1. These cross appeals by the Revenue and the assessee for Assessment Year 1989-1990 arise out of order of CIT(Appeals)-IV, Chennai. These appeals were heard together and for the sake of convenience, they are disposed off by this common order.
2. The first issue for consideration in assessee's appeal relates to re-opening of assessment under Section 148. The facts of the case as apparent from record are that return of income was filed on 26^th December 1989 admitting total income of Rs. 65,61,625/-. The return was processed under Section 143(1)(a) on 31^st March 1992 after making prima facie adjustments. Later on during the course of assessment proceedings for assessment year 1990-91 it was noticed that in the preceding assessment year the assessee company had created a provision towards unexpired warranty to the tune of Rs. 21,08,5507- out of sale proceeds of computers; thereby the assessee company had suppressed sales to the extent of Rs. 21,08,550/-. Therefore, the Assessing Officer had reason to believe that income had escaped assessment for assessment year 1989-90. He reopened assessment by issue of notice under Section 148 on 24^th February 1993. No action thereafter was taken by him. Again notice under Section 148 was issued on 13^th October 1995 for same reasons after obtaining approval of Addl.
Commissioner of Income-tax. The Assessing Officer the basis of notice issued under Section 148 dated 13^th October 1995 completed assessment Under Section 143(3)/147 on 31^st March 1997.
3. The matter was agitated before Id CIT(A) on the ground that reassessment made was time barred by limitation as Assessing Officer did not make any assessment with reference to notice issued under Section 148 on 24^th February 1993. The consequent assessment should have been completed by 31^st March 1995. No assessment was, however, made by 31^st March 1995. The Assessing Officer issued a fresh notice under Section 148 on 13^th October 1995. This notice was bad in law as it was based on the same ground i.e. provision of warranty receipts not included in the sale. Consequently the assessment completed on the basis of invalid notice was bad in law.
Before Id CIT(A) the Assessing Officer submitted that the assessee's case was covered under Section 149(1)(iii) and time was available upto ten years from the end of the relevant assessment year. That a notice was issued on 24^th February 1993 and no assessment was made by 31^st March 1995 would not affect the validity of the present reassessment as the notice dated 13^th October 1995 was valid in terms of Section 49(1)(iii) of the Act. Ld CIT(A) after considering the submissions made by assessee as well as the Assessing Officer held that Section 153(2) does not bar an assessment on the basis of second notice. It merely bars any assessment on the basis of first notice beyond 31^st March 1995. The second initiation is an independent action. Therefore, Assessing Officer was justified in reopening of assessment by issue of notice dated 13^th October 1995.
4. Before us, Ms Anita Sumanth, the Id AR of the assessee submitted that Assessing Officer has not taken any action on notice issued on 24^th February 1993. Therefore, he was satisfied that there was no escapement of income. The Assessing Officer has issued notice under Section 148 on 13^th October 1995 for the same reasons. Therefore, it is a case of change of opinion. She placed reliance on the decision of Hon'ble Delhi High Court in the case of Jindal Photo Films Ltd. v. CIT 234 ITR 170. The re-assessment made is therefore not justified and deserves to be annulled. She further submitted that Assessing Officer has issued two notices under Section 148. When notice under Section 148 dated 13^th October 1995 was issued no fresh information came into possession of Assessing Officer. Therefore, the assessment framed is bad in law. She placed reliance on the decision of Hon'ble Gujarat High Court in the case of Vikas Printery v. ADI 270 ITR 68 and decision of Hon'ble Madras High Court in the case of CIT v. Annamalai Finance Ltd. 275 ITR 451.
5. On the other hand Shri K. Srinivasan the Id DR submitted that no assessment was made in response to notice issued on 24^th February 1993. Under the law there is no bar for issue of fresh notice. It was also submitted that the first notice was not served on the assessee, therefore, second notice was served. Accordingly, assessment made is a valid assessment 6. We have heard both the parties and perused the records available on record. Admittedly, two notices under Section 148 have been issued in this case. From the copy of order sheet of assessment records for assessment year 1989-90 it is seen that Assessing Officer issued notice under Section 148 on 24^th February 1993, which was despatched on 26* February 1993. The Id AR of Assessee has filed copy of notice under Section 148 dated 24^th February 1993 in support of her contention that notice was issued and served on assessee. However, when a query was raised by the Bench as to whether any return of income was filed in response notice under Section 148, Mrs. Anita Sumanth, the Id AR of the assessee failed to answer the query. No evidence was filed to prove that return of income was filed in response to notice issued under Section 148 on 24^th February 1993. Further it is seen from order sheet that Assessing Officer did not take any action in the matter probably due to oversight After issue of notice under Section 148, when no return is filed by the assessee, the Assessing Officer could have issued notice under Section 142(1) requiring the assessee to file return of income. No such action was taken. Ultimately the reassessment proceedings initiated got barred by limitation on 31^st March 1995.
7. The assessee has not produced any evidence to show that return of income was filed in response to notice under Section 148 dated 24^th February 1993. Thus inaction on the part of Assessing Officer to complete assessment under Section 144 in the absence of return of income would not amount to forming of an opinion that there was no escapement of income. When assessee has not filed a return of income, it is not correct on the part of assessee to say that Assessing Officer has formed an opinion in the reassessment proceedings initiated by issue of notice under Section 148 dated 24^th February 1993. In fact Assessing Officer has not formed any opinion and cannot be said to have formed any opinion when no return of income was filed by the assessee.
Therefore, we are unable to agree with the submissions made by Id AR of the assessee.
The decision of Jindal Photo Films v. DCIT is not applicable to the facts of the case before us. In that case it was observed by Hon'ble Delhi High Court that the law does not require the assessee to state the conclusions that can reasonably be drawn from the primary facts.
Once that is done and the assessment order framed, the Assessing Officer cannot at a later point of time merely on forming an opinion, by giving a second thought to the primary facts disclosed by assessee, arrive at a finding that he had committed an error in computing the taxable income of the assessee and reopen the assessment by resort to Section 147 of the Act. Discovery of new and important matters or knowledge of fresh facts which were not present at the time of original assessment would constitute a reasonable belief that income had escaped assessment within the meaning of Section 147. Here also such facts which could have been discovered by assessing authority but were not discovered at the time of original assessment may not constitute new information. The facts of the case before us are entirely different. No assessment Under Section 143(3) consequent to reopening of assessment was framed and therefore, decision of Hon'ble Delhi Court in the case of Jindal Photo Films Ltd. will not be applicable. The assessee had not filed even return of income or any explanation based thereon it could be said that Assessing Officer applied his mind and came to conclusion that there was no escapement of income. Consequently, the reliance on the decision of Hon'ble Gujarat High Court in the case of Vikas Printery v. ACIT (Inv.) and Anr. 270 ITR 68 and decision of Hon'ble jurisdictional High Court in the case of CIT v. Annamalai Finance Ltd. 275 ITR 451 is misplaced. Inaction on the part of Assessing Officer cannot be equated with dropping of re-assessment proceeding on the ground that for the purposes of dropping of proceedings application of mind and appreciation of facts is necessary. This lacks in the case before us. In our view it is not a case of change of opinion.
8. Under law there is no bar to issue second notice. The case is to be examined whether conditions for reopening of assessment on second occasion did exist or not Once conditions precedent is satisfied, the Assessing Officer will be justified in initiating reassessment proceeding within the time limit specified Under Section 149. There is no restriction as to number of proceedings that can be taken to reopen the assessment by way of reassessment. The Assessing Officer can issue any number of notices under Section 148 provided the conditions stipulated in Section 147 are satisfied and the same is within the period specified under Section 149 read with Section 151. However, if an assessment is pending either by way of original assessment or by way of re-assessment proceedings, the Assessing Officer can not issue notice under Section 148. But if no proceedings are pending either by way of original assessment or by way of re-assessment, he can issue notice under Section 148 within the time allowed under the Act On the date of issue of second notice no re-assessment proceedings were pending. The re-assessment proceeding based on notice dated 24.02.1993 got barred by limitation on 31.03.1995. For . assessment year under consideration assessment could have been reopened upto a period of ten years from the end of the assessment year 1989-90 as specified in Section 149(1)(a)(iii) of the Act where income escaped was more than Rs. 1,00,000/- or more. In this case condition precedent is satisfied and therefore, in our considered view, the Assessing Officer was justified in re-opening of the assessment.
