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Income Tax Appellate Tribunal, “A”, BENCH KOLKATA
Before: SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM
आदेश / O R D E R Per Dr. A.L. Saini, AM:
The captioned two appeals filed by the Assessee, pertaining to assessment years2013-14 &2014-15 respectively, are directed against the separate orders passed by the Pr. Commissioner of Income Tax, Central, Kolkata-2, under section 263 of the Income Tax Act, 1961 (in short the ‘Act’) dated 06.03.2018.
Since these two appeals relate to the same assessee, common and identical issues are involved therefore these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. The assessee’s appeal in ITA No. 1071/Kol/2018, for A.Y. 2013-14 is taken as a lead case.
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15
The grounds of appeal raised by the assessee are as follows: 1.a) That the Ld. Pr. CIT was wrong in exercising the revisionary power u/s 263 of the I. T. Act on the order passed u/s 143(3) of the I. Tax Act by set aside the impugned order as erroneous and prejudicial to the interest of revenue. The assessee has taken and the A.O. also confirm the fact that the outstanding of FD/OD facility were available against FD and net income was offered for taxation without claiming deduction 80IA of the Act. Whereas, the Ld. Pr. CIT(A) has taken the gross receipt of income in place of net receipt of income and thereby, restricting the deduction claimed u/s 80IA of the Act in place of entire/actual deduction claimed u/s 80IA of the Act by the assessee. Thus, the above action of the Ld. Pr. CIT in setting aside the assessment order passed u/s 143(3) of the Act is bad in law and needs to be quashed.
b) That without prejudice to the above ground, the Ld. Pr. CIT(A) also ignore the fact that the interest paid on the OD against FD has not been used in the exempted unit. Hence, no portion of the interest of OD can be apportioned towards the exempted income on which the deduction claimed by the assessee and allowed by A.O. u/s 80IA of the Act. Thus, the above action of the Ld. Pr. CIT in setting aside the assessment order passed u/s 143(3) of the Act is bad in law and needs to be quashed.
c) That without prejudice to the ground (1a) & (1b), at the stage of assessment proceedings, the matter was explained and necessary documents were submitted before the A.O. All the issues have been examined by the A.O as submitted before the Ld. Pr.CIT with all supporting documents. The A.O. after due enquiry and taken one of the possible view as per law, pass the said order. Hence, the order passed u/s 143(3) cannot be termed as erroneous and prejudicial to the interest of revenue. Thus, the above action of the Ld. Pr. CIT in setting aside the assessment order passed u/s 143(3) of the Act is bad in law and needs to be quashed.
That the Ld. Pr. CIT(A) erred in not accepting the fact that the interest on OD and FD both are interlinked as both are linked with the bank. Thus, both the interest paid and earned are having the direct nexus. Hence, the net interest income after deduction of interest expenditure is become eligible for taxation to income tax. The said fact has already been adjudicated at various courts i.e. Supreme Court and other High Court. Thus, the not allowing the adjustment of Interest income on FD with interest expenditure on OD and thereby restricting the deduction claimed u/s 80IA of the Act is wrong. Thus, the order passed u/s 263 of the Act by the Ld. Pr. CIT in setting aside the assessment order passed u/s 143(3) of the Act is bad in law and needs to be quashed.
That the petitioner craves leave to add, alter, amend or withdraw any ground/s of appeal before or at the time of hearing.
Brief facts qua the issue are that the assessee filed its return of income for the A.Y. 2013-14, on 30.09.2013 disclosing total income of Rs. 4,20,61,240/-. In the
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 assessee`s case an assessment was made u/s 143(3) of the Income Tax Act on 07.01.2016 at total income of Rs. 4,34,64,832/-.
