M/S.. UPKAR INTERNATIONAL (P) LTD.,NEW DELHI vs. DCIT, NEW DELHI

PER H.S. SIDHU, JM

Assessee has filed this Appeal against the Order dated

08.10.2013 passed by the Ld. Commissioner of Income Tax

(Appeals)-XXI, New Delhi pertaining to assessment years 2003-04

on the following grounds:-

“1. That the learned CIT (Appeals) erred in upholding

the validity of reopening he assessment made u/s 143(3)

ITA No. 6710/Del/2013 A.Y. 2003-04

of the I T Act, simply because reasons had been recorded

by the AO, ignoring the fact that there was no income

that had escaped assessment. The disallowance of

Rs.10,13,828 u/s 801B of the I T Act sought to be made

by reopening the assessment, had already been made in

the original assessment.

reopening of the assessment when the Revenue's appeal

against the order u/ s 143(3) on the very issue of

deduction 1/ s 801B was pending before the Hon'ble

ITAT.

that in the original assessment, the issue of deduction

u/s 801B of the I T Act had been specifically examined

and discussed and in fact the deduction was disallowed

and thus the reopening was on account of a mere

change in opinion and a review of the original

assessment was sought to be made in the guise of

reassessment.

Tax Act is bad in law as the initiation of proceedings u/s.

147 itself was invalid.

ITA No. 6710/Del/2013 A.Y. 2003-04

learned CIT(A) erred in confirming the disallowance of

deduction of Rs.10,13,238/- u/s. 80-IB of the IT Act.

declaring income of Rs. 6,76,085/- and Book Profit u/s. 115JB

amounting to Rs. 47,95,793/- on 2.12.2003. The assessee filed a

revised return on 25.11.2004 reducing the Book Profit taxable u/s.

115JB to the tune of Rs. 24,30,393/-. The assessee had claimed

the deduction u/s. 80IB of Rs. 10,13,828/- from the exports

incentives like duty drawback etc. the AO examined the issue

regarding the eligibility of exports incentives as deduction u/s. 80IB

and had made a detailed note dated 26.3.2008 and has recorded

the reasons that the assessee has claimed the wrong deduction and

as such the income has escaped assessment. Accordingly, the AO

completed the assessment at an income of Rs. 20,64,503/- u/s.

147/143(3) of the I.T. Act, 1961 on 30.10.2008. .

Ld. CIT(A), who vide impugned order dated 08.10.2013 has

dismissed the appeal of the assessee.

appeal before the Tribunal.

ITA No. 6710/Del/2013 A.Y. 2003-04

Counsel of the assessee has only argued on the legal issue i.e.

about the validity of the reopening. In this connection, he stated

that the deduction u/s 80-IB amounting to Rs. 10,13,828/- had

been disallowed in the original assessment itself. Thus there was no

income which escaped assessment. Ld. Counsel of the assessee

further stated that in the original assessment, the AO had not just

formed an opinion in respect of the deduction u/s 80-IB claimed by

the assessee but had actually disallowed the same. Moreover, the

assessee had disclosed Export Incentives in its Profit & Loss A/c,

which formed the basis of the Computation of its Total Income in

the original assessment. The AO in the reasons recorded has

referred to the record as well as case laws that were already

available at the time of original assessment. Hence, no fresh or

tangible material came into the hands of the AO when reasons were

recorded and it is a case of change of opinion, which is not

permissible in view of the law settled by the following decisions and

therefore, the reassessment needs to be quashed.

(a) CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC)

(b) CIT vs Central Warehousing Corporation (2015) 371 ITR 81 Del)

(c) Vodafone South Ltd. vs Union of India (2014) 363 ITR 388 (Del)

(d) Madhukar Khosla vs ACIT (2014) 367 ITR 165 (Del)

ITA No. 6710/Del/2013 A.Y. 2003-04

(e) BLB Ltd. vs ACIT (2012) 343 ITR 129 (Del)

CIT(A) and stated that lower authorities have have passed a well

reasoned order on the basis of the documentary evidences filed by

the assessee as well as prevailing law. He further stated that Notice

u/s. 148 has been issued after adopting the prescribed procedure

under the law and with tangible material. Therefore, he stated that

the question of quashing the reassessment does not arise.

