HIGH COURT OF JUDICATURE AT ALLAHABAD AFR Reserved Income Tax Appeal No. 734 of 2007 The Commissioner of Income Tax & Another ...... Appellant Vs. M/s Rashid Exports Industries ......Respondent And Income Tax Appeal No. 598 of 2011 The Commissioner of Income Tax...... Appellant & Another Vs. Asian Handicrafts ....... Respondent Hon'ble Tarun Agarwala,J.
Hon'ble Vinod Kumar Misra,J.
(Per:Tarun Agarwala,J.)
1. Both the appeals are being decided together since it involves the same questions of law. For facility, the facts in Income Tax Appeal No. 734 of 2007 is being taken into consideration.
2. The assessee is a manufacturer and exporter. For the assessment year 2001-02, the assessee filed his return showing nil income claiming deductions under Sections 80HHC and 80-IB of the Income Tax Act,1961 (hereinafter referred to as the Act). The return of income was processed under Section 143(1) of the Act and a notice under Section 142(1) of the Act was issued. The computation of total income was checked and the deduction claimed under Sections 80HHC and 80-IB of the Act was scrutinized. The assessing authority, accordingly, computed the total income at nil after allowing deductions under Sections 80-IB and 80HHC of the Act. The Assessing Officer concluded as under:
"In response to discussion during the assessment proceedings, the assessee has filed the copies of Balance Sheet & Profit & Loss Account for the period ending 31/03/1992 and it is found that this firm was not constituted after splitting up the old business. The assessee was specifically asked when this firm was entitled for deduction u/s 80 IB since its establishment, then why it did not claim deduction u/s 80 IB prior to this year. In response to this, the assessee has submitted that in earlier years, there was 100% deduction u/s 80HHC of I.T.Act, 1961 and no income was left liable for assessment and this, it did not claim u/s 80IB of I.T.Act, 1961 in earlier year. On going through all the documents submitted and produced, it is seen that assessee qualifies for deduction u/s 80IB as per proviso (I) of sub-section (3) of section 80IB of I.T.Act, 1961. In view of above discussion, the deduction u/s 80IB of I.T.Act, 1961 is therefore allowed and A.Y. 1992-93 is the initial assessment year.
In view of above observations, total income is computed as under:
Net Profit as Per Profit and Loss Account = 3,4135,688
Add dep for separate Consideration = 34,05,139
Total Rs. 3,75,40,827
Add
1. Donation 75,800
2. Disallowance out of foreign
Tour as per para 2 above = 4,17,564
3. Disallowance out of vehicle
Maintenance & running
expenses vide para 3 above = 1,57,935
4. Disallowance out of Car
dep vide Para 4 above = 83,877
5. Disallowance as per Para 6 above=1,17,677 8,52,853
3,83,93680
Less:
6. Depreciation allowable = 34,04,286
3,49,89,394
Less : Claim u/s 80G = 75,800
3,49,13,594
Business income
Eligible for deduction u/s 80IB
& 80HHC
Deductions
80HHC = 2,79,30,875
Being 80% of Rs. 3,49,13,594
80 IB = 87,28,398
Being 25% of Rs. 3,49,13,594
Total = 3,66,59,273
But restricted to Gross = 3,49,13,594
Total income NIL
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Assessment is completed on total income at NIL. Tax payable works out at NIL. Allow credit of Rs. 35,00,000/-. Allowed interest u/s 244(A) of I.T.Act, 1961. Issue copy of the order, ND & refund voucher to the assessee.
Tax refundable comes as under-
Income Nil
Tax Nil
Adv tax 35,00,000
244A 7,00,000
42,00,000"
3. From the aforesaid, it is clear that the deductions under Sections 80-IB and 80 HHC of the Act was given from the profits and gains computed at Rs. 3,49,13,594.00. The computation further indicates that the Assessing Authority granted deductions upto a maximum of 100% of the profits and gains as provided under Section 80-IA(9) of the Act.
