The Principal Commissioner Of Income Tax 1 vs. M/S Kilpest India Limited

ITA-70-2016 (1) THE HIGH COURT OF MADHYA PRADESH: JABALPUR (Division Bench) ITA No. 70/2016 APPELLANT : The Principal Commissioner of Income Tax-I, Bhopal Versus RESPONDENT : M/s Kilpest India Limited ------------------------------------------------------------------------------------------- Coram: Hon’ble Shri Justice Ajay Kumar Mittal, Chief Justice Hon’ble Shri Justice Vijay Kumar Shukla, Judge ------------------------------------------------------------------------------------------- Appearance: Shri Sanjay Lal, Advocate for the appellant. None for the respondent. ------------------------------------------------------------------------------------------- JUDGMENT (Oral) [07.01.2020] Per: Ajay Kumar Mittal, Chief Justice: This appeal under Section 260-A of the Income Tax Act, 1961 (for short “the Act”) has been preferred by the Revenue being aggrieved by an order dated 21.09.2015 passed by the Income Tax Appellate Tribunal, Indore Bench, Indore (hereinafter referred to as “the Tribunal”) in ITA No. 175/Ind/2014 whereby the order of the Commissioner of Income Tax (Appeals) [for brevity “the CIT(A)”] allowing the relief to the assessee under Section 80-IA of said Act has been affirmed and the appeal of the Revenue has been dismissed. 2. The appeal was admitted on 20.06.2017 for determination of the following two substantial questions of law:- ITA-70-2016 (2) A. Whether on the facts and in the circumstances of case, the ITAT erred in upholding the order of CIT(A) which the Ld. CIT(A) held that the Unit-II was eligible for claiming deduction u/s 80-IA of the Act, where it had not filed form No.10CCB alongwith return of income in original assessment proceedings? B. Whether on the facts and in the circumstances of the case, the ITAT erred in upholding the order of CIT(A) in which the Ld. CIT(A) held that the Unit-II was eligible for claiming deduction u/s 80-IA of the Act, when the profits shown by the Unit-II in respect of sales to consumption of raw material clearly showed that the profit claimed by Unit-II for deduction u/s 80-IA of the Act was erroneous? 3. Briefly stated, the facts of the present case, as mentioned in appeal memo, are that the respondent-assessee engages in the business of formulation of pesticides, insecticides and micro-nutrient fertilizers. The original assessment of the respondent for the assessment year 2004-05 was completed under Section 143(3) of the Act vide order dated 26.06.2006 accepting the returned income wherein deduction of `16,71,579/- under Section 80-IA of the Act was claimed and determining the book profit under Section 115JB of the Act at `14,68,371/-. The said assessment was re- opened by the Assessing Officer under Section 147 of the Act by issuing notice dated 30.03.2011 under Section 148 of the Act. The Assessing Officer vide order dated 29.12.2011 (Annexure A-1) disallowed the deduction as claimed under Section 80-IA of the Act inter alia on the ground that neither the audit report in Form No.10CCB was filed with the return nor during the course of assessment proceedings and even the audit report in Form No.10CCB which was filed with the written submissions was incomplete as ITA-70-2016 (3) no separate audited financial statements of Unit-II were attached and further the assessee did not furnish detail to justify the consumption of raw materials and production (month-wise) for the Unit-I and Unit-II, whereas as per profit & loss account of Unit-II, the net profit was shown at a very higher figure of `96,67,206/- which on comparison with the combined account of Unit-I and Unit-II was found to be disproportionate, as the proportionate value of sale of Unit-II showed a very low figure of `38,30,063/-. It was also held that the assessee had concealed the particulars of income and furnished inaccurate particulars of income within the meaning of Section 271(1)(c) of the Act. Thus, the Assessing Officer added the amount of `16,71,579/- which was claimed by the assessee as deduction under Section 80-IA of the Act. The order of re-assessment was assailed by the respondent-assessee before the CIT(A)-I, Bhopal in first appeal, which was allowed vide order dated 02.12.2013 (Annexure A-2) with the direction to allow the deduction under Section 80-IA of the Act, as claimed by the assessee. Against the order of the CIT(A)-I second appeal was carried by the Revenue before the Tribunal, which has been dismissed vide order dated 21.09.2015 (Annexure A-3). In this background, the order of the Tribunal has been assailed in this appeal. 