THE COMMISSIONER OF IT -I vs. M/S RANA POLYCOT LTD

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 31.3.2005 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B” (hereinafter referred to as “the Tribunal”) in ITA No. 867/Chandi/2000, for the assessment year 1997- 98, claiming the following substantial questions of law:- “(a) Whether, in the facts and circumstances of the case, the Hon'ble ITAT has erred in holding that the assessee has validly withdrawn its exemption u/s 10B, earlier claimed in the original return by validly -2- filing a revised return u/s 139(5) on 31.3.98 in spite of the specific provisions of sub-section (7) of Section 10B applicable for the relevant period? (b) Whether, in the facts and circumstances of the case, the Hon'ble ITAT has erred in law in holding further that the assessee has rightly claimed the impugned interest as income from business source by ignoring the decision of the Apex Court in the case of Tuticorin Alkalies Ltd. (227 ITR 172)?”

Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee filed original return on 30.11.1997 for the assessment year 1997-98. The assessee had earned interest income of Rs.33,99,620/- on deposits made in banks and other companies for pre-operative period and post-operative period. It claimed exemption under Section 10B of the Act being 100% export oriented unit. The assessee filed revised return under Section 139(5) of the Act on 31.3.1998 by declaring the income at Rs.7,07,433/- after withdrawing the exemption claimed u/s 10B of the Act as per provisions of Section 115JA of the Act. The case of the assessee was taken up for scrutiny by issuing notice under Section 143(2) on 30.6.1998 and its assessment was completed on 25.10.1999 at a total income of Rs.33,87,620/-.. The Assessing Officer held the interest income as taxable under the head “other sources” and the income earned on surplus funds after commencement of business also as “income from other sources” and accordingly taxed the entire interest income of Rs.33,99,620/- as “income from other sources”. Feeling aggrieved, the -3- assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”] who vide order dated 5.10.2001 deleted the addition holding that the assessee was entitled to file revised return under Section 139(5) of the Act and to withdraw exemption as claimed under Section 10B of the Act in the original return. Against the order of the CIT(A), the revenue filed an appeal before the Tribunal who vide order dated 31.3.2005 dismissed the appeal. This gave rise to the revenue to approach this Court by way of the present appeal.

We have heard learned counsel for the parties.

At the outset, learned counsel for the revenue conceded that in so far as question (b) is concerned, no argument was raised before the Tribunal and, therefore, this question does not arise for consideration in this appeal. Accordingly, question (b) is declined.

The only point for consideration in this appeal is, whether the assessee was justified in filing the revised return under Section 139 (5) of the Act.

Learned counsel for the revenue relied upon the judgments of Madras High Court in Commissioner of Income Tax v. Southern Petro Chemical Industries Corporation Ltd., [1998] 233 ITR 400 and that of Madhya Pradesh High Court in Deepnarain Nagu and Company v. Commissioner of Income Tax, [1986] 157 ITR 37 to contend that the assessee was not entitled to file the revised return unless there existed wrong statement or some omission in the original return.

On the other hand, learned counsel for the assessee has placed reliance upon the decisions of this Court in Beco Engineering -4- Co. Ltd. Vs. Commissioner of Income-Tax, Rohtak (1984) 148 ITR 478 and Commissioner of Income Tax Vs. Friends Corporation (1989) 180 ITR 334 and submitted that the assessee was entitled to file the revised return under Section 139(5) of the Act and withdraw its claim under Section 10B of the Act.

We have given our thoughtful consideration to the respective submissions of learned counsel for the parties and do not find any merit in the submission made by the learned counsel for the revenue.

This Court in Beco Engineering Co. Ltd.'s case (supra) where the assessee had filed revised return withdrawing its claim for depreciation, as filed in the original return, has held as under:- “It is well settled that in case an assessee files revised returns, they are to be taken into consideration for the purpose of making an assessment. The original returns cannot be adverted to for that purpose. In this view , we are fortified by the observations of the Allahbad High Court in Niranjan Lal Ram Chandra V. CIT [1982] 134 ITR 352, wherein it was observed that once a revised return has been filed under s.139(5), the original return is substituted by the revised return as a result of the amendments made in the original return by the revised return.”

The Madras High Court in Southern Petro Chemical Industries Corporation Ltd's case (supra) after noticing the -5- judgments of this Court in Beco Engineering Co. Ltd. and Friends Corporation's cases (supra) had followed its earlier decision in this Court in Beco Engineering Co. Ltd. and Friends Corporation's cases (supra) and are unable to subscribe to the view taken by the Madras High Court.

Further, the CIT(A) while allowing the claim of the assessee in para 3.3 of its order had recorded as under:- “3.3 The submissions made by the appellant have been given careful consideration. The issue for consideration is whether the assessee was entitled to file a revised return and to withdraw the claim for exemption under section 10B of the I.T. Act, which had been claimed in the original return. There is no dispute that the original return under section 139(1) had been filed in time, therefore, the assessee was competent to file a revised return under section 139(5) of the I.T. Act. In the original return, the appellant had claimed exemption under section 10B of the I.T. Act. Later on the appellant realised that the market conditions were not conducive for export and he would not be able to fulfil the export obligations for eight years, therefore, a revised return was filed in which claim for exemption under section 10B was withdrawn and the assessee offered to be -6- assessed under section 115JA and the tax was also paid accordingly. Sub-section 2(ia) of section 10B makes it mandatory that export of the assessee should not be less than 75% of total sales during the previous year relevant to eight assessment years beginning from the date of commercial production. Since there was a slump in the economy due to market conditions, the appellant probably felt that it would be impossible to maintain export sales to the extent of 75% of total sales in the following years. Therefore, prudency demanded that the assessee should not claim the exemption under section 10B of the I.T. Act. The explanation offered by the appellant sounds to be convincing. Since the appellant had filed the original return in time and the claim under section 10B had been made for the first time, he was free to withdraw the claim before any assessment was made. The addition has been made by the Assessing Officer on the ground that the appellant was not competent to file the revised return and had no right or option to withdraw the claim under section 10B of the I.T. Act. Since the appellant was competent to file the revised return, the whole case of the Assessing Officer collapses on this ground alone. The Assessing Officer has observed in the order that, as required under section 10B(5), the -7- assessee had given written undertaking that it should be considered as a 100% export oriented unit under section 10B for subsequent years. It is seen that the assessee has not given any such undertaking. In the return, it has been mentioned that the assessee is 100% export oriented unit and its income is exempt under section 10B of the I.T. Act. Subsequently the return was revised under section 139(5) of the I.T.Act withdrawing the claim for exemption under section 10B of the I.T.Act, which was followed by a letter dated 31.3.1998 wherein it was undertaken that the assessee will not avail any benefit under section 10B of the I.T.Act even in the subsequent years. In the circumstances, the Assessing Officer has erred in holding that the interest earnest represents income from other sources. Since interest is a revenue receipt, therefore, it is held to be a business income and since the interest income has been included in the profit & loss account, the interest paid on borrowed funds is automatically set off against the interest income. In other words, the interest earned on deposits which has been held to be business income and which is reflected in the profit & loss account, gets set off against the interest paid which debited to the profit & loss account. Thus, this ground of appeal is allowed.”

The Tribunal had affirmed the aforesaid view of the CIT(A).

Learned counsel for the revenue has not been able to show that the approach of the CIT(A) and the Tribunal was incorrect in any manner.

In view of the above, we find no merit in this appeal and the same is hereby dismissed. (AJAY KUMAR MITTAL) JUDGE February 25, 2011 (ADARSH KUMAR GOEL) gbs JUDGE