1. These two appeals by the assessee emanate from the common order passed by the CIT(A) on 14th July, 1995, in relation to asst. yrs.
1989-90 and 1990-91. Since common issues are involved in these appeals, we are, therefore, proceeding to dispose them of by this consolidated order for the sake of convenience.
2. The first ground of the assessee's appeal deals with the computation of deduction under Section 32AB. The facts apropos of this issue are that the AO, in the course of assessment proceedings under Section 143(3), noted that the net profit declared by the assessee included the following incomes :(i) Income from sale of fixed assets Rs. 4,50,802(ii) Interest earned Rs. 5,17,611(iii) Dividend income Rs. 2,56,650(iv) Rent received Rs. 69,600 After discussing nature of the abovereferred items, it was opined that the profit on sale of fixed assets was relatable to the eligible business. However, dividend income, interest income and rental income to the tune of Rs. 2,56,650, Rs. 3,68,109 and Rs. 69,600 were found to be ineligible for deduction under Section 32AB on the premise that these items did not fall under the head "Profits and gains of business or profession". Resultantly, the deduction under Section 32AB was reduced. The learned CIT(A) echoed the action of the AO.2.1 Before us, the learned counsel for the assessee contended that the aforesaid items were eligible for the purposes of deduction under Section 32AB and hence, the learned CIT(A) failed to appreciate the legal position in this regard. He relied on certain decisions to bring home his point of view.
2.2 In the opposition, the learned Departmental Representative contended that the abovereferred three items of income were taxable either under the head "Income from house property" or "income from other sources" and hence were liable to be excluded for computation of deduction under Section 32AB as they were not falling under the head "Profits and gains of business or profession".
2.3 We have heard the rival submissions and perused the relevant material on record in the light of precedents cited before us. The only question involves the interpretation of the provisions of Section 32AB.Insofar as the eligibility of the assessee for deduction under Section 32AB and investment for such purpose are concerned, we find that there is no dispute and the Department has accepted that aspect of the matter. The controversy centres around the calculation of the profits of business for the purposes of Section 32AB. Sub-section (1) r/w Sub-section (3) makes it clear that the profits of the business are required to be computed in accordance with Parts II and III of the Schedule VI to the Companies Act, 1956, and thereafter certain adjustments are to be made. Sub-section (1) provides that two amounts, namely, 20 per cent of the profits of business or profession and a sum equal to the amount deposited or utilised as prescribed under the Act are to be considered and the lower of these amounts is to be allowed as deduction. Both the authorities below have interpreted the provisions of Sub-section (1) to mean that 20 per cent is to be calculated of the profits falling under the head "Business income". This is an erroneous approach adopted by them inasmuch as Sub-section (1) clearly provides that 20 per cent is to be considered of the profits of business or profession. In turn, Sub-section (3) defines the "Profits of business or profession" and the starting point is the amount of profits computed in accordance with the Parts II and III of Schedule VI of the Companies Act, 1956 which includes not only the 'Business income' but also other incomes of the company. The division of income under different heads as contemplated in Chapter IV of the IT Act is relevant only for this Act and is not germane to the profits as per Parts II and III of the Schedule VI to the Companies Act, 1956. A conjoint reading of these sub-sections leads us to the irresistible conclusion that for the purposes of Sub-section (3), i.e., computing the profits of business or profession, the requirement is not of considering the profit which is "Business income" as per Chapter IV-D of the IT Act alone. All the items of income falling under any of the heads of Chapter IV of the IT Act are required to be considered insofar as they fall within the ambit of Schedule VI of the Companies Act, 1956. It is only thereafter that the adjustments as specified in Sub-section (3) are required to be made to compute the "Profits of the business". The reference to "Profits and gains of business or profession" in Sub-section (1) is confined only to the determination of the maximum amount of deduction under Section 32AB. To put in simple words, if out of profits of the business of Rs. 600, income under the head "Profits and gains of business or profession" is Rs. 100 and the amount of calculation under Section 32AB comes to Rs. 120 then such deduction is to be reduced to the level of Rs. 100 only, namely, to the extent of the availability of the income falling under the head "Profits and gains of business or profession".