Later on, Ld Principal Commissioner of Income Tax (PCIT) has exercised his jurisdiction u/s 263 of the Act as the above mentioned assessment order dated 07.01.2016 framed u/s 143(3) of the Act was erroneous and prejudicial to the interest of revenue on the following issues:-
“(a) On perusal of assessment records of the above case, it has been found that the assessee company had set off interest of Rs. 3,19,81,862/- on Bank Overdraft account against FD interest income of Rs. 3,56,89,504/- and the resultant interest income of Rs. 37,07,642/- had been shown as other income chargeable to tax and thereby taxable income was reduced and profit from eligible unit was appreciated for claiming deduction u/s 80IA of the Act. The claim of such excess deduction was allowed by the AO at the time of assessment. Gross Total Income of the assessee company before allowing deduction u/s 80IA was assessed at Rs. 11,79,50,755/-. Deduction u/s 80IA allowed to the assessee company was Rs. 7,44,85,923/-. The assessee had disclosed other income of Rs. 2,43,01,928/- (Note-21 of Annual Accounts). It was observed from assessment records that the interest on FD (under the head ‘Other income’) was adjusted with interest on Bank Overdraft of Rs. 3,19,81,862/- which appeared to be a pure business expenditure. As per the provision of Income Tax Act, 1961 deduction u/s 801A is available to the assessee company to the extent of business income included in Gross Total Income. If the interest on FD was not adjusted with interest on Bank Overdraft then the total other income of the assessee company would be Rs. 5,62,83,790/- [2,43,01,928 + 3,19,81,862]. And income comprised of profits and gains of business & profession income would be Rs. 6,16,66,965/- [11,79,50,755 - 5,62,83,790] and assessee would be eligible for deduction u/s 80IA to the extent of Rs. 6,16,66,965. This issue was not examined at the time of assessment. b) It is observed that as per Form No. 10CCB the total sale of the eligible undertaking (Rs. 25,99,00,163/-) comprised of inter-unit sale of power: Sale of power to Sponge Iron Unit : Rs. 6,24,29,806/- Sale of power to Induction Furnace Unit : Rs. 12,22,63,460/- As per provisions of section 80IA(8) such notional sale value is required to be determined on ‘market value’ of the goods. The issue was not verified and examined by the Assessing Officer at the time of assessment.”
Accordingly, the show-cause notice dated 14.11.2017 was issued by the ld PCIT.
In response to the show cause notice of ld. PCIT, the assessee submitted written submission before the ld. PCIT which is reproduced below: Page | 3
M/s Singhal Enterprises Pvt. Ltd. M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072 1071 & 1072/Kol/2018 Assessment Years:2013 2013-14 & 2014-15
However, the ld. PCIT rejected the contention of the assessee and held as 6. However, the ld. PCIT rejected the contention of the assessee and held as 6. However, the ld. PCIT rejected the contention of the assessee and held as follows:
In the instant case the assessee company had set off interest of 13. In the instant case the assessee company had set off interest of 13. In the instant case the assessee company had set off interest of Rs.3,19,81,862/- on Bank Overdraft account against FD interest income of Rs. on Bank Overdraft account against FD interest income of Rs. on Bank Overdraft account against FD interest income of Rs. 3,56,89,504/- and the resultant interest income of Rs. 37,07,642/ and the resultant interest income of Rs. 37,07,642/ and the resultant interest income of Rs. 37,07,642/- had been shown as other income chargeable to tax. The assessee prepared the financial accounts as other income chargeable to tax. The assessee prepared the financial accounts as other income chargeable to tax. The assessee prepared the financial accounts following the generally acce following the generally accepted accounting principles. And as per generally pted accounting principles. And as per generally accepted accounting principles Bank Overdraft facility is utilized for the purpose accepted accounting principles Bank Overdraft facility is utilized for the purpose accepted accounting principles Bank Overdraft facility is utilized for the purpose of working capital of the business and accordingly interest on Bank O/D should of working capital of the business and accordingly interest on Bank O/D should of working capital of the business and accordingly interest on Bank O/D should be a business expenditure. Therefore in the i be a business expenditure. Therefore in the instant case interest on Bank O/D nstant case interest on Bank O/D should have been adjusted with business income. The assessee has contended that should have been adjusted with business income. The assessee has contended that should have been adjusted with business income. The assessee has contended that OD facility has been granted on the security of the Fixed Deposits and therefore OD facility has been granted on the security of the Fixed Deposits and therefore OD facility has been granted on the security of the Fixed Deposits and therefore the interest on OD and interest on FD are interlinked. The ass the interest on OD and interest on FD are interlinked. The assessee company has essee company has Page | 4