9. The second issue for consideration in assessee's appeal relates to disallowance of provision for unexpired warranty amounting to Rs. 18,28,490/-. The assessee made a provision of Rs. 21,08,550/- towards unexpired warranty and claimed as deduction. However, Assessing Officer found that actual expenditure incurred was at Rs. 2,80,131/- The Assessing Officer after considering the submissions made by assessee disallowed the amount of Rs. 18,28,490/- treating the expenditure as contingent in nature. The stand taken by the Assessing Officer was upheld by Id CIT(A).
10. Before us, it has been submitted that provision of Rs. 15,93,300/- was made towards total sales of Rs. 12,47,66,297/- for the period ended 30^th June 1988 and another provision of Rs. 5,15,250/- was made on sales of Rs. 7,83,386/-. The assessee was under obligation to incur the expenditure during the warranty period and the sales were subject to the provision of this warranty. As such the amount was allowable as deduction. On the other hand Id DR submitted that provisions have to be made based on scientific calculation or on actuarial basis. No such exercise was done by the assessee while making provision for unexpired warranty. He placed reliance on the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. v. CIT 245 ITR 428 to his contention.
11. We have heard both the parties. The assessee made a provision of Rs. 21,08,550/- on sales effected by it to the extent of about Rs. 20.30 crores, which amounts to nearly 1%. No basis for making provision has been made. There is no concept of deferred revenue expenditure under Income-tax Act. Expenditure which is deducted for income-tax purposes is one which is towards a liability actually existing at the time but the putting aside of money which may become expenditure on the happening of an event is not expenditure. This principle was laid down b Hon'ble Supreme Court in the case of Indian Molasses Company Pvt.
Ltd. v. CIT 37 ITR 66.
12. There is a distinction between an actual liability in preasenti and liability de future which, for time being, is contingent The former is deductible but not the later. However, Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. (supra) held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in preasenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. In the case before us the assessee could not produce any basis on which the provision for warranty was determined. The actual expenditure incurred was at Rs. 2,80,131/- as against the provision of Rs. 21,08,550/-. Therefore, it is clear that liability to the extent of Rs. 18,28,490/- did not accrue. The provision was not made on actual quantification. Therefore, issue is covered against the assessee by the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. (supra). In our considered view the authorities below were justified in disallowing the claim of assessee as contingent liability.
13. The next issue for consideration relates to exclusion of incentives received from total turnover. The Assessing Officer for the purpose of computing deduction Under Section 80HHC included export incentives in the total turnover on the ground that the amendment has been made effective from assessment year 1991-92. Before Id CIT(A) the reliance was placed by assessee on the decision of Hon'ble Supreme Court in the case of Allied Motors v. CIT 224 ITR 667 to support his contention that provisions of Explanation (ba) were curative in character and such provisions would have retrospective effect Therefore, the Clause (ba) of Explanation to Section 80HHC will apply with retrospective effect.
This contention of assessee was turned down by Id CIT(A) on the ground that the amendment was not curative in nature and will be applicable prospectively.
14. Before us, Id AR of the assessee reiterated the same arguments. On the other hand Id DR relied on the order of CIT(A). We have heard both the parties. Clause (ba) of Explanation to Section 80HHC which defines the expression 'total turnover' was inserted vide Finance (2) Act, 1991 with effect from 01.04.1987. Proviso to Clause (ba) carves out an exception according to which in relation any assessment year commencing on or after 1^st day of April 1991, the expression 'total turnover' shall have effect as if it also excluded any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28. Therefore, the legislature has deliberately has excluded the export incentives from total turnover from assessment year 1991-92 and onwards. There is no ambiguity in the language of the proviso and therefore principle of literal interpretation has to be applied. The provisions are applicable with effect from 01.04.1991 cannot be applied for assessment year 1989-90 before us. Accordingly we dismiss this ground of appeal raised by assessee.
