1. This appeal by the Revenue is directed against the order of the CIT(A) for Asstt.Year 1992-93. The only ground raised in this appeal by the Revenue reads as under:- The Id CIT(A) has erred in law and on facts in holding that the assessment framed Under Section 147 and the addition of Rs. 16,91,935/-being excess deduction Under Section 80 HHC cannot be sustained.
2. From the above ground of Appeal raised by the Revenue, it is evident that this ground has two limbs :- (i) Whether the CIT(A) was justified in canceling the reassessment ; and (ii) Whether the CIT(A) was justified in deleting the addition made by the AO by way of recomputation of deduction Under Section 80 HHC.3. The facts of the case are that in the return of income the assessee claimed deduction Under Section 80 HHC at Rs.1,41,38,523/-. However, in the assessment order dated 31-3-1995 passed Under Section 143(3), the AO allowed deduction Under Section 80 HHC at Rs.1,40,71,562/-. The AO has reduced the export turnover at Rs. 18,04,77,292/- as against the export turnover disclosed by the assessee at Rs. 18,18,49,364/-. The assessee has taken the goods weighing 1.430 MT on loan from some other party and has exported the same. The AO was of the opinion that the export of goods taken on loan cannot be considered as export of goods manufactured by the assessee. Therefore, he reduced the export turnover of the assessee. The AO also increased the total turnover by including the sales-tax, sale proceeds of gunny bags and weighment charges, in view of above modification in the export turnover as well as total turnover, deduction Under Section 80 HHC claimed by the assessee was reduced. Thereafter the notice Under Section 145 was issued and served upon the assesses on 23-11-1996. The AO has recorded the following reasons for reopening of assessment : it has been noticed from the assessment records that the assessee firm while calculating the deduction Under Section 80 HHC of the Act included receipt from interest amounting to Rs.20,30,240/- in the "profit of the business". Clause (baa) of the Explanation to Section 80 HHC lays down that "profits of the business" means the profits of the business as computed under the head "profits and gains of business or profession" as reduced by under the head "profits and gains of business or profession' as reduced by - 1) Ninety per cent of any sum referred to any Clauses (iia) (iiib) and (iiic) of Section 28 or of any receipts by way of brokerage, commission interest, rent, charges or any other receipt of a similar nature included in such profits; Since the assessee received Rs. 20,30,240/-, this should have been reduced from the eligible business profits amounting to Rs. 1,52,45,3327-. As s result of which, the assessee has claimed 80 HHC to the time of Rs. 17 lakhs more than his entitlement.
3.1 No return was fifed by the assesses in response to notice issued Under Section 148. In the re-assessment, the AO reduced the profits and gains of business by interest income of Rs. 20,30,240/-. Therefore, the deduction Under Section 80 HHC was reduced by a sum of Rs. 16,91,935/-.
The CIT(A) cancelled the reopening of assessment and also deleted the addition of Rs. 16,91,935/- made by the AO by way of reduction in the deduction Under Section 80 HHC. Hence the Revenue is in appeal before us.
4. At the time of hearing before us, it is submitted by the learned DR that the reopening is made within four years from the end of the relevant assessment year. Therefore, as per Section 147 the only requirement is the belief of AO for escapement of income chargeable to tax. While making the original assessment, the AO "has omitted to consider Explanation (baa) to Section 80HHC(3). Therefore, excess relief Under Section 80HHC allowed to the assessee. Thus, there was escapement of income and the notice Under Section 148 for escapement of income Under Section 147 was rightly issued. In support of his contentions, he relied upon the decisions of the hon'ble Jurisdictional High Court in the case of Praful Chunilal Patel v. CIT 236-ITR-832 (Guj) and Garden Finance Ltd. v. ACIT 268-ITR-48 (Guj).
4.1 On merits of the above it is submitted by the learned OR that on the .case of Lessons Enterprises v. DCIT (2004) 89-ITD-25 (Delhi) (SB), the Special Bench of ITAT has held that the interest income if. to be excluded from the profits and gams of business as pet Explanation (baa) to Section 80HHC(3) of the JT Act. He, therefore, submitted that the order of the CIT(A) should be reversed and that of the AO be restored.
