Chartered Accountant Finance: [aaykarbhavan] Re: Judgments

IT: Limitation for passing revisionary order is to begin from date of original order instead of reassessment order, where subject matter of additions made in revision are not dealt with in reassessment

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[2013] 37 taxmann.com 218 (Delhi)

HIGH COURT OF DELHI

Commissioner of Income-tax, Delhi - I

Bharti Airtel Ltd.*

SANJIV KHANNA AND SANJEEV SACHDEVA, JJ.

IT APPEAL NO. 294 OF 2013

JULY 19, 2013

Section 263, read with sections 143 and 147, of the Income-tax Act, 1961 - Revision - Of order prejudicial to interest of revenue [Limitation period] - Assessment year 2005-06 - Whether where subject matter of additions made in revisionary order were not dealt with in reassessment order passed under section 147, limitation for revision was to begin from date of original order passed under section 143(3), and not from date of reassessment order - Held, yes [Para 9] [In favour of assessee]

CASE REVIEW

CIT v. Alagendran Finance Ltd. [2007] 293 ITR 1 (SC) (para 1) followed.

CASES REFERRED TO

CIT v. Alagendran Finance Ltd. [2007] 293 ITR 1/162 Taxman 465 (SC) (para 1), Hindi Wire Industries Ltd. v. CIT [1995] 212 ITR 639/80 Taxman 79 (SC) and Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 (SC) (para 9).

Abhishek Maratha and Ms. Anshul Sharma for the Appellant.

ORDER

Sanjiv Khanna, J. - This appeal by the Revenue, which pertains to Assessment Year 2005-06, has to be dismissed in view of the authoritative pronouncement of the Supreme Court in CIT v. Alagendran Finance Ltd. [2007] 293 ITR 1/162 Taxman 465.

2. Relevant facts in brief may be noticed. Return filed by the assessee for Assessment Year 2005-06 was taken up for scrutiny and income was assessed at Rs. 860,18,30,950/- vide assessment order dated 31st December, 2007 after the setting off of brought forward loses and unabsorbed depreciation amounting to Rs. 1941,17,35,146/-.

3. There appears to be another order under Section 154 read with Section 143(3) dated 7th March, 2008, where the income under the normal provisions was assessed as "nil" after setting off brought forward losses and unabsorbed depreciation and the book profits were assessed at Rs.1724,82,75 449/- under Section 115JB of the Act.

4. Subsequently, the Assessing Officer issued notice under Section 147 and an order under Section 147 read with Section 143(3) dated 10th December, 2009 was passed. In the re-assessment order, two additions were made in respect of non-deduction of tax at source on payment of interest to ABN Amro Bank, Stockholm Branch. The second addition was made on account of ESOP expenses. The said order also discusses set off or brought forward loss or unabsorbed depreciation.

5. Subsequently, the Commissioner of Income Tax Delhi - I made an order under Section 263 of the Act dated 24th March, 2011 for failure to deduct TDS under Section 194H on free air time provided to distributors and under Section 194J on roaming charges paid to other network operators. The Commissioner invoked Section 40(a) (ia) to make the said disallowance.

6. Section 263(2) of the Act postulates and prescribes time limit of two years as it stipulates that no order in revision will be passed by the Commissioner after expiry of two years from the end of the financial year in which the order sought to be revised was passed.

7. The question raised is whether the first order under Section 143(3) dated 31st December, 2007 or the second order under Section 147 read with Section 143(3) dated 10th December, 2009 will be the starting point of limitation under Section 263(2) of the Act. If the first order dated 31st December, 2007 is taken as the starting point, the order passed under Section 263, dated 24th March, 2011 is barred by limitation, but if we treat the second order dated 10th December, 2009 under Sections 147/143(3) as the starting point, the order passed on 24th March, 2011 will be within time.

8. It is factually correct and cannot be disputed that the two aspects/questions, which have been dealt with and additions which have been made in the order under Section 263 dated 24th March, 2011, have not been dealt with or examined in the second assessment or the re-assessment order dated 10th December, 2009. The second order or the re-assessment order is on different aspects. In these circumstances, the decision of the Supreme Court in Alagendran Finance Ltd.'s case (supra) is clearly applicable and the following ratio is binding on us:—

"We, therefore, are clearly of the opinion that keeping in view the facts and circumstances of this case and, in particular, having regard to the fact that the Commissioner of Income-Tax exercising its revisional jurisdiction reopened the order of assessment only in relation to lease equalisation fund which being not the subject of the reassessment proceedings, the period of limitation provided for under sub-section (2) of section 263 of the Act would begin to run from the date of the order of assessment and not from the order of reassessment. The revisional jurisdiction having, thus, been invoked by the Commissioner of Income Tax beyond the period of limitation, it was wholly without jurisdiction rendering the entire proceeding a nullity."

9. In the said case, second or re-assessment order was passed under Section 147 of the Act. Order under Section 263 passed by the Commissioner was held to be barred by limitation as the subject matter of additions made in the said order were not dealt with in the reassessment order. Thus doctrine of merger it was held would not apply and limitation would begin from the date of the first or original assessment order. It has been held that once reassessment order was passed, original underassessment was set aside, to the extent of underassessment but not in respect of matters covered by the original assessment and not subject matter of reassessment proceedings or order. Earlier judgments in Hindi Wire Industries Ltd. v. CIT [1995] 212 ITR 639/80 Taxman 79 (SC), CIT v. Sun Engineering Works (P.) Ltd.[1992] 198 ITR 297/64 Taxman 442 (SC) and other cases, were examined before the said opinion and ratio was expounded.

The appeal is accordingly dismissed.

P. SEN

*In favour of assessee.

[2010] 187 TAXMAN 319 (MAD.)

HIGH COURT OF MADRAS

Commissioner of Income-tax, Madurai

VTM Ltd.*

F.M. IBRAHIM KALIFULLA AND MRS. R. BANUMATHI, JJ.

T.C.(A) NO. 881 OF 2009

SEPTEMBER 8 , 2009

Section 32 of the Income-tax Act, 1961 - Depreciation - Additional depreciation - Assessment year 2005-06 - Whether in order to claim additional depreciation under section 32(1)( iia), what is required to be satisfied is only that a new machinery or plant has been acquired and installed after 31-3-2002 by an assessee, who was already engaged in business of manufacture or production of any article or thing; said provision does not state that setting up of a new machinery or plant, which was acquired and installed after 31-3-2002 , should have any operational connectivity to article or thing that was already being manufactured by assessee - Held, yes

FACTS

The assessee-company was engaged in the business of manufacture of textile goods. During the relevant assessment year, it had set up a wind mill for generation of power and claimed additional depreciation thereon under section 32(1)( iia). The Assessing Officer disallowed the claim on the ground that the assessee was engaged only in the manufacture of textile goods and the setting up of a wind mill had absolutely no connection with the manufacture of textile goods. However, the Commissioner (Appeals) as well as the Tribunal allowed the assessee's claim of additional depreciation.

On appeal to the High Court, the revenue, inter alia, contended that earlier the Tribunal, under similar circumstances, had disallowed the additional depreciation claimed under section 32(1)( iia) whereas by the impugned order, the Tribunal had taken a diametrically opposite view and on that ground itself the order was liable to be set aside.

HELD

When the Tribunal, by the impugned order, had applied section 32(1)(iia ) to the facts of the case of the assessee and had found that it was entitled to the additional depreciation claimed under the said provision, it could not be held that simply because the co-ordinate Bench of the Tribunal had earlier taken a different view, the Tribunal in the instant case also ought to have followed the same. When the Tribunal had applied the law correctly in the impugned order, there was no gain saying that there was an earlier order by the co-ordinate Bench and, therefore, for that reason, in the instant case also the Tribunal should have blindly followed its own earlier decision even if such decision did not reflect the correct position of the law. [ Para 3]

As far as the application of section 32(1)(iia ) is concerned, what is required to be satisfied in order to claim the additional depreciation is that a new machinery or plant, which has been set up, should have been acquired and installed after 31-3-2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed after 31-3-2002should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a windmill had nothing to do with the manufacture of textile goods was totally not germane to the specific provision contained in section 32(1)(iia ). [Para 5]

It could also not be said that setting up of a windmill would not fall within the expression 'setting up of a new machinery or plant' . Therefore, there was no error in the conclusion of the Tribunal. [ Para 6]

Ms. Pushya Sitaraman for the Appellant.

JUDGMENT

F.M. Ibrahim Kalifulla, J. - The revenue has come forward with this appeal, raising the following substantial questions of law :

" (i )Whether on the facts and circumstances of the case, the Tribunal was right in allowing the claim of additional depreciation on windmill under section 32(1)( iia) ?

(ii )Whether on the facts and circumstances of the case, the Tribunal was right in holding that generation of power by windmill would amount to manufacture or production of any article or thing ?"

2. We heard Ms. Pushya Sitaraman, learned Standing Counsel appearing for the appellant. The learned counsel in his submissions contended that the Tribunal under similar circumstances earlier disallowed the additional depreciation claimed under section 32(1)( iia) of the Income-tax Act, whereas by the impugned order, the Tribunal has taken a diplomatic opposite view and on this ground itself the order is liable to be set aside. The learned counsel then contended that the additional depreciation was claimed on the setting up of windmills for generation of power and inasmuch as the assessee is only engaged in the manufacture of textile goods, the setting up of a windmill has absolutely no connection for the manufacture of textile goods, which is the power industry and therefore, the assessee was not entitled to claim the additional depreciation as allowed under section 32(1)( iia) of the Act.

3. We are not in a position to appreciate either of the contentions of the learned counsel for the petitioner. As far as the first contention is concerned, when the Tribunal by the impugned order has applied section 32(1)( iia) of the Act, to the facts involved in the case of the assessee and has found that the assessee is entitled for the additional depreciation claimed under the said provision, it cannot be held that simply because Co-ordinate Bench of the Tribunal had earlier taken a different view, the Tribunal on this occasion also ought to have followed the same. When we find that the Tribunal has applied the law correctly in the impugned order, there is no gain saying that there was an earlier order by the Co-ordinate Bench and therefore, for that reason, this time also the Tribunal should have blindly followed its own earlier decision even if such earlier decision did not reflect the correct position of the law.

4. As far as the contention based on section 32(1)( iia) of the Act, is concerned, the assessment year pertains to 2005-06. The provision, which is relevant for our purpose, reads as under :

" (iia )in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31 st day of March, 2002 , by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to fifteen per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) :

Provided that such further deduction of fifteen per cent shall be allowed to—

(A )a new industrial undertaking during any previous year in which such undertaking begins to manufacture or produce any article or thing on or after the 1 st day of April, 2002 ; or

(B )any industrial undertaking existing before the 1 st day of April, 2002 , during any previous year in which it achieves the substantial expansion by way of increase in installed capacity by not less than ten per cent."

5. In the case on hand, the assessee is stated to have set up a wind mill at a cost of Rs. 5, 85, 60, 000. It is true that the assessee is a company engaged in the business of manufacture of textile goods. As far as application of section 32(1)( iia) of the Act, is concerned, what is required to be satisfied in order to claim the additional depreciation is that the setting up of a new machinery or plant should have been acquired and installed after 31-3-2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed up to 31-3-2002 should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a wind mill has nothing to do with the power industry, namely, manufacture of oil seeds etc. is totally not germane to the specific provision contained in section 32(1)( iia) of the Act.

6. In such circumstances, we are not able to appreciate the contention of the learned standing counsel for the appellant on the ground that the order of the Commissioner of Income-tax (Appeals) as confirmed by the Tribunal should be interfered with. It cannot also be said that setting up of a windmill will not fall within the expression setting up of a new machinery or plant. We do not find any error in the conclusion of the Tribunal in confirming the order of the Commissioner of Income-tax (Appeals). We, therefore, do not find any question of law much less substantial question of law to entertain this appeal. The appeal fails and the same is dismissed. No costs.

Other Information

In favour of asssesee

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

O/o The Principal Accountant General

Ahmedabad, Gujarat

M. No. 9825829075

[2010] 187 TAXMAN 319 (MAD.)

HIGH COURT OF MADRAS

Commissioner of Income-tax, Madurai

VTM Ltd.*

F.M. IBRAHIM KALIFULLA AND MRS. R. BANUMATHI, JJ.

T.C.(A) NO. 881 OF 2009

SEPTEMBER 8 , 2009

FACTS

HELD

Ms. Pushya Sitaraman for the Appellant.

JUDGMENT

F.M. Ibrahim Kalifulla, J. - The revenue has come forward with this appeal, raising the following substantial questions of law :

" (i )Whether on the facts and circumstances of the case, the Tribunal was right in allowing the claim of additional depreciation on windmill under section 32(1)( iia) ?

(ii )Whether on the facts and circumstances of the case, the Tribunal was right in holding that generation of power by windmill would amount to manufacture or production of any article or thing ?"

4. As far as the contention based on section 32(1)( iia) of the Act, is concerned, the assessment year pertains to 2005-06. The provision, which is relevant for our purpose, reads as under :

Provided that such further deduction of fifteen per cent shall be allowed to—

(A )a new industrial undertaking during any previous year in which such undertaking begins to manufacture or produce any article or thing on or after the 1 st day of April, 2002 ; or

Other Information

In favour of asssesee

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

O/o The Principal Accountant General

Ahmedabad, Gujarat

M. No. 9825829075

2006] 10 SOT 106 (DELHI)

IN THE ITAT DELHI BENCH 'H'

Jindal Steel & Power Ltd.*

Additional Commissioner of Income-tax, Hissar Range, Hissar

S.C. TIWARI, ACCOUNTANT MEMBER AND A.D. JAIN, JUDICIAL MEMBER

I.T. APPEAL NO. 3663 (DELHI) OF 2005 [ASSESSMENT YEAR 2000-01]

MARCH 31, 2006

Section 32 of the Income-tax Act, 1961, read with rule 5, of the Income-tax Rules, 1962 - Depreciation - Allowance/Rate of - Assessment year 2000-01 - Whether as per second proviso to rule 5(1A), assessee may, instead of depreciation specified in Appendix IA on his option, be allowed depreciation under sub-rule (1), read with Appendix I, i.e., on WDV basis if such option was exercised by assessee before due date for furnishing return of income under section 139(1) for assessment year 1998-99 or for assessment relevant to previous year in which assessee began to generate power, whichever is later - Held, yes

FACTS

The assessee-company was engaged in the business of generation and distribution of power and had filed a return declaring a taxable income under section 115JA. The Assessing Officer processed the return under section 143(1) and issued the refund. Subsequently, the Assessing Officer initiated reassessment proceedings under section 147 against the assessee on the basis that the assessee had shown inflated income by charging a higher rate per unit for captive consumption of power as against that charged from the State Electricity Board [SEB] with a view to claim deduction of book profit by a higher amount worked out as profits derived from the business of generation and distribution of power, and that if the amount charged to captive consumption of power was taken at the same rate at which the assessee supplied power to the State Electricity Board, the assessee's deduction on account of the business of power generation would be less. The Assessing Officer also noted that the assessee had claimed deduction of depreciation of power generating plant installed/added after 1-4-1997 on written-down value basis rather than on straight line method and, thus, the assessee had claimed excessive depreciation. Thereafter, the Assessing Officer in reassessment proceedings worked out the assessee's profit on generation and distribution of power at a lower amount than that claimed by the assessee. The Assessing Officer, thus, worked out higher deemed income under section 115JA than that disclosed by the assessee and allowed a lower amount of deduction under section 115JA. The Assessing Officer, further, while computing the assessee's total income under the general provisions of the Act, made a disallowance on the ground that the assessee had claimed excess depreciation to that extent. The Assessing Officer also made certain disallowances out of the assessee's claim for deduction on the basis of materials brought on record during the course of assessment proceedings under section 147 and, accordingly, made additions to the income of the assessee.

On appeal, the Commissioner (Appeals) held that the proceedings under section 147 had been validly initiated. He further held that deduction under clause (iv) ofExplanation to section 115JA and disallowance of depreciation in respect of turbines had rightly been done by the Assessing Officer. The Commissioner (Appeals) further held that additions in expenses under valuation of stock, etc., could not have been made by the Assessing Officer in the impugned assessment order under section 147, but he, subject to his findings under the provisions of section 150(1) issued directions to the Assessing Officer to initiate proceedings under section 147 once again against the assessee for assessment of those very additions irrespective of the provisions of section 149.

On second appeal :

HELD

It is not correct position of law that the Assessing Officer should not only entertain belief that the assessee's income chargeable to tax had escaped assessment, but his reasons for such belief should stand the test of ultimate appeal as well. After having recorded the reasons, the hands of the Assessing Officer are not tied and he has a discretion to examine the explanation of the assessee on merits and if convinced, not to assess the amount that he believed at the time of initiation of assessment proceedings as having escaped assessment. If it was held otherwise, same would render proceedings after service of notice under section 148 on the assessee to be an empty formality. [Para 26]

At the stage of initiation of proceedings under section 147, the Assessing Officer records the reasons leading to formation of his belief that the assessee's income chargeable to tax had escaped assessment. The reasons recorded by the Assessing Officer must be based on some material and the formation of belief should be in earnestness and on application of mind. However, the reasons recorded by the Assessing Officer need not be proved correct after a detailed examination of the facts and circumstances of the case and of law applicable. That is an exercise to be undertaken during the course of assessment proceedings. In the instant case, the arguments led by the assessee against the Assessing Officer's reasons to believe touched upon many of the inferences drawn by the Assessing Officer at the time of initiation of proceedings under section 147. It was not the case of the assessee that the inferences drawn by the Assessing Officer were not based on facts and circumstances of the case. The assessee had also not been able to show that the reasons recorded by the Assessing Officer were mere pretence and the view taken by him was such that no person reasonably instructed in law would take. Therefore, the reasons to believe as recorded by the Assessing Officer met the requirements of provisions of section 147. Hence, the assessee's ground of appeal disputing initiation of proceedings under section 147 was rejected. [Para 31]

The next ground of the appeal taken by the assessee was against the disallowance of depreciation on turbines claimed by the assessee on the ground that the assessee was entitled to depreciation on straight line basis and not on the written-down value basis. As per the second proviso to rule 5(1A), the assessee may, instead of the depreciation specified in Appendix IA on his option, be allowed depreciation under sule-rule (1), read with Appendix I, i.e., on written-down value basis, if such option was exercised by the assessee before the due date for furnishing the return of income under section 139(1) for the assessment year 1998-99 or for the assessment relevant to the previous year in which the assessee began to generate power, whichever is later. No particular format or procedure has been laid down in the second proviso in relation to exercise of option by an assessee. Second proviso only says that option is to be exercised before the due date for furnishing the return of income under section 139(1) for the assessment year 1998-99 in respect of power generating undertaking then existing, and for the first assessment year in which a new undertaking begins to generate power. The case of the assessee was that it began to generate power during the previous year relevant to the assessment year 1999-2000. As per Annexure-D annexed to the computation of income chargeable to tax filed along with the return of income for the assessment year 1999-2000, the assessee had claimed depreciation in accordance with sub-rule (1), read with Appendix I. Thereafter, the assessee's return of income was processed under section 143(1) on 29-9-2000 and no adjustment in that behalf was made by the Assessing Officer. The assessee was correct in arguing that the return of income filed before the due date of furnishing the return under section 139(1) for the assessment year 1999-2000 made proper compliance to the requirements of the second proviso of rule 5(1A). The provisions of the Income-tax Rules, 1962 have not laid down any particular procedure for exercise of option by the assessee so that assessee could find the occasion to exercise his option while filing the return of income for the assessment year 1999-2000. There was no logic in the contention of the Commissioner (Appeals) that even after having claimed depreciation under the general provisions of Appendix-I, the assessee had not exercised its option as contemplated in the second proviso. Therefore, the Assessing Officer was directed to allow the assessee the depreciation as admissible to it under sub-rule (1) of rule 5, read with Appendix-I. [Para 32]

The other ground of appeal taken by the assessee was that the Assessing Officer had allowed deduction under clause (iv) of Explanation appended to section 115JA at a lower value instead of that as worked out in the books of account. For the purpose of adjustment, as provided in Explanation (iv) to section 115JA, the Assessing Officer cannot substitute the amount of profit derived by an industrial undertaking from the business of generation or generation and distribution of power as certified by the auditors of the company to be in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. It was not the case of the Assessing Officer that the assessee's profit and loss account had not been prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Therefore, the order of the Assessing Officer on this issue was deleted and the working of the assessee in relation to Explanation (iv) to section 115JA was restored. [Paras 33 and 39]

The next ground of appeal taken by the assessee was against the findings and directions made by the Commissioner (Appeals) and issued to the Assessing Officer for the purpose of initiation of proceedings under section 147 once again in the case of the assessee irrespective of the provisions of section 149. The Assessing Officer in the assessment order under section 147, read with section 143(3), made certain additions not enumerated anywhere in the reasons for issue of notice under section 148 as recorded by the Assessing Officer. The assessee challenged those additions and the Commissioner (Appeals) accepted that such additions were not sustainable and deleted the additions. The Commissioner (Appeals) then could not issue any finding or direction to the Assessing Officer to initiate proceedings under section 147 afresh for assessment of those very additions. Hence, the impugned order of the Commissioner (Appeals) in that respect was self-contradictory. Therefore, the impugned order of the Commissioner (Appeals) contained no finding or directions within the meaning of section 150 in respect of the disputed additions in question. [Paras 40 and 41]

EDITORS' NOTE

1. It was also held by the Tribunal that the provisions of the Act pertaining to payment of advance tax would apply to any liability of tax chargeable under provisions of section 115JA and, therefore, interest was to be levied on the assessee under sections 234B and 234C.

2. It was also held by the Tribunal that charging of interest for a period when the provisions of section 234D were not on the statute book would be wholly unreasonable and, therefore, the assessee was liable to pay interest under section 234D only with effect from 1-6-2003.

CASES REFERRED TO

CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/ 64 Taxman 442 (SC) (para 8), Vipan Khanna v. CIT [2002] 255 ITR 220/ 122 Taxman 1 (Punj. & Har.) (para 8), Shiva Medicare v. Dy. CIT [IT Appeal No. 5900 (Delhi) of [1998] (para 11), Assam Carbon Products Ltd. v. Asstt. CIT [IT Appeal No. 11 (Gauhati) of 2004] (para 12), Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) (para 13), Ramnarain Bhojnagarwalla v. ITO [1970] 77 ITR 653 (Cal.) (para 13), VXL India Ltd. v.Asstt. CIT [1995] 215 ITR 295/ 83 Taxman 582 (Guj.) (para 13), Birla VXL Ltd. v. Asstt. CIT [1996] 217 ITR 1 (Guj.) (para 13), Vishnu Borewell v. ITO [2002] 257 ITR 512/ 125 Taxman 996 (Ori.) (para 13), Bhubaneswar Stock Exchange v. Asstt. CIT [2005] 96 ITD 480 (Ctk.) (para 13), Manish Ajmera v. Asstt. CIT [2005] 95 ITD 111 (Chd.) (para 14), Plastic Concern v. Asstt. CIT [1998] 61 TTJ (Cal.) 87 (para 16), N. Naganatha Iyer v. CIT [1966] 60 ITR 647 (Mad.) (para 16), CIT v.Kelvinator of India Ltd. [2002] 256 ITR 1/ 123 Taxman 433 (Delhi) (FB) (para 16), Windson Electronics (P.) Ltd. v. Union of India [2004] 269 ITR 481/ 141 Taxman 419 (Cal.) (para 16), Smt. Durgabati and Smt. Narmadabala Gupta v. CIT [1956] 30 ITR 101 (Pat.) (para 16), Raja Yadvendra Dutt Dube v. State of Uttar Pradesh [1964] 54 ITR 506 (All.) (para 16), Babulal Lath v. Asstt. CIT [2002] 83 ITD 691 (Mum.) (para 16), Ambaji Traders (P.) Ltd. v. ITO [1976] 105 ITR 273 (Bom.) (para 17), B.A.R. Abdul Rahman Saheb v. ITO [1975] 100 ITR 541 (AP) (para 17), CIT v. S. Raghubir Singh Trust [1980] 123 ITR 438/3 Taxman 41 (SC) (para 17),ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC) (para 17), Dy. CIT v. Samir Diamond Mfg. (P.) Ltd. [1997] 59 TTJ (Ahd.) 1 (para 19), Tej International (P.) Ltd.v. Dy. CIT [2001] 118 Taxman 59 (Delhi) (Mag.) (para 19), Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 519/ 110 Taxman 47 (Kar.) (para 19), Steel Authority of India Ltd. v. Dy. CIT [1991] 38 ITD 193 (Delhi) (para 19), Bhushan Steels & Strips Ltd. v. Dy. CIT [IT Appeal No. 3727 (Delhi) of 1997] (para 19), Asstt. CIT v. Pratappur Sugar & Industries Ltd. [IT Appeal No. 2619 (Kol.) of 2002] (para 19), Jt. CIT v. IFGL Refractories Ltd. [IT Appeal No. 1360 (Cal.) of 1999, dated 19-2-2002] (para 19),S.S. Gadgil v. Lal & Co. [1964] 53 ITR 231 (SC) (para 19), K.M. Sharma v. ITO [2002] 254 ITR 772/ 122 Taxman 426 (SC) (para 19), Phool Chand Bajrang Lal v.ITO [1993] 203 ITR 456/ 69 Taxman 627 (SC) (para 20), CIT v. N. Kishore Settlement [1999] 236 ITR 35 (SC) (para 20), CIT v. British Paints India Ltd. [1991] 188 ITR 44/ 54 Taxman 499 (SC) (para 21), S. Narayanappa v. CIT [1967] 63 ITR 219 (SC) (para 29), ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) (para 30),Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC) (para 31), Bhilai Wires Ltd. v. CIT [1998] 231 ITR 288/[1997] 93 Taxman 462 (MP) (paras 34-35),Surana Steels (P.) Ltd. v. Dy. CIT [1999] 237 ITR 777/ 104 Taxman 188 (SC) (para 36), Krishna Oil Extraction Ltd. v. CIT [1998] 230 ITR 806/ 98 Taxman 8 (MP) (para 37), CIT v. Malayala Monorama Co. Ltd. [2002] 253 ITR 378/ 120 Taxman 343 (Ker.) (para 37), CIT v. Dynamic Orthopaedics (P.) Ltd. [2002] 257 ITR 446/124 Taxman 170 (Ker.) (para 37), Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/ 122 Taxman 562 (SC) (para 38), CIT v. Holiday Travels (P.) Ltd. [2003] 263 ITR 307/ 127 Taxman 250 (Mad.) (para 43), Karimtharuvi Tea Estates Ltd. v. Dy. CIT [2000] 113 Taxman 514 (Ker.) (para 43), Assam Bengal Carriers Ltd. v. CIT [1999]239 ITR 862 (Gauhati) (para 43), Itarsi Oils and Flours (P.) Ltd. v. CIT [2001] 250 ITR 686/ 119 Taxman 112 (MP) (para 43), CIT v. Kotak Mahindra Finance Ltd.[2004] 265 ITR 119/[2003] 130 Taxman 730 (Bom.) (para 43) and CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/ 5 Taxman 1 (SC) (para 43).

Sajjan Kumar Tulsiyan for the Appellant. Gopal Kamal for the Respondent.

ORDER

S.C. Tiwari, Accountant Member. - This appeal has been filed by the assessee on 15-9-2005 against the order of the learned CIT (Appeals), Rohtak, dated 14-7-2005 in the case of the assessee in relation to assessment order under section 143(3) read with section 147 for assessment year 2000-01. In this appeal the main disputes relate to initiation of proceedings under section 147 and additions to the book profit as sustained by the learned CIT (Appeals) in the computation of assessee's income chargeable to tax under the provisions of section 115JA of the Act.

2. Facts of the case leading to this appeal briefly are that the assessee filed return of income on 28-11-2000 declaring taxable income of Rs. 3,23,94,225 under the provisions of section 115JA of the Act. This return of income was processed under section 143(1) of the Act on 18-12-2000. On the basis of this return a refund of Rs. 39,80,007 was found due under section 143(1) on 18-12-2000. The refund was accordingly issued. The Assessing Officer did not issue any notice under section 143(2) within the prescribed time limit. Thereafter, a notice under section 148 was issued on 27-10-2003 and served on the assessee on 21-11-2003. This notice under section 148 was issued after recording reasons in writing on 27-10-2003 for initiating proceedings under section 147 of the Act. This action was taken by the Assessing Officer in the wake of assessment proceedings in the case of the assessee-company for assessment year 2001-02 on the basis that the assessee had shown inflated income by charging @ Rs. 3.72 per unit for captive consumption of power as against Rs. 2.32 per unit charged from State Electricity Board with a view to claim reduction of book profit by a higher amount worked out as profits derived from the business of generation and distribution of power. According to the Assessing Officer if the amount charged to captive consumption of power was taken at the same rate at which the assessee supplied power to State Electricity Board, the assessee's deduction on account of the business of power generation would be less by Rs. 25,76,59,186. Secondly, the learned Assessing Officer also noted that the assessee had claimed deduction of depreciation of power generating plant installed/added after 1-4-1997 on WDV basis rather than on straight line method. Thus, the assessee had claimed excessive depreciation by more than Rs. 2,21,00,000. The learned Assess- ing Officer held that due to assessee's omission to declare all material facts relevant for assessment an income of Rs. 27,97,59,186 chargeable to tax had escaped assessment for assessment year 2000-01. He, therefore, issued notice under section 148.

3. In response to the notice under section 148 issued by the learned Assessing Officer, the assessee filed a written reply on 19-12-2003, inter alia, stating that income-tax return already filed for assessment year 2000-01 on 28-11-2000 should be treated as income-tax return in response to notice under section 148 also. Thereafter the Assessing Officer has completed the assessment under section 143(3) read with section 147 on 29-12-2004. He computed income of the previous year under regular provisions of the Act at Rs. 37,56,89,119. However, as unabsorbed depreciation brought forward from the earlier years exceeded the income thus computed, the learned Assessing Officer computed assessee's total income for assessment year 2000-01 at nil amount after set off of unabsorbed depreciation. Thereafter the learned Assessing Officer computed assessee's income chargeable to tax under the provisions of section 115JA of the Act. The assessee had disclosed a net profit of Rs. 89,58,71,823. The assessee claimed reduction of a sum of Rs. 78,78,91,075 on account of profit on generation and distribution of power. The learned Assessing Officer, however, worked out the assessee's profit on generation and distribution of power at Rs. 58,95,31,370 only. The learned Assessing Officer, thus, worked out higher deemed income under section 115JA than as disclosed by the assessee.

4. While computing the assessee's total income under the general provisions of the Act, the learned Assessing Officer made a disallowance of Rs. 2,21,40,131 as the assessee, in the opinion of the Assessing Officer, had claimed excess depreciation to that extent. According to the Assessing Officer various power generating turbines put to use and capitalized during the financial year 1998-99 are entitled to depreciation on straight line method. The assessee-company was, therefore, entitled to depreciation on the turbines at Rs. 1,59,10,047 @ 7.84% on the basis of straight line method. The assessee has, however, claimed depreciation on these turbines at Rs. 3,80,50,138 @ 25% on the basis of WDV. The learned Assessing Officer disallowed the assessee's claim of depreciation to the extent of Rs. 2,21,40,131 on the basis of his working of admissible depreciation. The basis for this disallowance has been stated by the learned Assessing Officer in the reasons recorded in writing also for initiating proceedings under section 147 of the Act.

5. After having made disallowance out of the assessee's claim of depreciation, as above mentioned, the learned Assessing Officer proceeded to make certain further disallowances and additions based on the facts and materials brought on record during the course of assessment proceedings under section 147. The same are as under :—

(1)	Disallowance out of air journey expenses	2,00,000
(2)	Disallowance on account of alleged sales-tax liability payable to Jindal Strips Ltd.	45,25,628
(3)	Disallowance of depreciation on Hydraulic Excavator	14,92,626
(4)	Disallowance of interest on loan	3,68,219
(5)	Addition on account of alleged under-valuation of closing stock	3,98,193

In addition, the learned Assessing Officer also made a disallowance of Rs. 15.23 lakhs from out of commission expenses claimed by the assessee. That addition having been deleted by the learned CIT (Appeals), we are not concerned with the same in this appeal.

6. While computing assessee's income under the general provisions of the Act, the learned Assessing Officer made a total addition of Rs. 3,06,47,797. Out of the same the addition to the extent of Rs. 15,23,000 has been deleted by the learned CIT (Appeals) in the impugned order. Out of the remaining additions to the returned income the addition to the extent of Rs. 2,21,40,131 is relatable to escapement of income from assessment, as referred to in the reasons recorded by the learned Assessing Officer. Other additions are supported by the Assessing Officer on the ground that escapement from assessment of those income was noticed during the course of proceedings under section 147.

7. During the course of hearing before the learned CIT (Appeals), first and foremost the assessee disputed initiation of assessment proceedings under section 147. The assessee stated that the reasons if recorded by the Assessing Officer for initiation of proceedings under section 147 had not been communicated. Thereupon the learned CIT (Appeals) forwarded on 20-5-2005 the copy of reasons recorded by the Assessing Officer. The assessee filed objections thereto in the reply dated 30-5-2005. The learned CIT (Appeals) found that assessment proceedings had been validly initiated under the provisions of section 147. At the time of recording the reasons the learned Assessing Officer had before him the assessee's own case for subsequent assessment year 2001-02 wherein it had been found that with a view to getting higher benefit of section 80-IA(8) of the Act, the profits from the assessee's own undertaking had been over estimated. The learned CIT (Appeals) held that while recording reasons under section 148, the Assessing Officer applied his mind on the question of reduction provided in clause (iv) of Explanation to section 115JA. The learned Assessing Officer formed a belief for under-assessment within the meaning of Explanation 2(b ) to section 147 in relation to section 115JA. As to the second basis of escapement of income from assessment i.e., higher depreciation claimed by the assessee the learned CIT (Appeals) held that under section 32 of the Act read with rule 5 of the Income-tax Rules, 1962 an option had been granted to the assessee to claim depreciation on WDV basis. The assessee had not given any option for exercise of claim of depreciation on WDV basis. As no such option was exercised, the Assessing Officer could not presume the exercise of option within the meaning of rule 5(1A) of Income-tax Rules, 1962. The assessee committed a breach of statutory provisions that provided for depreciation under straight line method for an industrial undertaking carrying on power generation/ distribution. There was, thus, escapement of income on account of assessee's omission to declare all material facts relevant for assessment for the assessment year. The learned CIT (Appeals), therefore, held that proceedings under section 147 had been validly initiated.

8. The assessee further argued before the learned CIT (Appeals) that as per the reasons recorded for initiation of proceedings under section 147 there were only two issues. The first issue pertained to the assessment under the general provisions of the Act and there the case of the Assessing Officer was that the assessee had claimed excess depreciation by following written down value method instead of straight line method in relation to business of power generation and distribution. The second issue pertained to computation of tax liability under section 115JA and there the case of the Assessing Officer was that an inflated amount was excluded by way of profits of the assessee in the business of power generation and distribution. In the assessment order under section 143(3) read with section 147 the Assessing Officer had made a number of disallowances and additions to the income declared by the assessee that had nothing to do with the specific issues on which the assessment was taken up under the provisions of section 147 of the Act. The assessee argued that it was not open to the learned Assessing Officer during the course of proceedings under section 147 to make roving/fishing enquiries and consequent disallowance/ additions/adjustments to the assessed income. The assessee relied upon the judgment of Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297¹ and the judgment of Hon'ble Punjab & Haryana High Court in the case ofVipan Khanna v. CIT [2002] 255 ITR 220² (Punj. & Har.). The learned CIT (Appeals) held that the assessee's arguments might be applicable if the original assessment had been completed under section 143(3) of the Act. It was only a case where the return has been filed and processed under section 143(1)(a) of the Act. Hence the assessee's case was covered under Explanation 2(b) to section 147 and main section 147. Moreover the judgment in the case of Sun Engg. Works (P.) Ltd. (supra) related to the phraseology of section 147 prior to 1st day of April, 1989. After 1-4-1989 the deficiency was made up by the Legislature by insertion of the words "any other income, chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section". As in the case of the assessee there was no earlier assessment order and merely processing of the return under section 143(1)(a), the Assessing Officer could bring to tax all other disallowances/incomes which came to his notice during the course of enquiries and questionnaire under section 142(1)/143(3). However, the learned CIT (Appeals) noted that as per the observations of the jurisdictional High Court in the case of Vipan Khanna (supra) at page 234, it made no difference whether the assessment proceedings had become final on account of an assessment under section 143(3) of the Act or on account of non-issue of a notice under section 143(2) of the Act within the stipulated period. The amendments made in section 143 and section 147 with effect from April 1, 1989 did not in any manner negate the proposition of law as enunciated by the Supreme Court in the case of Sun Engg. Works (P.) Ltd. (supra). The learned CIT (Appeals) respectfully submitted that the abovesaid obiter and decision of the jurisdictional High Court in the case of Vipan Khanna (supra) deserved a reconsideration by the Hon'ble High Court. However, the judgment being binding upon him the learned CIT (Appeals) chose to follow it. Hence following the judgment in the case of Vipan Khanna (supra) the learned CIT (Appeals) found himself compelled to hold that the additions of Rs. 2,00,000 on account of air journey expenses; of Rs. 45,25,628 on account of sales-tax liability payable to M/s. Jindal Strips Ltd.; disallowance of Rs. 14,92,626 pertaining to depreciation on hydraulic excavator; disallowance of Rs. 3,68,219 on account of assessee's claim of interest on loan; addition on account of alleged under- valuation of closing stock and disallowance of Rs. 15,23,000 on account of commission payments could not have been made by the Assessing Officer in the impugned assessment order under section 147. The learned CIT (Appeals), therefore, deleted those additions/disallowances. However, he did so subject to his directions/findings under section 150(1) of the Act.

9. On merits, the learned CIT (Appeals) held that disallowance of depre-ciation of Rs. 2,21,40,131 had rightly been made by the learned Assessing Officer because the assessee had failed to furnish an option as required under rule 5(1A). As to the disallowance of Rs. 2 lakhs from out of expenditure on aircraft, the learned CIT (Appeals) noted that there was no evidence of entitlement of even Managing Director/Chairman to use the aircraft for the purpose other than business. As the assessee failed to produce any evidence of the business purpose of various air journeys prior to 27-11-1999, the learned CIT (Appeals) held that journeys to Bhuj, Patiala, Kullu & Bareilly were not for the purpose of business. At the average rate of expenditure of Rs. 8,177 per hour, the learned CIT (Appeals) held that disallowance was called for of Rs. 1,37,046. The learned CIT (Appeals) recorded this finding and directed the Assessing Officer to initiate proceedings under section 147 read with Explanation 2(c) of the Act for assessment year 2000-01. He directed the Assessing Officer under section 150(1) to issue notice under section 148. He further held that provisions of section 149 shall not apply. In relation to the disallowance of Rs. 45,25,628 the learned CIT (Appeals) held that the aforesaid sales-tax liability was no longer payable. The learned CIT (Appeals) gave a finding under section 150(1) that the amount of Rs. 45,25,628 deserved to be covered under section 28(iv) of the Act. He gave direction under section 150(1) to the Assessing Officer to issue notice under section 148 and held that the provisions of section 149 relating to time limit for issue of notice under section 148 shall not apply. As to the depreciation on excavator the learned CIT (Appeals) found that the excavator had left the vendor's premises on 31-3-2000 at 16.40 hours and there was no time to reach the appellant's premises so as to be put to use on 31st March, 2000. Hence he gave similar findings and directions under section 150(1) for assessment year 2000-01 irrespective of provisions of section 149. As to the disallowance of interest of Rs. 3,68,219, the learned CIT (Appeals) held that it was paid on a term loan from ICICI Bank for erection of a power project. Hence the expenditure was capital in nature. Hence he gave findings and directions to the Assessing Officer under section 150(1) irrespective of the provisions of section 149. Further the learned CIT (Appeals) held that the assessee was following exclusive method of accounting in respect of excise duty, on which MODVAT credit was available. That method was not correct method and the Assessing Officer rightly added back Rs. 3,98,193. Accordingly similar findings and directions under section 150(1) to the Assessing Officer were given irrespective of the provisions of section 149.

10. The assessee disputed before the learned CIT (Appeals) the deemed income under section 115JA computed by the learned Assessing Officer at Rs. 9,10,21,594 instead of Rs. 3,23,94,230 declared by the assessee. The assessee argued that in terms of clause (iv) of Explanation to section 115JA of the Act profit derived by the power plant as determined/ computed/recorded in the books of account of the assessee was required to be deducted and it was not permissible to tinker with/re-compute the same in any manner. Without prejudice, the assessee argued that the Assessing Officer erred on facts and in law in substituting the recorded price at which power was sold by the captive power plants to the other units by the price at which power was supplied to the State Electricity Board. The assessee argued that the rate at which price of power was charged from the assessee's own units was fixed being the rate at which State Electricity Board charged price of power from industrial consumers. The learned CIT (Appeals) held that sub-clause (iv) of Explanation to section 115JA did not speak of book profit. It referred to "profits derived". Therefore, the Assessing Officer was not required to accept the profits as recorded in the books of account of the assessee and was required to correctly compute the profits derived. The learned Assessing Officer was, therefore, justified to make adjustment to the book profits on the basis of what, according to the learned Assessing Officer, was the correct amount of profit earned by the assessee from various units of the assessee-company. As to the adjustment of Rs. 3,98,193 to the closing stock while computing book profit under section 115JA, the learned CIT (Appeals) held that here again the Assessing Officer was required to work out the correct profits derived by the assessee and he was not bound to accept the amounts recorded in the books of account of the assessee. The learned CIT (Appeals) also turned down the assessee's grounds of appeal relating to levy of interest under sections 234B, 234C and 234D of the Act. He held that provisions of section 115JA could not be considered to be out of purview of the obligation to make correct payment of advance-tax. Aggrieved by this order the assessee is in appeal before us.

11. Shri S.K. Tulsiyan, the learned counsel for the assessee argued that proceedings under section 147 of the Act had been initiated on account of the following alleged reasons :—

"(i )Alleged excessive depreciation claimed in respect of assets used in generation of power on WDV basis as against depreciation on Straight Line Basis (SIM).

(ii)Alleged excess deduction claimed in respect of profit derived from power unit under clause (iv) of Explanation to section 115JA."

As to the first reason retrospectively from 1-4-1997 rule 5(1A) laid down that in respect of assets acquired on or after 1-4-1997 depreciation shall be calculated at the specified percentage on the actual cost of the assets to the assessee. At the same time second proviso to rule 5(1A) laid down that an undertaking to which clause (i) of section 32(1) applied could, at its option instead of the depreciation at specified percentage, claim depreciation under sub-rule (1) read with Appendix-I if such option was exercised before the due date for furnishing the return of income under section 139(1) for the assessment year relevant to the previous year in which it began to generate power. Proviso further stipulated that any such option once exercised would be final and apply to all the subsequent assessment years. Thus, at its option the assessee could claim depreciation on conventional WDV method instead of straight line method as prescribed under rule 5. The power generating unit of the assessee commenced operation in the previous year relevant to assessment year 1999-2000. Assessment year 1999-2000 being the first year of operation of the power generating undertaking, depreciation was calculated and claimed at the rates specified in Appendix-I to Income-tax Rules, 1962. The said return of income was processed under section 143(1) vide intimation dated 29-9-2000. Thus, the claim of the assessee was impliedly allowed in assessment year 1999-2000. The assessee having once exercised the option available under the second proviso to rule 5(1A) continued to claim depreciation on WDV basis for the subsequent assessment years in accordance with the mandatory requirement of the third proviso to rule 5(1A). Consequently for assessment year 2000-01 the assessee claimed depreciation on the fixed assets of the power generating undertaking on WDV basis. The learned counsel argued that as the assessee's claim of depreciation was perfectly in accordance with law, there was no under-statement of income as alleged by the Assessing Officer. There was no force in the contention of the learned CIT (Appeals) that assessee had not exercised the option within the meaning of rule 5(1A). There was no prescribed form or procedure for exercise of the option by the assessee. The deduction claimed by the assessee in the computation of income chargeable to tax for the first assessment year satisfied the requirement of the assessee exercising his option. The learned counsel for the assessee found support to these arguments from the decision of Income-tax Appellate Tribunal, Delhi in the case of Shiva Medicare v. Dy. CIT in [IT Appeal No. 5900 (Delhi) of 1998] where the note given by the assessee at the end of the return of income was treated a declaration under section 10A/B(7) of the Act.

12. The learned counsel argued that the second reason given by the learned Assessing Officer for initiation of assessment proceedings under section 147 relating to clause (iv) of Explanation to section 115JA was not tenable. The assessee had set up two separate and distinct undertakings for generation of power. The electricity generated was partly captively consumed and the surplus electricity generated was sold to Madhya Pradesh State Electricity Board in terms of agreement dated 15-7-1999. For the purpose of transfer of power, to meet the requirement of the manufacturing units belonging to the assessee, transfer pricing was made at the price at which power was being sold by the State Electricity Board to the manufacturing units owned by the assessee. The surplus power was sold to State Electricity Board at the price dictated/fixed by them. Based on the rate at which power was supplied to State Electricity Board, the Assessing Officer had argued that the assessee had shown excessive transfer pricing for self consumption resulting into higher profit being disclosed in the assessee's business of generation and distribution of power. On that basis the learned Assessing Officer reduced the profit of the assessee's power business to a lesser amount. The learned counsel argued that the assessee had priced the power supplied for consumption by the assessee's own manufacturing units at the rate of market price the power was otherwise available to them in the open market. That was the right method as provided for in section 80-IA(8). Power was supplied to State Electricity Board at a rate lower than market value because of the provisions of the Electricity (Supply) Act, 1948 whereunder the generation and distribution of power was the monopoly of the State. The assessee could generate power and distribute only on the basis of consent given by State Electricity Board under section 44 of the Electricity (Supply) Act. Under these circumstances the rate at which power was purchased by Madhya Pradesh State Electricity Board was determined and dictated by the Electricity Board under the Power Purchase Agreement. The acceptance of such rate by the assessee-company and sale of power to the State Electricity Board was a condition precedent for their permission to the assessee to generate power in the first instance. That rate, by no stretch of imagination, could be termed as the market value of power. It was not the price at which power would normally be purchased or sold in the open market. Since the assessee was not entitled to sell power to third parties in the open market, the market value of power used for captive consumption could only be determined on the basis of the rate at which power was supplied by the State Electricity Board to its industrial customers. The learned counsel referred to the decision of ITAT, Kolkata in the case of Assam Carbon Products Ltd. v. Asstt. CIT in [IT Appeal No. 11 (Gauhati) 2004]. In that case the assessee-company used NH Coke for manufacture of Electrographized Carbon Blocks. The company had been importing the material from its collaborators in the U.K. Subsequently, the assessee entered into an agreement with the collaborators in the U.K. for transfer of new technology for in-house production of NH Coke in order to substitute imports. As stipulated by the Government of India the assessee was compulsorily required to export a part of the produce of NH Coke at pre-determined price to the U.K. company. The Tribunal held that market value of NH Coke for the purpose of valuing captive consumption of NH Coke for claiming deduction under section 80-IA would be the price at which the assessee could obtain NH Coke from the open market. Accordingly, the notional landed cost of NH Coke was held to be indicative of market value and not the price at which NH Coke had actually been exported to sister concern out of compulsion at a price dictated as per stipulations of Government of India. The learned counsel argued that the aforesaid decision of Tribunal completely covered the case of the assessee in favour of the assessee and against the revenue.

13. Thus, the learned counsel argued that both the reasons given by the learned Assessing Officer for initiation of proceedings under section 147 were not justified. For assumption of jurisdiction under section 147 formation of belief by the Assessing Officer about escapement of income chargeable to tax from assessment was pre-requisite. The reasons recorded by the Assessing Officer had to have a live link with the formation of belief about escapement of income. The belief had to be based on reasons which were relevant and material. If there was no rational and intelligible nexus between the reasons and the belief was such which no one properly instructed on facts and law, could reasonably entertain, the initiation of proceedings in itself was required to be quashed. In support of these contentions the learned counsel placed reliance on the judgments in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC); Ramnarain Bhojnagarwalla v. ITO [1970] 77 ITR 653 (Cal.); VXL India Ltd. v.Asstt. CIT [1995] 215 ITR 295¹ (Guj.), Birla VXL Ltd. v. Asstt. CIT [1996] 217 ITR 1 (Guj.); Vishnu Borewell v. ITO [2002] 257 ITR 512 ² (Ori.) and Bhubaneswar Stock Exchange v. Asstt. CIT [2005] 96 ITD 480 (Ctk.). The learned counsel argued that the reference to assessment order for assessment year 2001-02 in the impugned order of the learned CIT (Appeals) was not justified because the reasons were recorded by the Assessing Officer on 27th October, 2003, whereas the assessment order was passed on 26th March, 2004. Even otherwise, the reasons were unsustainable on the facts and in the circumstances of the case.

14. During the course of arguments the learned counsel for the assessee argued that the fact that the earlier assessment was made under section 143(1) without issue of notice under section 143(2) could not justify initiation of proceedings under section 147 in the absence of any fresh material on record. That showed that the assessment was reopened for making roving or fishing enquiries. In support of this contention reliance was placed on the decision of ITAT Chandigarh in the case of Manish Ajmerav. Asstt. CIT [2005] 95 ITD 111 (Chd.).

15. The learned counsel vehemently opposed the action of the learned CIT (Appeals) of announcing findings and directions under section 150(1) in respect of the following additions made in the assessment order under section 147 :—

(i)Expenditure on aircraft	Rs. 2,00,000
(ii)Amount refundable to Jindal Strips	Rs. 45,25,628
(iii)Depreciation on Hydraulic Excavator	Rs. 14,92,626
(iv)Interest on term loan	Rs. 3,68,219
(v)Alleged undervaluation of closing stock	Rs. 3,98,193

In the proceedings of assessment under section 147 of the Act, Shri Tulsiyan argued, the powers of the Assessing Officer were limited to look into items/issues in respect of which the proceedings were initiated. Any item/issue which was not in contemplation of the Assessing Officer at the time of recording of reasons under section 148 could not be subjected to verification/examination in the proceedings under section 147. The expression "any other income which comes to his notice subsequently in course of the proceedings under this section" employed in section 147 only empowered the Assessing Officer to tax that escaped income which came to his notice while examining the items escaping assessment as recorded in the reasons under section 148. That expression could not be construed to mean that the Assessing Officer had been conferred power to conduct roving and fishing enquiries on issues/items unconnected with initiation of proceedings under section 147. In the case of the assessee the learned Assessing Officer had travelled far beyond the scope of section 147 by making roving and fishing enquiries and thereafter additions/ disallowances. The action of the learned Assessing Officer was contrary to the judgment of jurisdictional High Court in the case of Vipan Khanna (supra), as also the judgment of Hon'ble Supreme Court in the case of Sun Engg. Works (P.) Ltd. (supra). The learned counsel contested the findings and directions given by the learned CIT (Appeals) in the impugned order in this respect purporting to act under section 150(1) on the following grounds:—

(a)The directions issued by the ld. CIT (A) purportedly under section 150(1) of the Act is beyond jurisdiction and bad in law.

(b)The Ld. CIT (Appeals) failed to appreciate that section 150(1) does not confer power to issue directions to the Assessing Officer to initiate proceedings under section 147 of the Act.

(c)Even otherwise, the so called findings recorded by the Ld. CIT (A) are baseless, devoid of any merit and unsustainable in law.

16. The learned counsel argued that the findings/directions given by the learned CIT (A) under section 150(1) were intended to grant extended time to the Assessing Officer for issue of notice under section 148 which was otherwise barred by limitation of time laid down under section 149 of the Act. In the case of the assessee assessment order under section 143(3) read with section 148 had been framed by the Assessing Officer on 29-12-2004. Therefore the last date for issue of any further notice under section 148 was before the expiry of four years from the end of the relevant assessment year i.e., 31-3-2005. The impugned order of the learned CIT (Appeals) itself was made on 31-5-2005. On that date no further notice could be validly issued by the Assessing Officer under section 148. To circumvent the time limit provided under section 149 and to some how bring to tax alleged incomes/additions which the learned CIT (A) had deleted following the ratio of binding judgment in the case of Vipan Khanna (supra), he issued so-called directions under section 150(1). This action of the ld. CIT (Appeals) was contrary to law. For that purpose the learned counsel placed reliance on the decision of ITAT, Kolkata in the case of Plastic Concern v. Asstt. CIT [1998] 61 TTJ (Cal.) 87 wherein relying upon the decision of Hon'ble Madras High Court in N. Naganatha Iyer v. CIT [1966] 60 ITR 647 , the Tribunal had held that what the Assessing Officer could not do directly, could not be done indirectly through the medium of appellate/revisionary orders. In support of these contentions the learned counsel for the assessee also relied upon the judgments in the case of CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1¹ (Delhi) (FB); Windson Electronics (P.) Ltd. v. Union of India [2004] 269 ITR 481² (Cal.); Smt. Durgabati and Smt. Narmadabala Gupta v. CIT [1956] 30 ITR 101 (Pat.); Raja Yadvendra Datt Dube v. State of Uttar Pradesh [1964] 54 ITR 506 (All.) and the Tribunal order in the case of Babulal Lath v. Asstt. CIT [2002] 83 ITD 691 (Mum.).

17. The learned counsel for the assessee took us closely through the provisions of sections 150 and 153 and he pointed out that the meaning of the terms "finding or direction" as contemplated under section 150 has been elucidated under Explanation 2 to section 153(3). The effect of the second Explanation to section 153(3) was that where the income of an assessee had been excluded from one assessment year and it had to be included in another assessment year, that had been fictionally treated for the purpose of section 150 as a proceeding in consequence or to give effect to any finding or direction contained in an order. In such circumstances the bar of limitation was lifted. For that proposition reliance was placed on the judgment of Hon'ble Bombay High Court in the case of Ambaji Traders (P.) Ltd. v. ITO [1976] 105 ITR 273, B.A.R. Abdul Rahman Saheb v. ITO [1975] 100 ITR 541 (AP). Furthermore the Hon'ble Supreme Court in the case of CIT v. S. Raghubir Singh Trust [1980] 123 ITR 438¹ held that the word 'finding' in the second proviso to section 34(3) of the 1922 Act meant a finding necessary for giving relief in respect of the assessment for the year in question. If any finding was not necessary for the disposal of appeal before the learned CIT (Appeals) such finding could not be said to be a finding under section 150(1). The same view was taken by Hon'ble Supreme Court in the case of ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335. In the instant case the appellate authority had merely recorded a finding in a round about way so as to enable the Assessing Officer to initiate proceedings under section 147 in relation to the same assessment year with a view to bye-pass the time limit provided under section 149. Relying upon the judgment of Hon'ble Madras High Court in the case of N. Nagunatha Iyer (supra), the learned counsel argued that when the Assessing Officer had no jurisdiction over a particular issue, the appellate authority could not confer such a jurisdiction by giving a direction to that effect.

18. During the course of proceedings before us the learned counsel for the assessee also addressed us at length on the merit of the disallowances/additions in respect of which the learned CIT (Appeals) has given the alleged findings/directions under the provisions of section 150(1).

19. In relation to ground of appeal No. 11 the learned counsel for the assessee argued that the provisions of section 115JA created a legal fiction by which the total income is deemed to be 30% of the book profit. It was trite proposition in law that a legal fiction has to be strictly construed. Liability to pay tax under section 115JA arose only if the total income computed under the general provisions of the Act was less than 30% of the book profit. Such event could not take place prior to the completion of assessment by the Assessing Officer and certainly not at the time when the advance-tax instalments become due. In this view of the matter provisions of sections 234B and 234C levying interest could not be invoked in relation to tax liability determined under section 115JA. In support of these contentions the learned counsel placed reliance on the following Tribunal decisions :—

l Dy. CIT v. Samir Diamond Mfg. (P.) Ltd. [1977] 59 TTJ (Ahd.) 1.

l Tej International (P.) Ltd. v. Dy. CIT [2001] 118 Taxman 59 (Delhi) (Mag.).

l Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 519¹ (Kar.).

l Steel Authority of India Ltd. v. Dy. CIT [1991] 38 ITD 193 (Delhi).

l Bhushan Steels & Strips Ltd. v. Dy. CIT [IT Appeal No. 3727 (Delhi) of 1997].

l Asstt. CIT v. Pratappur Sugar & Industries Ltd. [IT Appeal No. 2619 (Kol.) of 2002].

l Jt. CIT v. IFGL Refractories Ltd. [IT Appeal No. 1360 (Cal.) 1999, dated 19-2-2002].

In relation to ground of appeal No. 12 directed against levy of interest under section 234D of the Act the learned counsel argued that since the assessment framed by the Assessing Officer under section 143(3) read with section 147 was itself bad in law and void ab initio, the question of levy of any interest under section 234D did not arise. In any case the provisions of section 234D had been inserted by Finance Act, 2003 w.e.f. 1-6-2003. In the instant case the return of income had been filed by the assessee and had already been processed under section 143(1) vide intimation dated 18-12-2000 and the refund was granted to the assessee. Since the refund was granted to the assessee prior to insertion of the provisions of section 234D, no interest could be levied under that provision in the case of the assessee. In support of this contention the learned counsel placed reliance on the judgments in the case of S.S. Gadgil v. Lal & Co. [1964] 53 ITR 231 (SC) and K.M. Sharma v. ITO [2002] 254 ITR 772² (SC). Without prejudice, the learned counsel argued that as the provisions of section 234D had been inserted w.e.f. 1-6-2003, the Assessing Officer had no authority for levy of interest for the period prior to 1-6-2003. At best the Assessing Officer could charge interest only in respect of the period subsequent to 1-6-2003.

20. The learned D.R. argued that in this case prior to issue of notice under section 148 only an order of intimation under section 143(1)(a) had been made. Notice under section 148 was served on the assessee before the expiry of four years from the end of the assessment year. In these circumstances the only requirement in law was that the Assessing Officer should have reasons to believe that assessee's income chargeable to tax had escaped assessment. In the instant case the learned Assessing Officer recorded detailed reasons in writing. He pointed out escapement of income from assessment both under the general provisions of the Act and under the provisions of section 115JA of the Act. Thus, all the conditions laid down for initiation of proceedings under section 147 were duly satisfied and the assessee's challenge to initiation of proceedings under section 147 was uncalled for. The assessee's challenge to initiation of proceedings under section 147 was confined to his arguments on the merits of the reasons recorded by the learned Assessing Officer. Relying upon the Supreme Court judgment Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456¹ (SC) and CIT v.N. Kishore Settlement [1999] 236 ITR 35 (SC), the learned DR argued that sufficiency or adequacy of reasons recorded by the Assessing Officer was not justiciable. Reasons as recorded by the Assessing Officer could be subject to challenge only on the ground of irrationality or having been based on no material at all. In the present case the learned Assessing Officer's finding of escapement of income from assessment was based on the facts not disputed by the assessee. It was also not the case of the assessee that there was no application of mind on the part of the Assessing Officer. There was absolutely no reason to consider that the Assessing Officer had not actedbona fide. That being so, initiation of proceedings under section 147 was in order and the assessee's ground of appeal challenging the initiation of 147 proceedings deserved to be rejected.