4. It is stated that though the tax effect involved in the appeal is only `5,84,158/- which is below the prescribed monetary limit for filing appeal before the High Court in view of the CBDT’s circular No.21/2015 dated 10.12.2015 but since the proceedings under Section 147 of the Act were initiated at the instance of the Revenue Audit Party, therefore, the appeal is covered under the exceptions provided in the circular dated 10.12.2015. ITA-70-2016 (4) However, a preliminary objection was raised in this regard by the learned counsel for the assessee at the time of motion hearing, which was declined by order dated 22.03.2017 and thereafter, the appeal was admitted on the substantial questions of law, as noted above. However, today, nobody has chosen to appear on behalf of the assessee. 5. Learned counsel for the appellant has vehemently argued that the CIT(A) as well as the Tribunal both erred in not properly appreciating that the assessee had failed to fulfill the requirement of filing Form No.10CCB along with the return of income in the original assessment proceedings and therefore, could not have been allowed deduction under Section 80-IA of the Act at the time of reassessment. As prescribed under Section 80-IA(7) of the Act, the requirement of filing audited report in Form No.10CCB is mandatory and therefore, could not have been dispensed with merely on the ground that the same relief was granted in the immediately preceding year. He further argued that the Unit-II in its profit & loss account showed profit of `96,67,206/-, consumption of raw material as `31,36,696/- and sale of Unit-II as `1,67,56,520/- after deducting all other overheads, whereas on comparison with the combined accounts shown for Unit-I and Unit-II, the proportion of sales of Unit-II comes to only `38,30,063/- which is on very lower side and thus, the profit shown is apparently erroneous and the Assessing Officer has also recorded a finding that even if any reasonable amount is added to the sales shown for Unit-II to cover up the overheads then also it shows loss instead of profit shown by Unit-II. Thus, on this ground also the deduction under Section 80-IA of the Act was not allowable. On these premises, it was prayed that the appeal be allowed and the ITA-70-2016 (5) impugned orders passed by the CIT(A) and the Tribunal be set aside restoring the order of the Assessing Officer. 6. We have heard learned counsel for the appellant and perused the impugned orders. 7. Broadly, the following two issues arise for consideration in this appeal:- (a) Whether the assessee, who had failed to file the audit report at the time of original assessment was entitled to present it during the course of reassessment proceedings and, thus, entitled to claim deduction under Section 80-IA of the Act in view of the condition envisaged in sub-section (7) of Section 80-IA of the Act? (b) Whether the Tribunal had rightly allowed deduction under Section 80-IA of the Act in respect of profits shown by Unit-II when the profits of that Unit were not in proportion of sales to consumption of raw material therein? 8. Taking up the first broad issue, the answer would require discussion of the following points:- (i) Whether the assessee who fails to file the audit report under Section 80-IA(7) of the Act along with the original return of income filed under Section 139 of the Act but presents the same during the course of assessment proceedings under Section 143 of the Act, is entitled to deduction under Section 80-IA thereof. (ii) If answer to issue (i) above, is in affirmative, then whether the said benefit is admissible in the reassessment proceedings when no audit report had been filed during the original assessment proceedings but was presented only in reassessment proceedings. ITA-70-2016 (6) 9. Before considering the first point with regard to non-fulfillment of requirement of filing the audit report in Form No.10CCB by the assessee and the question as to whether the condition envisaged under Section 80- IA(7) of the Act for claiming deduction in respect of profits and gains is mandatory or directory, it would be apt to refer to the relevant provisions of the Act, which read, thus:- “Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. - 80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years. *** *** *** (7) The deduction under sub-section (1) from profits and gains derived from an undertaking shall not be admissible unless the accounts of the undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant.” 10. We proceed to examine the condition envisaged under Section 80- IA(7) of the Act, whether it is mandatory or directory in view of the language of the provision that the deduction under sub-section (1) from profits and gains derived from an undertaking shall not be admissible unless the relevant accounts for which deduction is claimed have been audited and the assessee has furnished the same along with his return of income. It is no ITA-70-2016 (7) longer res integra. A similar issue with regard to the requirement of filing audit report with the return in terms of selfsame Section 32AB(5) of the Act for claiming deduction under Section 32AB(1) of the Act came up for consideration in an appeal under Section 260A of the Act before a Full Bench of the Punjab and Haryana High Court in a decision reported in (2002) 254 ITR 6 (P&H) (Commissioner of Income Tax vs. Punjab Financial Corporation). The Bench held that Section 32AB(5) of the Act is not mandatory and the Assessing Officer has the discretion to entertain the audit report even though the same has not been filed with the return but presented during the course of assessment proceedings and give benefit of the deduction to the assessee in terms of Section 32AB(1) of the Act. The Bench further took note of the provision under Section 139 of the Act which provides for filing of revised return and rectification of defect in the return and, therefore, the requirement of filing the duly audited report along with the return was held to be not mandatory. Be it noted, the provision under Section 32AB(5) of the Act is similar to Section 80-IA(7) of the Act. Therefore, we are unable to take any different view in the matter than the one arrived at by the Punjab and Haryana High Court in Punjab Financial Corporation (supra). In view of the above, the first point under issue No.(a) is held in affirmative. In other words, where the assessee files the audit report in Form No.10CCB before completion of the assessment, we do not find any reason to hold that the condition envisaged under Section 80-IA of the Act had not been fulfilled. ITA-70-2016 (8) 11. Analysing whether the said benefit is admissible in case of reassessment proceedings as well, it would be expedient to reproduce relevant portion of Sections 147 and 148 of the Act, which read, thus:- “Income escaping assessment. 147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year: Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. *** *** ***” Issue of notice where income has escaped assessment. 148. (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in ITA-70-2016 (9) respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139: *** *** ***” According to the aforesaid provisions before making assessment/ reassessment or recomputation under Section 147 of the Act, the Assessing Officer shall serve on the assessee a notice requiring him to furnish a return of his income or income of any person in respect of which he is assessable during the previous year corresponding to the relevant assessment year even where a return had been furnished earlier under Section 139 or Section 142(1) of the Act, within such period as may be specified in the notice. The effect of return filed in response to notice under Section 148(1) of the Act is that it shall be treated as if such return was a return required to be furnished under Section 139 of the Act. Accordingly, the Assessing Officer shall serve a notice under Section 143(2) of the Act within the period of limitation provided thereunder from the end of the financial year in which the return is furnished by the assessee to make the assessment under Section 147 read with Section 143(3) of the Act. In view of the above, it may be safely concluded that the basic purpose of Section 148 of the Act is merely to empower the Assessing Authority with the machinery for assessment. Fundamentally, both the assessment and reassessment need the same machinery. In other words, the provisions relating to regular assessments shall apply to the assessment made pursuant to the notice of reassessment. Once that is so, all the essential traits and requirements of procedure embodied for framing of regular assessment under the Act would also apply ITA-70-2016 (10) to reassessment proceedings as well. Therefore, the audit report furnished at the time of reassessment proceedings could not be ignored by the Assessing Officer while adjudicating the issue of admissibility of deduction under Section 80-IA of the Act. The point No.(ii) noticed above is decided accordingly. 12. Adverting to the factual matrix in the present case, it is noticed that the findings recorded by CIT(A) and the Tribunal indicate that the assessee was carrying on its business since 1973-74 and had set up a new unit in 1997-98 and had been claiming deduction under Section 80-IA of the Act since then which was allowed by the Department. In the assessment years 2001-02 and 2002-03 also the assessee claimed the deduction under Section 80-IA(2) of the Act, which was allowed. Considering thus, the Tribunal dismissed the appeal holding that the same relief was granted on the basis of the decision of the ITAT in the immediately preceding year and the facts of the present case also remain the same. The relevant extract of the order passed by the Tribunal reads thus:- “2.1 The facts, in brief, are that, during the relevant period, the assessee company was carrying on the business of formulation of pesticides and insecticides since 1973-74. The assessee set up a new unit in 1997-98 to manufacture micronutrient fertilizers and had been claiming deduction u/s 80-IA since then which was allowed by the Department. The learned CIT(A) perused the assessment order framed u/s 143(3) for the A.Ys 2001-02 and 2002-03 wherein the claimed deduction u/s 80-IA(2) of the Act was allowed to the assessee. However, vide assessment order dated 23.12.2010 the learned Assessing Officer disallowed the claimed deduction on the ground that the assessee did not furnish the audit report in Form No.10CCB. The assessee approached the learned CIT(A) who after examining the facts allowed the claim which is under challenge before this Tribunal. We find that there uncontroverted finding in the impugned order (para 4.3) that the audit report was filed and the ITA-70-2016 (11) requirement of section 80-IA(7) of the Act has been duly met with. Unit-II was separate and independent unit from the existing unit and the new unit commenced its production during A.Y. 1997-98. The manufacturing of micronutrient fertilizers even has not been disputed by the Assessing Officer. It is not the case that the unit in dispute is part of earlier unit or its expansion. There is an uncontroverted finding in the impugned order that the assessee was maintaining separate accounts for both the units which are duly audited. Since the assessee has duly fulfilled the requirements of section 80-IA(7) of the Act by filing the audit report before framing the assessment, we are of the view that the Assessing Officer wrongly disallowed the claim of the assessee. As per provisions of section 80- IA(7), requiring filing of audit report alongwith the return is not mandatory rather it is directory and if the audit report is filed at any time before framing the assessment, the required conditions are considered to be fulfilled. Our view is fortified by the decision in CIT vs. ACE Multitaxes Systems (P) Ltd. (2009) 317 ITR 307 (Kar.); CIT vs. Medicaps Limited (2010) 323 ITR 554 (MP); AKS Alloys Pvt. Ltd. (2012); 18 Taxman.com 25(Mad.); CIT vs. A.N. Arunachalam; 75 Taxman 529 (Mad.). The sum and substance of these decisions is that audit report can be filed with the revised return or at any stage up to framing of assessment. In view of these facts and judicial pronouncements, we find no justification to interfere with the impugned order. Our view is further fortified by the decision from Delhi High Court in CIT vs. Contimeter Electricals Pvt. Ltd.; 317 ITR 249. In view of these facts, we find no merit in the appeal of the Revenue. It is dismissed. 3. Since the relief has been granted on the basis of the decision of the ITAT in the immediately preceding year and facts remain the same, therefore, respectfully following the order of the Tribunal, we sustain the order of the learned CIT(A) in allowing relief u/s 80-IA of the Act to the assessee.” 13. That apart, a perusal of the order passed by the Assessing Officer indicates that the assessee had filed audit report in Form No.10CCB dated 21.10.2004 along with the written submissions on 25.08.2011 showing profit of the eligible undertaking and deduction under Section 80-IA of the Act. It is, thus, clear that the said requirement of filing audit report was duly fulfilled by the asssessee during the course of the reassessment proceedings ITA-70-2016 (12) or for that matter before framing the reassessment by the Assessing Officer when the proceedings were re-opened. At the time of passing of the order, there was material before the Assessing Officer to rely upon the audit report duly filed by the assessee in Form No.10CCB as contemplated under Section 80-IA(7) of the Act. Once the accounts of the assessee for the relevant year were examined and the audit report was submitted at the time of reassessment proceedings, it could not have been discarded by the Assessing Officer on the ground that no separate audited financial statements were attached in the original assessment proceedings. There is nothing to show that the Assessing Officer had doubted the correctness of the said audit report so as to make it necessary for the assessee to have submitted separate audited financial statements of Unit No.II and in absence of which the audit report had been incomplete. 14. Admittedly, since the audit report in Form No.10CCB was ultimately filed before completion of the reassessment, we do not find any reason to hold that condition under Section 80-IA(7) of the Act had not been satisfied. Consequently, question No.(A) is answered in favour of the assessee and against the Revenue. 15. Now, taking up the second broad issue, as regards the argument of the learned counsel that deduction under Section 80-IA of the Act could not have been allowed in respect of Unit-II when the profit shown by it was erroneous as it was reflected from its sales and consumption of raw material which was disproportionate to the combined accounts of the Unit-I and Unit- II is concerned, it is gathered from the findings recorded by the CIT(A) that the products manufactured in Unit-I and Unit-II of the assessee are ITA-70-2016 (13) altogether different and therefore, percentage of raw material consumed in both the units and working out value of sale based on raw material consumed in Unit-II cannot be the same. Under these circumstances, the CIT(A) held that assessee was eligible for claiming deduction of `16,71,579/- under Section 80-IA of the Act on the profits derived from Unit-II. The relevant extract of the finding recorded by the CIT(A) is reproduced as under:- “As regards profits derived from Unit-II of manufacturing of micronutrient fertilizers, the appellant had shown net profit of `96,67,206/- and the allowable deduction u/s 80-IA @30% works out to `29,00,162/-. But the deduction was restricted to `16,71,579/- equivalent to the total income of the appellant, which is equivalent to net profit of `55,71,932/- (30% of `55,71,932/- = `16,71,579). The products manufacture in Unit-I & Unit-II are entirely different as in Unit-I, the appellant was manufacturing pesticides and insecticides, whereas in Unit- II, the appellant was manufacturing micronutrient fertilizers which is a totally different product. Therefore, the AO was not correct in assuming that the percentage of raw material consumed would be same in both the units and calculating value of sale based on raw material consumed in Unit-II on the basis of same ratio of the raw material consumed in Unit-I. Therefore, considering the totality of facts and circumstances of the case, I am of the considered opinion that the appellant was eligible for claiming deduction u/s 80-IA of `16,71,579/- on the profits delivered from Unit-II for manufacturing of micronutrient fertilizers. Accordingly, the AO is directed to allow deduction claimed u/s 80-IA of `16,71,579/- to the appellant.” Even though the Tribunal has not specifically discussed this aspect but the Tribunal in para 2.1 of its order has concurred with the view of the CIT(A) that the Unit-II was separate and independent unit from the existing Unit and the assessee was maintaining separate accounts for both the units which are duly audited. We find the view expressed by the CIT(A) and the Tribunal to be cogent because once the assessee was maintaining separate ITA-70-2016 (14) accounts for both the units and product manufactured was different and raw material used was also different then it was not open to the Assessing Officer to compare the value of sales of Unit-II by combining the accounts of Unit-I and Unit-II. Thus, we do not find any force in the submission of the learned counsel for the appellant that profit shown by Unit-II in respect of sales to consumption of raw material was erroneous and therefore, deduction under Section 80-IA of the Act was not allowable to the Unit-II. Accordingly, the question No.(B) is also answered against the Revenue. 16. There is no illegality or perversity in the findings of fact recorded by the Tribunal warranting interference by this Court in exercise of jurisdiction under Section 260A of the Act, which is confined to entertaining only those appeals where the substantial question of law is involved. 17. In view of the foregoing discussion, we find no reason to interfere with the order impugned herein. Accordingly, we answer the substantial questions of law against the appellant-Revenue. Resultantly, the appeal stands dismissed. (Ajay Kumar Mittal) (Vijay Kumar Shukla)

Chief Justice Judge S/ Digitally signed by SACHIN CHAUDHARY Date: 2020.04.10 16:18:35 +05'30'