M/S OPTO CIRCUITS INDIA LTD ,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-5(1)(2), BANGALORE

O R D E R

Per Chandra Poojari, AM :

“1. The impugned assessment order as well as the order of the CIT(A) is opposed to the facts of the case and law, and therefore, they are liable to be set aside and cancelled. 2. The learned AO as well as the learned CIT(A) has failed to appreciate that section 14A is not applicable to the strategic investment made in subsidiary companies out of surplus funds.

M/s.Opto Circuits (India) Limited.

3. The learned AO erred in not excluding the exempted income u/s 10AA in computing the MAT income u/s 115JB of the Act.

Regarding Notice u/s 143(2). 1.1. The impugned assessment order u/s 143(3), dated, 30-03-2015 is passed without the issue/ service of the mandatory Notice u/s 143(2) of the Act on the basis of the revised return of income filed on 1703-2014. It is submitted that the issue/service of Notice u/s 143(2) is fundamental and mandatory requirement of law for a valid assessment order and therefore, it is a legal ground going to the root of the matter. 1.2. It is settled law that legal grounds are allowed to be taken before the Hon'ble Tribunal. The Hon'ble Supreme Court reiterated this settled legal position in the case of the C1T vs Singhad Technical Education Society, Civil Appeal No. 11080 of 2017, where the legal ground on recording of satisfaction u/s 153C was taken for the first time before the Hon'ble Tribunal, which the Revenue objected. Reliance is also placed on the decision of the Larger Bench (3 Member) of Hon'ble Supreme Court in National Thermal Power Co. Ltd., (1998) 229 ITR 383 (SC). The Hon'ble jurisdictional Tribunal has also followed the said

M/s.Opto Circuits (India) Limited. decision in National Thermal Power Co. Ltd., in a number of cases and allowed additional grounds. 1.3. In view of the above submissions it is most respectfully prayed that the Hon'ble Appellate Tribunal may be pleased to allow the following additional ground of appeal:

The impugned assessment order u/s 143(3) dated, 30-03-2015 is void-ab-initio, since it is completed on the basis of the revised return of income filed on 17- 03-2014, but without issuing the Notice u/s 143(2), which is a condition precedent for a valid assessment order.

4. The facts of the case are that the assessee is a listed public limited company engaged in the business of manufacturing of electronic medical equipment / devices and filed return of income for the assessment year 2012-2013 on 30.09.2012 by declaring a taxable income of RS.7,05,85,430 after claiming deduction u/s 10AA of the Act at Rs.208,49,19,699, towards profits from SEZ Unit of the assessee. The assessee, as a business strategy, has made TRADE (BUSINESS) INVESTMENTS in 100% subsidiaries in India and in various countries to an extent of Rs.381,66,46,423. During the course of assessment proceedings, the Assessing Officer has made certain disallowance, as follow:-

Sl. Item disallowed Amount of Ground of No. disallowance disallowance 1. Deduction of profits 28,07,038 Excess deduction and gains derived from claimed u/s 10AA. SEZ Unit u/s 10AA 2. Expenditure incurred 3,74,01,344 Expenditure in relation to income disallowed u/s 14A

M/s.Opto Circuits (India) Limited. not includible in total in accordance with income Rule 8D of the Act. 3. Taxing under MAT Appellant’s Book profits provisions of section contention reworked for the 115JB not applicable to disallowed purpose of MAT SEZ units. liability. Total 4,02,08,382 4.1 Thereafter the Assessing Officer completed the assessment u/s 143(3) dated 30.03.2015 by making an addition of Rs.4,02,08,382 and computed tax liability under normal provisions of the Act and book profits u/s 115JB.

4.2 Aggrieved by the order of assessment making addition of Rs.3,74,01,344 u/s 14A of the Act, the assessee carried the matter in appeal before the first appellate authority. The CIT(A) upheld the view taken by the Assessing Officer, by observing as under:-

