Income Tax Appellate Tribunal - Delhi
Ajit Gupta vs Income Tax Officer on 25 January, 2007
Equivalent citations: (2007)108TTJ(DELHI)301
ORDER
G.S. Pannu, A.M.
1. These two appeals have been preferred by the assessee against the respective orders of the CIT, Moradabad (in short 'CIT') passed under Section 263 of the IT Act, 1961 (in short 'the Act') dt. 31st March, 2005 pertaining to the asst. yrs. 2001-02 and 2002-03.
2. In both the appeals, the assessee has assailed the assumption of jurisdiction by the CIT under Section 263 of the Act on various grounds. Since the two appeals relate to a single assessee and involve common issues they have been heard together and we find it expedient to dispose of the same by a common order. We take up for consideration appeal for the asst. yr. 2001-02.
3. In this appeal, the challenge to the order of the CIT under Section 263 is on the basis that the same is bad in law for it is beyond the jurisdiction of the CIT. The assessee has also challenged the order of the CIT on merits of the dispute. The brief background leading up to the present proceedings can be understood as follows. In this case, the assessee filed a return of income on 31st Oct., 2001 declaring total income at Rs. 12,70,840. In the return of income, the assessee, who is engaged in the manufacture and export of brass artwares, etc., declared income from business at Rs. 49,97,658 and claimed deduction under Sections 80-IB and 80HHC of the Act amounting to Rs. 11,18,635 and Rs. 38,17,023, respectively. The assessment was finalized by the AO under Section 143(3) of the Act on 26th March, 2004, wherein the income frqm business, deductions under Sections 80-IB and 80HHC of the Act were computed at Rs. 47,96,351, Rs. 11,80,635 and Rs. 35,77,491, respectively. The assessment so framed has been considered by the CIT as erroneous insofar as it is prejudicial to the interest of the Revenue on two counts. Firstly, the CIT observed that for the purpose of calculation of deduction under Section 80HHC, the AO adopted the same figure of profits as adopted for the purpose of calculation of deduction under Section 80-IB of the Act. The CIT observed that both the deductions were computed after taking into consideration the same amount of profit without considering the provisions of Section 80-IA(9) of the Act, which are applicable to Section 80-IB as well by virtue of the provisions of Section 80-IB(13) of the Act. In the context, the CIT issued notice under Section 263, dt. 31st March, 2005 requiring the assessee to show cause as to why the assessment order dt. 26th March, 2004 passed under Section 143(3) of the Act be not treated as erroneous insofar as it was prejudicial to the interest of the Revenue. Secondly, the CIT noted that the AO while computing the amount of deduction under Section 80-IB of the Act did not exclude the income by way of duty drawback receipt and sale of samples. On this count also, the CIT vide his notice dt. 17th March, 2005 show caused the assessee to explain as to why the assessment order dt. 26th March, 2004 be not treated as erroneous insofar as it was prejudicial to the interest of the Revenue. The assessee contested the action of the CIT and filed a detailed reply which has been exhaustively referred by the CIT in his impugned order. In brief, the stand of the assessee before the CIT was that the AO had duly examined the issue regarding the admissibility as well as quantum of deduction under Sections 80HHC and 80-IB of the Act, that therefore the notice issued under Section 263 of the Act was not justified since the AO had allowed both the deductions after consideration of the factual and legal aspects. On merits, it was contended that the provisions of Section 80-IA(9) of the Act do not impose the restriction that deduction under Section 80HHC is quantifiable after reducing the amount of deduction under Section 80-IB of the Act. According to the assessee, the implication of Section 80-IA(9) was to prevent total deductions under Chapter VI-A of the Act from exceeding the profit and gains. Similarly with regard to the second issue the stand of the assessee was that the issue regarding the exclusion of duty drawback and income on sale of samples for the purposes of Section 80-IB was debatable and a possible view has been taken by the AO and therefore, the CIT was ousted from assuming jurisdiction under Section 263 of the Act. The CIT, however, did not accede to the pleas of the assessee. The CIT held that the provisions of Section 80-IA(9) of the Act made it clear that the profits of the business for the purposes of calculation of deduction under Section 80HHC are to be reduced by the amount of deduction under Section 80-IB of the Act and that deduction under Section 80-IB is to be calculated and allowed first by virtue of Section 80-IA(9) of the Act. The CIT noted that the AO had overlooked the provisions of Section 80-IA(9) of the Act while computing deduction under Section 80HHC of the Act. Secondly, the CIT concluded that incomes by way of duty drawback receipts and samples could not be equated to profits derived from the industrial undertaking. He, therefore, held that duty drawback receipts and income from sale of free samples was excludible for computing deduction under Section 80-IB of the Act. On this basis, he held that the order of the AO dt. 26th March, 2004 was erroneous insofar as it is prejudicial to the interest of the Revenue. Thus, by exercising power conferred under Section 263 of the Act he cancelled the assessment order and directed the AO to make assessment de novo. Against the aforesaid, the assessee is in appeal before us.