5. The learned Counsel for the assesses, on the other hand, submitted that the AO has allowed deduction Under Section 80HHC in the original assessment after due application of mind. In fact the AO has reduced the assessee's claim of deduction Under Section 80HHC which was partly allowed fay the CIT(A) in first appeal He therefore, submitted that the reopening of assessment for re-working of deduction Under Section 80HHC is only change of opinion which is not permissible. In support of this contention, he has relied upon the decisions of the Hon'ble Jurisdictional High Court in the cases of Garden Silk Mills Ltd. v.DCIT 222-ITR-68 (Guj) and Gruh Finance Ltd. v. JCIT 243-ITR-482 (Guj).
5.1 With regard to the merit of the addition, the learned Counsel for the assessee fairly admitted that in view of the decision of the Special Bench of ITAT in the case of Lalsons Enterprises v. DCIT (2004) 89-ITD-25 (Delhi) (SB), the interest income is to be excluded from the profits and gains of business. However, he stated that it is only the net interest income which is to be excluded and not the gross amount of interest received fay the assessee. He, therefore, submitted that if the reopening of assessment is upheld, then the AO may be directed to re-work out the deduction Under Section 80HHC as per the above decision of the Special Bench of ITAT.6. We have carefully considered the arguments of both the sides and perused the material placed before us. Section 147 of the IT Act reads as under :- 147. If the [Assessing] Officer [has reason to believe] that any income chargeable to tax has escaped assessment 79 for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess 79 such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to fax has escaped assessment for such assessment year by reason of the failure 79 on the part of the assessee to make a return under Section 138 or in response to 8 notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts 80 necessary for his assessment, for that assessment year.
Explanation 1.--Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarlly 80 amount to disclosure within the meaning of the foregoing proviso.
Explanation 2.--For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :-- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; (b) where a return of Income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; (iii) such income has been made the subject of excessive relief under this ACT ;or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.] 7. From the above it is clear that if the AO has reason to believe that any income chargeable to tax has escaped assessment, he may assess or re-assess such income. By way of Explanation-2, the Legislature has specified the circumstances which will be deemed to be escapement of income chargeable to tax. As per Sub-clause (iii) of Clause (c) of Explsnsfion-2 where an assessment has been made but excessive relief has been allowed under any provisions of this Act, then, it will be deemed to be escapement of assessment, in the case under consideration before us, the assessee has claimed deduction Under Section 80HHC in the return of income. In the original assessment the AO has examined the correctness of the asseseee's claim Under Section 80HHC and has partly reduced the deduction claimed by the assessee. However the adjustment made by the AO was to the export turnover and total turnover. He has accepted the profits and gains of business as shown by the asseesse. if is contended by the learned Counsel that it is a case of chance of opinion by the AO and, therefore, It is out of purview of the powers of reopening of assessment Under Section 147. On the other hand, the learned DR has contended that the reopening is valid. Both the parties have relied upon the decisions of the Hon'ble Jurisdictional High Court. Therefore, it would be appropriate to consider the facts of the cases and the ratio laid down by the Hon'ble Jurisdictional High Court in various cases relied upon by the parties.
8. In the case of Praful Chunilal Patel (supra), their Lordships of the Hon'ble Jurisdictional High Court have held as under :- The power to make assessment or reassessment within four years of the end of the relevant assessment year would be attracted even in cases where there has been a complete disclosure of all relevant facts upon which a correct assessment might have been based in the first instance, and whether if is an error of fact or law that has been discovered or found out justifying the belief required to initiate the proceedings. The words "escaped assessment", where the return is filed, cover the case of discovery of a mistake in the assessment caused by either an erroneous construction of the transaction or due to its non-consideration, or caused by a mistake of law applicable to such transfer or transaction even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been based.
In cases where the AO had over-looked something at the first assessment, there can be no question of any change of opinion, when the income which was chargeable to fax is actually taxed as it ought to have been under the law, but was not, due to an error committed at the first assessment.
