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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
This appeal by the Assessee is arising out of the order of Commissioner of Income Tax (Appeals)-II Mumbai, [in short CIT(A)] in appeal No. THN/CIT(A)-II/AC Cir.1/Thn/Trns.10/2007-08 dated 07-01-2014. The Assessment was framed by the Income Tax Officer, Ward 3(1), Thane (in short ITO) for the assessment year 2002-03 vide order dated 30.03.2005 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’). The impugned order of rectification
Advanced enzyme Technologies Ltd. (A.Y. 2002-03) under section 154 of the Act was passed by ACIT, Circle 3, Thane vide order dated 15-02-2006.
The only issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in re- computing the amount of deduction under section 80HHC of the Act by reducing the brought forward depreciation losses of earlier years from the amount of claim and further, re- computing the book profit under section 115JB of the Act by reducing their from the amount on profit eligible for deduction under section 80HHC of the Act, while passing order under section 154 of the Act even though, the issue is highly debatable in nature. For this assessee has raised following jurisdictional issue: -
“2.1 The Ld. CIT(A) erred in upholding validity of the jurisdiction of the AO to initiate the proceedings, and pass the order u/s 154 of the Act.
2.2 It is submitted that in the facts and the circumstances of the case, and in law, the AO acted without / in excess of the jurisdiction u/s 154 of the Act, as there was no mistake apparent from the record within the meaning of that section, the concerned issues being highly debatable in nature.”
Brief facts relating to the issue are that the original assessment was completed by the AO and subsequently, the he noticed that there are mistakes kept in the order of assessment and hence, he rectified the mistakes vide order
Advanced enzyme Technologies Ltd. (A.Y. 2002-03) dated 15-02-2006 under section 154 of the Act on the following: -
“i. The assessee company has claimed deduction under section 80HHC of ₹ 57,24,268 before setting off brought forward unabsorbed losses & depreciation for AY 1998-99 & 1999-2000 which is not in order. The deduction under section 80HHC should have been claimed after setting of the unabsorbed business loss/ depreciation to gross total income, however, the assessee has claimed the deduction nbefore the set off of unabsorbed losses / depreciation. This is not in order which resulted into incorrect allowance of deduction under section 80HHC to the extent carry forward of unabsorbed losses to the extent of ₹ 57,24,268/- for subsequent years. ii) It is also observed that the assessee has claimed deduction u/s 80HHC of ₹ 81,77,566/- while computing of book profit under section 115JB which is also noting order since the assessee is not eligible for deduction under section 80HHC in view of the above observations. Hence the brought forward losses for the purpose of provisions under section 115JB would be ₹ 2,53,49,342/- (the correct figure is 2,53,79,342/-) as against ₹ 1,72,01,820/-.”
Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) also confirmed the action of the AO on merits as well
Advanced enzyme Technologies Ltd. (A.Y. 2002-03) as on the ground of jurisdiction. Aggrieved, assessee came in second appeal before Tribunal.
Before us, the learned Counsel for the assessee explained the facts that the assessee a limited company is engaged in the business of manufacturing industrial enzymes and chemicals and has been regularly filing its return of income since ten years. For the assessment year A.Y. 2002-03 the assessment was completed under section 143(3) of the Act after detailed examination of the assessee’s records and after raising specific query regarding the claim of deduction u/s. 80 HHC of the Act and verifying the explanation and details for claim of deduction u/s 80 HHC of the Act, the return income of the assessee was accepted by the AO. Thereafter, on 12.01.2006 notice u/s 154 of the Act was issued for rectification of the assessment order passed u/s. 143(3) of the Act on the ground that the deduction u/s. 80 HHC of the Act, as claimed by the assessee was not proper. As the hearing for AY 2003-2004 was in progress, this case was also discussed during the hearing. The learned Counsel for the assessee explained that for the year under appeal the assessee had claimed deduction u/s. 80 HHC of the Act of Rs. 57,24,268/- before setting off brought forward loss and unabsorbed depreciation of earlier years. The AO carried out two rectifications in the assessment order. According to the AO, the Assessee ought to have claimed deduction u/s. 80 HHC after setting off the unabsorbed business losses and deprecation As a result of this view taken by the AO, in the Assessee's case, after deduction of earlier years brought forward losses and deprecation there left no eligible profit for deduction u/s. 80 HHC of the Act and, consequently, the Advanced enzyme Technologies Ltd. (A.Y. 2002-03) Assessee was held not eligible for the deduction. Further, as the Assessee was not held eligible for deduction u/s. 80 HHC of the Act, according to the AO, the Assessee was not entitled to reduce the amount of the eligible deduction u/s. 80 HHC of the Act from the book profit for the purpose of computing tax liability u/s. 115 JB of the Act. The learned Counsel explained that whether the Assessee is eligible for deduction under section 80HHC of the Act only after setting off unabsorbed losses and depreciation is a highly debatable issue. In fact, the claim of the assessee, as well acceptance thereof by the AO was based on a series of judicial pronouncements, including of the jurisdictional high court. Hon’ble Bombay High Court in the case of CIT v/s. Shrike Construction Equipments Ltd. [(2000) 246 ITR 429 (Bom)] had taken a view that Section 80 HHC is a complete code in itself and while computing deduction u/s. 80 HHC of the Act unabsorbed business losses and depreciation of earlier year are not to be set off. On the other hand, the learned Sr. Departmental Representative heavily relied on the orders of the lower authorities.