4. The first and foremost submission of the learned Counsel is that the order passed by the CIT is beyond jurisdiction and is thus bad in law. According to the learned Counsel, the CIT has invoked Section 263 without satisfying the prerequisite conditions of the section. The learned Counsel submitted that in this case the AO had allowed the claim of deduction under Sections 80HHC and 80-IB of the Act after due verification and for that purpose referred to the copy of replies filed by the assessee before the AO during the course of assessment proceedings, the same are placed in the paper book at pp. 3 to 7. Reference was also made to the query letter issued by the AO during the assessment proceedings, placed at p. 2 of the paper book. It was contended that under such circumstances, the CIT was not justified in assuming jurisdiction under Section 263 of the Act and relied upon various decisions, viz., Oil India Ltd. v. CIT , CIT v. Salonah Tea Co. Ltd. (1992) 62 Taxman 51 (Cal), Remex Constructions/Remex Electricals v. TTO and Ors. , Mrs. Sujata Grover v. Dy. CIT (2002) 74 TTJ (Del) 347 and Desai Bros Ltd. v. Dy. CIT (1998) 61 TTJ (Pune) 527 : (1998) 66 ITD 203 (Pune). Further, it was contended that the CIT has merely substituted his opinion in place of that of the AO which was impermissible under Section 263 of the Act, without noticing that the view of the AO could not be termed as erroneous. Thirdly, it is submitted that on both the aspects, the AO has taken a possible view and as such the CIT could not have assumed jurisdiction under Section 263 of the Act. In support, the learned Counsel referred to the decisions, viz., Malabar Industrial Co. Ltd. v. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC), Paul Mathews & Sons v. CIT (2003) 181 CTR (Ker) 207 : (2003) 263 ITR 101 (Ker), CIT v. Gabriel India Ltd. (1993) 114 CTR (Bom) 81 : (1993) 203 ITR108 (Bom) and Maharashtra Seamless Ltd. v. Addl. CIT, Delhi Bench of the Tribunal in ITA No. 1825/Del/2003 [reported at (2004) 89 TTJ (Del) 173--Ed.
5. Apart from this, on merits, the assessee contended that the CIT erred on facts and in law in determining that the deduction allowable to the assessee under Sections 80HHC and 80-IB of the Act was lower than the amounts allowed by the AO. With regard to the simultaneous deduction under Sections 80HHC and 80-IB of the Act, it was contended that the same was not prohibited provided the aggregate of the deduction claimed under the two sections do not exceed the gross total income. Reliance was also placed on the following decisions:
(i) Bharat Heavy Electricals Ltd. v. Dy. CIT (2005) 98 TTJ (Del) 565;
(ii) Mittal Clothing Co. v. Dy. CIT (2005) 4 SOT 626 (Bang);
(iii) Toshica Creation v. ITO (2005) 96 TTJ (Jp) 651;
(iv) ITO v. R.V. Diamond Jewellers (P) Ltd. (Delhi 'SMC') in ITA No. 2252/Dey 2005, dt. 30th Nov., 2005.
6. Further with regard to the stand of the CIT on allowability of benefits under Section 80-IB with respect to receipt of duty drawback and samples, it was contended that the same are inextricably related to the business of industrial undertaking and thus rightly considered by the AO for allowing deduction under Section 80-IB of the Act. In support the learned Counsel referred to the following decisions:
(i) CIT v. India Gelatine & Chemicals Ltd. (2005) 194 CTR (Guj) 492 v (2005) 275 ITR 284 (Guj);
(ii) Dy. CIT v. Metro Tyres Ltd. (2001) 79 ITD 557 (Del);
(iii) A.P. Industrial Components Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 272;
(iv) Mima Industries Ltd. v. Asstt. CIT (2005) 95 TTJ (Ahd)(SB) 867 : (2005) 95 ITD 199 (Ahd)(SB);
(v) Dy. CIT v. Investwel Publishers (P) Ltd. (2005) 96 TTJ (Mumbai) 994.
