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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI RAMIT KOCHAR, AM ITA No.443/Mum/2006 (A.Y:1999-2000)
Dy. Commissioner of Income Tax, Novartis India Ltd. Circle 7(1) Sandoz House, Dr. Annie ACIT Circle 7(1), Vs. Besant Road, Mumbai-400 018 Aayakar Bhavan, Mumbai-20 PAN No. AAACH2914F Appellant .. Respondent
ITA No.2179/Mum/2006 (A.Y:1999-2000) CO No. 101/Mum/2006 (In ITA No.443/Mum2006 for AY 1999-2000)
Novartis India Ltd. Dy. Commissioner of Income Tax, Sandoz House, Dr. Annie Besant Circle 7(1) Road, Mumbai-400 018 Vs. ACIT Circle 7(1), Aayakar Bhavan, Mumbai-20 PAN No. AAACH2914F .. Shri SK Agarwal, DR Revenue by Assessee by .. Shri J.D. Mistry, AR .. Date of hearing 13-04-2017 Date of pronouncement .. 13-04-2017 O R D E R PER MAHAVIR SINGH, JM:
These Cross appeals one by the Revenue and one by assessee are arising out of the order of CIT(A)-XIX, Mumbai, in appeal No. CIT(A)-XIX/IT-33/05- 06 dated 17-10-2005. The Assessment was framed by ACIT Circle 7(1), Mumbai for the A.Y. 1999-00 vide order dated 28-02-2005 under section 143(3)/147/148 of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first issue in ITA No. 2179/Mum/2006 for the AY 2009-10 of assessee’s appeal is as regards to the assumption of jurisdiction by the AO under section 147 read with section 148 of the Act for reopening of assessment already completed under section 143(3) of the Act. For this assessee has raised following ground No. 1: -
ITA No.443&2179/Mum/2006 CO No. 101/Mum/2006 Novartis India Ltd;AY:99-00
“Ground No.1
(a) The Commissioner of Income-tax (Appeals)-XIX, Mumbai [hereinafter referred to as the CIT(A)] erred in confirming the action of the AO in re-opening the assessment under section 147/148 of the Income-tax Act, 1961(the Act).
The appellants submit as under:
(i) The re-opening is void and/or in excess of jurisdiction and otherwise contrary to the provisions of the Income-tax Act and bad in law and consequently the order passed by the AO, ought to be cancelled.
(ii) The appellants had disclosed all material facts necessary for assessment. The order passed by the AO represents a change of opinion on the same set of facts available at the time of passing of the original order.
(b) Without prejudice to the above, the CIT(A) ought to have held that the AO erred in exceeding his jurisdiction in revising the assessment.
The appellants submit that notwithstanding that the issues for which the assessment was re-opened were partly dropped, the AO erred in considering other issues while passing the order under appeal.”
At the outset, the learned Counsel for the assessee Shri. JD Mistry Sr. Counsel narrated the facts that original assessment was completed for the AY 1999-2000 by the ACIT Circle 7(1), Mumbai under section 143(3) of the Act vide his order dated 20-02-2002. Subsequently, the AO issued notice under section 148 of the Act for reopening of assessment vide notice dated 23-10-2003
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within four years. The learned Counsel for the assessee took us through the reasons recorded for reopening of assessment which reads as under: - “(a) The assessee had debited capital expenditure by way of write off of fixed assets and by way of write off of assets retired from active use and by way of fees payable to Gujarat Industrial Development Corporation, for change of name from Sandoz India Ltd. to Novartis India Ltd. These items of capital expenditure were not added back to the profits in the computation of income.
(b) The assessee had claimed depreciation on opening WDV of factory building at Rs. 136,131,782/-, of plant & machinery at Rs. 323,908,014/- and of furniture at Rs. 40,458,043/- whereas the closing WDV for A.Y.1998-99 was for factory building Rs. 136,020,778/-, for plant and machinery Rs. 323j32,614/-, for furniture Rs. 40,424,271/-. Therefore, the assessee has claimed excess depreciation by inflating the value of the opening WDV which should have been the same as the closing WDV.
