| SooperKanoon Citation | sooperkanoon.com/75950 |
| Court | Income Tax Appellate Tribunal ITAT Amritsar |
| Decided On | Nov-07-2007 |
| Judge | J Pall, A Jain |
| Reported in | (2008)113TTJ(Asr.)427 |
| Appellant | Assistant Commissioner of Income |
| Respondent | Asian Exim International |
2002-03. Since the issues raised in the appeal filed by the. Revenue and cross-objections of the assessee are interrelated and arise from the same order of the CIT(A), these were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. First, we take up cross-objections filed by the assessee, where the following grounds have been taken: 1. That the order of the CIT(A) is well reasoned on the law and facts of the case.
2. That even on merits the disallowance of deduction under Section 80-IB is wrongly made by the AO. The AO has gravely erred in deducting the amount of DEPB including premium on sale of DEPB from profit and gains of business of the undertaking.
3. That the grounds of Appeal No. 3 does not arise from the order of the learned CIT(A).
4. That the deduction under Section 80-IB and Section 80HHC have been rightly claimed by the assessee.
5. That the assessment was wrongly reopened by AO under Section 147 of the IT Act.
6. That the respondent requests for leave to add or amend any ground of appeal before cross-objection is heard and disposed off.
At the outset, the learned Counsel for the assessee, Sh. Sudhir Sehgal, requested to withdraw the cross-objections filed by the assessee. The learned Departmental Representative did not raise any objection to the request.of the learned Counsel. Therefore, the cross-objections filed by the assessee are dismissed as withdrawn.
3. We now take up the appeal filed by the Revenue, where the following four effective grounds have been taken: 1. That, the learned CIT(A) has erred in holding that the AO could not travel beyond the reasons recorded for reopening the assessment and thereby striking down the partial disallowance made out of the claim for deduction under Section 80-IB. 2. That, the learned CIT(A) has failed to appreciate that the AO can assess any other income which comes to his notice during the reassessment proceedings.
3. That, the learned CIT(A) has failed to give effect the judgment of the jurisdictional High Court in the case of Liberty India v. CIT (2007) 207 CTR (P&H) 243 wherein the Court has held that deduction under Section 80-IB is not allowable on duty drawback and other incentive. The learned CIT(A) has further erred in not taking note of the decision of the jurisdictional High Court in the case of CIT v. Smt. Aruna Luthra to the effect that even if the decision of the jurisdictional High Court on a certain point is rendered after the decision of the CIT(A)/Tribunal is contrary to the said decision of the High Court, it would be a case of a mistake apparent from record which can be rectified under Section 154.
4. That, on the facts and in the circumstances of the case, the learned CIT(A) has erred in law in vacating the finding of AO to restrict the deduction claimed by the assessee under Section 80HHC by the amount under Section 80-IB. While allowing the aforesaid relief, the learned CIT(A) has failed to appreciate the legal provisions of Section 80-IB(13) r/w Section 80-IA(9) of the Act.
4. The relevant material facts leading to this appeal are that the assessee mad filed return declaring therein income of Rs. 17,52,669 on 30th Oct., 2002. The return was processed under Section 143(1) and the assessment was not made under Section 143(3). Subsequently, the AO noticed that in the return of income filed, the assessee had claimed deduction under Sections 80HHC and 80-IB of the Income-tax Act, 1961 (in short "the Act") in respect of business income computed as per provisions of the Act. The AO referred to the provisions of Sub-section (13) of Section 80-IB r/w Sub-section (9) of Section 80-IA as per which the deduction allowed under these sections was required to be reduced from the business for the purpose of allowing deduction under any other provisions of Chapter VI-A (deduction under Section 80HHC in the present case). Thus, the AO was of the view that the amount of deduction allowed under Section 80-IB was to be reduced from the profits for the purpose of computing deduction under Section 80HHC. He, therefore, initiated proceedings under Section 147 of the IT Act, 1961 on 10th Nov., 2004 by issue of a notice under Section 148. In response to the said notice, the assessee filed return of income declaring the same income as shown in the original return. Thereafter, a notice under Section 143(2) of the Act was issued. During the course of reassessment proceedings, the AO also noticed that the assessee had claimed deduction under Section 80-IB of the Act without reducing the amount received as DEPB and duty drawback from the profits as according to him such receipts were not profits derived from industrial activities of an undertaking. He was of the view that assessee had claimed excess deduction under Section 80-IB. lie also relied on the two judgments of Hon'ble Supreme Court in the case of CAT v. Sterling Foods and Pandian Chemicals Ltd. v. CIT and the judgment of Hon'ble Delhi High Court in the case of CIT v.Ritesh Industries . Thus, the AO held that the assessee was not entitled to deduction in respect of DEPB receipts amounting to Rs. 1,63,85,511 and duty drawback of Rs. 55,54,245 both aggregating to Rs. 2,19,39,756. Accordingly, the AO reduced these amounts from the profits and computed the deduction under Section 80-IB, @ 25 per cent of profit of the industrial undertaking determined at Rs. 1,26,69,75. In this manner, the deduction under Section 80-IB was allowed at Rs. 31,67,439. Further, the AO reduced an amount of deduction allowed under Section 80-IB from the profits of the business and worked out deduction under Section 80HHC at Rs. 2,10,37,027. In this manner, the AO completed the assessment under Section 143(3) r/w Section 147 at total income of Rs. 1,04,05,050.