4. It transpires that the Commissioner of Income Tax did not agree with the assessment order contending that for the purpose of calculation of deductions under Section 80HHC of the Act, the Assessing Officer adopted the same figures of profit as adopted for the purpose of deduction under Section 80-IB of the Act. The Commissioner of Income Tax held that for the purpose of calculation of deduction under Section 80HHC and 80-IB of the Act income from business was taken to Rs.3,49,13,594.00 and both the deductions were allowed after taking this amount without considering the provision of Section 80-IA (9) of the Act, which are applicable to Section 80-IB of the Act by virtue of Section 80-IB(13) of the Act. The Commissioner, accordingly, held that the approach of the Assessing Officer was incorrect and consequently, the deductions given was prejudicial to the interest of the revenue. The Commissioner of Income Tax, accordingly, cancelled the assessment order and directed the Assessing Officer to make a fresh assessment de-novo after providing a reasonable opportunity of hearing to the assessee.
5. The assessee, being aggrieved, filed an appeal before the Tribunal, which was allowed and the order of the Commissioner of Income Tax passed under Section 263 of the Act was set aside. The Tribunal held that the Commissioner of Income Tax was not justified in revising the order of the Assessing officer under Section 263 of the Act. The Department, being aggrieved by the said order, has filed the present appeal under Section 260-A of the Act proposing that the following substantial question of law arises for consideration;
"(1) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that the deduction u/s 80-HHC and 80-IB on the same figure of profit without reducing deduction allowed u/s 80-HHC ?
(2) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that the Duty Draw Back received by the assessee is the income derived from Industrial Undertaking and also eligible for deduction u/s 80-IB of the Act?
(3) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that the CIT has erred in revising the order of the Assessing authority u/s 263 in respect of the controversy raised above?"
6. We have heard Sri Shubham Agrawal, the learned counsel for the appellant and Sri R.R.Agrawal, the learned Senior Counsel assisted by Sri Suyash Agrawal, the learned counsel for the respondent as well as Sri Piyush Agrawal, the learned counsel for the respondent in the connected appeal.
7. Lengthy arguments were made on the issue of the method of deduction that is permissible under Sections 80HHC and 80-IB of the Act and, in this regard, the learned counsel for the appellant has cited decisions given by various High Court in their favour. While considering the decisions on the question of applicability of deduction under Section 80HHC and 80-IB of the Act, we find that there are divergence of opinions of various High Courts. However, in the instant case, we are of the opinion that the proposed questions of law nos. 1 and 2 does not arise for consideration by this Court at this stage. In our opinion, the only issue which we are required to decide is "whether the Commissioner of Income Tax was justified in revising the order of the Assessing Authority under Section 263 of the Act on the ground that the assessment order was prejudicial to the interest of revenue". In the event the Court upholds the order of the Commissioner of Income Tax passed under Section 263 of the Act, in that event, the issue with regard to the manner and method of granting deductions under Sections 80HHC and 80-IB of the Act will be considered by the Assessing Authority pursuant to the order of the Commissioner of Income Tax passed under Section 263 of the Act. In the event the Court holds that the Commissioner committed an error in revising the order of the Assessing Authority under Section 263 of the Act, in that event answering question nos. 1 and 2 would only be an academic exercise in which case it is not necessary for the Court to answer those questions.
8. On the issue of exercise of powers under Section 263 of the Act there is a catena of decisions given by various Courts including this Court as well as by the Supreme Court and, it is not necessary to dwell in detail all those decisions. It is sufficient for this Court to consider one judgment given by the Supreme Court in Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax, (2000) 243 ITR 83 (SC), wherein the Supreme Court explained the provision of Section 263 of the Act as under:
" To consider the first contention, it will be apt to quote Section 263(1) which is relevant for our purpose.