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 further contended that since the company has used its FD for taking overdraft facilities without en-cashing FD, the interest on the overdraft has a direct nexus with the FD interest. Hence the interest on OD which has a direct bearing on the FD has been adjusted with FD interest and the net interest income has been shown as “Other Income” in Note No-21 of the Audited Accounts. In the instant caseno independent enquiry/verification was done at the time of assessment to determine whether interest on OD and interest on FD are interlinked or not and whether interest on OD can be adjusted with interest on FD in the light of provisions of Income Tax Act, 1961. Further no independent enquiry/verification was done at the time of assessment on the issue that interest on Bank OD and interest on FD are not relating to the eligible unit and the same are relating to DRI unit for which the assessee has not claimed deduction u/s 80IA. 14. In view of the facts and the legal position stated above, I am of the view that the order passed on an incorrect assumption of facts or incorrect application of law and without making requisite inquiries will satisfy the requirement of the order being erroneous and pre-judicial to the interest of the revenue within the meaning of Section 263 of the Income Tax Act, 1961. 15. I have carefully examined the assessment record and submissions made by the assesssee’s A.R. The impugned assessment order dated 07.01.2016 has been passed without making relevant enquiry or verification with respect to the issue discussed in Para-13. Therefore, the reliability, validity and genuineness of claim of the assessee appear to have not been examined by the Assessing Officer as no proper enquiry has been made to gather evidences in this regard. The A.O. has failed to make inquiries which were called for in the circumstances of the case. Having regard to the facts and circumstances of the case, the impugned assessment order for the A.Y. 2013-14 u/s 143(3) of the Income Tax Act, 1961 dated 07.01.2016 is deemed to be erroneous in so far as it is prejudicial to the interests of the revenue. 16. Consequently, in exercise of the jurisdiction conferred by section 263 of the Act, the said order of assessment dated 07.01.2016 for A.Y. 2013-14 is set aside on the above said specific issue with a direction to the A.O. to make necessary examination on the above issue and directed to pass a fresh assessment order and re-compute the assessee’s income after making proper enquiries on the foregoing issue, after offering reasonable opportunity to the assessee of being heard.” 7. Aggrieved by the order of the ld. PCIT the assessee is in appeal before us.
The ld. Counsel for the assessee submitted before us that the assessment order was passed by the AO after making proper enquiry and proper application of mind therefore, assessment order can’t be termed as erroneous and prejudicial to the interest of revenue. Apart from this, ld Counsel submitted before us a brief note to explain the expression 'erroneous’, 'erroneous assessment’ and 'erroneous judgment’ which have been defined in Black’s Law Dictionary 6th addition page
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 542, the same is relevant in the assessee`s case under consideration which is reproduced below:
“According to that definition ‘erroneous’ means involving error, deviating from the law. 'Erroneous assessment’ refers to an assessment that deviates from the law and is, therefore, invalid and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer. Similarly, 'erroneous’ judgment’ means “one rendered according to course & practice of court but contrary to law, upon mistaken view of law or upon erroneous application of legal principles”. From the aforesaid definitions, it is clear that an order can’t be termed as erroneous unless it is not in accordance with law. If AO acting in accordance with law, makes a certain assessment, the same cannot be branded as erroneous simply because of the fact that the commissioner is of the opinion that more elaborate enquiries and inquests should have been made. Error should be an error in approach, error in computation, error in applying the relevant law or facts, or error in selecting a principle which would not govern the fact situation. Arbitrary exercise of quasi judicial power certainly would fall within the scope of section 263. By resort to a different method, a larger tax can be levied and collected cannot be the sole consideration to attract section 263, as prejudicial to the interest of revenue, unless the said method is the only mode legally applicable (Cf. S.S. Muddanna Vs State of Karnataka (1963) 89 STC 90,95 (Karn.)”
