| Penalty provisions u/s 271(1)(c) of the Act are not automatic provisions | ||||||||||||
| Posted on 05 November 2012 by Apurba Ghosh | |
CourtINCOME TAX APPELLATE TRIBUNAL BriefBriefly stated, the facts giving rise to this appeal are that the assessee filed a return declaring an income of Rs.53,46,390 for AY 2003-04 which was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and accordingly a notice u/s 143(2) of the Act was issued and duly served on the assessee. The Assessing Officer noted that the appellant had received interest of Rs.23,45,708 on fixed deposits and he excluded 90% of such interest income from profit eligible for deduction as per clause (baa) of the Explanation to section 80HHC of the Act which resulted in part disallowance of the claim of deduction u/s 80HHC of the Act. The Assessing Officer concluded the assessment, assessing taxable income at Rs.60,61,360. Aggrieved, the assessee filed an appeal before Commissioner of Income Tax(A)-XXIV, New Delhi which was dismissed through order dated 21.08.2006. CitationAsstt.Commissioner of Income Tax, Circle 27(1), D-Block, Vikas Bhawan, New Delhi. (Appellant) Vs Indo Monex, A-31, Naraina Industrial Area, Phase - II, New Delhi.(PAN: AAAFI2746K) (Respondent) Judgement IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `C' NEW DELHI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI CHANDRAMOHAN GARG, JUDICIAL MEMBER I.T.A.No.1585/Del/2012 Assessment Year: 2003-04 Asstt.Commissioner of Income Tax, Circle 27(1), D-Block, Vikas Bhawan, New Delhi. (Appellant) Vs Indo Monex, A-31, Naraina Industrial Area, Phase - II, New Delhi. (PAN: AAAFI2746K) (Respondent) Appellant by: Shri Satpal Singh, Sr.DR Respondent by: None PER CHANDRAMOHAN GARG, JUDICIAL MEMBER This appeal has been preferred by the Revenue against the order of the Commissioner of Income Tax(A)-XVII, New Delhi dated 31.01.2012 for AY 2003-04 by which the Commissioner of Income Tax(A) deleted the penalty of Rs. 3,06,560 levied by the Assessing Officer u/s 271(1)(c) of the Act (hereinafter referred to as 'the Act'). 2. Briefly stated, the facts giving rise to this appeal are that the assessee filed a return declaring an income of Rs.53,46,390 for AY 2003-04 which was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and accordingly a notice u/s 143(2) of the Act was issued and duly served on the assessee. The Assessing Officer noted that the appellant had received interest of Rs.23,45,708 on fixed deposits and he excluded 90% of such interest income from profit eligible for deduction as per clause (baa) of the Explanation to section 80HHC of the Act which resulted in part disallowance of the claim of deduction u/s 80HHC of the Act. The Assessing Officer concluded the assessment, assessing taxable income at Rs.60,61,360. Aggrieved, the assessee filed an appeal before Commissioner of Income Tax(A)-XXIV, New Delhi which was dismissed through order dated 21.08.2006. The assessee filed a second appeal before ITAT Delhi 'E' Bench in ITA No.3331/D/2006 and the same was allowed with following observations:- "Both the parties were fair enough to concede that since this issue stands decided by the decision of ITAT (Special Bench) in the case of Lal Sons Enterprises vs DCIT, 89 ITD 25 (Del) (SB): 82 TTJ 1048 (SB) Del as well as the recent decision of the jurisdictional High Court of Delhi in the case of Commissioner of Income Tax vs Shri Ram Honda Power Equip(2007) 289 ITR 475 the assessee is entitled for the netting of the interest, subject to the condition that the assessee fulfills the guidelines laid down by the Tribunal in the case of Lal Sons Enterprises vs DCIT (supra) decided by the Special Bench. In this view of the matter, we restore this issue of netting of interest to the file of the Assessing Officer to decide the same afresh in the light of the guidelines issued in the case of Lal Sons Enterprises (supra) after affording reasonable opportunity of being heard to the assessee. For this limited purpose, the issue is restored to the file of the Assessing Officer for compliance and order of Commissioner of Income Tax(A) is also set aside only to this extent." Hence, the matter was restored to the file of the Assessing Officer for limited purpose i.e. to decide the issue whether the assessee was entitled for netting of interest. 3. The Assessing Officer vide his order u/s 254/143(3) of the Act dated 24.12.2008 added back interest of Rs.23,84,176 and initiated the proceedings u/s 271(1)(c) of the Act. 4. Finally, the Assessing Officer held that the assessee had furnished inaccurate particulars of the total income as referred in Section 2(45) of the Act and further held that the assessee is liable to levy of penalty u/s 271(1)(c) of the Act. The Assessing Officer imposed the penalty of Rs.3,06,560 with a finding that the case of the assessee was squarely covered under Explanation 1 of Section 271(1)(c) of the Act. 5. Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax(A)-XVII, New Delhi which was allowed with the following observations:- "4.3 The penalty order is actually silent on the aspect of netting of interest which was set aside by the Hon'ble ITAT. Though, the penalty is levied for furnishing inaccurate particulars of total income, the exact nature of these inaccurate particulars are nowhere mentioned in the penalty order. The Assessing Officer have resorted to Explanation 1 to 271(1)(c) of the I.T. Act, 1961, which are deeming provisions. The addition was made to the returned income as a result of the Hon'ble ITAT order and the same is improper as it was appellant who went on appeal and the Hon'ble ITAT's order was only on the limited issue of netting of interest. The Assessing Officer instead of limiting herself to the direction of the ITAT expanded the issue to include interest income under the head 'income from other sources;. The penalty levied for not including interest income under the head 'income from other sources' is not sustainable as the Assessing Officer has gone beyond the limited issue set aside by the ITAT and the penalty is levied on an improper addition. 4.4 It appears that the Assessing Officer is of the view that if the appellant had not filed an appeal against an addition, then penalty is required to be levied resorting to Explanation 1 to 271(1)( c) of the Act, 1961. In this connection, it is pertinent to note the observation of the Hon'ble Supreme Court in the case of Reliance Petro products (P) Ltd. where it is pointed out that by the Hon'ble Supreme Court in its decision in the case of Dharmendra Textiles had only ruled that mens rea is no more an essential requirement for levying penalty u/s 271(1)(c) of the I.T. Act, 1961. Therefore, the Department as of now need not prove mens rea in penalty proceedings but the meaning of the word 'concealment' and 'inaccurate' continues to be good law. The Hon'ble Supreme Court also held in the above case of Reliance Petro Products (P) Ltd. that "If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature." 4.5 Penalty provisions are not automatic provisions and the words 'concealment' and 'inaccurate' continue to be good law and in this case the exact reason for the levy of penalty is nowhere mentioned in the penalty order. The penalty levied in this case for not including interest income under the head 'income from other sources' is not sustainable as the same is levied on an improper addition. Therefore, penalty of Rs.3,06,560/- is hereby deleted and this ground of appeal is allowed." 6. On the date of hearing, neither the assessee appellant nor his representative appeared before us. We also note that there is no application for adjournment from the assessee. On perusal of impugned order and entire record, we find it just and proper to decide the appeal after hearing the DR and accordingly we proceed to adjudicate the appeal. 7. We have heard arguments of the Departmental Representative in the light of material on record before us. Ld. DR submitted that the decision of the Commissioner of Income Tax(A) is not acceptable on the ground that the interest income earned by the assessee has no nexus with the business of export and was rightly treated as income from other sources by the Assessing Officer and this fact was not disputed by the assessee. He also submitted that the Commissioner of Income Tax(A) deleted the penalty for not including interest income under the head "income from other sources" as the same was levied on an improper addition. But in fact, intention of the assessee was not good because he added interest income to the income of the business of export which was eligible for deduction u/s 80HHC of the Act. 8. On bare reading of the impugned order, we observe that the Commissioner of Income Tax(A) relied on the judgment of the Hon'ble Supreme Court in the case of Reliance Petro Products Ltd. vs Commissioner of Income Tax reported as (2010) 2010 TPI23(SC), SLP )C) No. 27161 of 2008 wherein their lordships held that if the contentions of the revenue are accepted for levy of penalty, then in case of every return where the claim made by the assessee is not accepted by the Assessing Officer for any reason, then the assessee will invite penalty u/s 271(1)(c) of the Act which is not the intention of the legislature. 9. After careful consideration of facts and circumstances of the case, we observe that the penalty provisions u/s 271(1)(c) of the Act are not automatic provisions and the words "concealment" and "inaccurate" must be taken in a good spirit considering the act of the assessee with his intention and in the case in hand, on micro reading of the penalty order, we are unable to see exact reasons for levy of penalty. On the other hand, as per impugned order, the ld. Commissioner of Income Tax(A) considered the facts and circumstances of the case and held that the penalty levied for not including interest income under the head "income from other sources" is not sustainable as the same was levied on improper addition. Accordingly, he rightly deleted the penalty levied by the Assessing Officer without giving any sound or exact reason. 10. In view of above, we finally hold that the Commissioner of Income Tax(A) rightly relied on the judgement of Reliance Petro Products Ltd. (supra) and we have no reason to interfere with the findings given by him. Therefore, we hold that this appeal by the revenue is devoid of merits and deserves to be dismissed. Hence, we dismiss the same. 11. In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open court on 07.09.2012. Sd/- Sd/- (SHAMIM YAHYA) (CHANDRA MOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 07th SEPTEMBER 2012 'GS' Copy forwarded to:- 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR By Order Asstt. Registrar |
iat India Automobiles Ltd vs. ACIT (Bombay High Court)
"Disgraceful & Deplorable Conduct" of ACIT & CIT in seeking to circumvent the law strongly condemned
Pursuant to the assessee's request, the CIT passed an order dated 22.11.2011 u/s 127(2) transferring the assessee's case from Mumbai to Pune. Despite the said transfer, the ACIT, Mumbai, issued a s. 148 notice seeking to reopen the assessee's case. The assessee filed a Writ Petition to challenge the reopening on the ground that the ACIT, Mumbai, had no jurisdiction. Before the Court, the department revealed that the ACIT had written a letter to the CIT requesting that the transfer of the case be cancelled "to circumvent any jurisdictional issue" and that the CIT had passed a "corrigendum order" stating that the transfer order was "temporarily withdrawn for the sake of administrative convenience". The said "corrigendum order" was passed without hearing the assessee and even a copy thereof was not served on the assessee. HELD by the Court allowing the Petition:
SEZ units continue to be exempt from MAT
An existing SEZ unit will be governed by Special Economic 2ones Act, 2005. Therefore, we are of the considered view that the benefits which are to be provided to the newly established unit in SEZ as per section 10AA of the Act will also be available to the existing units in SEZ. Moreover, section 4(1) of SEZ Act provides that an existing SEZ unit shall be deemed to have been notified and established in accordance with provisions of SEZ Act and the provisions of Special Economic 2ones Act shall apply to such existing SEZ units. It is also observed that by the SEZ Act, sub-section (6) to section 115JB was also inserted providing that provisions of section 115JB shall not apply to the income accrued or arisen on or after 1.4.2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic 2one, as the case may be. Hence, income of units located SEZ will not be included while computing book profit for the purpose of MAT as per section 115JB(6) of the Act. In view of above, we are of the considered view that there is merit in the contention of ld A.R. that irrespective of the fact that amendment has been made in clause (f) of Explanation (1) to section 115JB(2) of the Act to apply the provisions of MAT in respect of units which are entitled to deduction u/s. 10A or 10B but the units which are in SEZ will continue to get benefits from the applicability of provisions of MAT in view of sub-section(6) of the Act. The contention of ld D.R. that assessee will not be entitled to get the benefit u/s.115JB(6) of the Act as assessee has claimed deduction u/s. 10A of the Act is to be rejected for the reason that section 115JB (6) does not refer section 10A or section 10AA but it only refer that provisions of section 115JB will not apply to the income accrued or arisen on or after 1.4.2005 from any business carried on in an unit located in SEZ. Hence, we are of the considered view that the unit in SEZ will be covered by sub-section(6) to section 115JB of the Act irrespective of the fact that those units were claiming deduction u/s.10A of the Act. We also observe that benefit given to SEZ unit from the applicability of provisions of section 115JB has been withdrawn by the Finance Act, 2011 by inserting a proviso to section 115JB(6) of the Act, which reads as under:
"Section 15JB(6)
Provided that the provisions of this sub-section shall cease to have effect in respect of an previous year relevant to the assessment year commencing on or after the 1st day of April, 2012."