7. On the other hand, the learned Departmental Representative appearing for the Department has defended the order of the CIT. The learned Departmental Representative has relied upon the language of Section 80-IA(9) to emphasize that the assessee was entitled for deduction under Section 80HHC only on the balance profits after deducting claim under Section 80-IB of the Act and, therefore, the order of the AO was erroneous as it was contrary to the aforesaid position. Further with regard to the exclusion of duty drawback receipts and income from samples for the purposes of Section 80-IB it was justified in view of the ratio of the decision of the apex Court in the case of CIT v. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC). The learned Departmental Representative further submitted that the interpretation of the CIT was supported by the decision of the Rajasthan High Court in the case of CIT v. Rochi Ram & Sons . Further, learned Departmental Representative pointed out that the aspect of Section 80-IA(9) does not appear to have been dismissed by the AO and for that attention was invited to the order passed under Section 143(3) of the Act. Further it is submitted that even if the issues involved are debatable, the assumption of jurisdiction by the CIT was justified and in support reference was made to the decision of the Hon'ble Gujarat High Court in the case of CIT v. M.M. Khambhatwala (1992) 198 ITR 144 (Guj). The learned Departmental Representative also referred to the decision of the apex Court in the case of Malabar Industrial Co. Ltd. (supra). In nutshell the stand of the learned Departmental Representative was that in this case the AO has erroneously allowed claim of deduction under Section 80HHC on total income without deducting claim under Section 80-IB as provided under Section 80-IB(13) r/w Section 80-IA(9) and has erroneously allowed claim of deduction under Section 80-IB on the duty drawback receipt and receipts from sample.
8. We have considered the rival contentions and examined the material on record. The primary issue is as to whether the CIT was justified, on the facts and circumstances of the case, to hold that the assessment order dt. 26th March, 2004 passed under Section 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue, so as to justify invoking of Section 263 of the Act. A bare reading of Section 263 makes it clear that to justify exercise of jurisdiction by CIT, the order of the AO is to be erroneous insofar as it is prejudicial to the interest of the Revenue. The satisfaction of the aforesaid twin conditions is a prerequisite to justify intervention by the CIT under Section 263 of the Act. The order should be erroneous so that Section 263 is attracted. Similarly, the second condition of the order being 'prejudicial to the interest of the Revenue' is to be applied in conjunction with an erroneous order of the AO. So however, where the AO has adopted one of the course permissible in law or where two views are possible and the AO has taken a view which the CIT does not agree with, such an order of the AO cannot be treated as an erroneous order insofar it is prejudicial to the interest of the Revenue. The exception being a situation where the view taken by the AO is otherwise unsustainable in law. For the aforesaid proposition, a gainful reference can be made to the judgment of the apex Court in the case of Malabar Industrial Co. Ltd. (supra).
9. Similarly, in a situation where an assessment has been framed after making necessary inquiries such order cannot be held to be erroneous simply because in the order the AO did not make an elaborate discussion in that regard. The parity of reasoning enunciated in the case of Malabar Industrial Co. Ltd. (supra), Paul Mathews & Sons (supra) and Gabriel India Ltd. (supra) support the aforesaid proposition. With the aforesaid premises in the background, we may now examine the orders of the AO, dt. 26th March, 2004 and that of the CIT.
10. It appears that the AO in the instant case had examined the claim of deduction under Sections 80HHC and 80-IB of the Act. The charge of the CIT that the AO overlooked the provisions of Section 80-IA(9) also does not appear to be justified for the reason that the AO had examined the same. It clearly emerges from p. 4 of the paper book which is the explanation of the assessee addressed to the AO regarding applicability of Section 80-IA(9) of the Act. In this explanation, the assessee duly stated that the deduction under Sections 80HHC and 80-IB shall be available on complete profit of business. Therefore, to hold that the AO overlooked the provisions of Section 80-IA(9) would be a misnomer. The order of assessment dt. 26th March, 2004 no doubt does not contain a detailed discussion on this aspect. However, as we have noted earlier the same does not render the order as erroneous. On this aspect, we are satisfied that the AO had made inquiries in regard to the applicability of Section 80-IA(9) and the assessee had provided an explanation in that regard by a letter in writing. Thus, it would be safe to deduce that quantification of deduction under Sections 80HHC and 80-IB of the Act was made by the AO on being satisfied with the explanation of the assessee. The Hon'ble Bombay High Court in the case of Gabriel India Ltd. (supra) specifically observed that "such decision of the ITO cannot be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard.