“5. I have considered the above grounds of appeals, statement of facts and written submission made by the appellant and also perused the assessment order passed by the Assessing Officer. The appellant has raised a solitary ground which is on the disallowance of Rs.3,75,01,344/- made towards the expenditure incurred in relation to dividend income in accordance with Rule 8D of the IT Rules, 1962 without making distinction between the meaning of 'Trade Investment and Non-Trade Investments' on obstruct basis stating that the investment made in the group companies is a business strategy and not with an intention to earn dividend. The appellant submitted that it is a Listed Public Limited Company engaged in the business of manufacturing of electronic medical equipments/ devices, as a business strategy, has made TRADE (BUSINESS) INVESTMENTS in 100% subsidiaries in India and in various countries to an extent of Rs.381,66,46,423/-. Further submitted that M/s.Opto Circuits (India) Limited. investments made in the group companies is a 'Business Strategy' and not with an intention to earn dividends and also these investments amounts to “Trade Investments” which are different from “Non Trade Investments which are made out of surplus / idle funds to earn some additional income to enhance the profitability like “investments in listed company shares, mutual funds etc.”. Trade (Business) Investments represents “Capital in Subsidiary Companies and "Investments" in Holding Company (The Appellant Company) and once the consolidation of Balance Sheet and Profit and Loss Account takes place eventually "Capital" as well as "Investments" will become zero in the Consolidated Balance Sheet of the Holding Company (the appellant company) even though Income Tax Provisions are applicable on individual Companies. Where in cast of Non Trade Investments, the cost of investment remain same both in the Standalone Accounts as well as Consolidated Accounts. The Assessing Officer has made disallowance u/s 14A of the amount of expenditure incurred in relation to dividend income is determined in accordance with Rule 80 and RS.3,74,01,344/, being 0.5% of the average value of investment is disallowed and added back as income of the appellant. Further submitted that investments made in the group companies is a 'Business Strategy' and not with an intention to earn dividends and also these investments amounts to "Trade Investments" which are different from "Non Trade Investments which are made out of surplus/idle funds to earn some additional income to enhance the profitability like "investments in listed company shares, mutual funds etc". Further, the appellant company is engaged in the business of manufacturing of electronic medical equipments/devices and filed Return of Income for the Assessment year 2012-13 on 30/09/2012 by declaring a taxable income of Rs.7,05,85,430/- after claiming a Deduction of Rs.208,49,19,699/- under section 10AA of The Income Tax Act, 1961 towards profits from SEZ Unit of the appellant. The appellant, as a business strategy, has made TRADE (BUSINESS)

M/s.Opto Circuits (India) Limited. INVESTMENTS is 100% subsidiaries in India and in various countries to an extent of Rs.381 ,66,46,423/-. AO failed to make distinction between the meaning of "Trade Investments" and "Non-trade Investments" in the absence of definition of "Investments" either in the Act or in the Rules. Investments in subsidiaries should not be viewed as non trade investments even though it may fetch some exempted income/dividends and provisions of Section 14A should not be telescoped/ applied from the point of view of Non Trade Investments. Further, in the case of Interglobe Enterprises Ltd. v. Deputy Commissioner of Income- tax (Del-Trib) it is held that investment in subsidiary and for acquiring controlling interest / strategic investment no disallowance of interest is required to be made under rule 8D(i) & 8D(ii) as no direct or indirect interest expenditure has incurred for making investments. Strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 80 (iii). Since, the appellant had utilized interest free funds for making fresh investments and that too into its subsidiaries which were not for the purpose of earning exempt income but for strategic purposes only. Even in the case of Garware Wall Ropes Ltd. v. ACIT(Mum.)(Trib.) the same view was taken. However, the appellant could not prove that the investments made are strategic in nature and therefore the grounds of appeal are not allowed.”

5. Aggrieved by the orders of the Income Tax Authorities, the assessee is in appeal before us.

6. Since the additional ground raised by the assessee goes to the root of the matter, we proceed to adjudicate the additional ground first.

7. As regards the additional ground, the learned AR submitted that the impugned assessment order u/s 143(3) dated 30.03.2015 is void-ab-initio, since it is completed on the M/s.Opto Circuits (India) Limited. basis of the revised return of income filed on 17.03.2014, but without issuing the Notice u/s 143(2), which is a condition precedent for a valid assessment order.

7.1 The learned AR placed reliance on the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [(1998) 229 ITR 383 (SC)] and submitted that this ground was taken for the first time before the Tribunal and due to inadvertent and non-availability of order sheet entry pertaining to the assessment year 2012-2013, the assessee was not able to raise this ground on earlier occasion. This was furnished to the assessee on filing RTI application on 03rd May, 2019 by the A.O. It is thus filed consequent to the RTI application filed by the assessee on 03.05.2019. Accordingly, the learned AR prayed that this additional ground may be admitted and adjudicated as it goes to the root of the matter. The learned Departmental Representative did not seriously object to the admission of additional ground.

M/s.Opto Circuits (India) Limited.

"This bring us to the crux of the issue i.e., whether notices under s.143(2) mandatory in a reopened procedure and whether notices sued prior to the reopening would satisfy the require" specified under s. 143(2) of the Act. That issue of Notice under s.143(2) of the Act, is mandatory even in a reassessment proceedings initiated under s. 148 of the Act has been M/s.Opto Circuits (India) Limited. clearly laid down by the Hon'ble Delhi High court in the case of Alpine Electronics Asia PTE Ltd., (supra). Hon'ble Delhi High Court had reached this conclusion after considering the decision of the Hon'ble Apex Court in the case of Hotel Blue Moon (supra).” 9.1 The learned AR further submitted that to bring it in context, the learned AO has not issued any Notice u/s 143(2) on the revised return filed on 17-03-2014. It is also settled law that the original return of income filed u/s 139(1) would get substituted and effaced when the return is revised u/s 139(5) of the Act. Reliance is placed on the following decisions of the Hon'ble jurisdictional High Court:

(1) M/s Machine Tool Corporation of India Ltd (1993) 201 ITR 101 (Kar) — The Hon'ble High Court Held that once a revised return u/s 139(5) filed, the original return is substituted by the revised return. Consequently, the entries in the relevant column of the original return seeking depreciation, cannot be used for any purpose. It is therefore, not open for the ITO to advert to the original returns or the statement filed along with it for the purpose of allowing deduction after such claim is expressly withdrawn in the revised return. The matter was taken- up before the Hon'ble Supreme Court in SLP and the Hon'ble Court was pleased to dismiss the same in its corn!)in2c1 order in the lead case in Mahendra Mills in (2000) 109 taxmann.com 225 (SC). (2) M/s Mangalore Chemicals and Fertilizers Ltd., (1991) 191 ITR 156 (Kar) — The Hon'ble High Court held that once a valid revised return is filed by the assessee, it completely effaces and obliterates the original return and therefore, it is only the revised return that has to be taken into account for purpose of making assessment. 9.2 It is further submitted by the learned AR that there is no dispute that a valid revised return of income was filed on M/s.Opto Circuits (India) Limited. 17.03.2014 as could be seen from the impugned assessment order itself. It is also not in dispute that there is no Notice issued u/s 143(2) on or after 17-03-2014 after the filing of the revised return. It is also not considered out of context to submit that the assessment order is completed only on 30-03-2015, after one year from the date of filing the revised return and it was the duty of the assessing officer to issue the Notice u/s 143(2) before completing the assessment. It is further submitted that the provision of section 292BB incorporating the Rule of Evidence only applies to a case where the Notice u/s 143(2) is 'ISSUED', but not to a case where the Notice itself is not issued. In view of the above, the learned AR pleaded that the impugned assessment order completed u/s 143(3) without the issue/service of the mandatory Notice u/s 143(2) is void and is liable to be vacated.

9.3 The learned AR further submitted that as regards notice u/s 143(2) and section 292BB of the Act, that the Hon'ble Apex Court recently reiterated the settled law in the case of CIT vs. Laxman Das Khandelwal — Civil Appeal Nos. 6261 — 6262 of 2019, dated, 13-08-2019, that issue and service of a valid Notice u/s 143(2) is a pre-requisite for a valid assessment. The Hon'ble Court considered the impact of section 292BB and held that in order that the section applies, the Notice ought to be issued, and the section cures only the infirmities in the Notice. Section 292BB cannot be pressed into service if there is "no issue" of the Notice itself. It may not be out of context to refer to the decision of the Hon'ble Co-ordinate Bench in the case of G.N. Mohan Raju (2015) 57 taxmann.com 415. In that case,

M/s.Opto Circuits (India) Limited. the assessing officer issued the Notice u/s 148 and the return in response thereto was not furnished within the specified period of 30 days. The assessing officer treated the return filed in the normal course as the return filed u/s 148 and issued the Notice u/s 143(2). But the Notice was issued before the assessee filed the return u/s 148 and there was no Notice issued u/s 143(2) after the date of filing the return u/s 148. The Department contended that the assessment order was valid as the Notice u/s 143(2) was issued treating the return filed u/s 139 as the return filed u/s 148. The Hon'ble Tribunal was pleased to hold that there was no Notice issued u/s 148 after the date on which the assessee filed the return of income by reiterating the return filed u/s 139 as the return u/s 148. It is submitted that there was no issue/service of Notice u/s 143(2) after the filing of the revised return of income u/s 139(5) on 17.03.2014. As per the information provided under the RTI Act, it is clear that the Notice u/s 143(2) was not issued at all on the basis and subsequent to filing of the revised return of income on 17.03.2014.

M/s.Opto Circuits (India) Limited. “Income as per revised return of income Rs.7,05,85,430.”

10.1 The revised return filed by the assessee is within the stipulated time provided u/s 139(5) of the Act. Though the A.O. considered the revised return of income, which is stated in the assessment order as above, he has not issued any notice u/s 143(2) of the Act with regard to the revised return filed by the assessee. In our opinion, it was the duty of the Assessing Officer to issue notice u/s 143(2) of the Act, when he has taken the consequence of the revised return and pass assessment order. His failure to issue notice u/s 143(2) of the Act while framing the assessment on the basis of revised return, is bad in law and it cannot be sustained. Accordingly, we quash the assessment order. This view of ours is fortified by the order of the Tribunal in the case of DCIT v. ADEB Builedcon Pvt. Ltd. in order dated 18th July, 2014. Accordingly, we allow the additional ground raised by the assessee, on this issue.