1. This is an appeal by the assessee, M/s. Singal Brothers, Cochin against the order passed by the CIT(A), Cochin in respect of the asst.
yr. 1990-91.
2. The assessee is a partnership firm carrying on business mainly in the export of pepper. For the asst. yr. 1990-91 the firm filed the return on 15th October, 1990 declaring a total income of Rs. 40,800. In computing the income, the assessee claimed deduction under s. 80HHC on the export profit. The AO processed the return and issued an intimation under s. 143(1)(a) on 27th February, 1991, accepting the admitted income. Thereafter, a notice was issued under s. 154 on 24th February, 1993, proposing to rectify the intimation under s. 143(1)(a) on the view that relief under s. 80HHC as claimed by the assessee was not correct and that interest on deposits should have been excluded while working out the deduction. The AO passed the order of rectification on 8th March, 1993, with disallowance of Rs. 12,69,967 as the excess deduction claimed under s. 80HHC. The AO also issued a notice under s.
148 on 24th February, 1993, i.e. the same date on which the notice under s. 154 had been issued) requiring the assessee to file a return of income. In response to that notice, the assessee filed the return declaring income of Rs. 40,800 as admitted in the original return.
Subsequently, the AO sent a letter on 23rd December, 1993, informing the assessee that notice under s. 148 issued on 24th February, 1993, was cancelled for the reason that it was defective, in the sense that the assessee had not been given time of 30 days for filing the return.
The AO issued a fresh notice under s. 148 on 23rd December, 1993, calling for the return of income. The assessee was informed that the second notice under s. 148 was issued to bring to tax the income that had escaped assessment and to allow the deduction under s. 80HHC correctly by treating the interest on deposits as income under the head "other sources". The assessee filed the return on 27th January, 1994, stating that they had not concealed any particulars in regard to the income liable to tax and that the return was being filed under protest.
The assessment was made under s. 143(3) on 23rd March, 1994, treating the interest of Rs. 12,83,367 on fixed deposits as income under the head 'other sources', with consequential reduction in the relief under s. 80HHC. Meanwhile, against the order of rectification under s. 154 dt. 8th March, 1993, the assessee filed an appeal and the CIT(A) cancelled that order by the appellate, order dt. 15th June, 1993.
Against the assessment also, the assessee filed appeal before the CIT(A), challenging the computation of the deduction under s. 80HHC.The appellate authority held that the AO was justified in issuing notice under s. 148 to bring to tax the income that escaped assessment with the wrong computation of the deduction under s. 80HHC. It was also held that the assessment of the interest income under the head 'other sources', was in order, aggrieved with the order of the CIT(A), the assessee has filed this appeal before the Tribunal.
3. The first ground raised by the assessee in this appeal is that the CIT(A) was not justified in upholding the assessment made after the issue of the notice under s. 148. Questioning the validity of the assessment, the assessee's counsel, Shri G. Sarangan, Advocate submitted before us that the notice under s. 148 had been issued on 24th February, 1993, i.e., on the same date on which the notice under s. 154 had been issued for rectifying the intimation. It was pointed out that there was an order of rectification under s. 154 passed by the AO treating the interest on bank deposits as income under the head 'other sources', and reducing the deduction under s. 80HHC. The CIT(A) cancelled that order of rectification. Shri Sarangan contended that the same the disallowance made under s. 154, and cancelled by the CIT(A) could not have been again made in the order of assessment after the issue of the notice under s. 148. The learned counsel contended that the AO could assume the jurisdiction under s. 148 only if there was escapement of income as per the original assessment. According to Shri Sarangan, there was no material before the AO to hold that income liable to tax for the asst. yr. 1990-91 had escaped assessment. It was his contention that merely because the AO wanted the interest income to be assessed under some other head or to make the computation under s.
80HHC in a particular manner, that would not give him the jurisdiction to act under s. 148. The learned counsel stated that after processing the return under s. 143(1)(a) and issuing the intimation on 27th February, 1991, the AO could have made the regular assessment under s.
143(3) after issuing a notice under s. 143(2) within a period of 12 months from the end of the month in which the return had been filed.
Shri Sarangan contended that if the AO had failed to issue to notice under s. 143(3) within the statutory time, that would not give him the jurisdiction to make the assessment by issuing a notice under s. 148.
His contention was that the AO had wrongly assumed jurisdiction to make the assessment under s. 147, instead of making the regular assessment, as provided in s. 143(3) and so the impugned order of assessment was not a valid order. Arguing on the above lines, the learned representative urged us to cancel the assessment and reverse the finding of the first appellate authority.