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Authorities were not justified to include the book profit in respect of SEZ unit at Mumbai of the assessee while computing book profit u/s. 1 15JB of the Act for assessment year 2008-09.Therefore, we reverse the orders of authorities below by holding that income relating to SEZ unit at Mumbai is to be excluded while computing book profit u/s.115JB of the Act for assessment year 2008-09. Hence, Ground No.4 of appeal taken by the assessee for assessment year 2008-09 is allowed.
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No.6903/Mum/20 11: Assessment Year: 2008-09
ITA No.609/Mu m/20 12: Assessment Year: 2009-2010
Genesys International Corpn. Ltd Vs. ACIT
Date of pronouncement: 31.10.2012
ORDER
Per B.R.MittaI, JM:
The assessee has filed these two appeals against orders of ld CIT(A) dated 1.8.2011 forassessment year 2008-09 and dated 23.1.2012 for assessment year 2009- 2010 on following grounds:
"1. The Commissioner of Income tax (Appeal) erred in upholding the Assessing Officer's order for making addition of Rs.2936/-u/s 14A ofthe ITAct on the ground or grounds as alleged in theassessment order.
2. The Commissioner of Income tax (Appeal) erred in upholding the Assessing Officer's order of not allowing to set off the brought forward assessed business loss and unabsorbed depreciation of the previous assessment year 2004-05 against the current year's Business Income on the ground or grounds and in the circumstances ofthe case and law.
3. The Commissioner of Income tax (Appeal) erred in upholding the Assessing Officer's order of not allowing to set off the brought forward assessed unabsorbed depreciation ofthe previousassessment year 2004-05 against the current year's Income from Other Sources on the ground or grounds andin the circumstances ofthe case and law.
4. The Commissioner of Income tax (Appeal) erred in upholding the Assessing Officer's order for making addition of Profit of 1OAUnit located in SEZ Mumbai, to arrive at the Book Profit u/s 115JB ofthe c, in respect ofon the ground or grounds as alleged in the assessment order."
2. Both the representatives of parties submitted that facts and grounds of appeal for assessmentyear 2009-2010 are similar to assessment year 2008-09 and ld CIT(A) has also followed his own order for assessment year 2008-09 while deciding the grounds of appeal for assessment year 2009-2010. Therefore, we have heard these appeals together and dispose off the same by a common order for the sake of convenience.
3. During the course of hearing, it was submitted that ld CIT(A) has wrongly mentioned assessmentyear 2006-07 in para 2.3.1 due to typographical mistake in his order for assessment year 2009-10 and same be read as Assessment Year 2008-09, the assessment year followed by ld CIT(A) to decide the grounds of appeal for assessment year 2009-2010. Ld A.R. also submitted that to rectify the said mistake, assessee has filed an application dated 9.2.2012 and same is pending.
4. Firstly, we take up appeal for assessment year 2008-09 being I.T.A. No.6903/M/2011.
5. The assessee is a public limited company registered under the Companies Act, 1956 and is engaged in the business of Information Technology Solution, providing geographical information services.
6. In ground No.1 of appeal, assessee has disputed confirmation of addition of Rs.2936/- u/s. 14A of the Act made by the AO, ld A.R. submitted that said ground is not pressed for. In view of above, Ground No.1 for assessment year 2008-09 is rejected.
7. In respect of Ground Nos.2 & 3 of appeal, ld A.R. submitted that similar issue has been considered by the Tribunal in assessee's own case for assessment years 2004- 05 and 2005-06 in I.T.A. No.3333 & 3334/M/2010 by its order dated 31.8.2012 and the Tribunal has decided the issue in favour of assessee by following the decision of Hon'ble Jurisdictional High court in the case of Hindustan Uniliver Ltd vs. DCIT, 325 ITR 102(Bom) and ITAT Pune Bench in the case of Patni Computer Systems Ltd vs.DCIT,60 DTR 113 (Pune). To substantiate his submission, ld A.R. referred paras 28 to 34 of the said order of the Tribunal dated 31.8.2012 (supra). Ld A.R. submitted that said brought forward losses pertain to assessment year 2004-05 and whatever final figures comes after giving effect to earlier years orders of the Tribunal, set off may be restricted to that extent. Ld D.R. did not dispute above contention of ld A.R.
8. We have considered the submissions of ld representatives of parties and order of authorities below as also the order of the Tribunal dated 31.8.2012 (supra).
9. We observe that assessee claimed set off of Rs.37,10,326/- being unabsorbed depreciation pertaining to assessment year 2004-05 against returned income at the time of filing the return. AO stated that above losses were denied in earlier years and the matter is under appeal with the higher authorities. Therefore, AO rejected the claim of set off of unabsorbed depreciation for assessmentyear 2004-05. Ld CIT(A) also confirmed the action of AO. Since the Tribunal by its order dated 31.8.2012 after considering the decision of Hon'ble Jurisdictional High Court in the case of Hindustan Uniliver Ltd (supra) has held that while computing the income, assesse was entitled to set off the losses sustained by section 10A eligible unit against normal business income and the income from other sources. In view of above and following earlier order of Tribunal in assessee's own case (supra), we allow Ground Nos.2 & 3 of appeal taken by assessee for assessment year 2008-09 subject to the direction that whatever is final figures of loss after giving effect to order of earlier years, set off if any, to that extent, will be allowed as per provisions of law. Hence, Ground Nos.2 & 3 of appeal taken by the assessee is allowed for assessment year 2008-09.
10. In Ground No.4, the issued involved as to whether ld CIT(A) is justified to confirm the action of AO to make the addition of profit u/s. 10A unit located in SEEP2 Mumbai to arrive at book profit u/s.115JB of the Act.
11. The relevant facts giving rise to this ground of appeal are that assessee, while computing tax liability u/s.115JB of the Act, deducted the income of Rs.10,86,10,248 in respect of Mumbai Division from book profit as per the provisions of section 115JB(6) of the Act. Section 115JB(6) reads as under:
"115JB(6) – The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic 2one, as the case may be."
…….. …………… …..
12. During the course of assessment proceedings, assessee was asked to explain the reasons for reducing said income for computing book profit. Assessee stated vide letter dated 23.11.2010 stated that assessee has two undertakings, one located at SEEP2, Mumbai which is a SEZ unit and other located at Bangalore which is a STPI unit. Both units are eligible for tax benefit under section 10A of the Act. The Finance Act, 2007 amended section 115JB with effect from 2008-09 for bringing the amount of income to which provisions of section 10A or 10B apply within the purview of MAT. Section 10A / 10B of the Act provides tax incentive to units located in certain specified zone/park or to units which are export oriented, subject to the prescribed conditions. Broadly, the benefit granted under section 10A of the Act are available to units located in the following areas:
" Free Trade 2one (FT2)
• Electronic Hardware Technology Park (EHTP)
• Software Technology Par (STP)
• Export Oriented Units (EOUs)
• SEZ"
13. It was also contended that provisions of sub-section (6) of Section 115JB of the Act inserted by Special Economic 2one Act, 2005 (SEZ Act) w.e.f. 10.2.2006 provides that provisions of MAT would not apply to income from any business carried on by an entrepreneur or a developer in a unit or SEZ, as the case may be. Therefore, said provision was enacted so as to continue tax benefit promised by the Government under the SEZ scheme.
14. AO did not accept said contention of the assessee and stated that as per provisions of section 115JB of the Act, book profit is to be computed after making specified adjustments to the net profit as shown in the profit and loss account. In the Finance Act, 2007, the scope of Minimum Alternate Tax (MAT) was widened by including the income exempt u/s.10A/10B of the Income tax Act in the book profit. AO after considering explanatory notes i.e. Circular No.3/2008 dated 12.3.2008 held that MAT provisions are applicable to a company on the income which is from any business or services derived from unit or Special Economic 2one. He further stated that section 115JB(6) was inserted by Special Economic 2ones Act, 2005, when section 10AA was also inserted by the same Act. Section 10AA provides a deduction of such profits and gain derived by an assessee being entrepreneur referred to in clause (f) of Section 2 of Special Economic 2one Act, 2005 from its unit. AO stated that by inserting sub¬section(6) in Section 115JB, the legislature has provided an exemption under MAT also to such units. Therefore, section 115JB(6) is applicable to an assessee claiming deduction under section 10AA of the Act and not an assessee claiming deduction under 10A of the Act. AO stated that assesee has claimed deduction of 10A of the Act under normal provisions of the Act. Therefore, for computing book profit u/s.115JB of the Act, income relates to sec. 10A unit is to be included in the book profit. Being aggrieved, assessee filed appeal before ld CIT(A).
15. Ld CIT (A) after considering the submissions of assessee has confirmed the action of AO. Hence, assessee is in further appeal before the Tribunal.
16. On behalf of assessee, ld A.R. submitted that assessee has two undertakings, one located at SEEP2, Mumbai which is SEZ unit and other unit is located at Bangalore, which is STPI unit. He submitted that both units of assessee are eligible for tax benefit u/s.10A of the Act. He submitted that by Special Economic 2one Act, 2005, Section 10AA was inserted w.e.f. 10.2.2006 to provide deduction/benefit in respect of units established in SEZ i.e. SEZ units and correspondingly, amendment was also made by inserting sub-section (6) to section 115JB of the Act to exclude profits in respect of SEZ unit from book profits for MAT. He further submitted that by the Finance Act, 2007, the amendment in clause (f) to explanation (1) to Section 115JB (2) was made w.e.f. 1.4.2008 i.e. from A. Y. 2008-09 by deleting words "section 10 or 10B" and retained sub¬section (6) of Section 115JB which provides exclusion of income of units located in SEZ while computing book profit u/s.115JB of the Act. Ld A.R. submitted that AO as well as ld CIT(A) has rejected the claim of assessee for excluding profit of SEZ units from its book profit by stating that section 115JB(6) applies only to units which are covered by section 10AA and not the units to which section 10A applies. He submitted that AO by placing reliance on the para 44 of CBDT Circular 3 dated 12.3.2008, which explains the amendment made by Finance Act, 2007, without appreciating that sub -section (6) of Section 115JB does not refer any section, either sec. 10A or 10AA and it refers only to SEZ units. He submitted that section 10A/10B of the Act provides tax incentive to a unit located in certain specified zone/park or to units which are export oriented, subject to the prescribed conditions and not only the unit located in SEZ. He submitted that benefits u/s. 10A is available to unit located in following areas:
"*Free Trade 2one (FT2)
• Electronic Hardware Technology Park (EHTP)
• Software Technology Par (STP)
• Export Oriented Units (EOUs)
• SEZ
17. Ld A.R. further submitted that in view of amendment made by the Finance Act, 2007 in clause (f) of Explanation (1) to section 115JB(2) i.e. from A. Y. 2008-09, the units set up in STP, EHTP, SEZ, FT2 and EOU units are eligible for tax benefit under normal provisions of the Act but will be subject to levy of MAT. However, units in SEZ will continue to get the benefit of provisions of section 115JB of the Act in view of sub¬section (6) of section 115JB of the Act, which was inserted w.e.f. 10.2.2006 by the Special Economic 2ones Act, 2005. He submitted that the term 'unit' and 'SEZ' are not defined under section 115JB or under section 2 of the Income tax Act. The definition of these terms is provided under section 2 of Special Economic 2ones Act, 2005 (hereinafter to be referred as SEZ Act). It is relevant to state that section 2 of SEZ Act, define the term 'Special Economic 2one' and 'unit' as under:
"(za)Special Economic Zone – means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section(1) of section 4(including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone"
"(zc)Unit- means a unit set up by an entrepreneur in a Special Economic Zone and includes an existing unit, an Offshore Banking Unit and a unit in an International Finance Services Centre whether established before or established after the commencement of this Act."