On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the ld PCIT which we have already noted in our earlier para and the same is not being repeated for the sake of brevity.
We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other material available on record. First of all, we have to see whether the requisite jurisdiction necessary to assume revisional jurisdiction is there existing before the Pr. CIT to exercise his power. For that, we have to examine as to whether in the first place the order of the Assessing Officer found fault by the Principal CIT is erroneous as well as prejudicial to the interest of the Revenue. For that, let us take the guidance of judicial precedence laid down by the Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions needs to be satisfied before Page | 6
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; then the order passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to theinterest of the revenue’’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”.
Taking note of the aforesaid dictum of law laid down by the Hon’ble Apex Court, let us examine whether order passed by AO u/s 143(3) of the Act, dated 07.01.2016 is erroneous and prejudicial to the interest of Revenue. We note that ld PCIT has observed thatthe assessee company had set off interest of Rs.3,19,81,862/- on Bank Overdraft account against FD interest income of Rs. 3,56,89,504/- and the resultant interest income of Rs. 37,07,642/- had been shown as other income chargeable to tax. The assessee prepared the financial accounts following the generally accepted accounting principles. And as per generally
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 accepted accounting principles Bank Overdraft facility is utilized for the purpose of working capital of the business and accordingly interest on Bank O/D should be a business expenditure. Therefore, in the instant case interest on Bank O/D should have been adjusted with business income.Gross Total Income of the assessee company before allowing deduction u/s 80IA was assessed at Rs. 11,79,50,755/-. Deduction u/s 80IA allowed to the assessee company was Rs. 7,44,85,923/-. If the interest on FD was not adjusted with interest on Bank Overdraft then the total other income of the assessee company would be Rs. 5,62,83,790/- [2,43,01,928 + 3,19,81,862]. And income comprised of profits and gains of business & profession income would be Rs. 6,16,66,965/- [11,79,50,755 - 5,62,83,790] and assessee would be eligible for deduction u/s 80IA to the extent of Rs. 6,16,66,965/- instead of Rs. 7,44,85,923/-. As per ld PCIT, this issue was not examined by AO at the time of scrutiny assessment u/s 143(3) of the Act therefore order of the AO was erroneous and prejudicial to the interest of Revenue.
The Ld Counsel submitted that OD facility has been granted on the security of the Fixed Deposits and therefore the interest on OD and interest on FD are interlinked. Since the company has used its FD for taking overdraft facilities without en- cashing the FD, the interest on the overdraft has a direct nexus with the FD interest. Hence the interest on OD which has a direct bearing on the FD has been adjusted with FD interest and the net interest income has been shown as “Other Income”. The AO has taken one of the plausible view of netting up of interest expenses with interest income in view of the Supreme Court judgment in the case of ACG Associated Capsules (P) Ltd Vs. CIT (2012) 18 Taxmann. Com 137( SC). The Hon`ble Supreme Court has delivered the judgment in the context of section 80HHC wherein it was held thatninety per cent of the net interest or net rent which has been included in the profits of the assessee as computed under the head "Profits and gains of business or profession" and not the gross interest or gross rent, is to be deducted under cl. (1) of Expln. (baa) to s. 80HHC for determining the profits of the business. The findings of the Hon`ble Supreme Court is mentioned below:
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 “3. For appreciating the second issue, we may refer very briefly to the facts of the case. For the asst. yr. 2003-04, the assessee filed a return of income claiming a deduction of Rs. 34,44,24,827 under s. 80HHC of the Act. The AO passed the assessment order deducting ninety per cent of the gross interest and gross rent received from the profits of business while computing the deduction under s. 80HHC and accordingly restricted the deduction under s. 80HHC to Rs. 2,36,25,053. The assessee filed an appeal against the assessment order before the CIT(A), who confirmed the order of the AO excluding ninety per cent of the gross interest and gross rent received by the assessee while computing the profits of the business for the purposes of s. 80HHC. Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short 'the Tribunal'). The Tribunal held, relying on the decision of the Delhi High Court in CIT vs. Shri Ram Honda Power Equip &Ors. (2007) 207 CTR (Del) 689 : (2007) 289 ITR 475 (Del), that netting of the interest could be allowed if the assessee is able to prove the nexus between the interest expenditure and interest income and remanded the matter to the file of the AO. The Tribunal also remanded the issue of netting of the rent to the AO with the direction to find out whether the assessee has paid the rent on the same flats against which rent has been received from the staff and if such rent was paid then such rent is to be reduced from the rental income for the purpose of exclusion of business income for computing the deduction under s. 80HHC. Against the order of the Tribunal, the Revenue filed an appeal before the High Court and the High Court has directed that on remand the AO will decide the issue in accordance with the judgment of the High Court in CIT vs. Asian Star Co. Ltd. (2010) 231 CTR (Bom) 1 : (2010) 37 DTR (Bom) 209 : (2010) 326 ITR 56 (Bom) in which it has been held that while determining the profits of the business as defined in Expln. (baa) to s. 80HHC, ninety per cent of the gross receipts towards interest and not ninety per cent of the net receipts towards interest on fixed deposits in banks received by the assessee would be excluded for the purpose of working out the deduction under s. 80HHC of the Act.