Insofar as the computation of Rs. 120 is concerned, the same has to be reckoned with reference to the profits of the business as considered under sub- Section (3) which, in turn, refers to the profits as per the requirements of Parts II and III of Schedule VI of the Companies Act, 1956, subject to increases and reductions as specified. Merely because an item of income falls under the head "Income from house property" or "Income from other sources", that cannot be excluded from the profits of the business as per Sub-section (3). Our view finds support from the decision rendered in the case of Carborandum Universal Ltd. v. CIT (2004) 265 ITR 372 (Mad) and order of Special Bench in the case of Highway Cycle Industries Ltd. v. Asstt. CIT (2002) 74 .TTJ (Chd)(SB) 171. Coming back to the facts of our case, we find that the AO has computed "Business income" at Rs. 65,74,097 after allowing, inter alia, the deduction under Section 32AB at Rs. 27.55 lakhs which was separately computed by him. In such computation he reduced a sum of Rs. 6,94,359 as the incomes not eligible for deduction and falling under the heads other than 'Business income'. This shows that the amount of deduction claimed by the assessee under Section 32AB is much below the amount of income under the head "Profits and gains from business or profession" as finally determined by the AO. In our considered opinion, the learned CIT(A) was not justified in confirming the action of the AO in this regard. On the contrary, the manner of computation of deduction under Section 32AB, by the assessee accords with the correct interpretation of the provisions as discussed hereinabove. This ground is, therefore, allowed.
3. The second ground of the assessee's appeal relates to the disallowance of depreciation on godowns to the extent of Rs. 10,469.
3.1 The facts indicate that the AO found a sum of Rs. 66,000 included in the rental income as pertaining to godown, received by the assessee from M/s Prabhakar Brothers. It was further noted that the godown was given on rent for the period 1st April, 1989 to 31st March, 1990.
Following his view taken in asst. yr. 1989-90, such income was held to fall under the head "Income from house property" as against 'Business income' claimed by the assessee. Accordingly, depreciation was disallowed and deduction on account of l/6th towards repairs was allowed. -No relief was allowed in the first appeal.
3.2 After considering the rival submissions, we find that no material has been brought on record to justify the treatment of this amount as business income. It is admittedly, not the business of the assessee to let out the properties. The Hon'ble jurisdictional High Court in the case of Rani Paliwal v. CIT has held the income under such circumstances to be falling under the head "Income from house property". In view of these facts, it becomes apparent that when rent received from property is taxable under the head "Income from house property" there cannot be any question of allowing depreciation. The learned AO was justified in allowing l/6th deduction on account of repairs in relation in such income.
4. Ground No. 3 deals with the depreciation on trucks. The assessee owned seven trucks out of which four were running at Phagwara and three at Nizarnabad. As regards the trucks being run at Phagwara, the assessee claimed depreciation at 50 per cent. On being called upon to show if the trucks were in fact used for hire purposes, the assessee produced certain details taken note at p. 4 of the assessment order.
The AO found that as per the explanation and also the verbal discussion with the assessee, it was stated that the trucks were used for the purpose of carrying/supplying the goods of the company to different parties. Keeping into consideration these facts, the AO restricted the rate of depreciation to 33.33 per cent as against 50 per cent claimed by the assessee. No relief was allowed in the first appeal.
4.1 We have heard both the sides and perused the relevant material on record. It is the claim of the assessee that the trucks were used for own business as well as on hire also. In the case of CIT v. Sardar Stone (1995) 215 ITR 350 (Raj), the assessee was mainly using lorries in its own business for stone and was occasionally hiring out. In this case, it, was held that depreciation was admissible at lower rate.
Adverting to the facts of the instant case, we find that the necessary material facts in deciding this issue, namely, whether the trucks were used mainly or not for hiring purposes, are not coming up from the orders of the authorities below. In such circumstances, we are of the considered opinion that it would be in the interest of justice if the impugned order is set aside and the matter is restored to the file of the AO. We order accordingly and direct him to decide this issue de novo as per law after allowing reasonable opportunity of being heard to the assessee.
5. The last effective ground raised in this appeal is against the deduction under Section 48(2).
5.1 It was pleaded that this ground was raised before the first appellate authority contending that the AO had erred in not allowing deduction under Section 48(2) at Rs. 46,000 against long-term capital gain on sale of car at Rs. 1,30,000. The learned CIT(A) however, dismissed this ground, by observing that neither this issue has been discussed by the AO nor assessee's counsel had putforth any submissions in this regard.
5.2 Before us, the learned counsel for the assessee contended that the assessee was entitled to deduction and it was not given up at any stage.
Since this matter has not been considered by any of the authorities below, we are satisfied that it would be meeting both ends of justice, if this matter is restored to the file of the AO for fresh adjudication. We order accordingly and direct him to decide this issue afresh as per law after allowing reasonable opportunity of being heard to the assessee.
The first two grounds of the assessee's appeal deal with the validity of the proceedings under Section 147.