21. On merits of the assessment the learned DR argued that the reliance placed by the assessee on earlier years' treatment was not justified. The assessee merely claimed depreciation in the return of income for assessment year 1999-2000 without making any declaration of exercise of his option in accordance with the second proviso to sub-rule (1A) of rule 5. That return of income was only processed under section 143(1). That being so, it was open to the Assessing Officer to disallow the assessee's claim of depreciation that had not been made in accordance with the provisions of the Act. The learned DR strongly relied upon the judgment of Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44² in this behalf.

22. The learned DR argued that the assessee had in its books of account worked out unduly high and inflated profit from the business of power generation and distribution. That was done by the assessee as a device to reduce the assessee's tax liability arising under the provisions of section 115JA of the Act. The assessee's argument that it had charged power at the same rate at which the power was being supplied by State Electricity Board ignored the fact that it was a case of captive power generation. On account of integration with the assessee's manufacturing units the assessee did not incur any transmission loss of power. In the case of a State Electricity Board there was loss of power in transmission up to 40% of the power supplied. That was the reason for supply to individual customers at higher rate than the price at which State Electricity Board received power supply from the assessee. In the case of the assessee cost of power to manufacturing unit should have been estimated at the same rate at which the assessee supplied power to State Electricity Board. There was no rational basis as to why the rate at which power was supplied by the SEB to its consumers should be treated as market price and not the rate at which the power was supplied by the assessee to SEB. As far as the assessee was concerned, the market price was the price charged from the third party i.e., SEB. Hence the same price was required to be considered as price of power consumption by the manufacturing units of the assessee.

23. The learned DR argued that the Assessing Officer was not bound by the unreasonable entries made by the assessee in its books of account. Clause (iv) Explanationappended to section 115JA required the Assessing Officer to reduce from the book profits, "the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power". There was nothing in clause (iv) to suggest that the Assessing Officer was fettered by the profit worked out in the assessee's books of account. The Assessing Officer was required to reduce the amount of profit actually derived by the assessee from business of generation and distribution of power and not the artificially inflated profit worked out in the accounts of the assessee with an eye on the tax liability under the provisions of section 115JA.

24. The learned DR strongly defended the action of the learned CIT (Appeals) in relation to the assessment of items of income not referred to in the reasons recorded by the Assessing Officer. He argued that the Assessing Officer made the aforesaid additions and disallowances in the assessment order under section 143(3) read with section 147 on 29-12-2004. As the assessment proceedings were already pending, the Assessing Officer could not have issued a fresh notice under section 147 after recording fresh reasons based on escapement of income noticed by the Assessing Officer after recording of reasons earlier on 27-10-2003 but before completion of assessment on 29-12-2004. Otherwise, the Assessing Officer had time limit available to him at that point of time. The assessee's challenge to those disallowances and additions was accepted by the learned CIT (Appeals) for technical reasons only. For that reason provisions of section 150 were attracted and the learned CIT (Appeals) was justified in invoking the provisions of section 150.

25. During the course of hearing before us the learned DR took us closely through the relevant portions in the assessment order of the Assessing Officer and the impugned order of the learned CIT (Appeals), which we have already narrated earlier in this order.

26. We have carefully considered the rival submissions. First ground in this appeal is directed against initiation of proceedings under section 147. The assessee's challenge in this behalf is based on the reasons recorded in writing by the learned Assessing Officer before issue of notice under section 148 for his belief that the assessee's income chargeable to tax for assessment year 2000-01 had escaped assessment. During the course of hearing before us the learned counsel for the assessee has vehemently argued that both the escapement from assessment, viz., excess depreci-ation claimed in relation to the assessment under general provisions of the Act and excess deduction claimed under clause (iv) of Explanation in relation to computation of the assessee's tax liability under section 115JA are not tenable. The arguments advanced by the learned counsel in both respects are the same arguments on the basis of which the assessee has challenged assessment of these two amounts in the assessment order under section 147 read with section 143(3) made by the Assessing Officer. In other words, the assessee has disputed the Assessing Officer's 'reasons to believe' on merits of the case as made out by the learned Assessing Officer in the reasons recorded by him. To accept these arguments of the learned counsel would amount to holding that if assessment of an income in the assessment order under section 147 fails, such failure would invalidate the reasons as recorded by the Assessing Officer. To put it differently the case of the assessee before us is that the Assessing Officer should not only entertain belief that assessee's income chargeable to tax has escaped assessment, his reasons for such belief should stand the test of ultimate appeal as well. In our humble opinion, that is not the correct legal position. At the stage of issue of notice under section 148 the Assessing Officer only initiates the proceedings for assessment and he does not make any assessment at all. After having recorded the reasons the hands of the Assessing Officer are not tied and he has a discretion to examine the explanation of the assessee on merits and if convinced, not to assess the amount that he believed at the time of initiation of assessment proceedings as having been escaped assessment. To hold otherwise, would render proceedings after service of notice under section 148 on the assessee to be an empty formality.

27. In the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 the Hon'ble Supreme Court have stated the legal position relating to "reasons to believe" in the following words :—

"The expression " reason to believe" postulates belief and the existence of reasons for that belief. The belief must be held in good faith : it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-tax Officer. If it be asserted that the Income-tax Officer had reason to believe that income had been under assessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief; in other words, the Income-tax Officer must on information at his disposal believe that income has been under assessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion : it must be founded upon information."

28. It, therefore, follows that in a case where initiation of proceedings under section 147 is disputed in relation to reasons to believe as recorded by the Assessing Officer, the existence of the belief and the reasons for the belief can be called in question but not the sufficiency of the reasons.

29. In the case of S. Narayanappa v. CIT [1967] 63 ITR 219 the Hon'ble Supreme Court have reiterated this position in the following words :—

"But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non- disclosure as regards any fact, which could have a material bearing on the question of under assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression "reason to believe" in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith it cannot be merely a pretence."

30. In the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 the Hon'ble Supreme Court have elucidated the legal position in relation to 'reasons to believe' recorded by an Assessing Officer in the following words :—

"Once there exist reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law."

31. In the recent judgment in the case of Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC), this position has once again been reiterated as under :—

"In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there wasprima facie some material on the basis of which the department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the Income-tax Officer after completion of the assessment proceeding. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will been titled to take all the points before the assessing authority. The appeals are dismissed. There will be no order as to costs."

The correct legal position, therefore, is that at the stage of initiation of proceedings under section 147 the Assessing Officer records the reasons leading to formation of his belief that assessee's income chargeable to tax had escaped assessment. The reasons recorded by the Assessing Officer must be based on some material and the formation of belief should be in earnestness and on application of mind. However, the reasons recorded by the Assessing Officer need not be proved correct after a detailed examination of the facts and circumstances of the case and of law applicable. That is an exercise to be undertaken during the course of assessment proceedings. In the instant case we find the arguments led by the assessee against the Assessing Officer's reasons to believe touch upon many of the inferences drawn by the Assessing Officer at the time of initiation of proceedings under section 147. It is not the case of the assessee that the inferences drawn by the Assessing Officer are not based on facts and circumstances of the case. The assessee has also not been able to show that the reasons recorded by the learned Assessing Officer are mere pretence and the view taken by him is such that no person reasonably instructed in law would take. On the contrary we found-animated debate on the contentions of the learned Assessing Officer during the course of proceedings before us. We, therefore, hold that reasons to believe as recorded by the learned Assessing Officer meet the requirements of provisions of section 147. We, therefore, reject assessee's ground of appeal disputing initiation of proceedings of proceedings under section 147.

32. Ground of appeal No. 2 is directed against the disallowance of depreciation on turbines to the extent of Rs. 2,21,40,131 out of Rs. 3,80,50,138 claimed by the assessee on the ground that the assessee was entitled to depreciation on straight line basis and not on the written down value basis. The learned Assessing Officer held that under rules various power generating turbines put to use during the financial year 1998-99 were entitled to depreciation on straight line method. During the course of proceedings before the learned CIT (Appeals), the assessee pointed out that under rule 5(1A) of Income-tax Rules, the assessee was given an option to claim depreciation if he so desired on WDV basis instead of straight line method basis. Since the assessee had opted for depreciation on WDV basis, the Assessing Officer erred in reducing the assessee's claim of depreciation to an amount worked out on the basis of straight line method. The learned CIT(Appeals) held that the assessee had not exercised his option and, therefore, the Assessing Officer rightly calculated depreciation on straight line method. On consideration of the matter we find that as per second proviso to rule 5(1A), the assessee may instead of the depreciation specified in Appendix IA on his option be allowed depreciation under sub-rule (1) read with Appendix I i.e., on WDV basis if such option was exercised by the assessee before the due date for furnishing the return of income under section 139(1) of the Act for assessment year 1998-99 or for the assessment relevant to the previous year in which the assessee began to generate power, whichever is latter. It is seen that no particular format or procedure has been laid down in the second proviso in relation to exercise of option by an assessee. Second proviso only says that option is to be exercised before the due date for furnishing the return of income under section 139(1) for the assessment year 1998-99 in respect of power-generating undertaking then existing and for the first assessment year in which a new undertaking begins to generate power. The case of the assessee is that it began to generate power during the previous year relevant to assessment year 1999-2000. As per Annexure-D annexed to the computation of income chargeable to tax filed along with the return of income for assessment year 1999-2000, the assessee had claimed depreciation in accordance with sub-rule (1) read with Appendix I. Thereafter the assessee's return of income was processed under section 143(1) on 29-9-2000 and no adjustment in that behalf was made by the Assessing Officer. According to the learned counsel for the assessee the return of income filed before the due date of furnishing the return under section 139(1) for assessment year 1999-2000, made proper compliance to the requirements of the second proviso to rule 5(1A) of Income-tax Rules. On consideration of the matter we accept this argument. As noticed earlier the provisions of Income-tax Rules, 1962 have not laid down any particular procedure for exercise of option by the assessee. That being so the assessee could find the occasion to exercise his option while filing the return of income for assessment year 1999-2000. We do not appreciate the logic of the contention of the learned counsel CIT(Appeals) that even after having claimed depreciation under the general provisions of Appendix-I, the assessee had not exercised his option as contemplated in the second proviso. We, therefore, allow assessee's ground of appeal No. 2 and direct the learned Assessing Officer to allow the assessee depreciation as admissible to the assessee under sub-rule (1) of rule 5 read with Appendix-I.

33. Ground of appeal No. 3 is directed against the assessee being allowed reduction under clause (iv) of Explanation appended to section 115JA at Rs. 19,83,59,705 instead of Rs. 78,78,91,075 as worked out in the books of account of the assessee. Facts of the case in this behalf have already been briefly stated by us earlier in this order. The dispute has arisen because the assessee has worked out transfer pricing of power supplied to its industrial units from captive power generation plants at the rate at which State Electricity Board was supplying power for industrial units. According to the learned Assessing Officer, the assessee has inflated the profits of power generation plants in this manner. He has, therefore, determined the profits of the assessee's power generation and distribution business at the selling rate at which the assessee supplied power to SEB. During the course of hearing before us considerable arguments were made from both sides justifying the transfer pricing adopted by them. In our opinion, the entire debate is unnecessary, inasmuch as insofar as the provisions of section 115JA are concerned, clause (iv) of Explanation does not empower the Assessing Officer to determine an amount other than the amount as worked out in the assessee's profit & loss account. It is not the case of the Assessing Officer that the assessee's profit & loss account has not been prepared in accordance with the provisions of Parts II and III of Schedule VI to Companies Act, 1956.

34-35. In the case of Bhilai Wires Ltd. v. CIT [1998] 231 ITR 288¹ the Hon'ble Madhya Pradesh High Court have observed that section 115J of the Act is a special provision relating to certain companies and it lays down that where in the case of such a company the total income, as computed under the provisions of the Act, is less than 30% of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of such book profit. Their Lordships have held, "The Explanation further lays down that for the purposes of this section, book profit means the net profit as shown in the profit & loss account for the relevant previous year prepared under the Companies Act as increased by the conditions". Therefore, in a case where the income is less than 30% of the book profit then the company has to prepare the account of profit & loss in terms of section 205 of the Companies Act. In other words, it is the profit of the assessee as computed under section 205 of the Companies Act that is the prime mover of the provisions of section 115J.