15. The next issue for consideration relates to excluding of rent and interest for the purpose of computing deduction Under Section 801 of the Act. We find that this issue is covered against assessee by the decision of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT 262 ITR 278 wherein it has been held that interest derived by the. industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of Electricity for running the industrial undertaking could not be said to flow directly from industrial undertaking itself and was not profits and gains derived by the undertaking for the purpose of special deduction Under Section 80HH. Respectfully following the decision of Hon'ble Supreme Court it is held that interest and rent received by assessee are not derived from industrial activities of the assessee and accordingly deduction under Section 80I will not be available. We decide this issue in favour of Revenue and against the assessee.
16. The next two issues contained in grounds of appeal relates to deduction under Section 43B in respect of sales tax liability and ESI payment and also claim of deduction under Section 35D. These grounds have not been agitated by the Id AR of the assessee though contained in the grounds of appeal. The claim of assessee under Section 43B was confirmed by Id CIT(A) on the ground that no evidence regarding payment in compliance with Section 43 was filed either before the Assessing Officer or before him. The position remains the same before us also.
Accordingly, we confirm the orders of authorities below. As regards deduction of preliminary expenses under Section 3SD no valid objection was furnished before Id CIT(A) and therefore he confirmed the disallowance of Rs. 2,552/-. Before us Id AR of the assessee has not agitated this issue at all. We accordingly uphold the stand taken by the authorities below.
18. In Revenue's appeal the first issue for consideration relates to allowing the deduction Under Section 80HHC in respect of service charges, rent and interest. The Assessing Officer while computing profits of business deducted software service charges, rent and interest from gross total income for the purpose of deduction Under Section 80HHC. On appeal Id CITT(A) held that the benefit of Explanation (baa) is not applicable to the Assessing Officer since the same was inserted only with effect from 01.04.1992. He therefore, directed the Assessing Officer to include these three items in computation of profits of business for the purpose of deduction under Section 80HHC.19. We have heard both the parties. From assessment order it is clear that nature of the receipts has not been examined whether they are in nature of business or to be assessed as income from house property or other sources. As regards the interest Id DR placed reliance on the decision of Hon'ble Madras High Court in the case of South India Shipping Corporation Ltd. v. CIT 240 ITR 40, wherein it has been held that interest earned from short term deposits will be taxable as income from other sources and not as business income.
20. We have heard both the parties. From assessment order it is clear that the Assessing Officer has not examined nature of receipts of interests, rent and service charges. In the case of CIT v. Bangalore Clothing Co. 260 ITR 371 Hon'ble Bombay High Court held that if the receipts are in nature of operational income they will form part of business income. The Assessing Officer is therefore directed to verify the nature of receipts and decide the issue whether such income will part of business income or will be assessable under different heads. If they are not hi nature of operational income, the same will not be deducted from business profit for the purpose of computation of deduction under Section 80HC of the Act.
21. The second issue relates to deduction under Section 80I in respect of cash compensatory receipts. The Assessing Officer disallowed deduction Under Section 80I. However, Id CIT(A) has allowed the appeal in favour of assessee by holding that cash compensatory receipts is a direct receipt unlike the profits on sale of import entitlement which is remote.
22. Before us Id DR relied on the decision of Hon'ble Supreme Court in the case of CIT v. Sterling Foods 237 ITR 579, wherein it has been held that for the application of words 'derived from', there must be a direct nexus between the profits and gains and the activities of an industrial undertaking. Ld AR of the assessee on the other hand relied on the order of CIT(A). We find that this issue is covered by decision of Hon'ble Supreme Court in the case of CIT v. Sterling Foods, wherein their lordships have held that mere must be direct nexus between the profits and gams and the activities of industrial activities of the undertaking. In the absence of such nexus special deduction under Section 80I will not be allowable. Cash compensatory support has been received because of incentive scheme under exports and therefore, it has no nexus with the industrial activities of the assessee.
Accordingly the assessee will not be entitled for deduction under Section 80I of the Act We therefore set aside the order of Id CIT(A) and restore the order of the Assessing Officer.
23. In the result the assessee's appeal in ITA. No. 1462/Mds/1998 is dismissed and Revenue's appeal in ITA. No. l651/Mds/1998 is allowed on first issue for statistical purposes and allowed on second issue.