1. ITA 2898/Del/2005 is an appeal by the assessee against the order, dt. 31st March, 2005 of learned CIT, Moradabad, passed under Section 263 of the Act, relating to the asst. yr. 2001-02.
ITA 3039/Del/2005 is an appeal by the assessee against the order, dt.
12th April, 2005 of CIT, Moradabad passed under Section 263 of the Act, relating to asst. yr. 2002-03.
ITA 3041/Del/2005 is an appeal by the assessee against the order, dt.
12th April, 2005 of CIT, Moradabad passed under Section 263 of the Act, relating to the asst. yr. 2001-02.
2. All the above appeals pertain to different assessees and are directed against the order of the CIT passed under Section 263 of the Act. The facts and circumstances under which the order under Section 263 was passed by the CIT are identical in all the cases. The grounds of appeal raised by the assessee in all these appeals are also identical. These appeals were heard together and we deem it convenient to pass a consolidated order.
3. The assessees in all these cases are manufacturers and exporters of handicraft items. The assessee in ITA 2898/Del/2005 filed return of the income for asst. yr. 2001-02 on 30th July, 2001 declaring total income at nil. The assessee had claimed deduction under Section 80HHC and 80-IB of the Act. The case of the assessee was selected for a limited scrutiny by issue of a notice under Section 143(2)(i) of the Act. The copy of the notice so issued is at page Nos. 2 and 3 of the assessee's paper book and is dt. 23rd July, 2002 and 30th Dec, 2002 respectively.
The only issue which was considered necessary for determination in the limited scrutiny proceedings was the deduction claimed by the assessee under Section 80-IB of the Act. After seeking necessary explanation from the assessee the AO passed order dt. 10th April, 2003; the AO completed the assessment under Section 143(3)(i) of the Act allowing the claim of the assessee for deduction under Section 80-IB of the Act.
4. In the case of assessee in ITA 3039/Del/2005 return of income was filed on 28th Oct., 2002 declaring total income of Rs. 2,76,210 for the asst. yr. 2002-03. This was later revised and the total income declared in the revised return filed on 31st March, 2002 was Rs. 46,040.
Assessee claimed deduction under Section 80-IB in the revised return of income which was not claimed in the original return of income. The AO issued notice dt. 2nd Sept., 2003 under Section 143(2)(i) of the Act.
The only issue in respect of which the limited scrutiny assessment was sought to be made by the AO was verification of claim for deduction under Section 80-IB of the Act. After considering the explanation filed by the assessee the AO allowed the claim of the assessee for deduction under Section 80-IB of the Act. The order of the AO under Section 143(3)(i) of the Act was passed on 8th Sept., 2003.
5. The assessee in ITA 3041/Del/2005 filed its return of income on 14th March, 2002 for the asst. yr. 2001-02 declaring nil income. The assessee had claimed a deduction under Section 80-IB of the Act at Rs. 74,928. His case was taken up for limited scrutiny by issue of a notice dt. 5th Aug., 2003 under Section 143(2)(i) of the Act. The notice for limited scrutiny was issued only for the purpose of verification of the claim of the assessee under Section 80-IB of the Act. After the assessee filed the necessary details the AO was satisfied with the claim of the assessee for deduction under Section 80-IB of the Act. The AO passed the order under Section 143(3) of the Act dt. 29th Dec, 2003.
6. The CIT, Moradabad in exercise of his powers under Section 263 of the Act sought to revise the aforesaid orders passed by the AOs on the ground that they were erroneous and prejudicial to the interest of the Revenue. In the case of the assessee in ITA 2898/Del/2005 there were two show-cause notices, the first one dt. 27th Jan., 2005 and the second one dt. 17th March, 2005. According to the CIT the action of the AO in adopting the same figure of profit for the purpose of calculation of deduction under Section 80-IB and Section 80HHC of the Act was erroneous. According to CIT as per provisions of Section 80-IA(9A) r/w Section 80-IB(13) no double deduction should be allowed. The order of the AO having allowed the deduction under Section 80HHC of the Act was contrary to the above provisions and was erroneous insofar as it was prejudicial to the interests of the Revenue. According to the CIT the correct amount of deduction that should have been allowed under Section 80HHC was as follows: Profits of the business as adopted by the AO Rs. 14,34,729 Less : Admissible deduction under Section 80-IB as Rs. 3,58,682 worked by the AO According to the CIT, the AO allowed deduction under Section 80HHC at Rs. 10,76,047 which is excessive by Rs. 2,15,209 (Rs. 10,76,047 - Rs. 8,60,838).
7. Other areas of dispute raised by the CIT in the show-cause notice under Section 263 of the Act were as follows: (a) On perusal of the Trading and P&L a/c furnished it was noticed that the assessee has shown to have received incentives amounting to Rs. 12,60,612, the details of which were not available. As to whether the incentives include amount of DEPB or not was not shown.
The assessee was called upon to furnish the details of the incentives and in case any amount of DEPB is included, the assessee was called upon to show cause as to why the deduction under Section 80HHC may not be disallowed on this amount of DEPB. (b) On perusal of audit report vis-a-vis Trading and P&L a/cs it was seen that there is a negative figure of profit after the deduction of 90 per cent of the incentives received and claimed. The CIT called for explanation as to why the deduction claimed under Section 80HHC may not be disallowed.
(c) The CIT noticed that in the Trading and P&L a/cs, various items of income which cannot be included in income derived from industrial undertaking for allowing deduction under Section 80-IB had been included. The details in this respect are as under: The assessee was asked to explain as to how the above income could be considered as profits derived from the industrial undertaking.
8. As far as the assessee in ITA 3039/Del/2005 and ITA 3041/Del/2005 are concerned show-cause notices under Section 263 were issued on identical grounds as in the case of the assessee in ITA 2898/Del/2005, except that the claim for exclusion of DEPB incentive from the incentives on which deduction under Section 80HHG was to be allowed.
9. The plea of the assessees in reply to the show-cause notice under Section 263 may be summarised as follows: (a) that the provisions of Section 80-IA(9A) do not impose any restrictions that the deduction under different sections of Chapter VI-A shall be allowed only after reducing from the eligible profits of the business of the undertaking the amount of deduction allowed under Section 80-IB of the Act. This section is meant only for the purpose of emphasizing that the overall deduction under Chapter VI-A, including Section 80-IB should not exceed the profits and gains of the undertaking. In this regard reference was made to several judicial decisions.
(b) In respect of the proposal to disallow negative profit after reducing 90 per cent of the sum on account of drawback and DEPB it was contended that the proviso below Section 80HHC(3) contemplates that first of all 90 per cent duty drawback, DEPB, etc. has to be added to profit under Clause A, B or C of Sub-section (3) and then 90 per cent of amount referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 has to be reduced. If so done there will be no negative profit.
(c) In respect of excluding of duty drawback and DEPB from the net profit for computation of allowance under Section 80-IB the assessee submitted that the proposed interpretation would virtually deprive the assessee from the benefit of deduction under IT Act. It was submitted that in the case of exporters these items of income would have a bearing on the cost of production.
10. The CIT however did not agree with the submissions made by the assessees and for the reasons stated in the order under Section 263 the CIT held that the orders passed by the AO were erroneous inasmuch as it was prejudicial to the interest of the Revenue. The CIT therefore cancelled the assessment orders passed by the AO and directed the AO to make fresh assessment de novo after affording the assessee an opportunity of being heard. Against the orders of CIT under Section 263 of the Act, the assessees have preferred the present appeal before the Tribunal. The grounds of appeal as already stated are common in all the three appeals.
11. The first and foremost contention of the assessees is that the AO took up the case of all the three assessees only for the purpose of a limited scrutiny viz., verification of the claim for exception (sic-exemption) under Section 80-IB of the Act. It was contended that in such proceedings the AO could not travel beyond the claim for exemption under Section 80-IB of the Act. It was submitted that in the circumstances, the CIT could not invoke jurisdiction under Section 263 of the Act on the ground that deduction under Section 80HHC was not properly allowed. It was submitted that to this extent there was improper exercise of jurisdiction by the CIT under Section 263 of the Act. Our attention was drawn to the decision of the Hon'ble Delhi Bench of the Tribunal in the case of Ajit Gupta v. ITO in ITA Nos. 2990 and 2994/Del/2004 for the asst. yr. 2001-02 and 2002-03 reported at (2007) 108 TTJ (Del) 301--Ed. wherein on identical facts this Tribunal was pleased to hold that exercise of jurisdiction under Section 263 vis-a-vis claim for deduction under Section 80HHC was not proper. It was also submitted that in the aforesaid case the Tribunal had also considered the admissibility of duty drawback for deduction under Section 80-IB of the Act simultaneous deductions under Sections 80-IB and 80HHC without excluding from the eligible profits the deduction under Section 80-IB of the Act and deduction under Section 80HHC of the Act in spite of there being loss as defined under Clause (baa) of Explanation to Section 80HHC of the Act.
12. The learned Departmental Representative on the other hand submitted that as far as the deduction under Section 80HHC where there is a loss is concerned the issue was covered by the decision of the Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. v. Dy. CIT . Since the order of the AO did not consider this aspect, it was erroneous and the C1T was justified in exercising jurisdiction under Section 263 of the Act. On the question whether the AO having taken up the case for limited scrutiny of deduction under Section 80-IB could investigate the claim of the assessee for deduction under Section 80HHC of the Act, the learned Departmental Representative submitted that even an order under Section 143(1) of the Act could be subject-matter of revision. In this connection reliance was placed by the learned Departmental Representative on the decision of the Hon'ble Bombay High Court in the case of CIT v. Anderson Marine & Sons (P) Ltd. (2004) 189 CTR (Bom) 118 : (2004) 266 ITR 694 (Bom) and the decision of the Madras High Court in the case of CIT v. Chidambaram Construction Co. (2003) 181 CTR (Mad) 542 : (2003) 261 ITR 754 (Mad). Regarding the claim for deduction under Section 80-IB of the Act, the learned Departmental Representative submitted that in the light of the decision of the Hon'ble Supreme Court in the following cases: (a) Cambay Electric Supply Industrial Co. Ltd. v. CIT ;Pandian Chemicals Ltd. v. CIT the expression "derived from", used in Section 80-IB of the Act has to receive a narrow construction and therefore duty drawback could not be said to be income derived from the eligible business. According to him the exercise of jurisdiction by CIT under Section 263 was justified.
The learned Departmental Representative prayed that the appeals by the assessee should be dismissed. It was also contended that exercise of jurisdiction under Section 263 was justified even where issues which are considered by the CIT are debatable and in this regard reliance was placed on the decision of the Hon'ble Gujarat High Court in the case of CIT v. M.M. Khambhatwala 13. We have considered the rival submissions and perused the material available on record. There is no dispute that the cases of the assessee had been taken up only for a limited scrutiny by issue of a notice under Section 143(2)(i) of the Act. The issue that was taken up for limited scrutiny was the allowability or otherwise of the claim made by the assessee under Section 80-IB of the Act. The provisions of Section 143(2)(iii) as it existed between the period 1st June, 2002 and 1st June, 2003 contemplated taking up cases for limited scrutiny and taking up cases for a general scrutiny. If a case is taken up for limited scrutiny the AO could not exceed his jurisdiction beyond the one which he has carved out for himself in the notice issued for limited scrutiny. In the present case there is no dispute that the notices under Section 143(2)(i) were issued between the period 1st June, 2002 to 1st June, 2003 in the case of assessee in ITA 2898/Del/2005. In the case of Ajit Gupta (supra) this Tribunal had an occasion to examine identical issue and the Tribunal had held that exercise of jurisdiction under Section 263 was not justified in respect of deduction under Section 80HHC of the Act, when the same was not the subject-matter of limited scrutiny before the AO. The following were the observations of the Tribunal in this regard: The case of the assessee was selected for limited scrutiny as provided under Section 143(2)(i) of the Act on the point of claim for deduction under Section 80-IB of the Act. The deductions under Sections 80HHC and 80-IB, as claimed by the assessee, were allowed by the AO while passing order under Section 143(3)(i) of the Act on 9th Feb., 2004. The assessee contends that the issues raised by the CIT in the proceedings under Section 263 relating to the claim for deduction under Section 80HHC was not the subject-matter of limited scrutiny made by the AO under Section 143(2)(i) of the Act and, therefore, the same could not be gone into by the CIT by exercising jurisdiction under Section 263 of the Act.
On this fact, the learned Departmental Representative has justified the order of the CIT by resorting to the phraseology of Section 263 and submitted that since the AO had failed to examine the claims of the assessee, the learned CIT was justified in invoking Section 263 and directing the AO to complete the assessment de novo in the light of his observations and findings given in the impugned order. He further submitted that there is no bar in exercising powers under Section 263 by the CIT even in cases where the assessment was completed under Section 143(1) of the Act and thus in this case the order of the CIT was justified.
On this aspect of the matter, we find that the Calcutta Bench of the Tribunal in case of Nayek Paper Converters v. Asstt. CIT (2005) 93 TTJ (Cal) 574 : (2005) 93 ITD 144 (Cal) has considered an identical issue. The Tribunal has considered the issue comprehensively by noticing the scope and ambit of Sections 142(2)(i), 143(3)(i), 143(2)(ii) and also 263 of the Act. The Tribunal held that non-initiation of comprehensive security by issuing notice under Section 143(2)(ii) by the AO cannot be a subject-matter of revision under Section 263, where the assessment is completed under Section 143(3)(i) on limited issue. It was further held that no other item or matter other than items specified in notice under Section 143(2)(i) could be dealt with or examined or verified or adjudicated upon by the AO while passing order under Section 143(3)(ii), CIT cannot direct the AO to look into matters which could be dealt by the AO by assuming jurisdiction under Section 143(2)(i) of the Act.
We hereby concur with the decision of the Calcutta Bench of the Tribunal in the case of Nayek Paper Converters v. Asstt. CIT (supra) and uphold the plea of the assessee on the above additional fact also in this year and allow both the appeals of the assessee.
14. We concur with the view expressed by the Tribunal in the aforesaid order and hold that the CIT was not justified in invoking jurisdiction under Section 263 on issues other than those decided in limited scrutiny assessment.
15. As far as the admissibility of duty drawback for exemption under Section 80-IB of the Act is concerned the same was also considered in the case of Ajit Gupta (supra).
Now, with respect to the exclusion of incomes of duty drawback and samples for computing deduction under Section 80-IB of the Act, the AO had considered such amounts as part of eligible profits for the purposes of computing deduction under Section 80-IB of the Act. On the issue of duty drawback, the judgments of Gujarat High Court in the case of India Gelatine & Chemicals Ltd. (supra) and of the Tribunal in the case of Metro Tyres Ltd. (supra) and AP Industrial Components Ltd. (supra) support the stand of the AO. Similarly, Special Bench of the Tribunal in the case of Nirma Industries Ltd. (supra) and Mumbai Bench of the Tribunal in case of Investwel Publishers (P) Ltd. (supra) support the case of the assessee and the conclusion drawn by the AO. In contrast the CIT and the learned Departmental Representative interpreted 'derived from to infer that such incomes are not includible for the purposes of Section 80-IB of the Act and reliance was placed in the case of Sterling Foods (supra). Again on this aspect, it is evident that it is a matter of interpretative exercise and two possible interpretations are feasible. Therefore, without adjudicating as to which is a correct interpretation, it is clear that Section 263 is unwarranted in such situation. Therefore, on this aspect also, the assumption of jurisdiction by the CIT under Section 263 is unjustified.
16. On the question of allowing simultaneous deduction under Sections 80-IB and 80HHC without allowing eligible profits, the same was considered in the case of Ajit Gupta (supra). The Tribunal has held as follows: Now, we may also examine as to whether the stand of the AO on the issue can be said to be unsustainable in law. On merits, the controversy is whether the AO was correct in computing the deduction under Section 80HHC without reducing from the 'profits of business', the deduction allowable under Section 80-IB of the Act. The CIT has held that in view of the provisions of Section 80-IA(13), the deduction under Section 80HHC is to be computed by reducing from the 'profits of business' the deduction allowable under Section 80-IB of the Act. The conclusion drawn by the AO is supported by the decisions of the Tribunal in the cases of Bharat Heavy Electrical Ltd. (supra), Mittal Cloth Co. (supra), Toshica Creation (supra) and R.V. Diamond Jewellers (P) Ltd. (supra). In Bharat Heavy Electrical Ltd. (supra), the Tribunal held that Section 80HHC of the Act does not authorise adjustment of deduction under Section 80HH, 80HHB or 80-1 from the export profits before deduction under Section 80HHC is given. Whatever deduction is computed by applying the formula prescribed by Section 80HHC, same is to be allowed without such profits being reduced by other deduction.