36. In the case of Surana Steels (P.) Ltd. v. Dy. CIT [1999] 237 ITR 777² the Hon'ble Supreme Court have held that under the provisions of section 115J, first income is computed under the general provisions of Income-tax Act and thereafter book profit is computed in accordance with the provisions of the Companies Act. The Hon'ble Apex Court have further observed that provisions of section 115J are to be interpreted taking into account the meaning of expression under the provisions of the Companies Act. Their Lordships have observed :—

"A comparison may be made with the language employed in section 3(o) of the Sick Industrial Companies (Special Provisions) Act, 1985, wherein a distinction is made between "accumulated loss" and "cash loss". Learned senior counsel also referred to Garden Silk Weaving Factory v. CIT [1991] I 189 ITR 512 (SC), wherein this court has held that unabsorbed depreciation was part of loss. Learned counsel also referred to section 349(4)(l) of the Companies Act which uses the expression "excess of expenditure over income" which is narrower in scope and excludes depreciation. We find substance in the submission. There is no reason to assign to the term "loss" as occurring in section 205, proviso clause (b ), of the Companies Act, a meaning different from the one in which it is understood therein solely because it is being read along with section 115J of the Income-tax Act. Section 115J, Explanation, clause (iv), is a piece of legislation by incorporation. Dealing with the subject, Justice G. P. Singh states in Principles of Statutory Interpretation (7th edition, 1999) :

"Incorporation of an earlier Act into a later Act is a legislative device adopted for the sake of convenience in order to avoid verbatim reproduction of the provisions of the earlier Act into the later. When an earlier Act or certain of its provisions are incorporated by reference into a later Act, the provisions so incorporated become part and parcel of the later Act as if they had been 'bodily transposed into it'. The effect of incorporation is admirably stated by Lord Esher, M.R. 'If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act as if they had been actually written in it with the pen, or printed in it.'" (page 233) :

"Even though only particular sections of an earlier Act are incorporated into the later, in construing the incorporated sections it may be at times necessary and permissible to refer to other parts of the earlier statute which are not incorporated. As was stated by Lord Blackburn : 'When a single section of an Act of Parliament is introduced into another Act, I think it must be read in the sense it bore in the original Act from which it was taken, and that consequently it is perfectly legitimate to refer to all the rest of that Act in order to ascertain what the section, meant, though those other sections are not incorporated in the new Act", (page 244) Once we have ascertained the object behind the legislation and held that the provisions of section 205 quoted hereinabove stand bodily lifted and incorporated into the body of section 115J of the Income-tax Act, all that we have to do is to read the provisions plainly and apply the rules of interpretation if any ambiguity survives. Section 205(1) , proviso clause (b) of the Companies Act brings out the unabsorbed portion of the amount of depreciation already provided for computing the loss for the year. The words "the amount provided for depreciation" and "arrived at in both cases after providing for depreciation" make it abundantly clear that in this clause "loss" refers to the amount of loss arrived at after taking into account the amount of depreciation provided in the profit and loss account." (Emphasis supplied)

It would be seen that in the case of Surana Steels (P.) Ltd. (supra) the Hon'ble Supreme Court have held that for the purposes of incorporating the provisions of section 115J by virtue of doctrine of incorporation various provisions of the Companies Act, 1956 should be held applicable. In other words for the purpose of quantification of the amount to be excluded from the book profit by virtue of clause (iv) of Explanation, it is the provisions of the Companies Act, 1956 that would apply. If the amount of profit pertaining to the business of power generation and distribution as provided for in the books of account of the assessee is not in accordance with the provisions of the Companies Act, then for the purpose of adjustment as per clause (iv) the amount of profit as computed in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act has to be substituted. Conversely, if the amount provided in the books of account of the assessee is found to be correctly provided in accordance with the provisions of the Companies Act, 1956, the amount as provided in the books of account cannot be ignored and substituted by what in the opinion of the Assessing Officer is the correct amount of profit of the assessee from the business of power generation and distribution.

37. In the case of Krishna Oil Extraction Ltd. v. CIT [1998] 230 ITR 806¹ the Hon'ble Madhya Pradesh High Court have held that the depreciation and loss have to be worked out in terms of the borrowed Act, i.e., under section 205(l)(b) of the Companies Act and not under the Income-tax Act. The same view has been held by Hon'ble Kerala High Court in their judgments in the case of CIT v. Malayala Manorama Co. Ltd. [2002] 253 ITR 378² and CIT v. Dynamic Orthopaedics (P.) Ltd. [2002] 257 ITR 446³ (Ker.). During the course of hearing before us and even during the course of proceedings before the authorities below, there is no issue that the amount provided for in the books of account of the assessee as profit of power generation and supply business is not in accordance with the provisions of the Companies Act.

38. That apart, there is clear authority of Hon'ble Supreme Court that while working out the assessee's liability of tax payable under the provisions of section 115J, the Assessing Officer cannot question the correctness of the profit and loss account prepared by the assessee-company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act. In the case of Apollo Tyres Ltd. v. CIT[2002] 255 ITR 273⁴ (SC), that is the first question considered by Hon'ble Supreme Court :—

"Can an Assessing Officer while assessing a company for income-tax under section 115J of the Income-tax Act question the correctness of the profit and loss account prepared by the assessee-company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act ?"

In that case the assessee-company changed its method of accounting for working out depreciation allowance and provided for arrears of depreciation of earlier years worked out on the new basis in its profit & loss account. The Assessing Officer while considering the case of that assessee recomputed the book profit so as to exclude the provision made for arrears of depreciation. On revenue's appeal Hon'ble Kerala High Court accepted the adjustment as made by the Assessing Officer. On assessee's appeal the Hon'ble Supreme Court reversed the judgment of Hon'ble Kerala High Court and restored the order of the Tribunal on the basis that for the purpose of computation of book profit within the meaning of the provisions of section 115J, the Assessing Officer under the Income-tax Act has to accept the authenticity of accounts with reference to the provisions of Companies Act as certified by the statutory auditors. The Hon'ble Supreme Court have stated the legal position in the following words :—

"The above speech shows that the income-tax authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that section 115J was introduced in the Income-tax Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, section 115J makes the income reflected in the company's books of account the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the Assessing Officer to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the Revenue on sub-section (1A) of section 115J of the Income-tax Act in support of the above contention is misplaced. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income-tax Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. Beyond that, we do not think that the said sub-section empowers the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company's income, then it would have stated in section 115J that "income of the company as accepted by the Assessing Officer". In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal.

Therefore, we are of the opinion, the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J." [Emphasis supplied]

39. In view of the discussion in the foregoing paragraphs, we hold that for the purpose of adjustment as provided in Explanation (iv) to section 115JA, the Assessing Officer cannot substitute the amount of profit derived by an industrial undertaking from the business of generation or generation and distribution of power as certified by the auditors of the company to be in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. We, therefore, delete the addition made by the Assessing Officer while computing the assessee's income chargeable to tax under section 115JA in this behalf and restore the working of the assessee in relation to Explanation (iv) to section 115JA.

40. Ground of appeal No. 4 in this appeal is directed against the so-called "findings" and "directions" made by the learned CIT (Appeals) and issued to the Assessing Officer for the purpose of initiation of proceedings under section 147 once again in the case of the assessee irrespective of the provisions of section 149 of the Act. Brief facts in this regard have already been enumerated by us in the earlier part of the order. The learned CIT (Appeals) has purported to act under the provisions of section 150.

41. On consideration of the matter we find that the learned CIT (Appeals) has made a self-contradictory order or worse still made a futile attempt to introduce assessment of such income from back door, as is admittedly not in accordance with the dictates of jurisdictional High Court. In this case the Assessing Officer has in the assessment order under section 147 read with section 143(3) made certain additions not enumerated anywhere in the reasons for issue of notice under section 148 as recorded by the Assessing Officer. The assessee challenged these additions, among other grounds, on the ground of the additions being contrary to the judgment of jurisdictional High Court in the case of Vipan Khanna (supra). In the impugned order the learned CIT (Appeals) accepts that such additions are not sustainable following the ratio of the jurisdictional High Court in the case of Vipan Khanna ( supra). Revenue has not come in cross appeal or cross objection to this part of the order of the learned CIT (Appeals) and the same has, therefore, become final. In the present appeal we are concerned with the short question as to whether after having deleted the addition made by the Assessing Officer, the learned CIT (Appeals) could issue finding and/or directions for assessment of the same additions to the income declared by the assessee by way of a fresh notice under section 148 irrespective of the time limit. From the impugned order it is quite clear that in the opinion of the learned CIT (Appeals) the decision of the jurisdictional High Court in the case of Vipan Khanna (supra) deserves a reconsideration by the Hon'ble Punjab & Haryana High Court. The learned CIT (Appeals) does not leave the matter at that and proceeds to devise a way out so that the very same addition that he deletes, may later on be made to the assessee's returned income. In our opinion, it amounts to circumvent the effect of a binding judgment of jurisdictional High Court that cannot be permitted. To put it simply an assessment order or any of its part is either legally tenable or not legally tenable, it cannot be both. We, therefore, hold that the impugned order of the learned CIT (Appeals) in this respect is self-contradictory. According to the learned CIT (Appeals), following the judgment of the jurisdictional High Court in the case of Vipan Khanna (supra ), proceedings under section 147 as initiated by the Assessing Officer, could not be misused for making roving and fishing enquiries so as to explore further items of income having escaped assessment. He, therefore, deletes the additions in due deference to the judicial pronouncement of the jurisdictional High Court. How can the learned CIT (Appeals) then issue any finding or direction to the Assessing Officer to initiate proceedings under section 147 afresh for assessment of those very additions. In other words, according to the learned CIT (Appeals) while the proceedings under section 147 cannot be misused for the purpose of making fishing and roving enquiries, nonetheless proceedings under section 147 can be misused for making fishing and roving enquiries for the purpose of initiating proceedings under section 147 next time. To say the least, we cannot appreciate such convoluted logic of the learned CIT (Appeals). We, therefore, allow the assessee's ground of appeal No. 4 and hold that the impugned order of the learned ClT (Appeals) contains no finding or directions within the meaning of section 150 in respect of the disputed additions in question.

42. Ground of appeal Nos. 5 to 10 are directed against the decision on the merits as given by the learned CIT (Appeals). It so happened that after deleting the additions in question as not being legally tenable in the ratio of the judgment of jurisdictional High Court in the case of Vipan Khanna (supra), the learned CIT (Appeals) considered it necessary to examine the additions independently on merit. He has, therefore, discussed each one of the additions in the impugned order and decided on merits in favour of the revenue and against the assessee, except in relation to the addition of Rs. 15,23,000 made in paragraph 14 of the assessment order which the learned CIT (Appeals) has not approved of on merits. Thereafter the learned CIT (Appeals) has proceeded to give his "findings" and "directions" as discussed by us in the context of assessee's ground of appeal No. 4. We do not propose to go into the merit of these additions for the simple reason that that part of the impugned order deleting the additions in question following the binding judgment of jurisdictional High Court has become final, inasmuch as revenue is neither in appeal nor in cross objections against that part of the impugned order of the learned CIT (Appeals). We are, therefore, of the view that any discussion on the merits of these additions would be entirely academic. We, therefore, do not adjudicate upon the assessee's grounds of appeal Nos. 5 to 10 as being entirely academic.

43. Ground of appeal No. 11 is directed against levy of interest under sections 234B and 234C. According to the learned counsel for the assessee the provisions of the Act pertaining to payment of advance tax do not apply to any liability of tax chargeable under the provisions of section 115JA of the Act. We find that this issue is covered in favour of the revenue and against the assessee by the judgment of Hon'ble Madras High Court in the case of CIT v. Holiday Travels (P.) Ltd. [2003] 263 ITR 307¹ , of Hon'ble Kerala High Court in the case of Karimtharuvi Tea Estates Ltd. v. Dy. CIT [2000] 113 Taxman 514; of Hon'ble Gauhati High Court in the case of Assam Bengal Carriers Ltd. v. CIT [1999] 239 ITR 862 ; of Hon'ble Madhya Pradesh High Court in the case of Itarsi Oils & Flours (P.) Ltd. v. CIT [2001] 250 ITR 686² and of Hon'ble Bombay High Court in CIT v. Kotak Mahindra Finance Ltd. [2004] 265 ITR 119¹. There is of course a contrary judgment of Hon'ble Karnataka High Court in favour of the assessee and against the revenue on the same point in the case of Kwality Biscuits Ltd. (supra). However, preponderance of the judicial opinion is in favour of revenue. In the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294² . Hon'ble Supreme Court have held that preponderance of judicial opinion should be respected. We, therefore, decide this ground of appeal in favour of revenue and against the assessee.