18. Ld A.R. further submitted that section 4(1) of SEZ Act provides that an existing SEZ shall be deemed to have been notified and established in accordance with the provisions of the SEZ Act and the provisions of Special Economic 2ones Act shall apply to such existing SEZ units. Ld A.R. further submitted that in view of provisions of section 115JB(6), the exemption on MAT will be available to units located in SEZ and, accordingly, income in respect of SEZ unit is not to be included while computing book profit u/s.115JB of the Act. Ld A.R. also referred to para 143 of the speech of Hon'ble Finance Minister for financial year 2011-12 at page 63 of PB and submitted that exemption from MAT granted to units operating in SEZ has been deleted from A. Y. 2012-13 and correspondingly amendment has been made by inserting a proviso to sub¬section(6) of Section 115JB to provide that provisions of sub-section(6) are ceased to have effect in respect of any previous year relevant to assessment year commencing on or after 1.4.2012. He submitted that from the assessment year 2012-13, the benefit of exemption of MAT while computing book profit will not be applicable to units located in SEZ but the assessee is entitled to get the benefit of MAT in assessment year 2008-09.
19. On the other hand, ld D.R. supported the orders of authorities below. He submitted that there should be harmonious interpretation of provisions of the Act. He submitted that assessee has claimed deduction u/s.10A of the Act and in view of amendment made in clause (f) of Explanation (1) to Section 115JB(2) by the Finance Act, 2007 w.e.f. 1.4.2008 i.e. FROM Assessment year 2008-09, the benefit is not available to the assessee. He submitted that provisions of section 115JB(6) was inserted w.e.f 10.2.2006 i.e. assessment year 2006-07 and assessee cannot get benefit under two provisions of the Act. Since the assessee is getting exemption u/s. 10A and if the assessee's claim is accepted that assessee is also entitled for benefit of provisions of section 115JB(6), i.e. exemption from MAT in that case, assessee could claim exemption in the main provisions as well as u/s.115JB(6) of the Act prior to assessment year 2008- 09, which could not be the intention of the legislature. He submitted that ld CIT(A) has rightly confirmed the action of AO that while computing book profit u/s.115JB of the Act, that income relating to assessee's unit located in SEZ, Mumbai is to be included in the book profit.
20. We have considered submissions of ld representatives of parties and orders of authorities below. We have also carefully considered the relevant provisions of the Act. There is no dispute to the fact that assessee's unit in Mumbai is located in SEZ. Section 10A provides deduction of profits derived by the undertaking in respect of units which are located not only in SEZ but also in the following areas:
"*Free Trade 2one (FT2)
• Electronic Hardware Technology Park (EHTP)
• Software Technology Par (STP)
• Export Oriented Units (EOUs)
By Special Economic 2one Act, 2005 w.e.f 10.2.2006, a new section 10AA has been inserted which provide exemption to the units located in SEZ. Section 2 of SEZ Act, defines SEZ as under:
"(za)Special Economic Zone – means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section(1) of section 4(including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone"
21. It is evident from above that an existing SEZ unit will also be governed by Special Economic 2ones Act, 2005. Therefore, we are of the considered view that the benefits which are to be provided to the newly established unit in SEZ as per section 10AA of the Act will also be available to the existing units in SEZ. Moreover, section 4(1) of SEZ Act provides that an existing SEZ unit shall be deemed to have been notified and established in accordance with provisions of SEZ Act and the provisions of Special Economic 2ones Act shall apply to such existing SEZ units. It is also observed that by the SEZ Act, sub-section (6) to section 115JB was also inserted providing that provisions of section 115JB shall not apply to the income accrued or arisen on or after 1.4.2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic 2one, as the case may be. Hence, income of units located SEZ will not be included while computing book profit for the purpose of MAT as per section 115JB(6) of the Act. In view of above, we are of the considered view that there is merit in the contention of ld A.R. that irrespective of the fact that amendment has been made in clause (f) of Explanation (1) to section 115JB(2) of the Act to apply the provisions of MAT in respect of units which are entitled to deduction u/s. 10A or 10B but the units which are in SEZ will continue to get benefits from the applicability of provisions of MAT in view of sub-section(6) of the Act. The contention of ld D.R. that assessee will not be entitled to get the benefit u/s.115JB(6) of the Act as assessee has claimed deduction u/s. 10A of the Act is to be rejected for the reason that section 115JB (6) does not refer section 10A or section 10AA but it only refer that provisions of section 115JB will not apply to the income accrued or arisen on or after 1.4.2005 from any business carried on in an unit located in SEZ. Hence, we are of the considered view that the unit in SEZ will be covered by sub-section(6) to section 115JB of the Act irrespective of the fact that those units were claiming deduction u/s.10A of the Act. We also observe that benefit given to SEZ unit from the applicability of provisions of section 115JB has been withdrawn by the Finance Act, 2011 by inserting a proviso to section 115JB(6) of the Act, which reads as under:
"Section 15JB(6)
Provided that the provisions of this sub-section shall cease to have effect in respect of an previous year relevant to the assessment year commencing on or after the 1st day of April, 2012."
——— ———- ———–
22. Hence, we hold that authorities below were not justified to include the book profit in respect of SEZ unit at Mumbai of the assessee while computing book profit u/s. 1 15JB of the Act for assessment year 2008-09. Therefore, we reverse the orders of authorities below by holding that income relating to SEZ unit at Mumbai is to be excluded while computing book profit u/s.115JB of the Act for assessment year 2008-09. Hence, Ground No.4 of appeal taken by the assessee for assessment year 2008-09 is allowed.
23. Now we take up appeal for assessment year 2009-2010 being I.T.A. No.609/M/2012.
24. Grounds raised by assessee read as under:
"1. The Commissioner of Income tax (Appeal) erred in upholding the Assessing Officer's order for making addition of Profit of 10A Unit located in SEZ Mumbai, to arrive at the Book Profit u/s 115JB of the Act, in respect ofon the ground or grounds as alleged in the assessment order."
2. The Commissioner of Income tax (Appeal) erred in upholding the Assessing Officer's order of not allowing to set off the brought forward assessed business loss and unabsorbed depreciation against the current year's income on the ground or grounds and in the circumstances of the case and law."
25. In respect of Ground No.1 of appeal, ld representatives of both the parties submitted that facts and issue involved is identical to Ground No.4 of appeal for assessment year 2008-09 and whatever decision is taken in regard thereto, same will apply mutatis mutandis to decide Ground No.1 of appeal for assessment year 2009- 2010.
26. On perusal of orders of authorities below, we agree that facts and issue involved in Ground No.1 of appeal for assessment year 2009-10 are identical to ground No.4 of appeal for assessment year 2008-09, which we have discussed in paras 11 to 22 hereinabove. For the reasons mentioned in paras 20-22 hereinabove, we allow Ground No.1 of appeal taken by the assessee for assessment year 2009-10.
27. In respect of Ground No.2 of appeal, ld representatives of both the parties submitted that facts and issue involved is identical to Ground No.2 of appeal for assessment year 2008-09 and whatever decision is taken in regard thereto, same will apply mutatis mutandis to decide Ground No.2 of appeal for assessment year 2009- 2010.
26. On perusal of orders of authorities below, we agree that facts and issue involved in Ground No.2 of appeal for assessment year 2009-10 are identical to ground No.2 & 3 of appeal for assessment year 2008-09, which we have discussed in paras 7 to 9 hereinabove. For the reasons mentioned in para 9 hereinabove, we allow Ground No.2 of appeal taken by the assessee for assessment year 2009- 10.
27. In the result, appeal for assessment year 2008-09 is allowed in part and wherea appeal for assessment year 2009-2010 is allowed.
Pronounced on 31st October, 2012.
IT : In absence of any action taken by prescribed authority against assessee, engaged in scientific research and development, for violating provisions of sub-rule (2) of rule 18DA, its claim for deduction under section 80-IB (8A) was to be allowed
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[2012] 27 taxmann.com 4 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'B'
Deputy Commissioner of Income-tax, Circle-11(1), New Delhi
v.
Fortis Clinical Research Ltd.*
G.D. AGRAWAL, VICE-PRESIDENT
AND A.D. JAIN, JUDICIAL MEMBER
IT APPEAL NO. 3667 (DELHI) OF 2010
[ASSESSMENT YEAR 2007-08]
AUGUST 9, 2012
Section 80-IB of the Income-tax Act, 1961, read with rule 18DA of the Income-tax Rules, 1962 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings - Scientific research and development - Assessment year 2007-08 - Assessee company, engaged in scientific research and development, provided services of bio-equivalence of international standards to pharmaceutical companies - It claimed deduction under section 80-IB(8A) - Assessing Officer took a view that assessee company was selling services to pharmaceutical companies without prior permission of prescribed authority and, thus, there was violation of rule 18DA(2)(a) - He accordingly rejected assessee's claim - On appeal, it was noted that prescribed authority had not withdrawn approval of assessee-company for violating sub-rule (2) of rule 18DA, rather it had granted extension of approval for a further period of three years - Moreover, Assessing Officer himself had allowed deduction to assessee in subsequent assessment year after discussing relevant provisions of Act - Whether in view of aforesaid, assessee's claim for deduction was to be allowed - Held, yes [Paras 5 to 7] [In favour of assessee]
FACTS
Facts
• The assessee company was engaged in scientific research and development. It provided the services of bio-equivalence of international standards to pharmaceutical companies.
• The assessee claimed deduction under section 80-IB(8A) which was subject to rule 18DA of the Income-tax Rules, 1962.
• As per rule 18DA(2)(a), the assessee company could not sell any prototype or output without the prior permission of the prescribed authority.
• The Assessing Officer was of view that assessee company was selling the services to the pharmaceutical companies and receiving the service charges and that sale of those services was the sale of output of its research and since the prior permission of the prescribed authority was not taken, there was violation of rule 18DA(2)(a).
• The Assessing Officer thus rejected the assessee's claim.
• The Commissioner (Appeals), however, allowed the assessee's claim.
Assessee's contentions
• The assessee was simply rendering services to some of the pharmaceutical companies and receiving service charges and that rendering the services did not amount to sale of prototype or output.
• The Department of Scientific and Industrial Research Technology, i.e. prescribed authority to grant approval under rule 18DA, had itself granted its approval to assessee for subsequent assessment years and, the Assessing Officer relying on said approval, had allowed assessee's claim for deduction for subsequent assessment year.
Revenue's contentions
• The assessee had violated the prohibition provided by rule 18DA(2)(a), i.e., it had sold the output by way of selling services to the pharmaceutical companies.
Issue involved
• Whether on facts of the case, the assessee's claim for deduction under section 80-IB was rightly allowed.
HELD
Conditions for availability of deduction under section 80-IB
• Deduction under section 80-IB(8A) is available to a company carrying on scientific research and development work provided the company is registered in India. Its main object is scientific and industrial research, which is approved by the prescribed authority and it fulfils the conditions as may be prescribed. In the case of the assessee, it is not in dispute that it is a company which is registered in India. It has main object of scientific and industrial research and development and it is approved by the prescribed authority. The only dispute by the Revenue is that it has not fulfilled the conditions as prescribed by rule 18DA of the IT Rules. [Para 5 ]
Rule 18DA
• Sub-rule (3) of rule 18DA itself provides the consequence of violation of sub-rule (2). As per sub-rule (3), if at any stage it is found that any provisions of the Act or the rules have been violated, the prescribed authority specified may withdraw the approval so granted. Therefore, if there is a violation of sub-rule (2), the prescribed authority has to take action against the assessee by withdrawing the approval. In the case of the assessee, the prescribed authority has not withdrawn the approval of the assessee for the assessment year under consideration i.e., 2007-08 but has further granted the extension of the approval for a further period of three years. Moreover, the Assessing Officer himself in the subsequent year i.e., 2009-10 in the order passed under section 143(3) has discussed at length section 80-IB(8A) and rule 18DA(1) and has finally concluded that the assessee is entitled to deduction under section 80-IB(8A). [Para 6]
Conclusion
• In view of the above, there is no infirmity in the order of Commissioner (Appeals) who has directed the Assessing Officer to allow the deduction under section 80-IB(8A). Therefore, his order is upheld and Revenue's appeal is dismissed. [Para 7]
J.S. Ahlawat for the Appellant. M.S. Syali, Manish Upneja and Tarandeep Singh for the Respondent.
