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Income Tax Appellate Tribunal, DELHI BENCH “D”, NEW DELHI
Before: SHRI H.S. SIDHU & SHRI O.P. KANT
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) 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.
2. That the learned CIT (Appeals) erred m upholding the 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.
3. That the learned CIT(A) erred in overlooking the fact
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.
That the assessment order u/s 147/143(3) of the Income Tax Act is bad in law as the initiation of proceedings u/s. 147 itself was invalid.
5. That in the- facts and circumstances of the case, the learned CIT(A) erred in confirming the disallowance of deduction of Rs.10,13,238/- u/s. 80-IB of the IT Act.
The brief facts of the case are that the assessee filed a return 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. .
Against the order of the Ld. AO, assessee appealed before the Ld. CIT(A), who vide impugned order dated 08.10.2013 has dismissed the appeal of the assessee.
4. Aggrieved with the order of the Ld. CIT(A), Assessee is in appeal before the Tribunal.
At the time of hearing, Ld. Counsel of the assessee Ld. 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) (e) BLB Ltd. vs ACIT (2012) 343 ITR 129 (Del)
On the other hand, Ld. DR relied upon the order of the Ld. 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.
We have heard both the parties and perused the records 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 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
Deduction u/s 80IB 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
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.
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 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
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 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 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 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.