11. Now, we may also examine as to whether the stand of the AO on the issue can be said to be unsustainable in law. On merits, the controversy is whether the AO was correct in computing the deduction under Section 80HHC without reducing from the "profits of business", the deduction allowable under Section 80-IB of the Act. The CIT has held that in view of the provisions of Section 80-IA(13), the deduction under Section 80HHC is to be computed by reducing from the "profit of business" the deduction allowable under Section 80-IB of the Act. The conclusion drawn by the AO is supported by the decisions of the Tribunal in the cases of Bharat Heavy Electrical Ltd. (supra), Mittal Clothing Co. (supra), Toshica Creation (supra) and R.V. Diamond Jewellers (P) Ltd. (supra). In Bharat Heavy Electrical Ltd. (supra), the Tribunal held that Section 80HHC of the Act does not authorize adjustment of deduction under Sections 80HH, 80HHB or Section 80-I from the export profits before deduction under Section 80HHC is given. Whatever deduction is computed by applying the formula prescribed by Section 80HHC, same is to be allowed without such profits being reduced by other deduction.
12. The learned Departmental Representative has referred to the judgment of Rajasthan High Court in the case of Rochi Ram & Sons (supra) to support a contrary inference with regard to the application of Section 80-IA(9) of the Act. We have perused the said decision. The assessment year involved was 1995-96. The assessee has claimed simultaneous deductions under Sections 80HHC and 80-IA of the Act. The AO reduced the deduction under Section 80-IA by the amount of deduction allowed under Section 80HHC. The Hon'ble High Court held that Section 80-IA did not provide that a deduction under Section 80HHC has been allowed on a gross total income, deduction under Section 80-IA should be allowed only on the balance i.e., amount remaining after deduction under Section 80HHC of the Act. The Hon'ble High Court upheld the stand of the assessee. With respect to insertion of Section 80-IA(9A), it was noted that the same was applicable w.e.f. 1st April, 1999. It is this observation which the learned Departmental Representative has articulated to support his case. We have perused the said decision and find that such proposition does not emerge out of the judgment In fact, the Hon'ble High Court specifically noted that after considering the provisions of Section 80-IA(9) of the Act and the language used in Section 80HHC, there was no restriction on allowing deductions under any other section of Chapter VI-A on gross total income after deduction under Section 80HHC of the Act. The observation regarding the amendment w.e.f. 1st April, 1999 has been made as sequel to the argument of the Revenue and is not the ratio of the decision as contended by the learned Departmental Representative. Even if it is accepted that the legal proposition of the learned Departmental Representative is supported by the said decision, it merely reflects a possible view.
13. Thus, it cannot be inferred that the stand taken by the AO is unsustainable in law so as to render the order as prejudicial to the interest of Revenue. Certainly, the point of view of the AO is a possible view in the eye of law and the CIT cannot prefer another view and treat the order as erroneous and prejudicial to the interest of the Revenue. Therefore, following the ratio of judgments of the apex Court and Bombay High Court in Malabar Industrial Co. Ltd. (supra) and Gabriel India Ltd. (supra) the order of the AO on the issue of computing deduction under Sections 80HHC and 80-IB cannot be considered as erroneous insofar it is prejudicial to the interest of the Revenue.
14. Now, with respect to the exclusion of incomes of duty drawback and samples for computing deduction under Section 80-IB of the Act, the AO had considered such amounts as part of eligible profits- for the purposes of computing deduction under Section 80-IB of the Act. On the issue of duty drawback, the judgments of Gujarat High Court in the case of India Gelatine & Chemicals Ltd. (supra) and of the Tribunal in the case of Metro Tyres Ltd. (supra) and A.P. Industrial Components Ltd. (supra) support the stand of the AO. Similarly, Special Bench of the Tribunal in the case of Nirma Industries Ltd. (supra) and Mumbai Bench of the Tribunal in the case of Investwel Publishers (P) Ltd. (supra) support the case of the assessee and the conclusion drawn by the AO. In contrast the CIT and the learned Departmental Representative interpreted "derived from" to infer that such incomes are not includible for the purposes of Section 80-IB of the Act and reliance was placed in the case of Sterling Foods (supra). Again on this aspect, it is evident that it is a matter of interpretive exercise and two possible interpretations are feasible. Therefore, without adjudicating as to which is a correct interpretation, it is clear that Section 263 is unwarranted in such situation. Therefore, on this aspect also, the assumption of jurisdiction by the CIT under Section 263 is unjustified.