ORDER
G.D. Agrawal, Vice-President - The grounds raised in this appeal by the Revenue read as under:-
"1. The order of ld. CIT(A) is wrong, perverse, illegal and against the provision of law, liable to be set aside.
2. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in as the assessee has failed to comply with conditions specified U/s 80IB(8A)(iv) of the I.T. Act 1961 read along with Rule 18DA(2)(a) of the I.T. Rules.
3. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in not considering that the assessee has defaulted in its obligation to take prior permission of the prescribed authority to sell its services as required under Rule 18DA(2)(a)."
2. At the time of hearing before us, it is stated by the learned DR that the assessee company is engaged in scientific research and development and provide the services of bio-equivalence of international standards to pharmaceutical companies. During the year under consideration, the assessee claimed deduction under Section 80IB(8A) of the Income-tax Act, 1961. That the said deduction is subject to Rule 18DA of the Income-tax Rules, 1962. That as per Rule 18DA(2)(a), the assessee company cannot sell any prototype or output without the prior permission of the prescribed authority. That the assessee company was selling the services to the pharmaceutical companies and receiving the service charges. That sale of those services is the sale of output of its research and since the prior permission of the prescribed authority was not taken, there was violation of Rule 18DA(2)(a). Therefore, the Assessing Officer had rightly rejected the deduction under Section 80IB(8A) claimed by the assessee. The learned CIT(A) allowed the relief to the assessee without properly appreciating the facts of the case and the legal position. Therefore, the order of learned CIT(A) should be reversed and that of the Assessing Officer may be restored.
3. The learned counsel for the assessee, on the other hand, stated that Rule 18DA(2)(a) prohibits the sale of any prototype or output without the prior permission of the prescribed authority. That the assessee has not sold any prototype or output. It was simply rendering services to some of the pharmaceutical companies and receiving service charges. That rendering of services does not amount to sale of prototype or output. That Department of Scientific and Industrial Research Technology, Ministry of Science and Technology, is the prescribed authority under Rule 18DA. That the assessee company is approved by such prescribed authority vide order dated 30th March, 2007 for AY 2007-08, 2008-09 & 2009-10. That such approval is further extended vide order dated 30th June, 2009 for AY 2010-11, 2011-12 & 2012-13. That whether there is a violation of any clause of Rule 18DA is to be looked into by the prescribed authority before extending the approval. Had there been any violation, the approval to the assessee would not have been extended by the prescribed authority. That in AY 2009-10, the Assessing Officer himself, vide order dated 7th December, 2011 passed under Section 143(3), has granted approval under Section 80IB. That such approval is duly granted after considering Rule 18DA of the IT Rules. Thus, the department itself in the subsequent year on identical facts has taken a view that there is no violation of Rule 18DA(2). He, therefore, submitted that the order of learned CIT(A) should be sustained.
4. We have carefully considered the arguments of both the sides and perused the material placed before us. Section 80IB(8A) reads as under:-
"80-IB. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.
[(8A) The amount of deduction in the case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, beginning from the initial assessment year, if such company -
(i) is registered in India;
(ii) has its main object the scientific and industrial research and development;
(iii) is for the time being approved by the prescribed authority at any time after the 31st day of March, 2000 but before the 1st day of April, 2007;
(iv) fulfils such other conditions as may be prescribed.]."
5. From the above, it is evident that deduction under Section 80IB(8A) is available to a company carrying on scientific research and development work provided the company is registered in India. Its main object is scientific and industrial research, which is approved by the prescribed authority and it fulfils the conditions as may be prescribed. In the case of the assessee, it is not in dispute that it is a company which is registered in India. It has main object of scientific and industrial research and development and it is approved by the prescribed authority. The only dispute by the Revenue is that it has not fulfilled the conditions as prescribed by Rule 18DA of the I.T. Rules. The said Rule 18DA reads as under:-
"Prescribed conditions for deduction under sub-section (8A) of section 80-IB.
18DA. (1) Any company carrying on scientific research and development shall be eligible for deduction specified in sub-section (8A) of section 80-IB, if such company—
(a) is registered in India;
(b) has its main object the scientific and industrial research and development;
(c) has adequate infrastructure such as laboratory facilities, qualified manpower, scale-up facilities and prototype development facilities for undertaking scientific research and development of its own;
(d) has a well formulated research and development programme comprising of time bound research and development projects with proper mechanism for selection and review of the projects or programme;
(e) is engaged exclusively in scientific research and development activities leading to technology development, improvement of technology and transfer of technology developed by themselves;
(f) submits the annual return alongwith statement of accounts and annual report within eight months after the close of each accounting year to the prescribed authority.
(2) Every company which is approved under sub-rule (2) of rule 18D shall—
(a) sell any prototype or output, if any, from its laboratories or pilot plants with the prior permission of the prescribed authority;
(b) intimate the change, if any, in its memorandum of association and articles of association relating to its main objects and forward the altered copy of its memorandum of association and articles of association to the prescribed authority;
(c) apply for extension of the approval at least three months before expiry of the approval already granted by the prescribed authority;
(d) have a system of monitoring the cost of research and development projects.
(3) If, at any stage, it is found that—
(a) the approval granted to the company referred to in sub-rule (2) of rule 18D is to avoid payment of taxes by its group companies or companies related to its directors or majority of its shareholders;
(b) any provisions of the Act or the rules have been violated,
the prescribed authority specified may withdraw the approval so granted.
(4) Every company referred to in sub-rule (1) shall make an application to the prescribed authority for the purposes of obtaining approval.
(5) Every application referred to in sub-rule (4) shall be accompanied by—
(a) memorandum of association and articles of association incorporating all amendments duly certified by the company secretary or managing director of the company;
(b) annual report of the company for the last three years, if available;
(c) photocopies of the memorandum of understanding relating to all on-going and future sponsored research projects or programmes.
(6) The prescribed authority may call for any information or document which may be necessary for consideration of the grant of approval under sub-rule (2) of rule 18D.
(7) The prescribed authority shall grant approval within four months from the date of receipt of the application :
Provided that where the approval is not granted, the decision of the said authority shall be communicated to the applicant within the said period of four months :
Provided further that no approval shall be refused unless the applicant has been given an opportunity of being heard.]."
6. The contention of the Revenue is that the assessee has violated the prohibition provided by Rule 18DA(2)(a), i.e., it has sold the output by way of selling services to the pharmaceutical companies. However, we find that sub-rule (3) of Rule 18DA itself provides the consequence of violation of sub-rule (2). As per sub-rule (3), if at any stage it is found that any provisions of the Act or the rules have been violated, the prescribed authority specified may withdraw the approval so granted. Therefore, if there is a violation of sub-rule (2), the prescribed authority has to take action against the assessee by withdrawing the approval. In the case of the assessee, the prescribed authority has not withdrawn the approval of the assessee for the assessment year under consideration i.e. 2007-08 but has further granted the extension of the approval vide order dated 30th June, 2009 for a further period of three years. Moreover, the Assessing Officer himself in the subsequent year i.e. 2009-10 in the order passed under Section 143(3) has discussed at length Section 80IB(8A) & Rule 18DA(1) and has finally concluded that the assessee is entitled to deduction under Section 80IB(8A). The relevant finding of the Assessing Officer reads as under:-
"8. Reply/submission of the assessee has been considered and on going through the above reply of the assessee, it is found that the assessee company is registered in India and has its main object of being a Scientific and Industrial Research and Development. It also has adequate infrastructure and research programmes for the purpose of carrying out Scientific Research and Development and it has also submitted the annual return along with Statement of Accounts and Annual Report within eight months from the close of the accounting year under reference in accordance with Clause (f) of Rule 18DA(1).
9. Further, as regards Rule 18DA(2), the assessee has submitted in his reply dated 25.11.2011 that it is carrying out Scientific Research activities for and on behalf of M/s Ranbaxy Laboratories Ltd. and other sponsor companies to whom it was providing the results of its research activities as contained in the agreements entered into with them. It also stated that while it did not sell any Prototype or Output, it has duly filed all the agreements containing the research activities undertaken by it for its sponsors (M/s Ranbaxy and Other) with the DSIR. The said agreements have been obtained from the company and have been placed on records. The said agreements contain the elaborate process of research and development activities undertaken by it, research activities in progress as well as research activities proposed and planned during the year.
10. The assessee company has sought approval from the DSIR by furnishing all such agreements and related documents with the DSIR during the year under assessment, based on which, the DSIR has granted approval of extension to the assessee company for a further period of 3 years i.e. for A.Y. 2010-11, 2011-12 and 2012-13 vide its letter dated 30.06.2009, a copy of which has been submitted by the assessee and placed on record.
11. On going through the above documents filed by the assessee with the DSIR during the year under assessment for its approval and subsequent grant of approval by the DSIR for a further period of 3 years.
12. Keeping in view the details filed and above facts of the assessee specifically for the year under assessment, after discussion with the assessee's representative, the deduction u/s 80-IB(8A) is allowed as claimed."
7. In view of the above, we find no infirmity in the order of learned CIT(A) who has directed the Assessing Officer to allow the deduction under Section 80IB(8A). Therefore, his order is upheld and Revenue's appeal is dismissed.
8. In the result, the appeal of the Revenue is dismissed.
IT : Penalty was not justified where a revised return was filed after survey but before issue of notice under section 148 and taxes due with interest were paid
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[2012] 26 taxmann.com 335 (Karnataka)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax
v.
Vega Auto Accessories (P.) Ltd.*
N. KUMAR AND H.S. KEMPANNA, JJ.
IT APPEAL NOS. 5014 TO 5016 OF 2011†
AUGUST 8, 2012
Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income - Revise return, effect of filing - Assessment years 2004-05 to 2006-07 - In course of a search conducted at assessee's premises by Excise Department, assessee admitted suppression of turnover - Thereafter, based on said search, income-tax authorities, conducted survey and consequent thereto assessee filed revised returns declaring additional income and suppression of sales and paid taxes as well as interest - Whether merely because it was only after survey that a revised return was filed, it was a ground to hold that there was suppression of income so as to justify levy of penalty - Held, no [Paras 9 and 11] [In favour of assessee]
FACTS
• Based on the search conducted in the assessee's premises by the Excise Department, there was a survey action in the business premises of the assessee wherein suppression of sales was detected by the Assessing Officer.
• Consequent upon the survey, the assessee filed the revised returns for the relevant assessment years declaring additional income and suppression of sales and also paid tax and interest.
• The Assessing Officer held that there was concealment of income by way of suppression with intention to evade tax and the assessee even failed to revise the income after the date of search conducted by the Central Excise Department.
• On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer.
• On further appeal, the Tribunal held that when once the return was filed before the issue of notice under section 148 and tax due with interest was paid, as the income was not suppressed, the imposition of penalty was not proper. Therefore, the order of imposition of penalty was set aside.