4. On behalf of the Revenue, Shri Amba Sankar Dev, the Departmental Representative, submitted that the CIT(A) was fully justified in upholding the assessment, in view of the fact that the assessee had been granted excess relief under s. 80HHC and in that sense there was escapement of income. The learned Departmental Representative submitted that the proceedings for rectification under s. 154 were entirely different from the proceedings for assessment of escaped income. It was open to the AO to issue notice under s. 148, to disallow the excess relief allowed by assessing the interest income under a wrong head. It was stated that in the appeal the CIT(A) had cancelled the order of rectification for the reason that there was no mistake apparent on record as the issue was debatable and that no variation of the computation under s. 80HHC could be effected in the order under s. 154.
The learned Departmental Representative relied on the decision of the Kerala High Court in the case of Mrs. Gladys S. Koder vs. ITO (1976) 104 ITR 220 (Ker) to contend that the spheres of rectification and reassessment might sometimes overlap. It was his contention that in spite of the order of rectification under s. 154, it was open to the AO to issue the notice under s. 148 to bring to tax the same income that had escaped assessment. As regards the deduction under s. 80HHC, the learned Departmental Representative stated that the assessee had wrongly claimed deduction on the entire income including interest on bank deposits and that when the AO found that there was excess relief allowed to the assessee, he could assume the jurisdiction to issue the notice under s. 148, and so the CIT(A) had correctly upheld the assessment.
5. As already stated, the return of income filed by the assessee for the asst. yr. 1990-91 on 15th October, 1990, was processed under s.
143(1)(a) and an intimation was issued by the AO on 27th February, 1991. In the intimation, the income as returned by the assessee was accepted without any adjustment. In computing the income at Rs. 40,800, the assessee had claimed deduction under s. 80HHC on the entire income including Rs. 12,88,367 as interest on fixed deposits with banks, and investment in Vijaya Cash Certificates of the Vijaya Bank. In arriving at the profit, the assessee had credited in the P&L a/c of the business the total sum of Rs. 12,88,367. The assessee also worked out the deduction under s. 80HHC on the entire income from the business, which included the interest credited in the P&L a/c. While processing the return under s. 143(1)(a), the AO could not have made any disallowance in regard to the deduction under s. 80HHC as the same would not be in the nature of prima facie adjustment envisaged in that section. The AO had to issue the intimation accepting the income returned by the assessee.
6. True that there was a notice under s. 154 issued by the AO for the purpose of rectifying the intimation under s. 143(2)(a), on realising that the assessee could not have enjoyed the relief under s. 80HHC on the interest on bank deposits. As a matter of fact, an order of rectification under s. 154 was also passed treating the interest income under the head 'other sources' and the consequential reduction in the relief under s. 80HHC. But that order of rectification was cancelled by the CIT(A) by his order, dt. 15th June, 1993, with the reasoning as under : "I am in agreement with the contention of the learned representative. As pointed out by them the issue regarding the interest on F.D. is a debatable one and therefore the AO is not justified in rectifying the intimation. Accordingly, for this reason, the rectification order dt. 8th March, 1993, is cancelled." 7. It can also be seen that the CIT(A) cancelled the order of rectification for want of jurisdiction of the AO and not on the merit of the case. In the case relied on by the learned Departmental Representative (1976) 104 ITR 220 (Ker) (supra), the Kerala High Court held that proceedings under s. 148 of the IT Act were different from the proceedings under s. 154. In the case of R. Madhavan Nair vs. CIT (1976) 105 ITR 813 (Ker) the Kerala High Court held that the two ss.
155(5) and 147(b) are not mutually exclusive and that it is open to the ITO to resort to either of the two provisions according to the needs arising from the facts and the circumstances of the case. It may also be noted that though the first notice under s. 148 had been issued on 24th Feb, 1993, i.e. on the same date of issue of the notice under s.