The word "reason" in the phrase "reason to believe" would mean cause or justification. If the AO has a cause or justification to think or suppose that income had escaped assessment, he can be said to have a reason to believe that such income had escaped assessment. The words "reason to believe" cannot mean that the AO should have finally ascertained the facts by legal evidence. Unless the ground or the material on which his belief is based, is found to be so irrational as not to be worthy of being catted a reason by any honest man, his conclusion that it constitutes a sufficient reason, cannot be overridden.
8.1 Thus within a period of four years the assessment can be reopened where there has been complete disclosure of all the relevant facts by the assesses provided the income chargeable to tax has escaped assessment. Where the AO had over-looked something at the first assessment, then there is no question of any change of opinion. In the case under consideration before us, in the first assessment the AO has applied his mind to the previsions of Section 80HHC and he has considered the total turnover as well as export turnover. However, he has not considered whether the profits and gains of business as shown by the assessee and considered for the purpose of computation of deduction Under Section 80HHC was correctly taken or not. Explanation (baa) below Section 80HHC(4C) clearly provides that the profits and gains of business is to be reduced by 90% of the interest included in the profits. Admittedly in the profits and gains of business shown by the assesses, interest of Rs. 20,30,240/- was included. Ninety per cent of such interest was not excluded by the assessee as per Explanation (baa). The AO also did not apply his mind to Explanation (baa) to Section 80HHC which resulted in higher deduction being allowed to the assessee Under Section 80HHC. Therefore, On the above facts the decision of the Hon'ble jurisdictional High Court in the case of Praful Chunilal Patel (supra) would be equarely applicable.
9. The learned DR has also relied upon the decision of the Hon'ble Jurisdictional High Court in the case of Garden Finance Ltd. v. ACIT 268-ITR-48 (Guj). However, we find that in that case the notice for reopening of assessment was issued after four years from the end of the relevant assessment year. For reopening of assessment after four years from the end of relevant assessment years different parameters are applicable than where the assessment is reopened within four, years from the end of the relevant assessment year. Therefore, as the facts in the above case are different, the same would not be relevant in the case under consideration before us.
10. In the case of Garden Silk Mills v. DCIT 222-ITR-68 (Guj) relied upon by the learned Counsel for the assessee, their Lordships have held as under :- that the AO cannot take any action under Section 147 of the IT Act, 1961, merely because he happens to change his opinion or to hold an opinion different from that of his predecessor on the same set of facts. From the assessment order, it clearly appeared that at the time of original assessment, the AO had applied his mind to the computation of income. There was nothing to indicate that the AO in consequence of information in his possession had reason to believe that income had escaped assessment. The reassessment proceedings were not valid and were liable to be quashed.
10.1 From the above, it is evident that the AO cannot reopen the assessment merely on the basis of change of opinion, it was contended by the learned Counsel for the assessee that when the AO in the original assessment has already considered the issue of allowability of deduction Under Section 80HHC and has in fact reduced the deduction., the reopening of assessment for re-computation of deduction Under Section 80HHC was only change of opinion. However, we are unable to accept this contention of the learned Counsel. Section 80HHC allows deduction in respect of profits derived by the assessee from the export of goods or merchandise. Sub-section (3) of Section 80HHC provides the method for computation of profits derived from export of goods and merchandise. As per Clause (a) of Sub-section (3) where the export out of India is of goods or merchandise manufactured by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. Thus for the computation of the profit from export, there are three important ingredients ; (i) Export Turnover ; (ii) Total Turnover ; and (iii) Profits of the business. The terms "Export Turnover'' , "Total Turnover: and "Profits of the business" all are defined by the Legislature, by way of Explanation in Section 80HHC itself. In the original assessment the AO that examined the correctness of the export turnover as well as total turnover. However, he omitted to examine correctness of profit and gains disclosed by the assessee, Explanation (baa) defines the term "profit and gains of business". As per the Explanation (baa) 80% of the sum referred In Section 