7.1 Briefly stated, the facts of the case are that the Departmental audit party pointed out certain mistakes in the order passed by the AO under Section 143(3). Initially, the AO intended to rectify the assessment under Section 154. However, later on, it was thought better to reopen the assessment under Section 147 and accordingly, notice under Section 148 was issued. Such notice was issued to the assessee for withdrawing excessive allowance under Section 32AB allowed at the time of original assessment because the following items of income were opined to be wrongly treated as business income : Thus, the total income which was excluded by the AO for the purposes of allowing deduction under Section 32AB amounted to Rs. 32,96,120. The assessee assailed the initiation of reassessment proceedings before the first appellate authority but without success.
7.2 Before us, the learned counsel for the assessee made elaborate submissions by contending that in the proceedings under Section 143(3), the AO had allowed deduction under Section 32AB with respect to the items in question. It was stated that even in the earlier years, the said items were treated as business income. It was urged that once the Department has opined that the abovesaid items are taxable under the head "Business income", it was not open to change such view and initiate reassessment proceedings on that count. Reliance was placed on the decision of the Hon'ble apex Court in the case of CIT and Anr. v.Foramer Fiance (2003) 264 ITR 566 (SC) and that of the Delhi High Court in the case of CIT v. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del)(FB). It was stated that the decisions have clearly laid down that even subsequent to the amendment carried out in Section 147 w.e.f. 1st April, 1989, the AO is not empowered to proceed under this section on a mere change of opinion. The next contention raised by the learned Authorised Representative was that reassessment was initiated on the basis of the opinion expressed by the audit party. Relying on the decision of the Hon'ble Supreme Court in the case of CIT v. Lucas TVS Ltd. (2001) 249 ITR 306 (SC), it was contended that the reassessment based on such opinion was not valid.
7.3 In the opposition, the learned Departmental Representative strongly supported the impugned order on this score by stating that the provisions of Section 147 were rightly held to be applicable. The learned Departmental Representative relied on the apex Court decision in the case of CIT v. PVS Beedies (P) Ltd. (1999) 237 ITR 13 (SC) to state that the reopening on the basis of factual information given by the internal audit party was valid.
7.4 We have heard the rival submissions in the light of the material placed before us and precedents relied upon. Insofar as, the reopening of assessment on the basis of information given by the internal audit party is concerned, it is seen that both the decisions rendered by the apex Court relied upon by the rival parties operate in different fields. Insofar as the case of PVS Beedies (P) Ltd. (supra) is concerned, it confines to the reopening on the basis of factual information given by internal audit party. Such reopening has been held to be valid under Section 147(b) of the Act. On the other hand, the second decision of the Hon'ble Supreme Court in the case of Lucas TVS Ltd. (supra) has held that the opinion of audit party regarding application or interpretation of law does not constitute information and the reassessment based on such opinion under Section 147(b) is invalid. Be that as it may, we find that both these decisions were rendered on the basis of the provisions prevailing prior to the substitution of Section 147 by the Direct Tax Laws (Amendment) Act, w.e.f. 1st April, 1989. The said amendment has deleted the earlier Clauses (a) arid (b) of Section 1.47 and has enlarged the scope of the section by empowering the AO to make reassessment, if he has reason to believe that any income chargeable to tax has escaped assessment, subject to the provisions of Sections 1.48 to 153. The resultant position that crops up is that whereas in the unamended era, the reassessment was possible if (a) the income chargeable to tax escaped assessment by reason of omission or failure on the part of the assessee to make return under Section 139 or to disclose fully and truly all material facts or (b) by virtue of information in the possession of AO leading him to believe about the escapement of income, in the post amendment period after 1st April, 1989, the purview of section has been expanded and the resort to the reassessment is possible where "the AO has reason to believe that any income chargeable to tax has escaped assessment". Such reason to believe about the escapement may be by reason of earlier Clause (a) or (b) of Section 147 or due to any other reason. The crux of the matter is that so long as the AO has reason to believe that any income chargeable to tax has escaped assessment, subject to other provision, he is empowered to initiate the proceedings with the exception that it should not be a mere change of opinion.
Adverting to the facts, we find that notice under Section 148 was issued after 1st April, 1989 as the assessment year under consideration is 1989-90 and hence, the provisions of newly substituted section are applicable. With the enlargement of the ambit of the section, even the opinion expressed by the internal audit party would call for initiation of the reassessment proceedings. Since the instant reassessment is governed by the substituted provisions, we are, therefore, of the considered opinion that there is no merit in the submissions of the learned Authorised Representative in assailing the validity of the reassessment proceedings on the basis of opinion expressed by the internal audit party.