Accordingly, he requested that the Appeal filed by the Assessee may

be dismissed.

especially the orders of the Revenue authorities alongwith the

Paper Book filed by the assessee containing pages 1 to 36 having

various documentary evidences. We have also perused the case

laws cited by the Ld. Counsel of the Assessee, as aforesaid. We

have also perused the reasons recorded by the AO. For the sake of

clarity, we are reproducing the reasons recorded by the AO as

under:-

“Upkar International Ltd

26/03/08

Assessee is engaged in the business of

Manufacture/Assembling of Diesel Engines. In the return

ITA No. 6710/Del/2013 A.Y. 2003-04

of income assessee has wrongly claimed deduction u/s

80IB of the Income Tax Act. In the assessment year

2005-06 too the deduction claimed under section 80lB

held by the AO to be not allowable

The case of the assessee was completed u/s 143(3) for

the A Year 2003-04 at Rs. 20,64,503/- on 07-03-

200.6. The assessee has claimed deduction of Rs.

10.13,828/- u/s. 80IB @25% of the eligible profits which

have been worked out at Rs. 40,55,313/-_ In form No.

3CCB dated 1-8-2003 appended to the return of income.

Perusal of the details of income reveal that the assessee

has also shown other income which has been taken for

the purpose of eligible profits. The details of the other

income are as under:

a) Other income comprises of the following-

i) Brokerage Rs.69337

ii) Export Incentives Rs.4325443

iii) Profit on sale of fixed asset Rs.33874

iv) Interest on FDR Rs. 983

v) Rebate & Discount Rs. 12240

vi) Incentives Rs.148115

ITA No. 6710/Del/2013 A.Y. 2003-04

Besides other incomes like brokerage, rebates etc.,

a sum ofRs.43.25.443/- has been shown as export

incentives. The export incentives received by the

assessee cannot be said to be derived from the business

of industrial undertaking.

The benefit of deductions uls 8018 is provided on

the profits and gains derived from an industrial

undertaking as specified therein. It is not an omnibus

benefit available to the entire income of the assessee.

The term "derived from" used in the section cannot have

a wide import so as to include any income which can in

some

manner be attributable to the business. The derivation of

income must be directly connected with the business in

the sense that the income is generated by the business.

It would not be sufficient if it is generated by the

exploitation of business assets. The source of a particular

income by an assessee for which a rebate is sought for

must have directly emerged from the running of the

industrial undertaking, yielding profits and gains. Such

profits must have been derived from the industrial

undertaking which must itself be the source of that profit.

ITA No. 6710/Del/2013 A.Y. 2003-04

The legal position on interpretation of the term

"derived from" was settled by the Privy Council in the

case of en Vs. Raja Bahadur Kamakhya Narain Singh

(1948) 16 ITR 325. In that case it was pointed out that

the word "derived" is hot a term of art. Its use in the

definition demanded an inquiry into the genealogy of the

product. The question in that case was whether interest

in respect of arrears of rent payable for land which was

used for agricultural purposes would also be agriculture.

The claim on behalf of the assessee was that since

the rent was payable for agricultural land, the interest on

delayed payment of such rent was also of agricultural

character and was not taxable.

The Hon'ble Supreme Court of India has been

following the Interpretation given by the Privy Council in

Kamakhva Narain Singh's case. In the case of Mrs. Bacha

F. Guzdar {1955) 27 ITR 1, it was held that where a

company-deriving income from agriculture declared

dividend, the dividend did not arise from any agricultural

source and cannot be claimed to be income derived from

agricultural activity In Hindustan Lever Ltd. Vs. CIT

(1997) 239 ITR 297, (SC) while dismissing the appeal

ITA No. 6710/Del/2013 A.Y. 2003-04

held that the High Court was clearly right in holding that

the assessee's profit from sale of its goods in India

cannot be said to have been derived from export sales.

In English Electric Company of India Ltd. Vs CIT 168 ITR

513 Madras High Court had held that where the interest

is earned on deposits kept in normal course by the

industry, such income cannot be said to be attributable

to the industry-

The distinction between "derived from" and "attributable

to", which had been emphasised by the Supreme Court in

the case of Cambay Electric Supply. Industrial Co. Ltd. v

. CIT (1978], has been reiterated by the Supreme Court

in its later ruling in the case of CIT v Sterling Foods

[1999] which reversed the decision of the Karnataka

High Court (Sterling Foods v CIT[1991)), The reasoning

given by the Hon’ble Supreme Court is reproduced

hereunder:-

"The source of the import entitlements cannot be

said to be the industrial undertaking of the

assessee. The source of the import entitlements

can, in the circumstances, only be said to be the

Export Promotion Scheme of the Central

ITA No. 6710/Del/2013 A.Y. 2003-04

Government where under the export entitlements

become available. There must be, for the

application of the words "derived from", a direct

nexus between the profits and gains and the

industrial undertaking. In the instant case, the

nexus is not direct but only incidental. The

industrial undertaking exports processed seafood.