5. Aggrieved, the assessee filed an appeal before the CIT(A), where the action of the AO for initiating the reassessment proceedings was inter alia challenged. It was submitted that the action of the AO amounted to a mere change of opinion and, therefore, reopening of assessment on such basis was illegal and bad in law. It was submitted that earlier the AO had submitted a reply to the audit party stating that DEPB and duty drawback were to be considered as part of the profit of an industrial undertaking and, therefore, the assessee was entitled to deduction under Section 80-IB. Reliance was placed on certain decisions of Tribunal, Amritsar Bench, where it was held that the reassessment proceedings can confine only if the reopening of an assessment on the ground mentioned in the reasons recorded by the AO is found to be valid. Further, it was argued that the AO had initiated the proceedings under Section 147 on the ground that deduction under Section 80HHC was liable to be reduced after reducing the deduction allowed under Section 80-IB from the profits in view of provisions of Section 80-IB(13) r/w Section 80-IA(9) of the Act. It was submitted that the proceedings under Section 147 have not been initiated on the ground that the DEPB and duty drawback did not constitute profit from an industrial undertaking. The assessee had relied on the decision of Tribunal, Amritsar Bench, in the case of Upkar International in ITA No.559/Asr/2004 and some other decisions of CIT(A) where it was held that for the purpose of computing deduction under Section 80HHC, deduction allowed under Section 80-IB was not to be reduced from the profits of the business. The only condition was that deductions allowed under Sections. 80HHC and 80-IB should not exceed the gross total income computed as per provisions of the Act before allowing deductions under these sections. Thus, it was submitted that reassessment proceedings initiated by the AO could not continue because the ground for which such proceedings were initiated no longer survive. Relying on the judgment of Hon'ble Punjab & Haryana High Cburt in the case of CIT v.Atlas Cycle Industries , it was argued that reassessment proceedings cannot continue, if the ground on which such proceedings were initiated was found to be incorrect. Thus, it was submitted that since ground for which proceedings were initiated did not survive, no addition in respect of exclusion of DEPB receipts and duty drawback for the purpose of allowing deduction under Section 80-IB could be made by the AO. The learned CIT(A) considered these submissions and observed that the assessment has been reopened by the AO only on the basis of applicability of provisions of Section 80-IB(13) r/w Sub-section. (9) of Section 80-IA of the Act. In the reasons recorded, the AO has not mentioned that the assessee was not entitled to deduction under Section 80-IB in respect of DEPB and duty drawbacks. Earlier the AO had sent reply to AO that assessee was entitled to deductions under Section 80-IB in respect of these items of income. Therefore, the action of AO to withdraw such deductions in respect of these items of income tantamounted to change of opinion.
Therefore, such action was not valid. He further observed that it has been held by the Tribunal that deduction allowed under Section 80-IB is not to be reduced from the profits for the purpose of allowing deduction under Section 80-IB. Therefore, the action of the AO for reopening the assessment on the ground mentioned in the reason no longer survives. That being so, reassessment proceedings cannot continue for making disallowance of deduction under Section 80-IB in respect of DEPB receipts and duty drawback. He particularly relied on the decision of Tribunal, Amritsar Bench in the case of D.D. Cotton (P) Ltd. v. Asstt. CIT, Cir. II, 7, Bhatinda in ITA No. 555/Asr/2004 for the asst. yr. 1999-2000, where it was held that if the ground on which assessment was reopened is found to be incorrect, the reassessment proceedings cannot continue. Thus, the learned CIT(A) allowed the appeal of the assessee by recording following findings in the impugned order: I have considered the submissions of the appellant, the findings of the AO as incorporated in the order, the submissions of the AO and have gone through the "copy of reasons recorded by AO which led to initiation of proceedings under Section 148 of the IT Act in the case of appellant. I have also gone through the information available on case records. It is gathered from record that before resorting to action under Section 148 of IT Act the assessment in the case of appellant was completed under Section 143(1) of IT Act and the said fact is material in the light of arguments of appellant on the issue of change of opinion. It is also seen that the assessment was reopened by the AO only on the basis of applicability of provisions of Section 80-IB(13) r/w Sub-section (9) of Section 80-IA of the IT Act. From the reasons so recorded it is obvious that the issue of DEPB and duty drawback was not one of the reason for reopening the assessment. It is also important to mention here that an audit query was raised wherein it was objected that the receipt on account of DEPB and duty drawback cannot be said to be attributable to the business of industrial undertaking but the said objection was rejected by the AO by mentioning that the said receipts are attributable to the business of the undertaking directly and the case cited at Cambay Electric Supply Industrial Co.
Ltd. v. CIT was distinguished and the reference was invited by the AO to the decision reported at Dy. CIT v. Metro Tyres Ltd. (2001) 79ITD 557 (Del) which according to AO was direct case on the issue. In view of the reply furnished by the AO one fact becomes obvious that the said issue had already attained finality and due to this reason it was not made part of reasons at the time of reopening of case as per reasons recorded by the AO. Thus, herein, I find substance in the arguments of appellant that the assessment framed by invoking this issue again amounts to change of opinion and the situation- herein gets covered by the decision of Hon'ble jurisdictional High Court in the cases reported at Vipan Khanna v. CIT and Amrinder Singh Dhiman v. ITOCIT v. Sun Engineering Works (P) Ltd. adjudicated that AO cannot start inquiries on the issues which have already attained finality. It is mentioned here that the case of appellant prior to reopening was completed under Section 143(1) of the IT Act but even the said situation gets covered by the decision of Hon'ble Punjab & Haiyana High Court in the case reported at (supra) that it makes no difference whether the assistant proceedings have become final on account of framing of an asset under Section 143(3) of the IT Act or on account of non-issuance of notice under Section 143(2) of the IT Act within the stipulated period. It was further held that amendment made under Sections 143(3) and 147 of IT Act w.e.f. 1st April, 1989 do not in any manner negate this preposition of law as enunciated by the Hon'ble Supreme Court in the case reported at (supra). It was held by the Hon'ble Tribunal, Amritsar Bench in the case of D.D. Cotton (P) Ltd., by order dt. 12th Aug., 2005 bearing ITA No. 36/Asr/2003 that if the assessment had been opened On one issue and no addition had been made on that issue the reassessment proceedings conies to an end and no further addition can be made on any other issue. The Hon'ble jurisdictional Tribunal while holding so referred to decision of Hon'ble Punjab & Haryana High Court in the case reported at CIT v. Atlas Cycle Industries on record after the original assessment, though completed under Section 143(1) of the IT Act and in the light of the objection of the audit party being not accepted by the AO, the addition made on this issue amounted to change of opinion and in this regard I find substance in the submissions of the appellant. The proceedings before the appellate authority are not subject to proceedings pending under Section 263 of the IT Act whereas converse is true that if the order is passed under Section 263 of IT Act in the case of assessee for the same assessment year, the same effects the pending proceedings before the appellate authority. Therefore, the grounds taken by the appellant are allowed.
Ground Nos. 4 to 4.2. pertain to merits of addition corresponding to restricted claim for deduction under Section 80-IB by excluding the receipts on account of DEPB and duty drawback from the profits of the industrial undertaking as shown by the assessee whereby the claim for deduction was restricted to Rs. 31,67,439 as against the claim of Rs. 85,52,378 made by the assessee in the return. The learned Authorised Representative for the assessee filed written submissions on the merits of the issue. In view of the decision under ground Nos. 1 and 2, the merits of the addition are not required to be adjudicated and the relevant grounds taken by the appellant gets allowed.
Ground No. 5 taken by the appellate relates to restricting the claim of deduction under Section 80HHC by the amount allowed under Section 80-IB of the IT Act. It is seen from the order of AO that the deduction under Section 80HHC was worked out at sum of Rs. 2,42,04,466 but it was allowed at a sum of Rs. 2,10,37,027 after curtailing it with the figure of deduction allowable under Section 80-IB of the IT Act at a sum of Rs. 31,67,439. The learned Authorised Representative for the assessee relied upon the order of my learned predecessor in the case of assessee for asst. yr. 2001-02 decided vide Appeal Nos. 66/2004-05/CIT(A)/Jal and also for the same assessment year on the order bearing Appeal Nos. 401 and 442/2004-05/CIT(A)/Jal. The learned Authorised Representative for the assessee further relied on the decision of Hon'ble jurisdictional Tribunal in the case of Upkar International decided on 20th Sept., 2006 by order bearing ITA No. 559/Asr/2004. After considering the submission of the appellant, I find that the issue herein gets squarely covered by the decision in the case of Shital Fibres Ltd., decided on 29th March, 2007 bearing Appeal No. 50/2006-07/CIT(A)/Jal and following the decision therein, the findings of the AO to restrict the deduction claimed by the appellant under Section 80HHC by the amount allowed under Section 80-IB is vacated. Thus, the grounds taken by the appellant are allowed.
The Revenue is aggrieved with the order of the CIT(A). Hence, this appeal before this Bench.
6. The learned Departmental Representative, Sh. Manjit Singh submitted that in this case, the return filed was processed under Section 143(1).
The AO had not completed the assessment under Section 143(3) of the Act. He submitted that as per provisions of Section 147 amended w.e.f.