15. Before parting, we may refer to the reference made by the learned Departmental Representative to the judgment of the Hon'ble Gujarat High Court in the case of M.M. Khambhatwala (supra) for the proposition that Section 263 is justified even in case where two views are possible on a question. We have perused the said judgment and find that the same does not help the case of the Revenue. In the said decision, the Tribunal had set aside the order of the CIT passed under Section 263 of the Act on the ground that two views were possible on the question. The Hon'ble Gujarat High Court reversed the decision of the Tribunal on the ground that the 'possibility of two views' noted by the Tribunal was not supported by any provisions of the Act or any judgment. The fact situation in the instant case is entirely different for the reasons that the stand of the assessee is supported by the various decisions which we have adverted to in the earlier part of the order. Hence, the judgment of the Gujarat High Court is inapplicable on facts.
16. In view of the aforesaid discussion, we hold that the CIT erred on facts and in law in exercising revisionary powers under Section 263 holding that the assessment order dt. 26th March, 2004 passed under Section 143(3) of the Act was erropeous and prejudicial to the interest of the Revenue.
17. In the result, the appeal of the assessee for asst. yr. 2001-02 stands allowed.
18. Now, we may take up the appeal of the assessee for asst. yr. 2002-03. It was a common ground between the parties that the issues involved in this assessment year are similar to those considered by us in the appeal for the asst. yr. 2001-02. Our decision in the earlier year squarely applies herein also.
19. However, there is an additional feature in this year which has been separately argued by the parties before us. The same is discussed hereinafter. The case of the assessee was selected for limited scrutiny as provided under Section 143(2)(i) of the Act on the point of claim for deduction under Section 80-IB of the Act. The deductions under Sections 80HHC and 80-IB, as claimed by the assessee, were allowed by the AO while passing order under Section 143(3)(i) of the Act on 9th Sept., 2004. The assessee contends that the issues raised by the CIT in the proceedings under Section 263 relating to the claim for deduction under Section 80HHC was not the subject-matter of limited scrutiny made by the AO under Section 143(2)(i) of the Act and therefore, the same could not be gone into by the CIT by exercising jurisdiction under Section 263 of the Act.
20. On this fact, the learned Departmental Representative has justified the order of the CIT by resorting to the phraseology of Section 263 and submitted that since the AO had failed to examine the claims of the assessee, the learned CIT was justified in invoking Section 263 and directing the AC to complete the assessment de novo in the light of his observations and findings given in the impugned order. He further submitted that there is no bar in exercising powers under Section 263 by the CIT even in cases where the assessment was completed under Section 143(1) of the Act and thus in this case the order of the CIT was justified.
21. On this aspect of the matter, we find that the Calcutta Bench of the Tribunal in the case of Nayek Paper Converters v. Asstt. CIT (2005) 93 TTJ (Cal) 574 : (2005) 93 ITD 144 (Cal) has considered an identical issue. The Tribunal has considered the issue comprehensively by noticing the scope and ambit of Sections 143(2)(i), 143(3)(i), 143(2)(ii) and also Section 263 of the Act. The Tribunal held that non-initiation of comprehensive scrutiny by issuing notice under Section 143(2)(ii) by the AO cannot be a subject-matter of revision under Section 263, where the assessment is completed under Section 143(3)(i) on limited issue. It was further held that no other item or matter other than items specified in notice under Section 143(2)(i) could be dealt with or examined or verified or adjudicated upon by the AO while passing order under Section 143(3)(ii), CIT cannot direct the AO to look into matters which could be dealt by the AO by assuming jurisdiction under Section 143(3)(ii) of the Act.
22. We hereby concur with the decision of the Calcutta Bench of the Tribunal in the case of Nayek Paper Converters v. Asstt. CIT (supra) and uphold the plea of the assessee on the above additional fact also in this year and allow both the appeals of the assessee.
23. In the result, both the appeals of the assessee are allowed.