• On appeal:
HELD
Filing of return after survey does not mean there is suppression of income
• Filing of return after survey does not mean there is suppression of income. Merely because there was a survey by the Income-tax Department and it is only after a survey, a revised return is filed, is not a ground to hold that there was suppression of income. [Para 9]
Suppression of turnover is different from suppression of income
• The suppression of turnover is different from the suppression of income. If there is suppression of turnover, there is liability of pay excise duty. Merely because the excise duty is paid, there is no presumption that it leads to taxable income in the hands of the assessee. The tax under the Income-tax Act is payable for the income in excess of the limit prescribed under the Act. After the Settlement Commissioner under the Excise Act resolved the dispute between the parties, which waived the penalty, then whether he had income or not, he was forced to filed revised returns and then pay tax as well as the interest for delayed payment of tax. All this was done prior to issue of notice under section 148 or maybe after the survey was conducted by the Income-tax Department.
• That by itself would not lead to a conclusion that there was concealment of income, as rightly held by the Tribunal. [Para 11]
• Therefore, no substantial question arises on the facts of the case. [Para 12]
CASE REVIEW
LMP Precision Engg. Co. Ltd. v. Dy. CIT [2011] 330 ITR 93/[2009] 183 Taxman 12 (Guj.) (para 9) followed.
CASES REFERRED TO
LMP Precision Engg. Co. Ltd. v. Dy. CIT [2011] 330 ITR 93/[2009] 183 Taxman 12 (Guj.) (para 8).
Y.V. Raviraj for the Appellant. S. Parthasarathi, P. Dinesh and H.R. Kambiyavar for the Respondent.
JUDGMENT
N. Kumar, J. - As the questions involved in all these appeals are one and the same and between the same parties for different assessment years, they are taken up for consideration together and disposed off by this common order.
2. The assessee is a manufacturer of safety head-gear being helmets and sells their goods in the name of 'Vega' branded helmet. There was a survey action in the business premises on 17.10.2007 wherein the suppression of sales was detected by the assessing Officer, based on the search conducted in the assessee's premises by the Director General of Central Excise (intelligence), Bangalore, on 07.02.2006. Therefore, consequent upon the survey, the assessee filed the revised returns on 05.12.2007 for the assessment years 2004-05 to 2006-07 declaring the additional income on account of the initial capital of Rs. 6,50,000/- and suppression of sales of Rs. 34,94,129/- for assessment year 2004-05, Rs. 66,279/-. for assessment year 2005-06 and Rs. 82,85,703/- for assessment year 2006-07. After the said revised returns were filed, the assessing officer issued a notice under Section 148 of the Income Tax Act, 1961 [for short 'the Act'].
3. The case of the Revenue is the aforesaid facts clearly demonstrates the concealment of income by way of suppression with intention to evade tax and even failed to revise the income after the ' date of survey conducted by the Central Excise Department. Therefore, the Assessing Officer finalised the assessment under Section 143(3) read with Section 147 of the Act making the additions. He also called upon the assessee to show-cause why the penalty proceedings should not be initiated. In reply to the same, the assessee contended that there was no concealment involved as to additional income was found at the time of survey, except additional sales declared before the Central Excise authorities.
4. Secondly, he contended that he has filed revised returns upon the completion of the proceedings under the Central Excise Act. Not only he filed the revised returns, he has also paid taxes and interest payable thereon. Overruling the said objections, the additions were sustained.
5. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals), who confirmed the order and dismissed the appeal. It is against the said order, the assessee preferred a second appeal to the Tribunal.
6. On consideration of the aforesaid materials, the Tribunal was of the view that when once the return was filed before the issue of notice and taxes due with interest is paid, as the income was not suppressed, the imposition of penalty was not proper. Therefore, it set aside the order of imposition of penalty. Aggrieved by the said order, the Revenue is in appeal.
7. The learned counsel for the Revenue assailing the impugned order contends that admittedly, the assessee admitted before the Central Excise Authorities the suppression of turn-over and the suppression of payment of excise duty. After the same was detected, he did not file the income-tax returns. He waited till there was a survey of his premises by the Income Tax Department. It is only thereafter he has filed the returns, ofcourse, before the issue of notice under Section 148 of the Act. These facts clearly demonstrates that the revised returns filed by the assessee is not voluntary and bona fide, and there was an intention to avoid payment of tax. In those circumstances, the Tribunal was not justified in interfering with the well-considered orders passed by the appellate authority as well as the original authority, and therefore, he submits that the impugned order requires to be interfered with.
8. In support of his contention, he relied upon a judgment of the Gujarat High Court in the case of LMP Precision Engg. Co. Ltd. v.Dy. CIT (Asstt.) [2011] 330 ITR 93/[2009] 183 Taxman 12, where it has been held as under:
"9. The law on the subject of treating a revised return of income as voluntary or otherwise is well- settled. Merely because a return is revised that fact by itself cannot lead to any presumption as to concealment in the original return of income, because legislature itself has provided for furnishing a revised return in case of any omission in the original return. Albeit such omission has to be inadvertent and bona fide. If the omission is intentional, the revised return cannot absolve an assessee. The fact that the Department has initiated certain inquiries per se would not be sufficient to treat the revised return as not being voluntary. This would depend on facts of each case considering the stage at which the investigation has progressed, the subject-matter of investigation by the Department, and the evidence available in the course of such investigation."
9. There is no quarrel with the afore-said proposition of law. As is clear from the said law, in the background of the aforesaid law, we have to look into the facts of the case and then to apply the said law. Therefore, merely because there was a survey by the Income Tax Department and it is only after a survey, a revised return is filed, is not a ground to hold that there was suppression of income. In the instant case, first there was a search by the Excise Department. It is in the course of that search, the assessee admitted the suppression of turnover. Thereafter, he paid tax and interest to the Excise Department. Then, he went before the Settlement Commissioner seeking for waiver of penalty and prosecution. It is only after the order passed by the Settlement Commissioner and after the survey by the Income Tax Department of his premises, to bring it in conformity with the orders passed under the Excise Act, he filed the revised returns, paid the taxes as well as the interest It is thereafter the Revenue issued him the notice under Section 148 of the Act.
10. In reply to the same, he contended that the revised returns field may be treated as the returns in pursuance of the said notice and he pleaded before them that as he has already paid tax and interest, and as there is no suppression of income, he is not liable to pay the penalty.
11. The suppression of turnover is different from the suppression of income. If there is suppression of turn-over, there is liability to pay excise duty. Merely because the excise duty is paid, there is no presumption that it leads to taxable income in the hands of the assessee. The tax under the Income Tax Act is payable for the income in excess of the limit prescribed under the Act. It is in this context, after the Settlement Commissioner under the Excise Act resolved the dispute between the parties, which waived the penalty, then whether he had income or not, he was forced to file revised returns and then pay tax as well as the interest for delayed payment of tax. All this was done prior to issue of notice under Section 148 of the Act or may be after the survey was conducted by the Income Tax Department. That by itself would not lead to a conclusion that there was concealment of income, as rightly held by the Tribunal.
12. In that view of the matter, we do not find any substantial question of law which arise for consideration in the facts of the case. No merits. Dismissed.
IT : Non-maintenance of separate accounts regarding STP unit and other unit cannot be ground to deny exemption under section 10A when assessee is otherwise entitled to exemption
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[2012] 18 taxmann.com 57 (Kar.)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax, Central Circle
v.
Fusion Software Engg. (P.) Ltd.*
V.G. SABHAHIT AND RAVI MALIMATH, JJ.
IT APPEAL NOS. 952 & 953 OF 2006†
NOVEMBER 2, 2011
I Section 10A of the Income-tax Act, 1961 - Free trade zone - Assessment years 1999-2000 and 2000-01 - Assessee claimed exemption under section 10A in respect of its manufacturing unit claimed to have been established in Software Technology Park (STP) - Assessing Officer disallowed exemption holding that it was reconstruction of earlier establishment - On appeal, Tribunal, after considering material on record, held that it was not a case of reconstruction of already existing business and assessee could not be denied exemption under section 10A merely on ground that no separate accounts were maintained regarding STP unit and other unit - Whether finding arrived at by Tribunal being pure finding of fact based upon material on record, could not at all be said to be arbitrary or capricious so as to call for interference - Held, yes [In favour of assessee]
II Section 115JB of the Income-tax Act, 1961 - Minimum alternate tax - Assessment years 1999-2000 and 2000-01 - Whether provision for doubtful debts, doubtful investments and doubtful advances should be added back for purpose of computing book profit under section 115JB - Held, no [In favour of assessee]
FACTS
The assessee filed its return and claimed exemption under section 10A. The claim of the assessee was that it had established a manufacturing unit which was started in Software Technology Park (STP) after investing the amount which was independent of earlier business carried on by it at Devaiah Court and, thus, it was entitled to exemption under section 10A. The Assessing Officer held that provisions of sections 10A(2)(i)( b), 10A(2)(ii) and 10A(2)(iii) were not complied with as it was reconstruction of the earlier establishment and more than 20 per cent of the plant and machinery already available in the old establishment had been utilized for manufacturing in the STP unit and further the earlier organization had been closed and the assessee was manufacturing since the year 1993 but not in STP. Accordingly, he disallowed the exemption claimed by the assessee. On appeal, the appellate authority held that the conditions laid down in section 10A(2)(i)( b) and 10(2)(iii) had been complied with but condition in 10A(2)(ii) was not complied with as the establishment was the reconstruction of the unit which was already in existence. He, accordingly, confirmed the finding given by the Assessing Officer that the assessee could not claim exemption under section 10A. On second appeal, the Tribunal held that it was not a case of reconstruction and it was establishment of an independent unit in the STP and, therefore, was entitled to exemption under section 10A.
On revenue's appeal:
HELD
The Tribunal, which is the final authority on the question of fact, has rightly held that having regard to the material on record, it was clear that the plant and machinery that was available in the Devaiah Court unit was less than 20 per cent of the existing machinery in STP unit and having regard to the number of staff and other facts of the case, the said two conditions as specified in section 10A(2)(i) and (iii) are satisfied. So far as condition as per section 10A(2)(ii) is concerned, the Tribunal has held that it was not a case of reconstruction of already existing business. The Tribunal, on the basis of the material that was produced by the assessee, has referred to the facts which would clearly show that all the assets purchased after 31-3-1996 are stated to be located at STP unit, electronic city, while the assets purchased upto 31-3-1996 are stated to be located in Devaiah Court. It is clarified that the assets located in Devaiah Court unit are still there. [Para 10]
The material produced would clearly show that there was no reconstruction of already existing business and the Assessing Officer and the Appellate Authority could not have rejected the said claim for exemption only on the ground that no separate accounts are maintained regarding STP unit at electronic city and Devaiah Court unit. The said finding on the question of fact is clearly supported by the material on record as the material produced by the assessee would clearly show that the STP unit was established with plant and machinery and assets purchased after 31-3-1996 only and the staff was also recruited. The plant and machinery used was less than 20 per cent at STP unit and the earlier establishment which also continued to work with the machinery that was purchased prior to 31-3-1996. However, the finding of the Tribunal was that merely because no separate accounts are maintained in respect of the STP unit and the manufacturing unit at Devaiah Court, the same would not be a ground to disallow the exemption when the assessee is otherwise entitled to exemption having fulfilled the condition of no reconstruction of business of an already existing unit. The said finding arrived at by the Tribunal being a pure question of fact and based upon the material on record, cannot at all be said to be arbitrary or capricious so as to call for interference in the instant appeal.
CASE REVIEW
CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409 / 174 Taxman 118(SC) (para 13) followed.
CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409 / 174 Taxman 118(SC) (para 8), Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 (SC) (para 11) and Addl. CIT v. Hutti Gold Mines Co. Ltd. [1981] 128 ITR 476/16 Taxman 155 (Kar.) (para 12).
M.V. Seshachala for the Appellant. Sriranga for the Respondent.
