of the quantum of depreciation, the Commissioner cannot assume jurisdiction, otherwise an anomalous position would arise. The Income Tax Officer has been directed by the Appellate Assistant Commissioner to fix depreciation at a certain percentage, indicated by the Appellate Assistant Commissioner, without any further direction that it should be confined to 11 months or 12 months. But, now, if further consideration is superimposed by the Commissioner by rectification made by the Income Tax Officer as a result of the order passed by the Commissioner under section 263 then that would be in conflict with the direction given by the Appellate Assistant Commissioner, then that order, in our opinion, cannot be the subject-matter before the Appellate Assistant Commissioner, then that order, in our opinion, cannot be the subject-matter of an order of revision by the Commissioner. This principle, however, comes where the appeal does not lie from the order of the income-tax Officer and before the Appellate Assistant Commissioner where different kinds of appeal are provided for in the scheme of the Income Tax Act. This principle was enunciated by the Supreme Court in the case of CIT v. Amritlal Bhogilal & Co. (1958) 34 ITR 130 (SC). This was also reiterated in the decision in the case of Jeewanlal (1929) Ltd. v. Addl. CIT (1977) 108 ITR 407 (Cal) and the decision in the case of Premchand Sitanath Roy v. Addl. CIT (1977) 109 ITR 751 (Cal), the Allahabad High Court reiterated the same priciple in the case of J.K Synthetics Ltd. v. Addl. CIT (1976) 105 ITR 344 (All). Therefore, it appears to us that as the quantum of depreciation was the subject-matter of appeal the Commissioner had no jurisdiction, in the facts and circumstances of this case, to issue the notice under section 263 and to pass any order on this aspect of the matter. Question No. 1 therefore, in our opinion, must be answered in the negative and in favour of the assessee."
The above-mentioned case has been relied upon by Mumbai Tribunal A Bench in the case of Siemens Ltd.. (supra), a case relied upon by learned counsel of the assessee. We find that a similar view has been taken in the said decision of Tribunal. We are in entire agreement with the said order. Therefore, we hold that assessment order so as it relates to deduction under section 80HHC had merged with the order of CIT(A), therefore, exercise of power by CIT under section 263 was even not available under Explanation (c) to section 263(l). We, therefore, hold that order under section 263 is not a valid order in the eyes of law.
18. We also find that reliance in this regard by learned Departmental Representative on the decision of Honble Supreme Court in Shri Arbuda Mills Ltd..s case (supra) is also misplaced as the three items mentioned in the decision of Honble Supreme Court were not subject-matter of appeal filed before CIT(A); therefore, the Honble Supreme Court held that Explanation (c) to section 263(1) was applicable. In the present case, we have held that computation of deduction under section 80HHC was subject-matter of appeal before CIT(A) thus Explanation (c) to section 263(1) has no application to the facts of present case.
19. Having held that powers under section 263 having been exercised wrongly by CIT as the assessment order had merged with the appellate order, it is not necessary to consider the other aspects of the matter that when CIT was wrong in holding that assessee did not have positive profit from export activity as per provisions of section 80HHC(1), therefore, the assessee is not entitled at all for deduction under section 80HHC under the proviso to section 80HHC(3) as the same will be of academic interests only. Here also, we find that this view of CIT is not is accordance with law. Section 80HHC(3) provides the mode of computation of eligible profit for deduction under section 80HHC. Even if there is no positive profit as computed as per clauses (a), (b) and (c) of section 80HHC(3) and there is a negative profit, the same has to be increased by 90 per cent of the incentives referred to in clauses (iiia), (iiib) and (iiic) of section 28 of the Act. It is nobodys case that the export incentive received by the assessee does not fall within the ambit of items described in clauses (iiia), (iiib) and (iiic) to section 28 of the Act, therefore, export incentives have to be taken into account as per proviso to section 80HHC(3). This point of view is well supported by the Special Bench decision of Delhi Bench in the case of Lalsons Enterprises (supra). On this count also, the order under section 263 is not correct.
20. In the fight of above mentioned factual and legal positions, we quash the impugned order and allow the appeal filed by the assessee.