1st April, 1989, the AO has jurisdiction to assess or reassess income that has escaped assessment for which proceedings under Section 147 have been initiated and also to bring to tax any other income which has escaped assessment and the same comes to his notice during the course of completion of reassessment proceedings. He submitted that the learned CIT(A) was not correct in relying on the judgment of Hon'ble Punjab & Haryana High Court in the case of Vipan Khanna v. CIT for coming to a conclusion that initiating of the proceedings under Section 147 was on the basis of mere change of opinion. He particularly drew our attention to p. 235 of 255 ITR, wherein the Hon'ble High Court has clearly stated that the AO is free to bring to tax any other item of income which may have escaped assessment and which comes to his notice during the course of proceedings under Section 147 of the Act. He submitted that the only limitation imposed on his power is that the AO cannot make fishing inquiries. He submitted that in the present case, the Hon'ble jurisdictional High Court of Punjab & Haryana in the case of Liberty India v. CIT (2007) 207 CTR (P&H) 243 has already held that the assessee is not entitled to deduction under Section 80-IB in respect of DEPB and other incentives like duty drawback. Therefore, there is no doubt that the claim of the assessee for deduction under Section 80-IB by including DEPBs and duty drawback was against the law. Therefore, the same represented escaped assessment of the assessee. Further, relying on the judgment of Hon'ble Punjab & Haryana High Court (Full Bench) in the case of CIT v. Smt Aruna Luthra , it was submitted that in case where assessment was made only under Section 143(1) and subsequently there is a judgment of the jurisdictional High Court as per which the assessee is found to be not entitled to the claim made in the return, the same would constitute a mistake of law apparent from record and the same can be rectified under Section 154 of the Act. He submitted that the said mistake would relate back to the date when particular provision giving rise to dispute was inserted in the Act. Thus, he submitted that the learned CIT(A) was not justified in coming to the conclusion that the action of the AO for disallowing claim for deduction under Section 80-IB in respect of duty drawback and DEPB receipts during the course of reassessment proceedings tantamounted to a mere change of opinion. He further submitted that the reply submitted to the audit party by the AO (a copy placed at p. 3 of the paper book) does not amount to expression of an opinion on the issue. He submitted that the opinion can be said to have expressed only if the assessment was made under Section 143(3) and the claim of the assessee was examined at the time of completing such assessment.
Admittedly, in this case no assessment under Section 143(3) was made.
He further, submitted that the reply submitted to the audit party is purely a administrative matter and does not amount to recording of an opinion by the AO. Further, the learned Departmental Representative submitted that as per provisions of Section 80-IB(13) r/w Sub-section (9) of Section 80-IA of the Act, the deduction allowed under Section 80-IB has to be reduced from the business profit for the purpose of working out the deduction under Section 80HHC of the Act. He submitted that the learned CIT(A) has not decided the claim of the assessee on merits and has merely based his decision on the ground that the action of the AO for initiating the reassessment proceedings was based on mere change of opinion. He stated that such view is totally incorrect and untenable. Thus, the learned Departmental Representative submitted that the order of the CIT(A) may be set aside and that of the AO be restored.
7. The learned Counsel for the assessee, on the other hand, heavily relied on the order of the CIT(A) and reiterated the submissions made before the authorities below. He drew our attention to pp. 1 and 2 of the paper book, which is a copy of the audit objection raised by the audit party. He further referred to p. 3 of the paper book, which is a copy of reply dt. 8th Sept., 2004 of the AO to audit party where he has stated that the receipts on account of DEPB and duty drawback were attributable to the business of the undertaking. He also relied on the decision of Tribunal, Delhi Bench in the case of Dy. CIT v. Metro Tyres Ltd. (2001) 79 ITD 557 (Del). He then referred to p. 4 of the paper book which is a copy of the reasons recorded by the AO for initiating the proceedings under Section 147. The only reason given by the AO was that the deduction allowed under Section 80-IB required to be reduced from the profits of the business for the purpose of computing deduction under Section 80HHC in terms of provisions of sub-s. (13) of Section 80-IB r/w Sub-section (9) of Section 80-IA of the Act. He submitted that the AO has nowhere referred to the fact that the DEPB receipts and duty drawback were required to be reduced from the business profit for the purpose of computing deduction under Section 80-IB although this fact was within his knowledge. He submitted that these reasons were recorded by the AO on 10th Nov., 2004 i.e. after the reply was sent to the audit party on 8th Sept., 2004. Accordingly, the learned Authorised Representative argued that the action of the AO not to allow deduction under Section 80-IB in respect of DEPB receipts and duty drawback was based on mere change of opinion and the same was untenable. The learned Authorised Representative further drew our attention to a copy of Tribunal, Amritsar Bench's decision dt. 20th April, 2007 in the case of the assessee in ITA No. 590/Asr/2004 for the asst. yr. 2001-02 (a copy placed at pp. 5 to 25 of the paper book), where it was held that for the purpose of computing deduction under Section 80HHC, deduction allowed under Section 80-IB is not to be reduced from the profits of the business. Thus, the learned Authorised Representative submitted that the basis for initiating the proceedings under Section 147 no longer survives. However, his attention was drawn to the decision dt.
27th April, 2007 of Tribunal, Special Bench Chennai in the case of Asstt. CIT v. Rogini Garments (2007) 111 TTJ (Chennai) (SB) 274 : (2007) 294 ITR (AT) (Chennai)(SB) 15, where it has been held that the deduction allowed under Section 80-IA/80-IB is to be deducted from profits and gains of business for computing deduction under Section 80HHC. A copy of the relevant part of the ITR where this judgment has been reported was also shown to him. It is precisely for this reason that he has withdrawn the cross-objections filed by the assessee. As regards the action of the AO to deny deduction under Section 80-IB in respect of DEPB receipts and duty drawback, the learned Authorised Representative submitted that this action could survive if only ground for which proceedings have been initiated is found to be correct. He relied on the decision of Tribunal, Amritsar Bench in the case of D.D.Cotton (P) Ltd. v. Asstt. CIT in ITA No. 555/Asr/2004 (supra) for the asst. yr. 1999-2000. A copy was also placed before the Bench. He further submitted that since the AO had in his reply to the audit party submitted that the impugned receipts were attributable to industrial undertaking, the subsequent action to cover these receipts tantamounted to mere change of opinion. Such action is untenable in the eyes of law.