JUDGMENT
1. These two appeals are filed by the Revenue being aggrieved by the order dt. 23.12,2005 in ITA No.315/Bang./2005 and 316/Bang./2005 respectively by Income Tax Appellate Tribunal, Bangalore (hereinafter called as 'ITAT' for short). The respondent assessee filed return for the assessment year 1999-2000 admitting the total income of Rs. Nil. However, the return indicated that Company was incorporated on 04.11.1992. It indicated profit from business/profession of Rs. 1,17,83,132/- and the exemption has been claimed on this amount also. Return was processed on 7.12.2000 resulting in nil demand. In the return of income for the AY 2002 03 assessee has filed form 56F indicating that it was third year of claim of exemption under Sec. 10A of the Income Tax Act (hereinafter called as 'Act' for short). Since the records revealed that no two undertakings existed, question of admissibility of exemption under Sec. 10A and the extent of admissibility was examined after issuing notice to the assessee by the Assessing Officer. It was contended by the assessee that though the establishment of the manufacturing unit was started in Software Technology Park (hereinafter called as 'STP' for short) after investing the amount which was independent of earlier business which was being carried on by the assessee at Devaiah Court. The unit established in the STP has been established independently and production was started and profit was earned from 1.5.1998. Wherefore, the assessee was entitled to exemption under Sec. 10A. The Assessing Officer after considering the objection shown by the assessee, held that provisions of Sections 10A(2)(i)(b): 10A(2)(ii) and 10A(2)(iii) were not complied with and wherefore, the assessee was not entitled to exemption under Sec. 10A of the Act as it is reconstruction of the earlier establishment and more than 20% of the plant and machinery already available in the old establishment has been utilised for manufacturing in the STP unit and further the earlier organisation has been closed and assessee was manufacturing since the year 1993 but not in STP and accordingly, disallowed the exemption claimed by the assessee by his order dt. 20th January 2004. The Assessing Officer had also held that the bad and doubtful debts should be added for calculating book profit under Sec. 115JB of the Act and being aggrieved by the same ITA Nos.62 to 64/W-11(2)/CIT(A)I/03-04 were filed by the assessee before the Commissioner of Income Tax (Appeals) - I Bangalore and appellate authority by order dt. 16.12.2004 held that the conditions laid down in sections 10A(2)(i)(b) and 10(2)(iii) has been complied with. However, condition in 10A(2)(ii) is not complied with and accordingly held that the establishment was the reconstruction of the unit which was already in existence and accordingly confirmed the finding given by the Assessing Officer that the assessee cannot claim exemption under Sec. 10A and upheld the order passed by the Assessing Officer that the bad and doubtful debts should be included for the purpose of calculating book profit under Sec. 115JB of the Act.
2. Being aggrieved by the said order passed by the Appellate Authority ITA Nos.315, 31.6 and 317/Bang./2005 were filed before the ITAT and the ITAT by order dt. 23.12.2005 held that Clause (i) and (iii) of Sec. 10A(2) had already been satisfied and it was not a case of reconstruction and it was establishment of an independent unit in the STP and wherefore, the assessee was entitled to exemption under Sec. 10A and accordingly, allowed the appeals.
3. Being aggrieved by the said order passed by the ITAT in ITA Nos.315 and 316/Bang./2005 these two appeals are filed by the Revenue.
4. I.T.A. No. 952/2006 has been admitted by order dt. 26.9.2007 and I.T.A. No. 953/2006 has been admitted on 22.10.2007 to consider the substantial questions of law framed in the appeal memo of ITA No. 952/2006 which reads as follows :
1.Whether the Tribunal was correct in holding that the assessee would be entitled to claim allowance under Sec. 10A of the Act in respect of Software Development Centre at Devaiah Court, Jayanagar, Bangalore, by ignoring the holdings of the Assessing Officer that the same was set up by reconstruction of the assessee's business and consequently the claim was not allowable in view of Sections 10A(2)(I)(b); 10(2)A(I); 10(2)(iii) and 33B of the Act?
2. Whether the Tribunal was correct in holding that the provision for doubtful debts, doubtful investments and doubtful advances should not be added back for the purpose of computing book profit u/s. 115JB of the Act?
5. However, when ITA Nos. 952/06 and 953/06 were posted before the Court it was found that ITA No. 552/2006 was not connected to these cases and it was delinked from ITA Nos. 952 and 953 of 2006 by order dt. 13.07.2011 and it was held that these two appeals involve adjudication of the following two substantial questions of law :
"(1) Whether the Tribunal was correct in holding that the assessee would be entitled to claim allowance under Section 10A of the Act in respect of Software Development Center at Devaiah Court, Jayanagar, Bangalore by ignoring the finding of the Assessing Officer that the same was set up by reconstruction of the assessee's business and consequently, the claim was not allowable in view of Sections 10A(2)(I)(b); 10(2)A(I); 10(2)(iii) and 33B of the Act?
(2) Whether the Tribunal was correct in holding that the provision for doubtful debts, doubtful investments and doubtful advances should not be added back for the purpose of computing back profit under Section 115JB of the Act?"
6. We have heard the learned counsel appearing for the appellant - Revenue and the learned counsel appearing for the respondent.
7. Learned counsel appearing for the appellants submitted that the ITAT was not at all justified in holding that the establishment in STP is an independent unit and not reconstruction of the earlier unit which existed in Devaiah Court. Wherefore, all the conditions of Sec. 10A seeking for exemption had been satisfied. Learned counsel further submitted that the material on record would clearly show that the machinery had been purchased in the name of the old establishment. The plant and machinery were transferred to the STP unit front Devaiah Court. The concurrent finding of the Assessing Officer, Appellate Authorities was justified and the reasoning given by the ITAT to hold that all the conditions of Sec. 10A(2) had been satisfied, is clearly erroneous and the same may be set aside and first substantial question of law may be answered in favour of the appellant. He has also submitted that the bad and doubtful debt had been rightly added to the book profit under Sec. 115JB of the Act. Therefore, the second substantial question of law may be answered in favour of the appellant.
8. Learned counsel appearing for the respondent submitted that the second substantial question of law had already been answered by the Hon'ble Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409 / 174 Taxman 118 (SC), wherein the Hon'ble Supreme Court has clearly held that the bad and doubtful debts are not liability and cannot be added back for the purpose of calculating book profit under Sec. 115JA(2)(c) of the Act. Wherefore, the second substantial question of law has to be answered against the Revenue and in favour of the assessee and so far as the first substantial question of law is concerned, the ITAT which is the final authority on the question of fact having regard to the material on record that was produced before the Assessing Officer and the Appellate Authority, has rightly come to the conclusion and cogent reasons are given and following the earlier decisions of the ITAT and the High Court, ITAT has rightly held that there was no reconstruction of the earlier establishment and merely because there was earlier establishment, would not preclude an independent unit in STP, if the assessee is able to show that the said STP unit was established by investment of plant and machinery. Wherefore, the first substantial question of law may be answered in favour of the assessee and against the Revenue.
9. We have given careful consideration to the contention of the learned counsel appearing for the parties and scrutinised the material on record.
10. The material on record would clearly show that the Assessing Officer held that the provisions of Sec. 10A(2) (i), (ii) and (iii) have not been satisfied. Wherefore, the assessee is not entitled to exemption. The appellate authority held that clause (i) and (iii) of Sec. 10A (2) had been satisfied. However, clause (ii) was not satisfied as the establishment of STP was reconstruction of a business already in existence in Devaiah Court. The Revenue has not chosen to file an appeal against the said finding that the assessee had satisfied clause (i) and (iii) of Sec. 10A(2) of the Act. Even otherwise, the ITAT which is the final authority on the question of fact, has rightly held that having regard to the material on record, it was clear that the plant and machinery that was available in the Devaiah Court unit was less than 20% of the existing machinery in STP unit and having regard to the number of staff and other facts of the case, the said two conditions as specified in Sec. 10A(2) (i) find (iii) of the Act are satisfied. So far as condition as per Sec. 10A(2)(ii) is concerned, the ITAT has held that it was not a case of reconstruction of already existing business. The ITAT on the basis of the material that was produced by the assessee, has referred to the facts which would clearly show that all the assets purchased after 31.3.1996 are stated to be located at STP unit, electronic city, while the assets purchased upto 31.3.1996 arc stated to be located in Devaiah Court. It is clarified that the assets located in Devaiah Court unit are still there.
11. The material produced would clearly show that there was no reconstruction of already existing business and the Assessing Officer and the appellate authority could not have rejected the said claim for exemption only on the ground that no separate account is maintained regarding STP unit at electronic city and Devaiah Court unit. The said finding on the question of fact is clearly supported by the material on record as the material produced by the assessee would clearly show that the STP unit was established with plant and machinery and assets purchased after 31.3.1996 only and the staff was also recruited. The plant and machinery used was less than 20% at STP unit and the earlier establishment which also continued to work with the machinery that was purchased prior to 31.3.1996. Having regard to the interpretation of the word "construction" and Sec. 10A(2)(ii) of the Act and decision of the Hon'ble Supreme Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 , wherein it is held as follows :
"As in the instant case, once then new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are commercially tangible products and the undertakings can be carried on separately without complete absorption and losing their identity in the old business, they are not be treated as being formed by reconstruction of the old business."
12. The ITAT has also relied upon the decision of this Court in the case of Addl. CIT v. Hutti Gold Mines Co. Ltd. [1981] 128 ITR 476 /16 Taxman 155 (Kar.) wherein it is held that the concept of reconstruction of business will not be attracted when a company which is already running one industrial unit sets up another industrial unit. In fact in the said case, the old mill was completely dismantled and a new mill was installed in the adjacent premises and this Court held that there is no reconstruction. However, the finding of the ITAT that merely because no separate account is maintained in respect of the STP unit and the manufacturing unit at Devaiah Court, the same would not be a ground to disallow the exemption when the assessee is otherwise entitled to exemption having fulfilled the condition of no reconstruction of business of an already existing unit. Wherefore, the said finding arrived at by the ITAT which is a pure question of fact and based upon the material on record, cannot at all be said to be arbitrary or capricious as to call for interference in this appeal. Accordingly, we answer the first substantial questions of law against the Revenue and in favour of the assessee.
13. So far as the second substantial question of law is concerned, the said question is already covered by the decision of the Supreme Court in the case ofHCL Comnet Systems & Services Ltd. (supra) wherein the Hon'ble Supreme Court has clearly held that bad and doubtful debts can never be said to be liability and cannot be added up for computing the book profit under Sec. 115JA(2)(c) of the Act. It has been clearly observed by the Hon'ble Supreme Court as follows :
'The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of the asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for a liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view, item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the Assessing Officer was not justified in adding back the provision for doubtful debts of Rs. 92,15,187 under clause (c) of the Explanation to section 115JA of the 1961 Act."
14. In view of the above said principle laid down by the Hon'ble Supreme Court, we answer the second substantial question of law also in favour of the assessee and against the revenue and pass the following:
ORDER
Appeals are dismissed.
It seems that the amendment in sec. 115JB has not been brought to the notice of the High Court. kindly take necessary action.
IT : When assessee himself offers a disallowance under section 14A, Assessing Officer need to record its satisfaction for invoking rule 8D but when assessee claims that there was no expenditure incurred to earn exempt income, Assessing Officer, to invoke rule 8D, need not express any satisfaction as to correctness of claim of assessee
IT : Correct application of formula set out in rule 8D(2)(ii) is that interest expenses directly attributable to tax exempt income as also directly attributable to taxable income are to be exclude from computation of common interest expenses
■■■
[2012] 26 taxmann.com 342 (Kolkata - Trib.)
IN THE ITAT KOLKATA BENCH 'B'
Assistant Commissioner of Income-tax, Circle 10, Kolkata
v.