Learned counsel for the appellant submitted that it will be clear from the Expln. (baa) that ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits will be excluded for determining the profits and gains of business or profession. He argued that as the net receipts and not the gross receipts towards interest and rent are included in profits and gains of business or profession, ninety per cent of such net interest and net rent and not ninety per cent of gross interest and gross rent are to be excluded for determining the profits of the business under Expln. (baa) to s. 80HHC of the Act.
In support of this argument, learned counsel for the appellant relied on the decision of this Court in Distributors (Baroda) (P) Ltd. vs. Union of India &Ors. (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) in which a Constitution Bench of this Court has held that only the dividends computed in accordance with the provisions of the Act, which is included in the gross total income of the domestic company, shall be taken into account for working out the relief under s. 80M of the Act. He cited the judgment in CIT vs. Shri Ram Honda Power Equip (supra) in which the Delhi High Court has taken a view that the word 'interest' in Expln. (baa) to s. 80HHC connotes 'net interest' and not 'gross interest' and, therefore, in deducting such interest, the AO will have to take into account the net interest, i.e. gross interest as reduced by expenditure incurred for earning such interest. He submitted that the Karnataka High Court in CIT vs. Gokuldas Exports &Ors. (2011) 333 ITR 214 (Kar) has taken a similar view relying on the decision of the High Court in CIT vs. Shri Ram Honda Power Equip (supra).
Learned counsel for the appellant referred to the Memorandum to Finance (No. 2) Bill, 1991 explaining the rationale of Expln. (baa) in which inter alia it is stated that as some expenditure might be incurred in earning such incomes, which in the generality of cases is part of common expenses, and thus ad hoc 10 per cent deduction from such incomes have been provided for to account for these expenses. He submitted that the High Court has not correctly appreciated the Memorandum and has held, relying on the Memorandum, that gross interest and gross rent have to be deducted under Expln. (baa) to s. 80HHC to avoid a distorted figure of export profits.
Learned counsel for the Revenue, on the other hand, relied on the reasons given by the Bombay High Court in CIT vs. Asian Star Co. Ltd. (supra) and submitted that the Bombay High Court has rightly held that ninety per cent of the gross amount received towards interest and rent have to be excluded from the profits and gains of business for computing the profits of the business as defined in Expln. (baa) to s. 80HHC of the Act. He also relied on the Memorandum to the Finance (No. 2) Bill, 1991 in support of his submission that ninety per cent of the gross interest and gross rent has to be deducted from the profits of the assessee under Expln. (baa).
Before we deal with the contentions of learned counsel for the parties, we may extract Expln. (baa) to s. 80HHC of the Act : Page | 9
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 "Explanation.—For the purposes of this section,—
(baa) 'profits of the business' means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by—
(1) ninety per cent of any sum referred to in cls. (iiia), (iiib), (iiic), (iiid) and (iiie) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and
(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India."