He further submitted that even as per amended provisions, the AO can bring to tax any other income that has escaped assessment, if it comes to his notice subsequently. He submitted that there is nothing on record to show that it came to his notice subsequently though the facts on record do show that the AO was aware of the same even on the date when he initiated proceedings under Section 147 on 10th Nov., 2004.
Reply to audit was sent on 9th Sept., 2004.
8. In the rejoinder, the learned Departmental Representative submitted that the action of the AO is to be seen in the spirit of provisions of Section 147. If the fact that income chargeable to tax by way of allowing deduction under Section 80-IB in respect of DEPB receipts and duty drawback also represented escaped income of the assessee, the same can be disallowed while completing the reassessment proceedings. He submitted that it is not correct to say that such action had attained finality.
9. We have heard both the parties at some length and given our thoughtful consideration to the rival contentions, gone through the material and evidence placed on record as well as the orders of the authorities below. The picture that emerges from the detailed discussion of the facts of the case, the submissions made by the assessee before the authorities below and the findings recorded by the authorities below is that the return was processed under Section 143(1); that the original assessment under Section 143(3) had not been made; that the AO initiated the proceedings under Section 147 on the ground that the deduction under Section 80HHC was to be computed after reducing the amount of deduction allowed under Section 80-IB in terms of provisions of Sub-section (13) of Section 80-IB r/w Sub-section (9) of Section 80-IA and that during the course of reassessment proceedings, the AO by relying on the two judgments of Hon'ble Supreme Court in the cases of CIT v. Sterling Foods (supra) and Pandian Chemicals Ltd. v. CIT (supra) observed that the assessee was not entitled to deduction under Section 80-IB in respect of DEPB receipts and duty drawback and accordingly allowed the claim for deduction under Section 80-IB after reducing these amounts from the profits of the industrial undertaking. The learned CIT(A) observed that in the reply sent to the audit, the AO had clearly mentioned that DEPB receipts and duty drawback were attributable to the business of the undertaking and, therefore, the assessee was entitled to deduction under Section 80-IB in respect of such receipts. Accordingly, the learned CIT(A) has held that the subsequent action to exclude these receipts for the purpose of computing deduction under Section 80-IB tantamounted to mere change of opinion and the same was not permissible under the law. He relied on the two judgments of Hon'ble Punjab & Haryana High Court in the cases of Vipan Khanna v. CIT (supra) and Amrinder Singh Dhiman v. ITO . The learned CIT(A) did not record any finding on the merits of such claim of the assessee for deduction under Section 80-IB in respect of DEPB receipts and duty drawback. As regards the issue that deduction under Section 80HHC is to be reduced after reducing the amount of deduction allowed under Section 80-IB, the learned CIT(A) accepted the claim of the assessee by relying on the decision dt. 20th Sept., 2006 of Tribunal, Amritsar Bench in the case of Upkar International (supra). Now the Bench is required to decide whether the learned CIT(A) was justified in arriving at the above conclusion.
10. Admittedly, in this case, the proceedings for the assessment year under consideration have been initiated under Section 147 by issue of a notice under Section 148 on 10th Nov., 2004. The action of the AO is to be considered as per amended provisions of Section 147 of the Act w.e.f. 1st April, 1989. Section 147 of the Act confers powers on the AO to assess or reassess the income, if he has "reason to believe" that such income chargeable to tax has escaped assessment for that assessment year. The amended provisions of Section 147 of the Act are liberal and confer more power on the AO for initiating the reassessment proceedings. In the case of Asstt. CIT v. Rajesh Javeri Stock Brokers (P) Ltd. , the Hon'ble Supreme Court has recently considered the scope of powers of the AO for initiating action under Section 147 in a case where return filed was processed under Section 143(1) and the original assessment was not completed under Section 143(3). The Hon'ble apex Court, observed that under the old provisions, if the assessment was to be reopened under Section 147(a) of the Act, two conditions were required to be satisfied : firstly, the AO must have reason to believe that income or profits chargeable to tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment of that year. However, under the amended provisions, the AO can initiate proceedings under Section 147 on existence of only the first condition i.e. the income chargeable to tax has escaped assessment. The second condition need not be satisfied.
However, both the conditions would be required to be Satisfied in a case where the case is covered under the proviso to Section 147, i.e.
where an original agreement Was completed under Section 143(3) or Section 147 and the action for reopening the assessment is being initiated after a period of four years from the end of the relevant assessment year. But in the present case, the original assessment has not been made under Section 143(3) or under Section 147. Therefore, this condition is not required to be satisfied for reopening the assessment. The Hon'ble Supreme Court has also observed that so long as ingredients of Section 147 are fulfilled, the AO is free to initiate proceedings under Section 147 and failure to take steps under Section 143(3) will not render the AO powerless to initiate reassessment proceedings even when intimation under Section 143(1) had been issued.