44. Ground of appeal No. 12 is directed against levy of interest under section 234D of the Act. The contention of the assessee is that the provisions of interest under section 234D were inserted by the Finance Act, 2003 w.e.f. 1-6-2003. The same are, therefore, not applicable to assessment year 2000-01. Alternatively the assessee has argued that such interest cannot be levied for the period prior to 1-6-2003. On consideration of the matter we do not see merit in the main contention of the assessee but we agree with the alternate contention of the assessee. Levy of interest to be computed with reference to period of time has to come into force immediately and it cannot be bound to any particular assessment year. At the same time it would be wholly unreasonable to charge interest for the period when the provisions of section 234D were not on the statute book. We, therefore, allow the assessee's ground of appeal No. 12 partially and direct the Assessing Officer to compute interest chargeable under section 234D, if any, with effect from 1-6-2003.

45. In the result, this appeal is partly allowed.

SC decision in L&T case - VAT effect & ST implication

SEPTEMBER 30, 2013

IN what could be termed as one of the most awaited and keenly followed decisions, the Hon'ble Supreme Court has, in L&T Limited v. State of Karnataka (2013-TIOL-46-SC-CT-LB) affirmed its earlier decision rendered in the very famous K Raheja case. While heartily complimenting TIOL for bringing this very important decision with lightning speed, I have attempted to understand the broader implications arising out of this very important case, in this piece.

It would help to understand the background pertaining to the K Raheja decision, as the L & T decision is only reinforcing the Apex Court's earlier decision. In Karnataka, in the 1990s and the early 2000s, the rate of sales tax used to be rather low at around 4%, while the stamp duty rate used to be at around 15%. Some of the brightest tax brains (in Bangalore) came out with a plan to split the consideration for the sale value of the immovable property, into two agreements, viz. one, for the sale of the undivided portion of the land and the second, for the construction of the apartment and due to this, while sales tax came to be levied on the construction value, stamp duty was levied on the market value of the flat, which was lower than the total consideration for the sale of the undivided portion of the land and the value of the construction. It is obvious that, the purchaser of the apartment saved quite a bit of tax, as between stamp duty and Sales Tax, the stamp duty rate was significantly higher than the sales tax rate.

When the VAT law came into effect from 1-4-2005, the VAT rate was fixed at 12.5% initially and now stands at 14.5% in Karnataka. Of course, the stamp duty rate has been consistently coming down and is currently at 5%. What was good planning in an era where the stamp duty rate was high became a disaster, with the sales/VAT rates climbing up and the stamp duty rate falling significantly.

Some Developers and Builders tried to come out of this scenario by entering into single agreement of a future sale of the apartment on the basis of the view that, amounts received by them prior to the completion of the flat would be in the nature of advance monies for the future conveyance of immovable property and consequently, cannot be treated as 'works contracts' under the sales tax/VAT law. It was in this background that the Apex Court delivered its historic verdict in the K Raheja case, in 2005 (2005-TIOL-77-SC-CT), under the then prevailing Karnataka Sales Tax Act, 1957.

For the benefit of TIOL readers, I've reproduced the relevant paras from the L & T decision, which beautifully summarizes the issue, as under:

Quote:

The Larger Bench noted the broad facts in Raheja Development's case as:

1. Raheja Development carried on the business of real estate development and allied contracts;

2. Raheja Development entered into development agreements with the owners of land;

3. Raheja Development entered into agreements of sale with intended purchasers. The agreements provided that on completion of the construction the residential apartments or the commercial complexes would be handed over to the purchasers who would get an undivided interest in the land also;

4. The owners of the land would then transfer the ownership directly to the society formed under the Karnataka Ownership Flat (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1972 (for short, 'KOFA').

The following definition of "works contract" was under consideration before this Court in Raheja Development': "works contract" includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property".

In light of the above facts and the definition of "works contract", the question before this Court was whether Raheja Development were liable to pay turnover tax on the value of goods involved in the execution of the works contract.

The Court in Raheja Development held as under:

(i) The definition of the term "works contract" in the Act is an inclusive definition.

(ii) It is a wide definition which includes "any agreement" for carrying out building or construction activity for cash, deferred payment or other valuable consideration.

(iii) The definition of works contract does not make a distinction based on who carries on the construction activity. Even an owner of the property may be said to be carrying on a works contract if he enters into an agreement to construct for cash, deferred payment or other valuable consideration.

(iv) The developers had undertaken to build for the prospective purchaser.
(v) Such construction/development was to be on payment of a price in various installments set out in the agreement.

(vi) The developers were not the owners. They claimed lien on the property. They had right to terminate the agreement and dispose of the unit if a breach was committed by the purchaser. A clause like this does not mean that the agreement ceases to be "works contract". So long as there is no termination, the construction is for and on behalf of the purchaser and it remains a "works contract".

(vii) If there is a termination and a particular unit is not resold but retained by the developer, there would be no works contract to that extent.

(viii) If the agreement is entered into after the flat or unit is already constructed then there would be no works contract. But, so long as the agreement is entered into before the construction is complete it would be works contract.

Unquote:

While interpreting the K Raheja decision as well as the L & T decision, it would do us a lot of good to appreciate the fact that the definition of 'works contracts' under the VAT laws of most States are very similar to that we have in Karnataka and to this extent, this decision will apply to almost, the whole of the country.

The sum and substance of the K Raheja decision, which has been affirmed in the L & T decision, as far as I can see, is that, even an agreement to sell an immovable property would be treated as a 'works contract' as long as, amounts are received from the prospective buyer prior to the completion of the construction, as this transaction would also be a 'works contract' coupled with a transaction involving sale of immovable property.Though the K Raheja case actually dealt with a commercial property (located on M G Road, Bangalore), it is obvious that the law laid down by the Apex Courts applies, more importantly, to 'works contracts' involving residential properties as well.

This decision, very aptly, also refers to another historic decision of the Apex Court in, interestingly, another decision involving L & T viz. State of Andhra Pradesh & Ors. vs. Larsen & Toubro Ltd. & Ors.; (2008-TIOL-158-SC-VAT), in Para 31 and other Paras. The Apex Court has not overruled its decision in the case of State of AP and Ors v. Larsen & Toubro Ltd and Ors and this would lead to the sustainable view that, if the Developer is not purchasing any goods and not transferring any property in goods to the prospective buyer, which is actually undertaken by the contractor appointed by the Developer, no VAT is still leviable on the Developer, under the VAT law.This argument is based on the view that, by not transferring goods, in the same or in other form, to the prospective buyer, the Developer, who has contracted out the construction activity, cannot be treated as a 'dealer' or 'works contractor' under the VAT law.

As a matter of huge relief, the Apex Court rejected the contention of the State of Karnataka that, even in the case of sale of the immovable property after completion of construction, sales tax is to be levied on the value of the materials and goods comprised in the sale consideration. Hence, sale of immovable properties, whether finished or semi-finished, are outside the purview of VAT.

Be that as it may, now… to my favourite zone… are there any service tax implications arising out of this landmark decision of the Apex Court? Well… quite a few, Sir.

Firstly ... it would seem that the levy of service tax on the 'deemed service' on Developers in terms of Item No. (b)of Section 66E of the Finance Act, 1994, wherein, service tax is leviable on the amounts received from the prospective buyer, unless the entire amount for the sale of the property is obtained after the OC date, gets some legal sanction from the Apex Court. After all, this deemed service would be a works contract under the VAT law post the L & T decision and ipso facto , would also be a works contract under the service tax law.

Secondly, though this decision is not applicable to the service tax law, it would seem that, the decisions of the High Courts in the Magus Construction Pvt Ltd Vs Union of India - (2008-TIOL-321-HC-GUW-ST) and Assotech Realty Pvt Ltd Vs State of UP - (2007-TIOL-297-HC-ALL-CT), which had held that, no service is involved when the Developer enters into an agreement of sale of a flat and receives amounts prior to the completion of the construction, would no longer be valid, as these transactions are to be treated as 'works contracts' under the VAT law and by default, would become 'works contracts' under the service tax law.

Thirdly,… I feel that, since the law laid down by the Apex Court in the State of AP v. L & T case has not been overruled, a view can still be taken by 'pure Developers' who do not effect transfer of property in goods by themselves having employed turnkey contractors, cannot be treated as 'dealers' under the VAT law and consequently, the levy of service tax would fail, notwithstanding Entry No. (b)of the Declared List of services covered under Section 66E. Of course, the constitutionality of this entry would need to be challenged both under the new law that has taken effect from 1-7-2012 as well as, in respect of the amendment brought into the service tax law, by the insertion of the Explanation, with effect from 1-7-2010, in respect of 'construction services'.

Fourthly, ….the concept of a joint development agreement between the Developer and the owner of the land, not being treated as a 'works contract' under the VAT law, still holds good, in my view, even after this landmark decision. This decision refers to the concept of a joint "development agreement in Para 111 and makes an observation that "direct monetary consideration may not be involved but such agreement cannot be seen in isolation to the terms contained therein and following development agreement, the agreement in the nature of the tripartite agreement between the owner of the land, the developer and the flat purchaser whereunder the developer has undertaken to construct for the flat purchaser for monetary consideration". In my humble view, given the fact that, monetary consideration is a pre-requisite for levy of VAT, no sales tax/VAT can be levied in respect of joint development agreements entered into between the Developer and the owner of the land, as these are largely 'barter' transactions involving the Developers and the Land owners. Though non-monetary consideration might be good enough to attract service tax levy, insofar as levy of service tax on works contracts is concerned, the service tax law will have to follow the VAT law and consequently, no service tax can be levied in respect of transactions between the Developers and Landowners.

And, lastly... unlike the service tax law, there is no concept of the OC date being treated as the 'deemed' date of completion of construction of the apartment under the VAT law. There could be some instances, whereunder, the construction would have been completed but the OC would not have been received. In these cases, it is perfectly legal to take the view that, no VAT is applicable, as the construction is complete. But, the levy of service tax, in terms of Entry No. (b)of Section 66E could still survive, as the consideration has been received prior to the date of the OC. I have my serious doubts.

Before concluding…..

Undoubtedly, this much awaited decision has come as a surprise (definitely, not a pleasant surprise, Sir) to many of the tax practitioners, especially after the Apex Court had doubted the correctness of its earlier decision in the K Raheja case, in L & T Limited v. State of Karnataka (2008-TIOL-186-SC-CT). In any case, this decision would set to rest, all controversies that are existing in the Realty Sector, on the levy of VAT and service tax on 'sale agreements', which are popularly referred to as 'single agreements' (as contrasted to the system of Developers entering into 'two agreements' involving sale of land and for construction of the apartment).

Interestingly, the Apex Court did not accept the view of the counsel that the dominant intent of the transaction should be taken into account in the case of works contracts covered by Article 366(29-A)(b) of the Constitution. (In the case of an agreement of sale, it was argued that the dominant intent is one of sale of immovable property). I don't know if this would reinforce the Apex Court's earlier decision in the BSNL case (2006-TIOL-15-SC-CT-LB), in terms of which, the dominant intention would be a factor to determine the levy of either of service tax or VAT on a composite transaction, other than deemed sale transactions covered under Article 366(29-A).

I am not competent enough to delve into the wider ramifications arising out of this decision. It would seem that this decision would have more implications for Service Tax than that for the VAT law. Insofar as the impact on the VAT law is concerned, it would seem that this decision would not have a big impact as most Developers (at least, in Karnataka) have already shifted to the practice of entering into two agreements.

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

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Chartered Accountant Finance

Monday, September 30, 2013

[aaykarbhavan] Re: Judgments

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