Explanation (baa) extracted above states that "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by the receipts of the nature mentioned in cls. (1) and (2) of the Expln. (baa). Thus, profits of the business of an assessee will have to be first computed under the head "Profits and gains of business or profession" in accordance with provisions of ss. 28 to 44D of the Act. In the computation of such profits of business, all receipts of income which are chargeable as profits and gains of business under s. 28 of the Act will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable under ss. 30 to 44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assessee computed under the head "Profits and gains of business or profession" from which deductions are to made under cls. (1) and (2) of Expln. (baa).
Under cl. (1) of Expln. (baa), ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head "Profits and gains of business or profession". The expression "included in such profits" in cl. (1) of the Expln. (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "Profits and gains of business or profession". Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under ss. 30 to 44D of the Act and is not included in the profits of business as computed under the head "Profits and gains of business or profession", ninety per cent of such quantum of receipts cannot be reduced under cl. (1) of Expln. (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in cl. (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining "profits of the business" of the assessee under Expln. (baa) to s. 80HHC.
For this interpretation of Expln. (baa) to s. 80HHC of the Act, we rely on the judgment of the Constitution Bench of this Court in Distributors (Baroda) (P) Ltd. vs. Union of India &Ors. (supra). Sec. 80M of the Act provided for deduction in respect of certain intercorporate dividends and it provided in sub- s. (1) of s. 80M that "where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, 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 from such income by way of dividends an amount equal to" a certain percentage of the income mentioned in this section. The Constitution Bench held that the Court must construe s. 80M on its own language and arrive at its true interpretation according to the plain natural meaning of the words used by the legislature and so construed the words "such income by way of dividends" in sub-s. (1) of s. 80M must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. Similarly, Expln. (baa) has to be construed on its own language and as per the plain natural meaning of the words used in Expln. (baa), the words "receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits" will not only refer to the nature of receipts but also the quantum of receipts included in the profits of the business as computed under the head "Profits and gains of business or profession" referred to in the first part of the Expln. (baa). Accordingly, if any quantum of any receipt of the nature mentioned in cl. (1) of Expln. (baa) has not been included in the profits of business of an assessee as computed under the head "Profits and gains of business or profession", ninety per cent of such quantum of the receipt cannot be deducted under Expln. (baa) to s. 80HHC.
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 12. If we now apply Expln. (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under s. 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with ss. 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and gains of business or profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under cl. (1) of Expln. (baa) to s. 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head "Profits and gains of business or profession", is to be deducted under cl. (1) of Expln. (baa) to s. 80HHC for determining the profits of the business.
The view that we have taken of Expln. (baa) to s. 80HHC is also the view of the Delhi High Court in CIT vs. Shri Ram Honda Power Equip (supra) and the Tribunal in the present case has followed the judgment of the Delhi High Court. On appeal being filed by the Revenue against the order of the Tribunal, the High Court has set aside the order of the Tribunal and directed the AO to dispose of the issue in accordance with the judgment of the Bombay High Court in CIT vs. Asian Star Co. Ltd. (supra). We must, thus, examine whether reasons given by the High Court in its judgment in CIT vs. Asian Star Co. Ltd. (supra) were correct in law.
On a perusal of the judgment of the High Court in CIT vs. Asian Star Co. Ltd. (supra), we find that the reason which weighed with the High Court for taking a different view, is that rent, commission, interest and brokerage do not possess any nexus with export turnover and, therefore, the inclusion of such items in the profits of the business would result in a distortion of the figure of export profits. The High Court has relied on a decision of this Court in CIT vs. K. Ravindranathan Nair (2007) 213 CTR (SC) 227 : (2007) 295 ITR 228 (SC) in which the issue raised before this Court was entirely different from the issue raised in this case. In that case, the assessee owned a factory in which he processed cashewnuts grown in his farm and he exported the cashewnuts as an exporter. At the same time, the assessee processed cashewnuts which were supplied to him by exporters on job work basis and he collected processing charges for the same. He, however, did not include such processing charges collected on job work basis in his total turnover for the purpose of computing the deduction under s. 80HHC(3) of the Act and as a result this turnover of collection charges was left out in the computation of profits and gains of business of the assessee and as a result ninety per cent of the profits of the assessee arising out of the receipt of processing charges was not deducted under cls. (1) of the Expln. (baa) to s. 80HHC. This Court held that the processing charges was included in the gross total income from cashew business and hence in terms of Expln. (baa), ninety per cent of the gross total income arising from processing charges had to be deducted under Expln. (baa) to arrive at the profits of the business. In this case, this Court held that the processing charges received by the assessee were part of the business turnover and accordingly the income arising therefrom should have been included in the profits and gains of business of the assessee and ninety per cent of this income also would have to be deducted under Expln. (baa) to s. 80HHC of the Act. In this case, this Court was not deciding the issue whether ninety per cent deduction is to be made from the gross or net income of any of the receipts mentioned in cl. (1) of the Expln. (baa).