154, that notice under s. 148 was later cancelled on 23rd December, 1993, when another notice under s. 148 was issued. The assessment under s. 143(3) was made only on the basis of the second notice issued on 23rd December, 1993. The contention of the learned counsel for the assessee, that on 24th February, 1993, the AO was not sure regarding the escapement of income and that it was because he had his doubts that notices had been issued both under s. 154 and under s. 148 do not hold good, as on the date of the issue of the second notice under s. 148, i.e. on 23rd December, 1993, there was no such doubt, as the CIT(A) had already passed the order on 15th June, 1993. Further, it appears to us that the doubt of the AO initially was on the provisions to be applied to bring to tax the escaped income, whether s. 154 or s. 148, and not on the fact of escapement of income. Sec. 147 gives the AO the jurisdiction to make the assessment/reassessment, if he has reason to believe that income liable to tax has escaped assessment. It is clear from Expln. 2 cl. (c)(iii) that, if income has been made the subject of excessive relief, that shall be deemed to be a case where income chargeable to tax has escaped assessment. If the income liable to tax in the hands of the assessee has been made the subject of excessive relief under s. 80HHC, and the AO has reason to believe so, that will give him the jurisdiction to make the assessment or reassessment under s. 147 and for that purpose the notice can be issued under s. 148. The AO was thus justified in issuing the notice under s. 148 to withdraw the excess deduction allowed under s. 80HHC, with the computation of the income from business, including interest on deposits as business income.
8. It is provided in s. 143(2) that where a return has been made under s. 139, the AO shall, if he considers it necessary or expedient, to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice requiring him on a date to be specified therein, either to attend his office or to produce or cause to be produced there, any evidence on which the assessee may rely in support of the return. But then no notice shall be served on the assessee after the expiry of 12 months from the end of the month in which the return has been furnished. In this case, admittedly no notice under s. 143(2) was issued within the statutory time. The AO could not have therefore made the assessment under s. 143(3). Before the CIT(A) the assessee had raised a claim that the AO had issued a notice under s. 143(2) on 10th March, 1993, very much after the time-limit, but from a verification of the assessment records, the appellate authority found that no such notice under s. 143(2) had been issued by the AO (vide para 6 of the appellate order). It is the contention of the learned representative of the assessee that the notice under s. 148 had been issued only because there was the failure to issue the notice under s. 143(2) within the statutory time and to make the assessment under s. 143(3). There is the further submission that the intimation issued under s. 143(1) should be viewed as an order of assessment and so the notice issued by the AO under s. 148 was with a view to reopen the assessment.
9. The question to be decided first is whether the intimation issued under s. 143(1)(a) could be considered as an order of assessment.
10. Sec. 143(1)(a) permits certain prima facie adjustments to be made in the income or loss declared in the return filed by the assessee. The adjustments can be made only on the basis of the information available in the return, accounts or documents submitted along with the return.
It can be seen that s. 143(1)(a) does not provide for the assessment of the income or the determination of the total income, but only for certain prima facie adjustments to be made on the income returned by the assessee. Such adjustments are to be made without hearing the assessee. In the provision of s. 143 there is nothing to show that the intimation sent to the assessee under sub-s. (1) is an order of assessment. It may be noted that in s. 143 entirely recast as from 1st April, 1989, by the Direct Tax Laws (Amendment) Act, 1987, there is no provision to the effect that the intimation under s. 143(1)(a) shall be an order of the AO. There is the Explanation inserted w.e.f. 1st October, 1991, after s. 143(5) to the effect that an intimation sent to the assessee under sub-s. (1) or (1B) shall be deemed to be an order for the purpose of s. 264. The Finance Act, 1994, has substituted in the Explanation "ss. 246 and 264" for s. 264 w.e.f. 1st June, 1994. The effect of the amendment is that an intimation sent to the assessee under s. 143(1)(a) or s. 143(1B) is also deemed to be an order for the purpose of s. 246 which deals with the first appeals against the orders of the AO. From the above provisions in s. 143 it can be seen that only for the limited purpose of s. 246 or 264 the intimation under s. 143(1) will be treated as an order passed by the AO. But for the above amendments and for the limited purpose of ss. 246 and 264 the intimation under s. 143(1)(a) will not be an order and much less an order of assessment. The fact that the intimation under s. 143(1)(a) is not an order is evident also from the provisions of s. 154, which provides for rectification of mistakes. With a view to rectify any mistake apparent from the record of an IT authority, it is provided that the IT authority may - (b) amend any intimation sent by it under s. sub-s. (1) of s. 143, or enhance or reduce the amount of refund granted by it under that sub-section.
11. If an intimation sent under s. 143 is an order, then the same would have been brought in cl. (a) of s. 154(1) and in that case there was no need to specifically provide in cl. (b) for amendment of any intimation sent under sub-s. (1) of s. 143. Evidently, the intention is to treat the intimation under s. 143(1) as different from an order of the AO. If the intimation under s. 143(1)(a) is not an order of the assessing authority (other than for the purpose of ss. 154, 246 or 264), it cannot be considered as an order of assessment. It is important to note that there is no provision deeming the intimation under s. 143(1) as an order of assessment by the AO. We do not accept the contention of the learned counsel for the assessee that the intimation sent by the AO on 27th February, 1991, is an order of assessment and that the notice under s. 148 was issued to reopen the original assessment. It is our considered view that the notice under s. 148 had been issued in this case only to assess the income that had escaped assessment and it was not for reopening any assessment that had been completed earlier. In other words, this is a case of assessment under s. 148 and not a case or reassessment. For the purpose of such an assessment, the AO was fully justified in issuing the notice under s. 148 on finding that the assessee had claimed excess deduction under s. 80HHC in the computation of the total income. The CIT(A) was, therefore, justified in upholding the assessment on the facts and in the circumstances of this case.
12. The next ground in this appeal is that the CIT(A) was not correct in upholding the assessment of the interest income under the head 'other sources'. During the previous year the assessee was in receipt of a total sum of Rs. 12,83,367 as interest on fixed deposits with banks and investment in Vijaya Cash Certificates of the Vijaya Bank.
The assessee had credited the interest receipts in the P&L a/c of the business and showed the same as part of the business profit. On the ground that it was part of the profit derived from export business, the assessee had included the interest amount in the computation of the deduction under s. 80HHC. In the assessment the AO considered the interest as income under the head "other sources" and excluded the same while working out the deduction under s. 80HHC. This was confirmed by the CIT(A). The CIT(A) noticed that it was the surplus amount generated from the export business that the assessee had invested for a period of two years and more and on the facts of the case the decision of the jurisdictional High Court in the case of Collis Lines Ltd. vs. ITO (1982) 135 ITR 390 (Ker) was applicable. The appellate authority also placed reliance on the decision of this Tribunal in the case of Abad Fisheries in ITA No. 515/Coch/1993, dt. 23rd November, 1993, wherein it had been held that interest income earned as a result of employment of surplus funds with banks was assessable under the head 'other sources'.
13. Before us, the learned counsel Shri Sarangan submitted that the CIT(A) was not correct in confirming the assessment of the interest on bank deposits as income from other sources without considering the fact that it was the business income that had gone into the deposits. The learned counsel stated that the assessee-firm had made the investment in bank deposits and cash certificates only the money that was not immediately needed for business purpose and to earn some income by way of interest, so as to reduce the interest liability on the loans taken from banks. It was pointed out that interest on the deposits had been credited in the business account only. Shri Sarangan submitted that the assessee had only one business and that was the export of pepper and all the receipts, including the interest receipts, formed part of the export income and so the Revenue authorities were not justified in denying the relief under s. 80HHC on the bank interest. The learned counsel made the further submission that the assessee had also taken loan from the banks and for the purpose of raising loans, some of the deposits had been offered as security. It was stated that the interest payable on the loan taken on the security of the F.D. accounts came to around Rs. 68,000. Shri Sarangan added that it would not be correct to separate the interest receipts from the business income of the assessee and give it a separate treatment as income under the head 'other sources', ignoring the fact that interest payable by the assessee on the loans taken from the banks had been allowed as a deduction in computing the income from business. Shri Sarangan submitted that the first appellate authority was not correct in confirming the assessment of the income under the head 'other sources' relying on the decision of the Kerala High Court in the case of Collis Lines Ltd. (supra).
According to him, the facts in that case were distinguishable. Shri Sarangan raised another contention that atleast the interest/payment should have been adjusted against the interest receipts and only the net amount, if any, should have been treated as income under the head "other sources". It was his contention that the Revenue authorities were not justified in treating the entire interest of Rs. 12,83,367 as income under the head 'other sources' and excluding the same for the purpose of computing the deduction on the export profit under s. 80HHC.14. Per contra, Shri Amba Sankar Dev, the Departmental Representative, supported the order of the CIT(A) and submitted that the immediate source of interest income for the assessee was the fixed deposit with banks and not the export business and so, the interest income would not form part of the export profit. He further submitted that the CTI(A) was fully justified in confirming the assessment of the interest income under the head 'other sources', in view of the decisions of the jurisdictional High Court in the case of Collis Lines Ltd. vs. ITO (supra) and also in the case of CIT vs. Cochin Refineries Ltd. (1985) 154 ITR 345 (Ker).
15. As per the details available in the assessment order, the assessee had a number of F.D. accounts and cash certificates with Vijaya Bank.
Almost all the deposits were for a period of two years, except two deposits, (1) 13/89 and (2) 15/89, which were for a period of six months only. The question to be considered is whether the interest accrued on the term deposits and the Vijaya Cash Certificates could be considered as income from business. Considering the duration of the deposit period, it can be seen that it was the surplus money available with the assessee that had gone into the deposit accounts. In the case of Collis Lines Ltd. vs. ITO (supra), decided by the Kerala High Court, a shipping company, deposited in the bank account the money that was lying idle. On finding that it was safer and wiser to put it in a bank, the company made the deposit in F.D. accounts. The High Court upheld the finding of the Tribunal that interest earned on the deposit could not be said to be received in the course of the business so as to make it part of the profits and gains of the assessee's business. The assessment under the head 'income from other sources' in that case was upheld. The learned counsel for the assessee wanted to distinguish that case by pointing out that the money was lying idle and that it was felt by that company that it was wiser and safer to put it in the bank, whereas in the present case it was not the assessee's intention to invest the money in bank deposits or cash certificates. The fact is that the assessee has made the investment in long-term deposits and also earned interest. Interest accrued on such investments cannot be viewed as income from business. There is no direct nexus between the assessee's export business and the earning of the interest income. In the case of Collis Lines Ltd. (supra) on p. 393 the Kerala High Court observed as under : "The assessee is not a banking company. Money was not deposited by it by way of moneylending as a business. That was not its object.
The interest arose from amounts deposited in bank otherwise than by way of business. The amount was deposited because money was lying idle and it was safer and wiser to put it in the bank. The interest thereby earned was incidental to the main purpose of the deposit, which was safe keeping and not earning profits. Such income is rightly found to be income from other sources." 16. On the facts of the case, we find that the CIT(A) has rightly applied the ratio of the decision in the case of Collis Lines Ltd. to the facts of the present case for upholding the assessment of the interest income under the head 'other sources'.
17. The learned Departmental Representative has also brought to our notice the decision of the Kerala High Court in the case of Cochin Refineries Ltd. (supra) to contend that interest on bank deposit was not assessable as income from business. In that case the assessee claimed deduction under s. 80-I in respect of interest on amounts deposited in banks and other financial institutions. The High Court held that the amounts received as interest were receipts from other sources and not profits and gains attributable to the business of the assessee as a priority company. In that case it was as under : "profits and gains are well understood to mean only the business income, and not any other income. So long as the company has no business of lending money, and so long as the admitted case of the company is that the income derived is only on account of the peculiar situation arising from the time schedule for repayment of the loans, it cannot be stated that the income yielded by the deposits or investments was received by the deposits or investments was received in the course of the company's business so as to be treated as a business profit." 18. As regards the claim for deduction under s. 80HHC of the interest amount; it may be noted that the deduction is allowable only on the profit derived by the assessee from the export of specified goods and merchandise. In the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) the Supreme Court has held that the expression "derived from" has a definite, but narrow meaning and it cannot receive a flexible or wider concept. Reference may also be made to the decision of the Karnataka High Court in the case of Sterling Foods vs. CIT (1984) 150 ITR 292 (Kar). The Kerala High Court had also occasion to consider the meaning of the expression "derived from" in the case of Cochin Co. vs. CIT (1998) 114 ITR 822 (Ker). In that case, the High Court observed : "profit or gain can be said to have been derived from an activity carried on by a person only if the activity is the immediate and effective source of the profit or gain. There must be a direct nexus between the activity and the earning of the profit or gain. Income, profit or gain cannot be said to have been derived from an activity merely by reason of the fact that the activity may have helped to earn the income or profit in an indirect or remote manner." 19. We may also refer to the decision of the Madras High Court in the case of CIT vs. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad), wherein it was held that interest on deposits with the Tamilnadu Electricity Board was not to be taken into account for the purpose of s. 80HHC. In that case, the Madras High Court held as under : 20. "Though the assessee had to necessarily make the deposit with the Electricity Board for running the industry, and the power supply would not be made without the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board could not be said to have been derived from the industrial undertaking. The immediate source of interest was the deposit itself. In other words, the immediate and effective source of the interest was the deposit and not the industrial undertaking. The fact that the amount was assessable as the business income would not be sufficient to hold that the interest income was derived from the actual conduct of the business of the industrial undertaking. Hence, the interest could not be treated as income derived from an industrial undertaking for the purpose of relief under s. 80HHC.21. In the light of the judicial pronouncements noted above, it cannot be said that the interest earned by the assessee on the deposits with banks qualified as profit derived from the export of goods or merchandise to make it eligible for the deduction under s. 80HHC. This ground of appeal is, therefore, decided against the assessee.