Champion Commercial Co. Ltd.*
PRAMOD KUMAR, ACCOUNTANT MEMBER
AND MAHAVIR SINGH, JUDICIAL MEMBER
IT APPEAL NO. 644 (KOL.) OF 2012
C.O. NO. 55 (KOL.) OF 2012
[ASSESSMENT YEAR 2008-09]
SEPTEMBER 21, 2012
Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not chargeable to tax - Application of rule 8D - Assessment year 2008-09 - Whether when assessee offers a disallowance under section 14A, provisions of section 14A(2), read with rule 8D cannot be invoked unless Assessing Officer is satisfied about incorrectness of disallowance so offered, but when assessee does not offer any disallowance under section 14A by claiming that there is no expenditure incurred to earn exempt income, provisions of section 14A(2), read with rule 8D can be invoked without there being any need to express satisfaction about correctness of such a claim - Held, yes [Para 6]
Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not chargeable to tax - Application of rule 8D - Assessment year 2008-09 - Whether definition of variable 'A' embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch as while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income, which results into a consequence as to that rule 8D(2)(ii) ends up allocating not only interest expenditure not directly attributable to any particular income but also interest which is directly attributable to taxable income - Held, yes - Whether correct application of formula set out in rule 8D(2)(ii) would be that interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii) - Held, yes [Para 12] [Matter remanded]
FACTS
Facts
• The assessee was engaged in the business of trading in chemicals and dyes.
• During the scrutiny assessment proceedings, the Assessing Officer noted that the assessee had earned tax exempt dividend income of Rs. 6.63 lakh. However, the assessee did not show any expenditure related to such dividend income for disallowance under section 14A.
• On being questioned, the assessee explained,
- that it had total turnover of Rs. 35 crore from its business of chemicals and dyes and it had not traded in shares at all;
- that it had its own capital of Rs. 8.09 crore, borrowing of Rs. 4.05 crore whereas total investment in shares was only Rs. 5.40 crore, which showed that entire investment in the shares was out of own interest-free capital;
- that it had paid interest of around Rs. 41 lakh on the borrowings whereas its interest income was Rs. 2.20 lakh;
- that the provisions of section 14A could not be invoked on the facts of the instant case as there were no expenses directly relatable to earning of exempt income and there was no expenditure incurred in relation to earning of exempt income and as 'the dividend income was directly debited to assessee's bank account for which no expenditure was required to be incurred.
- that the provisions of section 14A, read with rule 8D can only be invoked when there is actually an expenditure in relation to exempt income.
• The Assessing Officer rejected the explanation of the assessee and proceeded to determine the disallowance under section 14A, read with rule 8D, relying upon the order of the Special Bench of the Tribunal in ITO v. Daga Capital Management (P.) Ltd.[2009] 117 ITD 169 (Mum.).
• Aggregate of the disallowance under clauses (i), (ii) and (iii) of rule 8D(2) was arrived at Rs. 30.81 lakh by the Assessing Officer.
• While adopting the formula under clause (ii), for determining common interest expenditure of assessee allocable to exempt income, the Assessing Officer took the entire interest expenditure of Rs. 41.82 lakh incurred by the assessee as 'A' and computed the interest allocable to exempt income at Rs. 28.89 lakh.
• The Commissioner (Appeals), under appeal from the assessee, accepted the case of the assessee that out of total interest expenditure of Rs. 41.82 lakh, Rs. 36.42 lakh was towards borrowing taken for trading in chemicals and rest of the expenditure,i.e., Rs. 5.41 lakh was common interest expenditure not directly attributable to any income. Accordingly, instead of entire interest of Rs. 41.82 lakh, only Rs. 5.41 lakh was taken by Commissioner (Appeals) in the formula under rule 8D(ii).
• Total disallowance was, therefore, restricted to Rs. 3.71 lakh from Rs. 30.81 lakh by the Commissioner (Appeals).
• Both the assessee and the revenue challenged the order of Commissioner (Appeals).
Assessee's grievance
• Grievance of the assessee was that the disallowance should have been deleted in entirety on ground that the Assessing Officer had not recorded a specific satisfaction to the effect that the claim of the assessee, i.e., no expenditure was incurred on earning the tax exempt dividend, was incorrect.
Revenue's grievance
• Revenue was aggrieved by the disallowance being restricted to Rs. 3.71 lakh as against disallowance of Rs. 30.81 lakh made in the assessment proceedings.
Issues involved
• Whether assessee's grievance that entire disallowance should have been deleted on ground that Assessing Officer did not record any satisfaction to the assessee's claim was acceptable.
• Whether computation of disallowance as reworked by the Commissioner (Appeals) was correct.
HELD
Whether section 14A, read with rule 8D was rightly invoked?
• There is no substance in the plea of the assessee. A lot of emphasis is placed by the assessee on the wordings of section 14A(2) which refer to the need of Assessing Officer's satisfaction to the effect that the claim made by the assessee is incorrect, it simply overlooks the provisions of section 14A(3) which state that a disallowance under section 14A(2) can also be made in a case in which assessee claims that no expenditure has been incurred for earning the tax exempt income. Therefore, a plain reading of the statutory provisions of section 14A(2) and (3) shows that when assessee offers a disallowance under section 14A, the provisions of section 14A(2), read with rule 8D cannot be invoked unless the Assessing Officer is satisfied about the incorrectness of the disallowance so offered, but when assessee does not offer any disallowance under section 14A on his own, the provisions of section 14A(2), read with rule 8D can be invoked without there being any need to express satisfaction about incorrectness of such a claim. That apart, when assessee is paying interest on borrowings and the assessee is not able to show that investment in shares are out of internal accruals or non-interest bearing funds, disallowance under section 14A can indeed be made. [Para 6]
• It is, therefore, held that the provisions of section 14A, read with rule 8D were rightly invoked on the facts of instant case. [Para 7]
Whether computation of disallowance, as reworked by Commissioner (Appeals), was correct:
• On the face of it, based on a plain reading of rule 8D, the computation of disallowance made by the Commissioner (Appeals) may be viewed incorrect inasmuch as one of the variables in formula set out in rule 8D(2)(ii) seems to have been wrongly adopted as 'interest paid in the relevant previous year which cannot be directly related to any of the asset' in the place of 'amount of interest paid in the relevant previous year, other than interest included in direct expenses incurred for earning tax exempt income', but, for the following reasons, it is held that this action of the Commissioner (Appeals) is, even if somewhat serendipitously, in accordance with the correct legal position. [Para 9]
Scope of provisions of clause (ii) to sub-rule (2) of rule 8D
• There is no dispute about the working of this method so far as rule 8D(2)(i) and (iii) is concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the Commissioner (Appeals) have different approaches. This provision admittedly deals with a situation in which 'the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt'. Clearly, therefore, this sub-clause seeks to allocate 'common interest expenses' to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is "expenditure by way of interest………..which is not directly attributable to any particular income or receipt" and the only categories of income and receipt, so far as scheme of rule 8D is concerned, are mutually exclusive categories of 'tax exempt income and receipt' and 'taxable income and receipt'. No other classification is germane to the context in which rule 8D is set out, nor does the scheme of section 14A leave any ambiguity about it. [Para 11]
Variable 'A' in formula under rule 8D(2)(ii) is clearly incongruous:
• Ironically, however, the definition of variable 'A' embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate 'expenditure by way of interest, which is not directly attributable to any particular income or receipt' it ends up allocating 'expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income'. [Para 12]
Whether Tribunal can construe rule 8D(2)(ii) in any other manner :
• The question then arises whether instant Tribunal can tinker with the formula prescribed under rule 8D(2)(ii) or construe it in any other manner other than what is supported by plain words of the rule 8D(2)(ii). [Para 14]
• It is found that notwithstanding the rigid words of rule 8D(2)(ii), the stand taken by the revenue authorities about its application before the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203, when constitutional validity of rule 8D was in challenge, is that 'It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)'. Therefore, it is not only the interest directly attributable to tax exempt income,i.e. under rule 8D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable 'A' in formula as per rule 8D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed. [Para 15]
Correct application of formula set out in rule 8D(2)(ii):
• Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8D(2)(ii), and based on such a stand constitutional validity is upheld by the High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), 'amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)'. Accordingly, even by revenue's own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii). [Para 16]
Matter needs to be restored:
• Coming to the facts of instant case, it is found that Commissioner (Appeals) has not given categorical findings in respect of factual aspects of specific utilization of borrowings on which interest was paid, and he has simply accepted the assessee's contention that out of a total interest expenditure of Rs. 41,84,249, a sum of Rs. 36,42,935 was paid with respect to borrowing for the purposes of trading in chemicals, and the common interest expenses to be allocated was, thus, only Rs. 5,41,313. Neither these details were before the Assessing Officer, nor has the Commissioner (Appeals) sought any remand report on the same. [Para 18]
• Therefore, while the action of the Commissioner (Appeals) is upheld in principle, assuming that it was based on principle discussed above, the matter, however, is remitted to the file of the Assessing Officer for adjudication de novo in the light of the legal position discussed above. It is made clear that the common interest expenses which are to be allocated in terms of the formula under rule 8D(2)(ii) will only be such interest expenses as are neither directly attributable to borrowings specifically used for tax exempt incomes or receipts, nor are directly attributable to borrowings specifically used for taxable incomes or receipts. With these directions, the matter stands restored to the file of the Assessing Officer. [Para 19]
PER COURT
• To the above extent, therefore, we have to proceed on the basis that rigour of rule 8D(2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8D was in challenge before the High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain words of the said rule, but even on the face of things as they are at present, in our humble understanding, revenue authorities cannot take one stand when demonstrating lack of 'perversity, caprice or irrationality' in rule 8D before High Court, and take another stand when it comes to actual implementation of the rule in real life situations. Therefore, even as we are alive to the fact that the stand of the learned Departmental Representative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice.[Para 17]
CASE REVIEW
Dhanuka & Sons v. CIT [2011] 339 ITR 319/201 Taxman 105/12 taxmann.com 227 (Cal.) (Mag.) (para 7) and Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 16) followed.
CASES REFERRED TO
CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 (Punj. & Har.) (para 2), ITO v. Daga Capital Management (P.) Ltd.[2009] 117 ITD 169 (Mum.) (SB) (para 2), Dhanuka & Sons v. CIT [2011] 339 ITR 319/201 Taxman 105/12 taxmann.com 227 (Cal.) (Mag.) (para 6) and Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 15).
Asit Mahapatra and Susanta Kumar Saha for the Appellant. Manoj Kataruka for the Respondent.
ORDER
Pramod Kumar, Accountant Member - The appeal filed by the Assessing Officer, as also cross objection filed by the assessee, call into question correctness of order dated 3rd January 2012 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), for the assessment year 2008-09. Grievances raised by both the parties, being interconnected and relating to scope of disallowance under section 14A, are being taken up together. These grievances are reproduced below for ready reference:
Grievance of the Assessing Officer in appeal:
Whether, on the facts and in the circumstances of the case, the learned CIT(A) is justified in restricting the disallowance of Rs. 30,81,503 under section 14A, to Rs. 3,71,687, by not applying the formula as per Rule 8D correctly as applied by the Assessing Officer?
Grievances of the assessee in cross objection:
1. That on the facts and in the circumstances of the case, the action of the learned CIT(A) to confirm addition of Rs. 3,71,687 under section 14A, read with rule 8D is bad in law.
2. That on the facts and in the circumstances of the case and material evidences on record, the action of the learned CIT(A) to make addition of Rs. 3,71,687 under section 14A, read with Rule 8D, even after finding that there is no proximate link of expenditure with exempt income and further there was no satisfaction recorded by the Assessing Officer is erroneous, unjustified and excessive.
