COMMISSIONER OF INCOME TAX, KOTTAYAM vs. M/S.N.C.JOHN & SONS LTD, ALAPPUZHA

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ITA/1483/2009HC KeralaKLHC01026244200904 October 2010Bench: HONOURABLE MR.JUSTICE K.SURENDRA MOHAN,HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR8 pages
AI SummaryRemanded

What did the High Court hold?

The High Court held that the Tribunal's orders were unsustainable. The Court found that the Tribunal had misinterpreted the scope of Section 263, treating it akin to rectification under Section 154. The Court noted that the Supreme Court in CIT v. K. Ravindranathan Nair (295 ITR 228) had held that income unrelated to export business must be excluded for Section 80HHC computation, indicating the assessee's case on merits was likely against them. The Court agreed with the Commissioner that the Assessing Officer had committed a prima facie mistake by not considering Explanation (baa) to Section 80HHC, which prejudiced the revenue. Citing its own decision in CIT, Cochin v. Veepees Enterprises (175 Taxman 11), the Court reversed the Tribunal's order. However, the Court left the issues regarding exclusions from total income and turnover for the Assessing Officer to consider afresh, based on the Supreme Court's decision and after giving the assessee an opportunity to be heard. The Court also noted that the assessee could move the Tribunal to reopen appeals that were closed as infructuous.

What were the facts?

The appeals by the Commissioner of Income Tax (CIT) challenge orders of the Income Tax Appellate Tribunal (ITAT) for assessment years 1995-96 and 1996-97. The ITAT had cancelled revision orders passed by the CIT under Section 263 of the Income Tax Act. The CIT had initiated revision because the assessee, M/s. N.C. John & Sons (P) Ltd., a manufacturer and exporter of coir products, had computed deduction under Section 80HHC without excluding certain charges as per explanation (baa) to Section 80HHC. For AY 1995-96, specific items like dyeing and bleaching charges, baling charges, garment making charges, rent, and boat hire charges were in question. Additionally, a deduction of bad debts from the turnover for Section 80HHC calculation was also an issue for AY 1995-96. The ITAT had allowed the assessee's appeals, holding that the CIT's view was merely one possible view, not necessarily correct.

What were the issues?

1. Whether the Tribunal erred in cancelling the Commissioner's revisionary order under Section 263 of the Income Tax Act, 1961, when the Assessing Officer's assessment was prima facie prejudicial to the interest of the revenue due to non-consideration of Explanation (baa) to Section 80HHC? Assessee's Contention: The Tribunal's view was that the Commissioner's view was only a possible view, and the Assessing Officer's view was also possible under the relevant provisions. The Tribunal interpreted Section 263 similarly to rectification proceedings under Section 154. Revenue's Contention: The Commissioner had correctly identified a mistake in the assessment order, where the Assessing Officer failed to consider the scope of Explanation (baa) to Section 80HHC, making the assessment prejudicial to the revenue. The revenue relied on the Supreme Court decision in CIT v. K. Ravindranathan Nair (295 ITR 228) and its own earlier decision in CIT, Cochin v. Veepees Enterprises (175 Taxman 11).

Which sections of the Income-tax Act were involved?

Section 80HHC,Section 263,Section 154

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN MONDAY, THE 4TH OCTOBER 2010 / 12TH ASWINA 1932 ITA.No. 1483 of 2009() --------------------------- ITA.841/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/ APPELLANT ----------------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/ RESPONDENT ------------------------------------- M/S.N.C.JOHN & SONS (P) LTD., ALLEPPEY. R1 BY ADV. SRI.S.ARUN RAJ THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04/10/2010, ALONG WITH ITA NO. 1559 OF 2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: SVS/

C.N.RAMACHANDRAN NAIR & K. SURENDRA MOHAN, JJ. ------------------------------------------------------------ I.T.A.NOS: 1483 & 1559 OF 2009 ----------------------------------------------------------- Dated this the 4th October, 2010. JUDGMENT Ramachandran Nair, J. Heard senior standing counsel appearing for the appellant and Shri. Arun Raj appearing for the respondent-assessee. Orders under challenge are those issued by the Tribunal for the assessment years1995-96 and 1996-97. Even though Tribunal has issued separate orders for both the years the issues raised are almost the same and therefore, we proceed to dispose of the connected appeals by this common judgment. 2. The original assessments for both years were subjected to revision by the commissioner under Section 263 of the Income Tax Act for the reason that deduction under Section 80 HHC of the Income Tax Act was computed without excluding charges which fall within the scope of explanation (baa) to Section 80HHC of the Act. The assessee is engaged in manufacture and export of coir products. In the course of business assessee has earned certain income in respect of various activities, the details of which pertaining to the year 1995-96 are given hereunder:-

ITA Nos: 1483/2009 & 1559/2009 2 1) Dyeing and Bleaching charges: Rs.14,31,054/- 2) Baling charges : Rs. 65,460/- 3) Garment Making charges : Rs. 49,528/- 4) Rent : Rs. 3,261/- 5) Boat Hire charges : Rs. 1,61,183/- The first three items appear for the next year also. There is no receipt for boat hire charges received by the assessee for the year viz., 1996-97. For the assessment year 1995-96 another issue involved is deduction of bad debts amounting to Rs.4,59,450/- from the total turnover which is a denominator to be applied for working out relief under Section 80HHC. The Tribunal allowed the appeals by cancelling the impugned orders issued by the Commissioner under Section 263 for the reason that the view taken by the Commissioner is only a possible view and the view taken by the Officer is also a view possible under the relevant provisions of the Act. 3. After hearing both sides we notice that Tribunal has interpreted the scope of Section 263 as similar to proceedings for rectification under Section 154 of the Income Tax Act. In fact the

ITA Nos: 1483/2009 & 1559/2009 3 issue on merit is covered by later decision of the Supreme Court reported in Commissioner of Income Tax v. K. Ravindranathan Nair (295 ITR 228). Under this decision the Supreme Court held that income received by the assessee which have no connection to export business should be excluded while computing deduction of export profit under Section 80HHC of the Income Tax Act. Therefore, prima facie the case on merits is against the assessee. The question to be considered is whether the order for assessment was prejudicial to the interest of the revenue justifying revision by Commissioner. In this case the finding of the Commissioner in the orders issued under Section 263 is that the Assessing Officer has not considered the scope of explanation (baa) of Section 80HHC of the Act. In similar cases in I.T.Appeal 21/2003 reported in Commissioner of Income Tax, Cochin v. Veepees Enterprises (175 Taxman 11) we reversed the order of the Tribunal interfering with suo motu revisional order issued by the Commissioner. 4. We therefore find that the Tribunal's orders are not sustainable because the Commissioner had only pointed out the mistake prima facie committed by the Officer in making assessment

ITA Nos: 1483/2009 & 1559/2009 4 without reference to the relevant statutory provisions and directed him to re-work the relief under Section 80 HHC. Even though counsel for the assessee contended that for the year 1993-94 Tribunal allowed these issues on merit, Senior counsel appearing for the appellant submitted that on account of the low stakes involved revenue has not filed appeal and it is open to the department to challenge the order for later year, no matter earlier order of ITAT was not appealed against by the Revenue. Since filing of appeal by the Government is essentially a matter of policy and if there is no substantial benefit of tax the department is free to accept the order of the Tribunal for that year. We therefore feel that the department is free to contest the issue for subsequent years. However, on merits of the case that is with regard to the exclusions to be considered from the total income as well as the turnover covered by the Commissioner's order, we leave the issues open for the Officer to consider based on the decision of the Supreme Court and after giving opportunity to the assessee. 5. Counsel for the assessee submitted that pursuant to orders issued by the Commissioner assessment was revised making

ITA Nos: 1483/2009 & 1559/2009 5 substantial disallowance against which another appeal was filed which the Tribunal closed as infructuous in view of the orders impugned by the revenue in these appeals. Since we have now reversed the orders of the Tribunal, it is for the assessee to move the Tribunal to reopen the closed appeals to get decision on merit. If assessee considers merit in their appeals, they are free to apply for reopening appeals closed as infructuous by the Tribunal. C.N.RAMACHANDRAN NAIR Judge K. SURENDRA MOHAN Judge jj

ITA Nos: 1483/2009 & 1559/2009 6

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