The Bombay High Court has also relied on the Memorandum Explaining the Clauses of the Finance Bill, 1991 contained in the Circular dt. 19th Dec., 1991 [(1992) 101 CTR (St) 1] of the CBDT to come to the conclusion that the Parliament intended to exclude items which were unrelated to the export turnover from the computation of deduction and while excluding such items which are unrelated to export for the purpose of s. 80HHC, Parliament has taken due note of the fact that the exporter assessee would have incurred such expenditure in earning the profits and to avoid a distorted figure of export profits, ninety per cent of the receipts like brokerage, commission, interest, rent, charges are sought to be excluded from the profits of the business. In our considered opinion, it was not necessary to refer to the Explanatory Memorandum when the language of Expln. (baa) to s. 80HHC was clear that only ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits computed under the head profits and gains of business of an assessee could be deducted under cl. (1) of Expln. (baa) and not ninety per cent of the quantum of any of the aforesaid receipts which are allowed as expenses and therefore not included in the profits of business of the assessee.
In the result, we allow the appeal and set aside the impugned order of the High Court and remand the matter to the AO to work out the deductions from rent and interest in accordance with this judgment. No costs.”
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 Therefore, the AO has taken one of the plausible view of netting up of interest expenses with interest income in view of the Supreme Court judgment in the case of ACG Associated Capsules (P) Ltd(supra), therefore, under these circumstances the order passed by the AO u/s 143(3) is not erroneous.
We note that the AO after making proper enquiry and proper application of mind framed the assessment u/s 143(3) of the Act, therefore the order of the AO can’t be termed as erroneous and prejudicial to the interest of revenue. At this juncture it is relevant and useful to quote the provisions of Explanation 2 to Sec 263 of the Act, which is reproduced hereunder ready reference;
Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so faras it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— a) the order is passed without making inquiries or verification which should have been made: b) the order is passed allowing any relief without inquiring into the claim; c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person,’ During the assessment proceedings all the details asked for by the Ld. AO have been duly submitted by assessee. The AO vide SI No-11 of Notice u/s 142(1) dated 16.07.2015 had asked to submit the details, separate accounts of the power generation plant with separate calculation of profit from it. The AO had also asked to submit the Form No-10CCB for claiming deduction u/s 80IA.In the course of hearing all the relevant details and documents were submitted before AO. It is also evident from the noting of the Assessment Order made in Para-2 where the Assessing Officer had observed the following :- “ In response to the said notices, assessee’s A/R Shri S.K.Raut, F.C.A appeared from time to time and explained the return. He has also submitted the details as and when requisitioned and the case was heard. The assessee is a company engaged in the manufacturing of sponge iron, ingots and power at it’s factories located at Raigarh in Chhattisgarh and Jharsuguda in Orissa.. " Page | 12
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15
From the above it is abundantly clear that Ld AO has examined the issue of deduction claimed u/s 80IA for the power unit of the company. The AO had examined the documents and explanations submitted before him.Thereafter the AO had taken one of the plausible view of netting up of interest expenses with interest income in view of the Supreme Court judgment in the case of ACG Associated Capsules (P) Ltd(supra).Therefore, under these circumstances it cannot be said that the order of the AO is erroneous.