263. Revision of orders prejudicial to revenue - (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Explanation...
A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i). the order of the Assessing Officer sought to be revised is erroneous; and
(ii) it is prejudicial to the interests of the revenue. If one of them is absent -- if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue recourse cannot be had to Section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
The phrase prejudicial to the interests of the revenue is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. Vs. S.P. Jain (1957) 31 ITR 872, the High Court of Karnataka in Commissioner of Income- tax, Mysore Vs. T. Narayana Pai (1975) 98 ITR 422, the High Court of Bombay in Commissioner of Income-tax Vs. Gabriel India Ltd. (1993) 203 ITR 108 and the High Court of Gujarat in Commissioner of Income-tax Vs. Smt. Minalben S. Parikh (1995) 215 ITR 81 treated loss of tax as prejudicial to the interests of the revenue. Mr. Abaraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Company Vs. Commissioner of Income-tax (1987) 163 ITR 129 interpreting prejudicial to the interests of the revenue. The High Court held (page 138): "In this context, it must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the Order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration. In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi Vs. Commissioner of Income-tax (1968) 67 ITR 84 and in Smt. Tara Devi Aggarwal Vs. Commissioner of Income-tax, West Bengal (1973) 88 ITR 323"
9. From the aforesaid, the assessment order can be revised under Section 263 of the Act if the assessment order is based on incorrect assumption of fact or incorrect application of law or where the order was passed without application of mind. If any of these conditions exists, the Commissioner is still required to be satisfied that the order is not only erroneous but is prejudicial to the interests of revenue. Both these conditions are required to exist before exercising the powers under Section 263 of the Act. The Supreme Court held that even if the order is erroneous but is not prejudicial to the interests of revenue in which case recourse to Section 263(1) of the Act could not be taken. Thus, even if the order is erroneous, Section 263 of the Act cannot be invoked unless it is found that the order is also prejudicial to the interest of the revenue. The Supreme Court further held that the phrase "prejudicial to the interests of revenue" has to be read in conjunction with erroneous order passed by the Assessing Officer and thus every loss of revenue as a consequence of an erroneous order of the Assessing Officer could not be treated as prejudicial to the interest of revenue. The Supreme Court further held that where two views are possible and the Income Tax Officer has taken one view the same cannot be treated as an erroneous order which is prejudicial to the interest of the revenue merely because the Commissioner does not agree with the order unless the view taken by the Income Tax Officer was not sustainable in law.
10. In the light of the aforesaid pronouncement, Sri Shubham Agrawal, Advocate urged that the Assessing Officer did not consider nor mentioned the provision of Section 80-IB (13) read with Section 80-IA(9) of the Act and the assessment order was, therefore, passed in complete ignorance of the provisions and, therefore, the assessment order granting deductions was passed on incorrect application of law. The learned counsel urged that consequently, the Commissioner of Income Tax was justified in holding that the order of the Assessing Officer was erroneous and prejudicial to the interest of the revenue.
11. On the other hand, Sri R.R.Agrawal, the learned Senior Counsel for the assessee submitted that the Assessing Officer considered all the provisions and, after detailed discussions, made the assessment order under Section 143(3) of the Act granting maximum deduction permissible as provided under Section 80-IA (9) of the Act. It was urged that mere fact that Sections 80 IA (9) and 80-IB (13) were not indicated in the assessment order does not make the assessment order erroneous or prejudicial to the interest of the revenue.
12. Having heard the learned counsel for the parties, we find from a reading of the assessment order that the Assessing Officer has discussed in detail the deductions sought to be claimed by the assessee under Sections 80HHC and 80-IB of the Act and, after considering the provisions, computed the income after granting deductions as per Section 80-IA(9) of the Act on the amount of profits and gains upto the extent of 100% of the amount of profits and gains. The assessment order indicates that deductions calculated was more than 100% of the profits and gains but the Assessing Officer restricted the deductions only to the extent of 100% of the amount of profits and gains.
13. The object of amending section 80-IA by the Finance (No.2) Act, 1998, as is evident from the memorandum explaining the provisions in the Finance (No.2) Bill, 1998 ([1998] 231 ITR (St.) 252), is that it was noticed that certain assessees were claiming more than 100 percent deduction on the profits and gains of the same undertaking, when they were entitled to deductions under more than one section under heading C of Chapter VI-A. With a view to prevent the taxpayer taking undue advantage of the existing provisions of the Act, section 80-IA was amended by the Finance (No.2) Act, 1998, so that the deductions allowed under section 80-IA and various sections under heading C of Chapter VI-A are restricted to the profits of the business of the undertaking/enterprise.
14. We also find that it is not a case where the assessment order is based on incorrect assumption of fact. We also find that it is not a case where the Assessing officer has not applied its mind to the provision of Section 80-IB (13) read with Section 80-IA(9) of the Act. The Assessing Officer after considering the matter in detail has passed an assessment order by applying its mind. The Assessing officer had allowed the deduction under Sections 80 HHC and under Section 80-IB of the Act to the extent of the amount of profits and gains as contemplated under Section 80-IA(9) of the Act. The question as to whether the deduction under Section 80HHC was to be computed after reducing the deduction under Section 80-IB of the Act from the profits and gains is a legal consideration. The Assessing Officer allowed the deduction in terms of Section 80 IA(9) of the Act and, therefore, it cannot be said that the Assessing Officer had not applied its mind and had failed to make an enquiry.