8. Now, we will consider the second limb of the contention putforth by the learned counsel challenging the validity of the initiation of the proceedings under Section 147. In that respect, it was urged that there is no power with the AO to make reassessment on the change of the opinion. In the Kelvinator of India Ltd. (supra) it was found by the Hon'ble Delhi High Court that Section 147 of the Act does not postulate conferment of power upon the AO to initiate reassessment upon a mere change of opinion. Albeit the assessment year under consideration was 1987-88, but the Hon'ble Judges considered the amendment made to Section 147 w.e.f. 1st April, 1989 and opined that such amendment has not altered the position and mere change of opinion of the AO will not constitute a ground for reassessment. Their Lordships of the Hon'ble Gujarat High Court in the case of Govind Chhapabhai Patel v. Dy. CIT (1999) 240 ITR 628 (Guj) have also laid down to the same effect.
Recently, the Hon'ble apex Court had an occasion to deal with this issue in the case of CIT and Anr. v. Foramer France (supra). The assessment years under consideration were 1988-89 to 1990-91. By confirming the judgment of the Hon'ble Allahabad High Court in the case of Foramer v. CAT and Anr. (2001) 247 ITR 436 (All), the question of reassessment on the basis of change of opinion was settled by directing that there was no scope for making reassessment on a mere change of opinion and the provisions of Sections 147 and 148 in this regard were held to be same before and after the amendment of Direct Tax Laws (Amendment) Act, 1987. Similarly, view was reiterated by the Pune Bench of the Tribunal in the case of Sh. K.B. Mehra v. Dy. CIT (2003) 79 TTJ (Pune)(TM) 527, in which one of us (the learned JM) was a party. There is no dispute about the fact that the ratio laid down in the above referred judgments holds the field even after the amendment carried out in Section 147 w.e.f. asst. yr. 1989-90 and consequently the reassessment on a change of opinion is invalid. But before applying the ratio decidendi of these judgments to the facts of the case, it is relevant to find out whether there is any change of opinion of the AO? Change of opinion takes place when, on the facts and circumstances of the case, the view already taken is substituted with another contrary view. If, however, between the time when original view was taken and the revised opinion is adopted, there occur some external events which necessitate the modification in the earlier view, it cannot be said that there is change of opinion. In the instant case, after allowing deduction under Section 32AB as claimed, it transpired through the opinion of the internal audit party that the assessee had been allowed more deduction than the amount to which it was actually entitled. This compelled the AO to reconsider the matter and on such reconsideration, in the light of the opinion expressed by the internal audit party, it transpired that the deduction was initially allowed in excess of entitlement. Under such circumstances, it cannot be said that there was change of opinion. Rather, the latter action was influenced by the external happenings occurring after the original assessment, which is certainly different from the AO's suo motu reconsideration of the matter. We, therefore, hold that the learned CIT(A) was perfectly justified in upholding the initiation of reassessment proceedings.
First two grounds raised by the assessee in this regard, therefore, stands dismissed.
9. Ground No. 3 deals with the exclusion of income from sale of fixed assets, rent received, interest received and dividend for computing the income for the purposes of deduction under Section 32AB on merits. This issue has been elaborately discussed in the earlier paras while dealing with the ground No. 1 for the asst. yr. 1990-91. Following the view taken above, we set aside the impugned order on this issue and direct the AO to include the above four items in "Profits of the business" while computing deduction under Section 32AB.10. Ground No. 4 relates to the disallowance of depreciation on godowns to the extent of Rs. 11,610.
10.1 This issue has also been discussed in ground No. 2 of the assessee's appeal for the asst. yr. 1990-91 hereinabove. Following our view taken above, we uphold the impugned order on this score. This ground is, therefore, not allowed.
11. The last effective ground deals with the levy of interest under Section 234B in the reassessment proceedings.
11.1 The learned Authorised Representative has relied on the decision of the Hon'ble Punjab and Haryana High Court in the case of Smt. Kamla Vati v. CIT (1978) in ITR 248 (P&H) to contend that there was no scope for charging interest in the reassessment proceedings.
11.2 We find that the contention raised by the learned Authorised Representative in this regard is devoid of any merits inasmuch as the above referred decision of the Hon'ble High Court is not applicable to the facts of the present case seen in the phraseology used in Section 234B. It is noted that in the present case, originally assessment was made under Section 143(3) and Expln. (3) to Section 234B clearly contemplates the charging of interest in such circumstances. In view of this legal position, we hold that the interest is rightly chargeable.
However, the consequential relief resulting from our decision on the above grounds is directed to be allowed accordingly.