By reason of such export, the Export Promotion

Scheme applies. There under, the assessee is

entitled to import entitlements, which it. can sell.

The sale consideration there from cannot be held to

constitute a profit and gain derived from the

assessee's industrial undertaking."

It is clear that in order to determine whether an income.

can be said to be “derived" from an industrial

undertaking an enquiry should be made into the source

of the income and the enquiry should end at the first step

otherwise enquiry will ultimate lead to business

connection in every case. For instance in the case of

Sterling Food Ltd the enquiry ended at the scheme of

the Govt. for Duty Draw Back and did not continue to

reach the fact that DDBK arose out of the. exports made

ITA No. 6710/Del/2013 A.Y. 2003-04

by the assessee. In the case of Pandian Chemical Ltd.

Vs. CIT (2003) 262 ITR 278 (SC) the Hon'ble

Supreme Court held that interest on deposit with

electricity board is not derived from industrial

undertaking as it was a step removed from the business

of industrial undertaking.

Thus in order to qualify for deduction u/s 80-lB the

income should qualify the above test of being born out of

immediate source of manufacture.

The jurisdictional High Court in the case of Ritesh

Industries Ltd 274 ITR 324 held that duty draw back

cannot be regarded as the profit or gain "derived" from

Industrial Undertaking. It may constitute profit or gain of

the business by virtue of section 28 but it cannot be

constructed as profit or gains derived from Industrial

Undertaking, since its 'immediate and oroximate source

is not the industrial undertaking but the scheme of duty

draw back. The judgment in this case also referred was

the decision of Apex Court in the case of Sterling Food

237 ITR 579.

The verdict of Hon'ble Supreme Court is law of the

land and is equal to the statue book, also it should have

ITA No. 6710/Del/2013 A.Y. 2003-04

been followed by the assessee in letter and spirit. In view

of above facts I have reason to believe that income to

the tune of Rs, 10,13,8281/- arising out of wrong claim

of deduction uls 80IB has escaped assessment. The

components of the income that escaped are given in lea)

above. In other words the escaped income was also due

to a wrong act on the part of the assessee to correctly

claim deduction uls 80IB. In the circumstances of the

case to bring the escaped income to tax provisions as

contained in section 147 read with explanation 2 are

clearly attracted.

The facts explained above shows the circumstances

leading to the wrong claim under section 80IB made by

the assessee and the facts indicating that there was

failure on the part of the assessee to comply with the

provisions of Income Tax Act and also the law enunciated

by the Hon'ble Supreme Court for these sections are fully

discussed above.

In the circumstances of the case provisions as

contained in section 147 read with explanation 2 are

clearly attracted. As 4 years have not elapsed from the

end of the relevant assessment year the power of issuing

ITA No. 6710/Del/2013 A.Y. 2003-04

rests with the DCIT, hence no permission is required

from Ld. Commissioner of Income Tax/Addl.

Commissioner

of Income Tax, New Delhi as mentioned in section 151(

I) of the L Tax Act, 1961. Therefore, on the above

reasons I am satisfied that income to the tune of Rs.

10,13,828/- has escaped assessment within meaning of

section 147 of the Income Tax Act.

Issue notice uls 148 of the Income Tax Act for

income escaping tax.

Sd/-

(Virender Singh)

Dy. Commissioner of Income Tax

Circle-I8(l), New Delhi “

7.1 After going through all the records available with us, we find

that the original assessment was made by the AO u/s 143(3) on

07/03/2006 and the reasons recorded on 26/03/2008, there is not

even a whisper of the original assessment order and the

disallowances made therein. We also note that the deduction u/s

80-IB amounting to Rs. 10,13,828/- had been disallowed in the

original assessment itself. As per the reasons recorded u/s. 148,

the reopening was made to disallow the same deduction of Rs.

ITA No. 6710/Del/2013 A.Y. 2003-04

10,13,828/- u/s. 80IB which had already been disallowed in the

original assessment. Thus, there was no income which is escaped

assessment. This is also evident from the fact that the total income

determined in the original assessment as well as the reassessment

is the same i.e. Rs. 20,64,503/-. It is a settled law that in the

absence of any income escaping assessment, no reassessment can

be made.