15. The contention that the order of the Assessing Officer was erroneous as there was incorrect application of law, namely, that the deduction under Section 80HHC of the Act was computed after reducing the amount of deduction under Section 80 IB of the Act from the profits and gains is a legal consideration and does not mean that there has been an incorrect application of law. The mere absence of the discussion of the provision of Section 80 IB (13) of the Act read with Section 80 IA(9) would not mean that the Assessing Officer had not applied its mind to these provisions or that the assessment order has been passed on incorrect application of law. From a perusal of the assessment order it is clear that the deduction has not exceeded beyond 100%, as contemplated under Section 80 IA(9) of the Act. Consequently, even if the Section 80 IA(9) has not been mentioned in the impugned order, nonetheless, the impact of this section has been given effect to in the assessment order. This view of ours is also supported by the decision of Delhi High Court in Commissioner of Income-Tax Vs. Honda Siel Power Products, (2011) 33 ITR 547 (Del).
16. The Assessing Officer granted deduction under Sections 80HHC and 80-IB of the Act by taking the same figure of profits. On the other hand, the Department's case is that the deduction under Section 80 HHC of the Act was required to be computed after reducing the amount of deduction under Section 80-IB of the Act from profits and gains. On this score, there are a divergence of views taken by different High Courts. In the case of Associated Capsules P Ltd. Vs. Dy. Commissioner of Income Tax and another, (2011) 332 ITR 42 (Bom) and Commissioner of Income Tax and another Vs. Millipore India P.Ltd., (2012) 341 ITR 319 (Kar), the Courts have taken the view that the same figures of profit is required to be taken for calculating the deductions under Section 80HHC of the Act and under Section 80-IB of the Act:
17. On the other hand, in the decision of Liberty India Vs. Commissioner of Income Tax, 2009 (225) CTR (SC) 233, Great Eastern Exports Vs. Commissioner of Income Tax, (2011) 332 ITR 14 (Del) and M/s Broadway Overseas Ltd. Vs. Commissioner of Income Tax, 2014 (265) CTR (P&H) 49, the Courts have held that the deduction under Section 80HHC of the Act is required to be computed after reducing the amount of deductions under Section 80-IB of the Act from the profits and gains.
18. From this, it is apparently clear that there are two views on the subject in question. The Supreme Court in the case of Malabar Industrial Co. Ltd. (Supra) has clearly held that where two views are possible and Income Tax Officer has taken a view with which the Commissioner does not agree it does not mean nor it can be treated that the order passed by the Assessing Officer was an erroneous order prejudicial to the interest of the revenue. Further, we find that at the time when the assessment order was made there was no decision either by the jurisdictional High Court or by any other High Court on the subject.
19. In the light of the aforesaid, we are of the view that there was no material to indicate that the Assessing Officer had not applied its mind to the provisions of Section 80IB(13) of the Act and Section 80IA(9) of the Act nor we find that the Assessing Officer had passed the order without application of mind or the assessment order was based on incorrect application of law. The assessment order, on the other hand, was passed under Section 143(3) of the Act by the Assessing Officer on applying its mind and after due discussion and enquiry.
20. From the aforesaid discussion, it is apparent that the expression "prejudicial to the interests of revenue" appearing in Section 263 of the Act has to be read in conjunction with "erroneous" and that every loss of revenue as a consequence of the assessment order could not be treated as prejudicial to the interest of the revenue. Where the Assessing Officer has adopted a view, which is permissible in law or where two views are possible and the Income Tax Officer has taken one view, we are of the view that the Commissioner of Income Tax could not exercise its power under Section 263 of the Act to differ from the view of the Assessing Officer even if there was a loss of revenue. There is no doubt that the provision cannot be invoked on each and every type of error committed by the Assessing Officer. It is only when an order is erroneous then Section 263 of the Act could be invoked.
21. In the light of the aforesaid, we are of the opinion that the Tribunal was justified in setting aside the order of the Commissioner of Income Tax passed under Section 263 of the Act. The appeal fails and is dismissed. The question of law as modified above is answered in favour of the assessee and against the Department. The appeal is dismissed.
Date: 11.12.2015 MAA/-
(Vinod Kumar Misra,J.) (Tarun Agarwala,J.)