28(iiia), 28(iiib) and 28(iiic) or any receipt by way of brokerage, commission, interest, rent, charges, etc. is to be excluded. Admittedly the profits and gains of business disclosed by the assessee included the interest, 80% of which was not excluded by the assessee while computing the deduction Under Section 80HHC. The provisions of Explanation (baa) of Section 80HHC escaped notice of the AO in the original assessment and he computed the deduction Under Section 80HHC on the basis of profits and gains of business as shown by the assessee. Thus deduction Under Section 80HHC was allowed more then what the assessee wes legally entitled to. Therefore, in view of Sub-clsuse (ii) of Clause (c) of Explsnatton-2 to Section 147 there was escapement of assessment because She income has been made subject of excessive relief Under Section 80HHC. Since in the original assessment the AO has not applied his mind to the correctness of the profits and gains of business which was shown by the assessee in violation of Explanation (baa) to Section 80HHC, the reopening of assessment to modify the deduction Under Section 80HHC in accordance with Explanation (baa) to Section 80HHC cannot be said to be change of opinion. Section 80HHC has various aspects. If one of the aspects was omitted to Be considered by the AO in the original assessment order, and as a result thereof, excess deduction was allowed, the assessment can be reopened because there is escapment of income on account of allowance of excess deduction Under Section 80HHC.There is no change of opinion when one of the aspects was not considered at all in the original assessment. In this case in the original assessment, the AO has omitted to consider Explanation (baa) of Section 80HHC for the purpose of determining the profit and gains of business. Therefore the excess deduction Under Section 80HHC was allowed, in view of above the decision of the Hon'ble Jurisdictional High Court in the case of Garden Silk Mills Ltd. (supra) relied upon by the learned Counsel, would not be applicable. On the other hand, the decision of the Hon'ble Jurisdictional High Court in the case of Praful Chunilal Patel (supra) would be applicable wherein their Lordships have held that where the AO had over-looked something at the first assessment, there can be no question of any change of opinion. In the original assessment the AO has over-looked Explanation (baa) to Section 80HHC and, therefore, the reopening of assessment to apply Explanation (baa) to Section 80HHC cannot be said to be a change of opinion.
11. The learned Counsel for the assessee has also relied upon the decision of the Hon'ble Jurisdictional High Court in the case of Gruh Finance Ltd. v. JCIT 243-ITR-482 (Guj), wherein their Lordships have held as under :- that in so far as the expressions "reasons to believe" and "change of opinion" are concerned though materiel was available on record at the time of first assessment, when no conscious consideration of the material was made and a mistake had been committed it would not create an embargo or a ban on the competent officer to exercise powers under the amended Section 147. Upon information the Department noticed that depreciation was claimed and allowed in respect of machinery which was not at all in existence and that aspect was not consciously considered at the time of first assessment. The notices of reassessment were valid.
11.1 From the above, it is evident that the ratio of the above decision rather supports the case of the Revenue than the assessee. In that case also the material was available on record at the time of first assessment but the AO has not consciously considered the same and, therefore, the reopening of assessment was held to be valid.
12. In view of above, we respectfully following the decision of the Hon'ble Jurisdictional High Court in the case of Praful Chunilal Patel(supra) hold that the AO validly reopened the assessment and the CIT(A) was not justified in quashing the reopening of assessment.
13. Coming to the merits of the addition, both the parties have fairly admitted that on merits the issue is squarely covered by the decision of the Special Bench of ITAT in the case of Lalsons Enterprises v. DCIT (2004) 89-ITD-25 (Delhi) (SB), wherein the Special Bench of the Tribunal has held as under :- For the purpose of supplying Explanation (baa) below Sub-section (4B) of Section 80HHC and while reducing 90 per cent of the receipt by way of interest from the profits of the business, it is only the 90 per cent of the net interest remaining after allowing a set off of interest paid, which has a nexus with the interest received, that can be reduced and not 90 per cent of the gross interest.
We therefore, respectfully following the same hold that only net interest income is to be disallowed and not the gross amount of interest received by the assessee.
14. In the result, the Revenue's appeal is deemed to be allowed.
Sd/- Sd/-(I.P. Bansal) (G.D. Agarwal)Judicial Member Accountant Member