7.2 We further find that in this case the reassessment seeks to

review the original assessment without any fresh or tangible

material and was actuated by Change of opinion in the original

assessment, the AO had not just formed an opinion in respect of the

deduction u/s 80-IB claimed by the assessee but had actually

disallowed the same. Moreover, the assessee had disclosed Export

Incentives in its Profit & Loss A/c, which formed the basis of the

Computation of its Total Income in the original assessment. We

note that the AO in the reasons recorded has referred to the record

as well as case laws which were already available at the time of

original assessment. No fresh or tangible material came into the

hands of the AO when reasons were recorded. In the circumstances,

the reopening was sought to be made only to review the original

assessment which was actuated by Change of opinion by the AO,

which is clearly impermissible in view of the law settled by the

ITA No. 6710/Del/2013 A.Y. 2003-04

Hon’ble Supreme Court of India in the case of CIT vs. Kelvinator of

India Ltd. (2010) 320 ITR 561 (SC). The Hon’ble Apex Court in the

aforesaid case has analysed in detail the provisions of section 147 of

the IT Act and held as under:-

“After the Amending Act, 1989, Section 147 reads as

under:

“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).”

made to Section 147 of the Act, we find that, prior to

Direct Tax Laws (Amendment) Act, 1987, re-opening

ITA No. 6710/Del/2013 A.Y. 2003-04

could be done under above two conditions and fulfillment

of the said conditions alone conferred jurisdiction on the

Assessing Officer to make a back assessment, but in

section 147 of the Act [with effect from 1st April, 1989],

they are given a go-by and only one condition has

remained, viz., that where the Assessing Officer has

reason to believe that income has escaped assessment,

confers jurisdiction to reopen the assessment. Therefore,

post-1st April, 1989, power to re-open is much wider.

However, one needs to give a schematic interpretation to

the words “reason to believe” failing which, we are

afraid, Section 147 would give arbitrary powers to the

Assessing Officer to re-open assessments on the basis of

“mere change of opinion”, which cannot be per se reason

to re-open. We must also keep in mind the conceptual

difference between power to review and power to re-

assess. The Assessing Officer has no power to review; he

has the power to re-assess. But re-assessment has to be

based on fulfillment of certain pre-condition and if the

concept of “change of opinion” is removed, as contended

on behalf of the Department, then, in the garb of re-

opening the assessment, review would take place. One

ITA No. 6710/Del/2013 A.Y. 2003-04

must treat the concept of “change of opinion” as an in-

built test to check abuse of power by the Assessing

Officer. Hence, after 1st April, 1989, Assessing Officer

has power to re-open, provided there is “tangible

material” to come to the conclusion that there is

escapement of income from assessment. Reasons must

have a live link with the formation of the belief. Our view

gets support from the changes made to Section 147 of

the Act, as quoted hereinabove. Under the Direct Tax

Laws (Amendment) Act, 1987, Parliament not only

deleted the words “reason to believe” but also inserted

the word “opinion” in Section 147 of the Act. However,

on receipt of representations from the Companies against

omission of the words “reason to believe”, Parliament

re-introduced the said expression and deleted the word

“opinion” on the ground that it would vest arbitrary

powers in the Assessing Officer. We quote hereinbelow

the relevant portion of Circular No.549 dated 31st

October, 1989, which reads as follows:

“7.2 Amendment made by the Amending Act,

1989, to reintroduce the expression `reason to

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believe' in Section 147. –A number of

representations were received against the omission

of the words `reason to believe' from Section 147

and their substitution by the `opinion' of the

Assessing Officer. It was pointed out that the

meaning of the expression, `reason to believe' had

been explained in a number of court rulings in the

past and was well settled and its omission from

section 147 would give arbitrary powers to the

Assessing Officer to reopen past assessments on

mere change of opinion. To allay these fears, the

Amending Act, 1989, has again amended section

147 to reintroduce the expression `has reason to

believe' in place of the words `for reasons to be

recorded by him in writing, is of the opinion'. Other

provisions of the new section 147, however, remain

the same.”

these civil appeals filed by the Department, hence,

dismissed with no order as to costs.”

7.3 In view of the aforesaid facts and circumstances, as explained

above and respectfully follow the law laid down by the Hon’ble

ITA No. 6710/Del/2013 A.Y. 2003-04

Supreme Court of India in the case of CIT vs. Kelvinator of India

Ltd. (2010) 320 ITR 561 (SC), as aforesaid, we are of the view that

both the authorities below have gone wrong in deciding the

reopening as valid. Therefore, we quash the orders of the

authorities below on this legal issue and decide the same in favor

of the assessee.

as aforesaid, raised in the Assessee’s Appeal, in our considered

opinion, there is no need to adjudicate the issues on merits.

Order pronounced in the Open Court on 02/06/2016.

Sd/- Sd/-

[O.P. KANT] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER

Date 02/06/2016

“SRBHATNAGAR” Copy forwarded to: - 1. Appellant - 2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches