COMMR. OF INCOME TAX, LDH. vs. M/S NAHAR EXPORT LTD.

This judgement will dispose of above noted two appeals since common issues are involved in both these appeals. These appeals have been filed by the revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') against the common order dated 8.11.2004 of the Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh in ITA No.460/Chandi/1998 for the assessment year 1994-95 and ITA No.285/Chandi/1999 for the asessment year 1994-95. 2. According to the revenue, the order of the Tribunal give rise to the following substantial question of law:- “Whether the ITAT was correct in law in setting aside order under Section 263 of the Act passed by the CIT directing the AO not to ignore loss on export of trading goods for the purpose of computing deduction under Section 80 HHC of the Act disregarding the fact that the law has been settled by the Hon'ble Supreme Court in the case of IPCA Laboratories Ltd. 266 ITR 521 ?”

The respondent is a limited company and derives income from manufacturing of cotton yarn. For the accounting year relevant for the assessment year 1994-95, return declaring income of Rs.18,76,090/- was filed on 30.11.1994. The respondent-assessee claimed deduction amounting to Rs.5,96,147/- under Section 80HHC of the Act. However, the Assessing Officer while computing deduction under Section 80HHC of the Act ignored loss on export of trading goods and computed the deduction at Rs.7,35,435/-. The assessment was computed at an income of Rs.26,67,350/- vide order dated 18.12.1995 under Section 143(3) of the Act.

The Commissioner of Income Tax (Central), Ludhiana initiated proceedings under Section 263(1) of the Act on the ground that the order of the Assessing Officer is erroenous and prejudicial to the interest of revenue. Vide order dated 18.2.1998, the Commissioner of Income Tax (Central), Ludhiana held that the excess deduction under Section 80HHC of the Act has been wrongly allowed to the assessee and necessary verification was not made with reference to admissibility of the claim in accordance with the relevant provisions of law, therefore, the assessment order passed by the Authority, Ludhiana was not only erroneous but also prejudicial to the interest of revenue. While passing the said order dated 18.2.1995, the Commissioner of Income Tax (Central), Ludhiana directed the Assessing Officer to recompute the deduction under Section 80HHC of the Act after taking into consideration net result of both activities i.e. manufacturing and trading and not that only profit of one activity i.e manufacturing is to be considered and losses of the other activities i.e. trading are to be ignored.

The assessee feeling aggrieved against the order of the Commissioner of Income Tax (Central), Ludhiana passed under Section 263(1) of the Act, filed an appeal before the Tribunal. The Tribunal after relying upon the decision of this Court in CIT v. Max India Ltd. (2004) 268 ITR 128 (P&H) held that the Commissioner had no jurisdiction to interfere with the view taken by the Assessing Officer by exercising his powers under Section 263 of the Act, since the view expressed by the Assessing Officer was a possible view because majority of the Tribunal Benches has taken the same view and the Commissioner was not justified in exercising his powers under Section 263 of the Act to revise the order passed by the Assessing Officer. Accordingly, these appeals were allowed by the Tribunal. Hence, these appeals by the revenue.

Mr. Sanjiv Bansal, learned counsel for the revenue, has vehemently argued that on an interpretation of the provision of Section 80HHC (3) of the Act as it then stood the view taken by the Assessing Officer was unsustainable in law and therefore, the Commissioner was right in invoking Section 263 of the Act. In this connection, he has further submitted that in fact the 2005 amendment which is clarificatory and retrospective in nature itself indicates that the view taken by the Assessing Officer at the relevant time was unsustainable in law. According to the learned counsel for the revenue, the Hon'ble Supreme Court of India in the case of IPCA Laboratories Ltd. v. DCIT (2004) 266 ITR 521 (SC) has authoritatively held that while computing the deduction under Section 80HHC of the Act, the result of both manufacturing as well as trading activities has to be taken into account. Learned counsel for the appellant has also relied upon the judgement of the Hon'ble Supreme Court in A.M. Moosa v. Commissioner of Income Tax (2007) 294 ITR 1 (SC) to argue that the word “profit” in Section 80HHC (1)and (3) of the Act, 1961, means a positive profit and the deduction can be permitted only if there is a positive profit in the export of both self manufactured goods as well as trading goods and if there is a loss in either of the two then that loss has to be taken into account for the purpose of computing the profits. On the basis of above authoritative judgments, Mr. Sanjiv Bansal has further argued that in view of the above said settled proposition of law on the merits of the case, the order of the Assessing Officer cannot be sustained and therefore, the order of the Commissioner of Income Tax passed under Section 263 (1) of the Act was legal and correct and the Assessing Officer's order under Section 143 (3) of the Act was correctly held to be erroneous and prejudicial to the interest of revenue.

On the other hand, Mr. Sanjay Bansal, Sr. Advocate, instructed by Mr. Parvesh Saini, Advocate and Mr. Parshant Bansal, Advocate for the respondent-assessee has argued that Section 263 of the Act confers revisional jurisdiction on the Commissioner to revise an order which is prejudicial to the interest of the revenue and is erroneous. However, the Commissioner is not empowered to revise an order of an assessment based on one view out of the two possible views and thus, the inherent limitation on the exercise of powers by the Commissioner under Section 263 of the Act is that such a power cannot be exercised where the order of assessment is based upon one possible view as a result of issue being debatable. In other words, if the very exercise of power results in change of opinion on account of issue being debatable, the order passed under Section 263 of the Act would be bad in law. It was argued that the assessment order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of revenue and therefore, the Commissioner of Income Tax was not justified in setting aside the order passed by the Assessing Officer by invoking the provisions of Section 263 of the Act. It was further argued that since the Assessing Officer after proper verification allowed the claim of the assessee under Section 80HHC of the Act which was supported by auditor's certificate and the view taken by him was one of the possible views allowable in accordance with law, the Assessing Officer had decided the issue on the basis of one of the possible views, the order can neither be erroneous nor prejudicial to the interest of revenue. Mr. Sanjay Bansal, Sr. Advocate has argued that in view of the decision rendered by the Hon'ble Supreme Court of India in CIT v. Max India Ltd.'s case (supra), these appeals are liable to be dismissed.

We have heard learned counsel for the parties and perused the record.

We find no merit in the contentions raised by the learned counsel for the appellant. Firstly, it is not in dispute that when the order of the Commissioner was passed there were two views on the word “profits” in that section and different views existed on the day when the Commissioner passed the above order. Moreover, the mechanics of the section have become so complicated over the years that two views were inherently possible. Therefore, the subsequent amendment in 2005 even though retrospective, will not attract the provisions of Section 263 of the Act particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated 18.2.1998, in purported exercise of powers under Section 263 of the Act.

The Hon'ble Supreme Court of India in CIT v. Max India Ltd.'s case (supra) held as under:- “In our view at the relevant time two views were possible on the word “profits” in the proviso to Section 80HHC(3) of the Act. It is true that vide the 2005 amendment the law has been clarified with retrospective effect by insertion of the word ”loss” in the new proviso. We express no opinion on the scope of the said amendment of 2005. Suffice it to state that in this particular case when the order of the Commissioner was passed under Section 263 of the Income-tax Act, 1961, two views on the said word “profits” existed. In our view the matter is squarely covered by the judgement of this Court in the case of Malabar Industrial Co. Ltd. v. CIT reported in [2000] 243 ITR 83 ; as also by the judgement of the Calcutta High Court in the case of Russell Properties P. Ltd v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 at 243.”

In the case of Malabar Industrial Company Ltd. v. CIT (2000) 243 ITR 83 the Hon'ble Apex Court has taken the view that the phrase “prejudicial to the interests of the Revenue” under Section 263 of the Act has to be read in conjunction with the expression “erroneous” order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. For example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible or the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue.

In view of the above settled proposition of law and following the law laid down by the Hon'ble Apex Court in CIT v. Max India Ltd.'s case (supra) and the Malabar Industrial Company Ltd.'s case (supra), we find that no questions of law survive for determination of this Court. Thus, there being no merit in the appeals of the revenue, the same are hereby dismissed. RAKESH KUMAR GARG) JUDGE March 26, 2008 (SATISH KUMAR MITTAL) ps