13.We note that when there is an application of mind and a decision has been taken by the A.O., the assessment order cannot be said to be erroneous unless the same is potentially wrong or unlawful. For that we rely on the judgment of the Hon’ble Supreme Court in the case of M/s. Malabar Industrial Co. Ltd. Vs CIT (2000) 243 ITR 83 (SC)(supra).
Further, we note that the Hon'ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd. (227 CTR 133) drew the thin line of difference between "lack of inquiry" and "inadequate inquiry" and held that in the case of inadequate inquiry there cannot be 263 order. Therefore, without prejudice, even it is held that the AO had made inadequate inquiry then also powers under section 263 of the Act cannot be invoked under the facts and circumstances of the case. This position is further supported by the following judicial pronouncements;
CITVs. Anil Kumar Sharma, 335 ITR 83 (Del HC); Ramakant Singh Vs. CIT 140 TTJ 41 (Patna ITAT); Vodafone Essar South Ltd. vs CIT 141 TTJ 84 (Del ITAT); CIT Vs. Development Credit Bank Ltd. 323 ITR 206 (2010); CIT vs Gabrial India Ltd. 203 ITR 108 (1993); Russel Properties Pvt Ltd Vs. CIT 109 ITR 229 (Cal); CITVs. Vikash Polymers 341 ITR 537 (Del);
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 14. In this regard, we also place reliance on the judgment of Delhi High Court in the case of Fab India Overseas (P) Ltd. Vs. CIT, 201 Taxman 173 wherein under the similar facts and circumstances of the case the Hon'ble court observed as under:
''In view of aforesaid, it is reiterated that the Assessing Officer called for certain clarifications through the questionnaire of the assessee and that the same were furnished with the required details. This fact is even taken note of by the Commissioner himself in his order. The only grievance of the Commissioner was that the Assessing Officer should have made further enquiries rather than accepting the explanation given by the assessee. It cannot be said to be a case of lack of enquiry. We accordingly, answer Question No. 2 in favour of the assessee and against the Revenue. " (Emphasis supplied)."
In view of the facts of the case and judicial pronouncements relied upon, it is well established that the impugned order passed u/s. 143(3) dated 07.01.2016 was passed after calling for relevant information and after detailed examination of the same. The AO has passed the assessment order after calling for details on the issue and after considering the reply and documents after verification of the same and after due application of mind passed the assessment order, so it cannot be termed as erroneous and prejudicial to the interest of the revenue. So, the Ld. CIT’s finding fault with the order of the AO is erroneous as well as prejudicial to the interest of revenue on account of lack of inquiry has to fail.
In any event, we note that the Assessing Officer has adopted one of the courses permissible in law and even if it has resulted in loss to the revenue, the said decision of the Assessing Officer cannot be treated as erroneous and prejudicial to the interest of the revenue as held by Hon’ble Supreme Court in Malabar Industries Ltd. vs. CIT (supra). Since the order of the Assessing Officer cannot be held to be erroneous as well as prejudicial to the interest of the revenue, in the facts and circumstances narrated above, the usurpation of jurisdiction exercising revisional jurisdiction by the Principal CIT is not sustaining in the eyes of law and, therefore, we are inclined to quash the very assumption of jurisdiction to invoke revisional jurisdiction u/s 263 by the Principal CIT. Therefore, we quash the order of the Principal CIT dated 06.03.2018, being ab initio void. Page | 14
M/s Singhal Enterprises Pvt. Ltd. ITA Nos.1071 & 1072/Kol/2018 Assessment Years:2013-14 & 2014-15 16. In the result, the both the appeals of the assessee ( in ITA No.1071 and 1072/kol/2018)are allowed.
Order pronounced in the Court on 26.02.2020
Sd/- Sd/- (S.S.GODARA) (A.L.SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER �दनांक/ Date: 26/02/2020 (SB, Sr.PS)
Copy of the order forwarded to: 1. M/s Singhal Enterprises Pvt. Ltd. 2. DCIT, CC-4(1), Kolkata 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), KolkataBenches, Kolkata. 6. Guard File.