The learned Departmental Representative has referred to the judgment of Rajasthan High Court in the case of Rochi Ram & Sons (supra) to support a contrary inference with regard to the application of Section 80-IA(9) of the Act. We have perused the said decision. The assessment year involved was 1995-96. The assessee has claimed simultaneous deduction under Sections 80HHC and 80-IA of the Act.
The AO reduced the deductions under Section 80-IA by the amount of deduction allowed under Section 80HHC. The Hon'ble High Court held that s: 80-IA did not provide that a deduction under Section 80HHC has been allowed on a gross total income, deduction under Section 80-IA should be allowed only on the balance i.e. amount remaining after deduction under Section 80HHC of the Act. The Hon'ble High Court upheld the stand of the assessee. With respect to insertion of Section 80-IA(9A), it was noted that the same was applicable w.e.f.
1st April, 1999. It is this observation which the learned Departmental Representative has articulated to support his case. We have perused the said decision and find that such proposition does not emerge out of the judgment. In fact, the Hon'ble High Court specifically noted that after considering the provisions of Section 80-IA(9A) of the Act and the language used in Section 80HHC, there was no restriction on allowing deductions under any other section of Chapter VI-A on gross total income after deduction under Section 80HHC of the Act. The observation regarding the amendment w.e.f. 1st April, 1999 has been made as a sequel to the argument of the Revenue and is not the ratio of the decision as contended by the learned Departmental Representative. Even if it is accepted that the legal proposition of the learned Departmental Representative is supported by the said decision, it merely reflects a possible view.
Thus, it cannot be inferred that the stand taken by the AO is unsustainable in law so as to render the order as prejudicial to the interest of Revenue. Certainly, the point of view of the AO is a possible view in the eye of law and the CIT cannot prefer another view and treat the order as erroneous and prejudicial to the interest of the Revenue. Therefore, following the ratio of judgments of the apex Court and Bombay High Court in Malabar Industrial Co.
Ltd. (supra) and Gabriel India Ltd. (supra) the order of the AO on the issue of computing deduction under Sections 80HHC and 80-IB cannot be considered as erroneous insofar it is prejudicial to the interest of the Revenue.
17. With regard to allowing deduction under Section 80HHC in spite of there being a loss as defined under Clause (baa) of Explanation to Section 80HHC, it is seen that provisions of Section 80HHC(3) have been amended retrospectively w.e.f 1st April, 1992 and in the light of the aforesaid amendment the claim of the assessee is in accordance with law. Even otherwise as already held by us, the claim for deduction under Section 80HHC was never the subject-matter of the limited scrutiny assessment and therefore the AO could not have considered the same. The CIT in exercise of the jurisdiction under Section 263 could not therefore hold the order of the AO as erroneous on this ground. It is further seen that the AOs passed the orders of assessments in the case of present assessees on 10th April, 2003, 8th Sept., 2003 and 29th Dec, 2003 respectively. The decision of the Hon'ble Supreme Court in the case of IPCA Laboratory (supra) was rendered much later in point of time. Prior to the said decision there was a considerable debate, on this issue. As already stated, the subsequent statutory amendment with retrospective effect also supports the claim of the assessee. Exercise of jurisdiction under Section 263 on this ground cannot be sustained.
18. The decisions relied upon by the learned Departmental Representative viz., the decision in the case of Anderson Marine & Sons (P) Ltd. (supra), Chidambaram Construction Co. (supra), do not support the case of the Revenue. The point for consideration in those cases was as to whether the intimation under Section 143(1) could be revised by a CIT in exercise of powers under Section 263 of the Act. The Court held that even while issuing an intimation, application of mind was required to see if some prima facie adjustments have to be made and if the AO does not properly apply his mind, then the same can be interfered in a revision under Section 263 of the Act. As can be seen from the ratio laid down in these cases the issue in the said cases were totally different. In the present case the question is whether exercise of jurisdiction under Section 263 is warranted where the subject-matter of scrutiny assessment was only in respect of claim under Section 80-IB alone. In a limited scrutiny the AO could not go into any other claim except claim under Section 80-IB of the Act because that was the only issue which the AO thought fit to investigate in the limited scrutiny assessment. On the facts and circumstances of the present case we are of the view that the exercise of jurisdiction by the CIT under Section 263 was not justified. Orders under Section 263 are therefore quashed and the appeals of the assessee are allowed.