The Hon'ble Supreme Court has further explained the meaning of expression "reason to believe" in Section 147. It would be relevant to reproduce hereunder the relevant para at p. 501 (headnotes) of 291 ITR: The expression 'reason to believe' in Section 147 would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion . What is required is 'reason to believe' but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the AO.Punjab & Haryana High Court has held that the intimation sent under Section 143(1) does not amount to an assessment. The mere fact that the AO had not issued a notice under Section 143(2) within the time allowed does not debar the AO for initiating the proceedings under Section 147, if there is a material to show that income chargeable to tax has escaped assessment Thus, the position that emerges from these judgments of Hon'ble Punjab & Haryana High Court and the Supreme Court is that the mere fact that return was processed under Section 143(1) does not debar the AO from initiating the proceedings under Section 147. It has also been held that the processing of return under Section 143(1) in the absence of examination of books of account and material does not amount to an assessment and expressing an opinion by the AO. Therefore, the doctrine of change of opinion is not applicable to the initiation of proceedings under Section 147 where the return is processed under Section 143(1). Since the original return is processed under Section 143(1), the AO is not required to establish that income chargeable to tax has escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts for that assessment year. Only the first condition that there is an escapement of income is required to be specified. The Hon'ble Supreme Court has also held that the expression "reason to believe" in Section 147 only means cause or justification and falls within the realm of subjective satisfaction of the AO.11. The scope of powers for initiating proceedings under Section 147 under the /amended provisions of Section 147 in a case where original assessment was completed under Section 143(3) and the AO initiated reassessment proceedings under Section 147 within a period of four years from the end of the relevant assessment year came to be considered by the Hon'ble Gujarat High Court in the case of Inductotherm (India) (P) Ltd. v. James Kurian, Asstt. CIT (2007) 212 CTR (Guj) 195 : (2007) 294 ITR 341 (Guj). The facts of the case before the Hon'ble Gujarat High Court were that the assessec had claimed deduction under Section 80IIIIC at Rs. 59,86,965. At the time of completing the assessment under Section 143(3), the AC) examined the claim and restricted the deduction under Section 80HHC to Rs. 50,37,685. Subsequently, the AO noticed that in view of the judgment of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CJT (supra), the judgment of Hon'ble Kerala High Court in the case of K.Ravindranathan Nair v. Dy. CIT , the interest income was taxable under the head 'Income from other sources' and, therefore, the same was not eligible for deduction under Section 801IHC even to the extent of 10 per cent as per Expln. (baa) to Sub-section (4) of Section 80HHC. Similarly, certain other receipts like insurance claim, bad debts recovered, exchange rate fluctuation, training fees income etc. were also liable to be excluded for computing deduction under Section 801-IHC. Accordingly, the AO initiated the proceedings under Section 147. On these facts, the Hon'ble High Court referred to Expln.
(1) to Section 147 and observed that once the AO found that income has escaped the assessment and income chargeable to tax has been underassessed or such income has been assessed at too low a rate or such income has been made subject of excessive relief under this Act or excessive loss or depreciation allowance or any other allowance under this Act, the AO can reopen the assessment provided such action is being taken within a period of four years from the end of the relevant assessment year. The Hon'ble High Court observed that it does not make any difference to such action even if the original assessment was completed under Section 143(3). While taking such view, the Hon'ble High Court also followed its earlier judgment in the case of Praful Chunilal Patel v. M.J. Makwana, Asstt. CIT . where the expression "reason to believe" was dealt with. The relevant findings recorded at p. 840 of 236 ITR, which are as under: 8. On a proper interpretation of Section 147 of the Act, it would appear that 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 it is an error of fact or law that has been discovered or found out justifying the belief required to initiate the proceedings. In our view, the words 'escaped assessment' where the return is filed, are apt to cover the case of a discovery of a mistake in the assessment caused by either on 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.
9. As noted above, the provisions of Section 147 require that the AO should have reason to believe that any income chargeable to tax has escaped 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. They only mean that he forms a belief from the examination he makes and if he likes from any information that he receives. If he discovers or finds or satisfies himself that the taxable income has escaped assessment, it would amount to saying that he had reason to believe that such income had escaped assessment. The justification of his belief is not to be judged from the standards of proof required for coming to a final decision. A belief though justified for the purpose of initiation of the proceedings under Section 147, may ultimately stand altered after the hearing and while reaching the final conclusion on the basis of the intervening enquiry. At the stage where he finds a cause or justification to believe that such income has escaped assessment, the AO is not required to base his belief on any final adjudication of the matter.
The findings recorded by the Hon'ble Gujarat High Court are more or less similar to the findings recorded by the Hon'ble Supreme Court in the case of Asstt. CIT v. Rqjesh Javeri Stock Brokers (P) Ltd. (supra) except that in the case before the Hon'ble Gujarat High Court, the original assessment was completed under Section 143(3) and in the case before the Hon'ble Supreme Court the return was processed under Section 143(1).