2. The material facts are not in dispute. The assessee is engaged in the business of trading in chemicals and dyes. In the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has earned tax exempt dividend income of Rs. 6,63,033 but the assessee has not income any of the related expenditure for disallowance under section 14A. It was explained by the assessee (i) that the assessee's entire turnover of around Rs. 35 crores is in respect of chemicals and dyes and that there has been no trading of shares at all; (ii) that the assessee's own capital is of Rs. 8.09 crores (borrowings are to the tune of Rs. 4.05 crores) while assessee's total investment in shares is only Rs. 5.40 crores, which shows that assessee's entire investment in the shares is out of own interest free capital; (iii) that the assessee has paid interest of Rs. around Rs. 41 lakhs on the borrowings whereas assessee's interest income is of Rs. 2.20 lakhs; (iv) that the provisions of Section 14A cannot be invoked on the facts of the present case as there are "no expenses directly relatable to earning of exempt income and there is no expenditure incurred in relation to earning of exempt income of Rs. 6,63,033" and as "the dividend income is directly debited to assessee's bank account for which no expenditure is required to be incurred"; (v) that the provisions of Section 14A, read with Rule 8D can only be invoked when there is actually an expenditure in relation to exempt income; and (vi) that the stand of the assessee is supported by Hon'ble Punjab & Haryana High Court's judgment in the case of CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 wherein Their Lordships have inter alia observed that "disallowance under section 14A requires a finding of incurring of expenditure" and "if it is found that, for earning the exempt income, no expenditure has been incurred, disallowance under section 14A cannot stand". None of these submissions impressed the Assessing Officer. The Assessing Officer rejected these submissions, relying upon Special Bench decision of this Tribunal in the case of ITO v.Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (Mum.), and proceeded to make the disallowance as follows:
| 8(2)(i) | Demat Charges1 | Rs. 15,796 | ||
| 8(2)(ii) | 41,82,2482 × 3,51,71,5413 | Rs. 28,89,850 | ||
| 5,09,25,2904 | ||||
| 8D(2)(ii) | 0.5% of 5,41,47,6045+1,61,95,4786 | Rs. 1,75,857 | ||
| 2 | ||||
| Total disallowance under section 14A r.w.r 8D | Rs. 30,81,503 | |||
3. Aggrieved by the disallowance so made by the Assessing Officer, assessee carried the matter in appeal before the learned CIT(A). While learned CIT(A) apparently made observations to the effect that all the above contentions of the assessee are correct, in the concluding operative portion of the order, he recomputed the disallowance under section 14 A r.w.r. 6D as follows:
| 8(2)(i) | Demat Charges | Rs. 15,796 | ||
| 8(2)(ii) | 5,41,313 × 3,51,71,541 | Rs. 1,80,034 | ||
| 5,09,25,290 | ||||
| 8D(2)(ii) | 0.5% of 5,41,47,604+1,61,95,478 | Rs. 1,75,857 | ||
| 2 | ||||
| Total disallowance under section 14A r.w.r 8D | Rs. 3,71,687 | |||
4. None of the parties is satisfied by the stand so taken by the learned CIT(A), and the Assessing Officer is in appeal, and the assessee in related cross objection, before us. While Assessing Officer is aggrieved of the disallowance being restricted to Rs. 3,71,786, as against disallowance of Rs. 30,81,503 made in the assessment proceedings, grievance of the assessee is that the disallowance should have been deleted in entirety. That is how we have come to be in seisin of the matter.
5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
6. Let us take up assessee's grievance first, as it challenges the very application of Section 14 A to the facts of the case before us, because the Assessing Officer has not recorded a specific satisfaction to the effect that claim of the assessee, i.e. no expenditure is incurred on earning the tax exempt dividend, is incorrect. We see no substance in this plea. We find that section 14A(2) provides that, "(t)he Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act" and section 14A(3) provides that, "(t)he provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act". While a lot of emphasis is placed by the learned counsel on wordings of Section 14A(2) which refer to the need of Assessing Officer's satisfaction to the effect that the claim made by the assessee is incorrect, it simply overlooks the provisions of Section 14A(3) which state that a disallowance under section 14A(2) can also be made in a case in which assessee claims that no expenditure has been incurred for earning the tax exempt income. Therefore, a plain reading of the statutory provisions of Section 14A(2) and (3) shows that when assessee offers a disallowance under section 14A, the provisions of Section 14A(2), read with rule 8D cannot be invoked unless the Assessing Officer is satisfied about incorrectness of the disallowance so offered, but when assessee does not offer any disallowance under section 14 A on his own, the provisions of section 14A(2) read with rule 8D can be invoked without there being any need to express satisfaction about incorrectness of such a claim. That apart, as learned Commissioner (DR) Shri Mahapatra rightly points out, when assessee is paying interest on borrowings and the assessee is not able to show that investment in shares are out of internal accruals or non interest bearing funds, and in the light of by Hon'ble jurisdictional High Court in the case of Dhanuka & Sons v. CIT [2011] 339 ITR 319/201 Taxman 105/12 taxmann.com 227 (Cal.) (Mag.), disallowance under section 14 A can indeed be made. In Dhanuka & Sons' case (supra), Their Lordships have, inter alia, observed as follows:
9. In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired…………………..
10. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.
7. In the light of the views so expressed by Hon'ble jurisdictional High Court, we hold that the provisions of Section 14A r.w.r. 8D were rightly invoked on the facts of this case. As the views of Hon'ble jurisdictional High Court legally bind us, see no need to deal with the judgments of Hon'ble non jurisdictional High Courts and coordinate benches of this Tribunal, as cited before us. Suffice to reiterate that in any event, in a situation in which assessee does not offer any disallowance under section 14A in respect of a tax exempt income, the provisions of Section 14A(2), read with rule 8D can be invoked under section 14A(3). None of the judicial precedents cited before us anyway deal with this scenario, which is applicable on the facts of this case.
8. The plea raised in the cross objection is thus stands rejected.
9. The next issue is whether the computation of disallowance, as reworked by the learned CIT(A), is correct. On the face of it, based on a plain reading of rule 8D, the computation of disallowance may be viewed incorrect inasmuch as one of the variables in formula sect out in rule 8D(2)(ii) seems to have been wrongly adopted as 'interest paid in the relevant previous year which cannot be directly related to any of the asset' in the place of 'amount of interest paid in the relevant previous year, other than interest included in direct expenses incurred for earning tax exempt income', but, for the reasons we will now set out, in our considered view, this action of the CIT(A) is, even if somewhat serendipitously, in accordance with the correct legal position.
10. We find that in terms of the provisions of section 14A(2), "(t)he Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed…" and rule 8D prescribes this method as follows:
Method for determining amount of expenditure in relation to income not includible in total income.-
| (1) | ** | ** | ** |
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :-
(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :-
| A | x | B | ||
| C |
Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
(iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year."
(3) For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.
11. There is no dispute about working of this method so far as rule 8D(2)(i) and (iii) is concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the CIT(A) have different approaches. This provision admittedly deals with a situation in which "the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt". Clearly, therefore, this sub clause seeks to allocate 'common interest expenses' to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is "expenditure by way of interest………..which is not directly attributable to any particular income or receipt" and the only categories of income and receipt, so far as scheme of rule 8D is concerned, are mutually exclusive categories of 'tax exempt income and receipt' and 'taxable income and receipt'. No other classification is germane to the context in which rule 8D is set out, nor does the scheme of Section 14 A leave any ambiguity about it.
12. Ironically, however, the definition of variable 'A' embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate "expenditure by way of interest, which is not directly attributable to any particular income or receipt" it ends up allocating "expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income" [Emphasis supplied]. This incongruity will be more glaring with the help of following simple example:
In the case of A & Co Ltd, total interest expenditure is Rs. 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is Rs. 10,000. Out of the balance Rs. 90,000, the assessee has paid interest of Rs. 80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is "not directly attributable to any particular receipt or income" is thus only Rs. 10,000.
However, in terms of the formula in rule 8D(2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for Rs. 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be "A = amount of expenditure by way of interest other than the amount of interest included in clause (i) [i.e. direct interest expenses for tax exempt income] incurred during the previous year".
Let us say the assets relating to taxable income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8D(2)(ii) will be Rs. 18,000 whereas entire common interest expenditure will only be Rs. 10,000.
13. The incongruity arises because, as the wordings of rule 8D(2)(ii) exist, out of total interest expenses, interest expenses directly relatable to tax exempt income are excluded, interest expenses directly relatable to taxable income, even if any, are not excluded.
14. The question then arises whether we can tinker with the formula prescribed under rule 8D(2)(ii) of the Income Tax Rules, or construe it any other manner other than what is supported by plain words of the rule 8D(2)(ii).
15. We find that notwithstanding the rigid words of Rule 8D(2)(ii), the stand taken by the revenue authorities about its application, as was before Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 when constitutional validity of rule 8D was in challenge, is that "It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)". Therefore, it is not only the interest directly attributable to tax exempt income, i.e. under rule 8D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable 'A' in formula as per rule 8D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed. This is clear from the following observations made by Their Lordships of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra):
60. In the affidavit-in-reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying r. 8D. In the written submissions which have been filed by the Addl. Solicitor General it has been stated, with reference to r. 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)…………… The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'.
16. Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8D(2)(ii), and based on such a stand constitutional validity is upheld by Hon'ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd.(supra), "amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)". Accordingly, even by revenue's own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii).
17. To the above extent, therefore, we have to proceed on the basis that rigour of rule 8D(2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8D was in challenge before Hon'ble High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain words of the said rule, but even on the face of things as they are at present, in our humble understanding, revenue authorities cannot take one stand when demonstrating lack of 'perversity, caprice or irrationality' in rule 8D before Hon'ble High Court, and take another stand when it comes to actual implementation of the rule in real life situations. Therefore, even as we are alive to the fact that the stand of the learned Departmental Representative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice.
18. Coming to the facts of this case, we find that learned CIT(A) has not given categorical findings in respect of factual aspects of specific utilization of borrowings on which interest was paid, and he has simply accepted the assessee's contention that out of a total interest expenditure of Rs. 41,84,249, a sum of Rs. 36,42,935 was paid with respect to borrowing for the purposes of trading in chemicals, and the common interest expenses to be allocated was thus only Rs. 5,41,313. Neither these details were before the Assessing Officer, nor has the CIT(A) sought any remand report on the same.
19. In our considered view, therefore, the right course of action will be that while we uphold the action of the CIT(A) in principle, assuming that it was based on principle discussed earlier in this order that quantum of allocated common interest expenses were reduced, we remit the matter to the file of the Assessing Officer for adjudication de novo in the light of the legal position discussed above. We make it clear that common interest expenses which are to be allocated in terms of the formula under rule 8D(2)(ii) will only be such interest expenses as are neither directly attributable to borrowings specifically used for tax exempt incomes or receipts, nor are directly attributable to borrowings specifically used for taxable incomes or receipts. With these directions, the matter stands restored to the file of the Assessing Officer.
20. The plea raised by the Assessing Officer is thus rejected in principle but the matter is remitted to the file of the Assessing Officer for verification of factual elements in the terms indicated above.
21. To sum, while appeal of the revenue is allowed for statistical purposes in the terms indicated in this order, the cross objection of the assessee is dismissed.
IT : Where notice for re-assessment is issued on the basis of material available at the time of original assessment, the impugned notice was a case of second thought and was liable to be quashed
■■■
[2012] 25 taxmann.com 301 (SC)
SUPREME COURT OF INDIA
Assistant Commissioner of Income-tax (OSD)
v.
Parixit Industries (P.) Ltd.*
S.H. KAPADIA, CJ AND A.K. PATNAIK, J.
CC.NO. 15455 OF 2012
SEPTEMBER 14, 2012
Section 147, read with section 80-IA, of the Income tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts - Assessment year 2006-07 - Assessee-company was engaged in manufacturing and supply of different types of irrigation products - In some cases assessee had worked as contractor - It claimed deduction under section 80-IA which was allowed by Assessing Officer after considering assessee's reply to detailed questionnaire - However, later on Assessing Officer issued notice under section 147 on ground that assessee was a contractor or supplier of irrigation products and could not be called a developer of any new infrastructural facility so as to be eligible for deduction under section 80-IA - Whether in view of existence of all material on record, issue of impugned notice was a case of second thought on same material and was, therefore, liable to be quashed - Held, yes [In favour of assessee]
CASE REVIEW
SLP against decision of High Court in Parixit Industries (P.) Ltd. v. Asstt. CIT (OSD) [2012] 207 Taxman 140/ 20 taxmann.com 750 (Guj.) dismissed.
Mohan Parasaran, Arjun Krishnan, S. Nanda Kumar and Ms. Anil Katiyar for the Petitioner.
ORDER
Heard learned counsel for the petitioner.
Delay condoned.
The special leave petition is dismissed.
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