We have heard the rival contentions and gone through the facts and circumstances of the case. Now the issue before us is whether the claim of deduction under section 80HHC is to be allowed after set off brought forward losses and depreciation is debatable issue or not? In any case, this, by itself, shows that the issue that the AO has sought to rectify was a highly debatable issue. It is now a very firmly settled legal principle that debatable issues can never be subject matter of rectification proceedings under 154 of the Act. The Hon'ble Madras High Court in the case of CIT v/s. Nameel Leathers & Uppers (2005) 273 ITR 350 (Mad), held that it is a Advanced enzyme Technologies Ltd. (A.Y. 2002-03) settled law that the question of relief under section 80HHC is a debatable issue and no recourse of section 154 of the Act be taken to rectify the amount of relief. This view has been recently followed by the Hon'ble Madras High Court itself in the case of CIT v/s. Seshasayee Papers & Boards Ltd. (2006) 283 ITR 200 (Mad). It is important to note that the Court was dealing with the very similar issue of section 80 HHC, viz., the adjustment of unabsorbed investment allowance in rectification proceedings. Similarly, Hon'ble Delhi High Court in the case of CIT v/s. Krishak Bharati Co-operative Ltd. (2004) 266 ITR 208 (Delhi), while dealing with the provisions of section 80 I of the Act, which are akin to section 80HHC of the Act, held that the relief granted to an assessee u/s. 80 I of the Act could not be withdrawn by taking recourse to section 154 of the Act. Even in this case, the SLP filed by the department is also dismissed by the Apex Court (2003) 264 ITR (St.) 200. Lastly, we would refer to the case law cited by the learned Counsel of Hon’ble Supreme Court Judgment in the case of T.S. Balaram ITO v/s Volkart Bros. (1971) 82 ITR 50 (SC), where the apex Court has clearly held that:
"A mistake apparent on the record within the meaning of section 154 of the Act must bean "obvious" and "patent" mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. A decision on debatable point of law is not a mistake apparent from the record."
Even the issue is consistently followed by all the High Courts in India and Hon’ble Bombay High Court in the case of Advanced enzyme Technologies Ltd. (A.Y. 2002-03) CIT v/s. K. Subnani Construction Co. (1989) 177 ITR 219 (Bom) has observed that as regards the AO's action of not reducing the export profits eligible u/s. 80HHC of the Act while calculating book profit is not a mistake apparent from record and highly debatable.
Even on merits, we find that the issue is covered in favour of the Assessee by the order of Mumbai Tribunal in the case of Dy. CIT v. Govind Rubber (P.) Ltd. [2004] 89 lTD 457 (Mum)], where the Tribunal, while dealing with the provisions of Sec. 115J of the Act which is akin to the present provisions of 115 JB of the Act, has held that in a case where there are eligible profits from export business as computed under section 80HHC of the Act, deduction under Explanation (iii) to section 115J of the Act would automatically follow and the assessee is entitled to the deduction, from the book profit, of the amount so eligible under section 80HHC of the Act even though the assessee is denied the deduction under section 80HHC of the Act due to his income computed for assessment year becoming nil because of set off of unabsorbed depreciation. In the light of the above jurisdiction Tribunal Order, We are of the view that the action f the AO is bad in law and hence, we reverse the orders of the lower authorities. The appeal of the assessee allowed.