12. The present case also requires to be examined in the light of legal position explained above. The AO has recorded the following reasons for initiating the proceedings under Section 147: This is the case of a firm deriving income from manufacture and trading of tyres and tubes. Returns declaring total income of Rs. 17,52,669 was furnished by the assessee on 31st Oct., 2002 which was processed accordingly. A deduction of Rs. 86,52,378 was claimed by the assessee under Section 80-IB of the IT Act, 1961 on the total profit of Rs. 3,46,09,513. It is seen that the assessee has claimed a deduction at Rs. 2,42,04,446 under Section 80HHC of the IT Act, 1961. As per the provisions of Sub-section (13) of Section 80-IB r/w Sub-section (9) of Section 80-IA of the IT Act, 1961, deduction claimed under Section 80HHC is liable to be excluded from the profits eligible for deduction under Section 80-IB. Section 80-IA(9) of the IT Act, 1961 reads as under: (9) Where any amount of profit and gains of an undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profit and gains shall not be allowed under any other provisions of this chapter under the heading 'C- Deduction in respect of certain income', and shall in no case exceed the profit and gains of such eligible business of undertaking or enterprise, as the case may be.
The deduction under Section 80-IB allowed in excess works out to Rs. 77,01,917 chargeable to tax has escaped assessment for the previous year relevant to asst. yr. 2002-03 and as such, with a view to assess/reassess such escaped income and also any other income chargeable to tax which comes to notice subsequently in due course, proceedings under Section 147 are hereby initiated against the assessee whereby issuing notice under Section 148 of the IT Act, 1961 for the said assessment year.
There is no dispute about the fact that the assessee had claimed deduction under Section 80HHC independently without reducing the amount of deduction allowed under Section 80TB. No doubt earlier, there was some doubt as to whether both deductions are to be allowed separately or deduction under Section 80HHC is to be computed after reducing the amount of deduction allowed under Section 80-IB in terms of provisions of Section 80-IB(13) r/w Section 80-IA(9). This controversy has since been resolved by the Tribunal (Special Bench) Chennai Bench in the case of Asstt. CIT v. Roglni Garments (supra), where it has been held the relief allowed under Section 80-IA is to be deducted from profits and gains of business before computing deduction under Section 80HHC in terms of provisions of Section 80-IB(13) r/w Section 80-IA(9). The decision of Tribunal (Special Bench) Chennai, takes precedence over the decision of the Division Bench and binding on all the Benches of the Tribunal except in a case where there is a contrary judgment of jurisdictional High Court or Supreme Court. In the present case, there is a none. Further, even if the decision of the Special Bench is of a later date, it would relate back to the date on which provisions giving rise to the dispute were inserted in the Act. Reliance in this regard is placed on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Smt. Aruna Luthra (supra).
13. Considering the fact that the return was processed under Section 143(1) and original assessment under Section 143(3) had not been made, the AO was justified in forming a 'reason to believe' that income chargeable to tax has escaped assessment in terms of provision of Section 80-IB(13) r/w Section 80-IA(9) of the Act. As regards the merits of the claim of the assessee, the issue already stands decided in favour of the Revenue and against the assessee by the decision of Tribunal, (Special Bench) Chennai in the case of Asstt. CIT v. Rogini Garments (supra). Having regards to these facts and circumstances of the case, we set aside the order of the CIT(A) and restore that of the AO in respect of this ground. Accordingly, this ground of appeal is allowed.
14. The next aspect that requires to be decided by the Bench is whether the AO was justified in restricting the claim of the assessee for deduction under Section 80-IB by excluding DEPB receipts and duty drawback from the profit of an industrial undertaking for the purpose of computing deduction under Section 80-IB. Undoubtedly, the AO had not covered this issue in the reasons recorded for initiating the proceedings under Section 147. Section 147 of the Act reads as under: 147. If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 and 153, assess or reassess 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 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 and 153 referred to as the relevant assessment year).
A bare reading of the above section shows that the AO has jurisdiction to assess or reassess income that has escaped assessment for which proceedings under Section 147 have been initiated and also any other income chargeable to tax which has escaped assessment which comes to his notice subsequently in the course of proceedings under this section. It is true that this issue was raised by the audit party. This is clear from pp. 1 and 2 of the paper book. It is also true that in the reply sent by the AO (a copy placed at p. 3 of the paper book) to the audit party, the AO had mentioned that DEPI3 receipts and duty drawback are attributable to the business of an undertaking. Therefore, the objection was not accepted. Now the question arises whether the reply sent to the audit party which is purely an internal matter can be said to reflect the opinion of the AO at the time of initiating the reassessment proceedings. In our humble view, the opinion is to be expressed in the assessment order only and not in the form of internal communication or correspondence exchanged with the senior authorities or with the audit reply. But in this case, the original return filed was processed under Section 143(1) and no assessment under Section 143(3) was made. Therefore, it cannot be said that the AO had expressed his opinion in regard to this issue. Be that as it may, the AO did not cover this item in the reasons recorded at the time of initiating the proceedings under Section 147 on 11th Oct., 2004 i.e. subsequent to the reply sent to the audit. Thus, it shows that at the time of when proceedings were initiated, the AO did not consider this item having escaped assessment. However, during the course of proceedings under Section 147, the AO referred to the two judgments of Hon'ble Supreme Court in the cases of C1T v. Sterling Foods (supra) and Pandian Chemicals Ltd. v. CIT (supra) and observed that the DEPB receipts and duty drawback were not profits derived from an industrial undertaking, and, therefore, the assessee was not entitled to deduction under Section 80-IB in respect of-these items of income. This fact came to the knowledge of the AO after he had initiated proceedings under Section 147. Now the fact that the assessee is not entitled-to deduction under Section 80-IB in respect of these items of receipts, it is supported by the judgment of jurisdictional High Court in the case of Liberty India v. CIT (supra), where again the Hon'ble Punjab & Haryana High Court has relied on the judgment of Hon'ble Supreme Court in the case of CIT v. Sterling Foods (supra). Therefore, the deduction claimed under Section 80-IB by the assessee in respect of duty drawback and DEPB receipts was not admissible and represented the escaped income of the assessee. Therefore, such income can be brought to tax while completing the reassessment even though, the same was not covered in the reasons recorded by the AC). The plea of the learned Authorised Representative that the fact that this was escaped income must come to the notice of the AO subsequently is untenable for the reason that at the time of initiating the proceedings, the AO was of the view that deduction under Section 80-IB was admissible in respect of these items.
However, subsequently, during the course of reassessment proceedings, the AO by referring to the two judgments of Hon'ble Supreme Court came to know that the assessee was not entitled to deduction under Section 80-IB in respect of these items. This only shows that the fact that such income has escaped assessment came to his knowledge only after initiation of reassessment proceedings. As already held by the Hon'ble Supreme Court in the case of Asstt. CIT v. Rqjesh Javeri Stock Brokers (P) Ltd. (supra), the theory of change of opinion is not applicable to a case where the return was processed under Section 143(1). Therefore, this plea of the assessee is rejected. Since the reassessment proceedings were initiated within period of four years from the end of the relevant assessment year and the original assessment was not completed under Section 143(3), the AO was only required to form a 'reason to believe' that income chargeable to tax has escaped assessment and he was not required to establish that such escapement was due to failure on the part of assessee to disclose fully and truly all material facts necessary for assessment. The judgment of Hon'ble Supreme Court in the case of Asstt. CIT v. Rqjesh Javeri Stock Brokers (P) Ltd. (supra) and the judgment of Hon'ble Gujarat High Court in the case of Inductotherm (India) (P) Ltd. v. James Kurian, Asstt. CIT (supra) also supports this view. Further, in the case of Srikant G.Shah v. ITO (2007) 110 TTJ (Mumbai) 422 : (2007) 108 ITD 577 (Mumbai), the Tribunal, Bombay Bench has held that in a case where the proceedings under Section 147 have been validly initiated, the AO is authorised to bring to tax any other income chargeable to tax which has escaped assessment and which comes to his notice, subsequently, in the course of assessment proceedings under Section 147; his jurisdiction is not merely confined to bringing to charge to tax, income referred to in reasons recorded by issue of notice under Section 148. In that case, the Tribunal has upheld the disallowance of telephone, car and salary expenses, although the proceedings were not initiated for making disallowance of such expenses. Besides in the case of Vipan Khanna vs.
CIT (supra), the Hon'ble Punjab & Haryana High Court has held that the AO can bring to tax any other item of income which may have escaped assessment and which comes to his notice during the course of the proceedings under Section 147 of the Act. However, the AO cannot make fishing enquiries to probe, if any other income has escaped income or not. In the case under consideration, the items of income i.e. DEPB receipts and duty drawback are clearly mentioned in the accounts and the return and the same represented escaped income of the assessee to the extent the assessee had claimed deduction under Section 80-IB by including these in the profits. The action of the AO is in conformity with the view of the Punjab & Haryana High Court in the case of Liberty India v. CIT (supra). The plea of the learned Counsel that the judgment of Hon'ble Punjab & Haryana High Court in the case of Liberty India v.CIT (supra) is of later date would not make any difference because in the case of CIT v. Smt. Aruna Luthra (supra), the Hon'ble Punjab & Haryana High Court has held that once there is a subsequent judgment of jurisdictional High Court or Supreme Court, the same would relate back to the date when the provisions of the Act giving rise to dispute were inserted. The Hon'ble Punjab & Haryana High Court has held that the same would be mistake of law apparent on record for which the AO would be justified to rectify such mistake under Section 154 of the Act. The judgment of Hon'ble Punjab & Haryana High Court in the case of Amrinder Singh Dhiman v. ITO (supra) is not applicable, because in this case issue involved did not relate to making of general enquiry. The issues covered are definite, specific and represent the escaped income of the assessee. As regards the merits of disallowance of deduction in respect of these items of income, the issue is squarely covered in favour of the Revenue and against the assessee by the judgment of Hon'ble Punjab & Haryana High Court in the case of Liberty India v. CIT (supra).
15. Thus, having regard to these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the AO was justified in reducing the deduction under Section 80-IB by excluding DEPB receipts and duty drawback from the profits of the business while completing the reassessment. Accordingly, we set aside the order of the CIT(A) and restore that of the AO. These grounds of appeal are also allowed.
16. In the result, the appeal of the Revenue is allowed and cross-objection filed by the assessee is dismissed.