(c) Expenses by way of interest and bank charges paid in foreign currency amounting to Rs.11.79/- lacs were allowed although the assessee had not produced any evidence to show that tax had been deducted at source as per the provisions of Sec. 195. According to the provisions of Sec.40(a)(i), such expenses are not deductible if the tax has not been deducted at source. This has resulted in excess allowance of Rs.11 .79 Lacs and consequently, under assessment of income to the same extent.
(d) While claiming the deduction u/s.80HHC, the assessee has reduced from the eligible profits, deduction claimed u/s801A of Rs. 38,588,000/-. As per the Page 3 of 13
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provisions of Sec.801A(9) the assessee was required to reduce the profits of the industrial undertaking of Rs.128,626,000/- which has been subjected to deduction u/s.801A. By failing to do so, the deduction u/s.80HHC has been allowed in excess.
(e) The assessee has claimed depreciation at full rate on motor cars which were purchased during the year but was used for less than 180 days. As per the provision of Sec.32, depreciation should have been restricted to 50% of the prescribed rate. Failure to do so, the same has resulted in excess depreciation being allowed to the assessee.”
The learned Counsel for the assessee explained the above reasons as under:- i) Capital expenditure debited to P& L A/c > Reassessment is dropped ii) Depreciation claim on factor building, plant and machinery, furniture > Reassessment is dropped iii) Disallowed under section 40(a)(i) of the Act > Reassessment is dropped. iv) Deduction claimed under section 80IA of the Act reduced from eligible profits while computing deduction under section 80HHC > In the computation sheet in assessment order passed under section 143(3) of the Act, independent deduction has been allowed in respect of 80HHC and 80IA of the Act. v) Depreciation on motor cars > Assessee’s contention has been allowed by CIT(A). The Department has accepted the ruling and has not appealed further. 4. According to the learned Counsel for the assessee, the only surviving issue now remains is item No.4 of the reasons recorded which is as regards to the claim of the deduction under section 80HHC of the Act has been reduced from Page 4 of 13
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eligible profit of deduction under section 80(IA) of the Act amounting to Rs.3,85,88,000/- But according to AO as per the provisions of Section 80(IA) (9) of the Act, the assessee was required to reduce the profit of the industrial undertaking amounting to Rs. 12,86,26,000/- which has been subjected to deduction under section 80(IA) of the Act. According to AO while passing assessment order under section 143(3) of the Act the deduction under section 80HHC of the Act has been excess allowed. Now, the learned Counsel for the assessee drew our attention to Para 14 of previous assessment order in assessee’s paper book at page 19 and 18. “14. Deduction u/s 80 HHC.
It is found in the course of the assessment proceeding that deduction u/s. 80 HHC has been claimed by the assessee at Rs. 5,82,57,000/-. However, while calculating the total turnover, the assessee has not included sales tax of Rs.20,36,70,000/- while excise duty is included in sales. On being confronted, the assessee vide letter dated 21.1.02 has contended that excise duty, scrap sales and sales tax should not be included in the total turnover for computing deduction u/s 80HHC. However, the above contention of the assessee cannot be allowed in view of the clear provision of law u/s 80HHC in this regard. The department's stand in this regard has also been confirmed in the case Ponds India Limited vs. DC1T (164 ITD 33) as decided by Mumbai Bench of the Tribunal. Further, it may be pointed out that the decision in the case of Sudarshan Chemicals Industries Ltd 245 ITR 769 (Born) on the issue of exclusion of excise duty element from total turnover has not been accepted by the Department and SLP has been recommended on this issue. With due respect to the Hon'ble Bombay High Court, in view of the above and the clear provision of law as enshrined in Section 80HHC, the above items are to be included in computing the figure of total turnover. Page 5 of 13
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Needless to say, the above amount of Rs. 1,49,56,817 has to be excluded from the export turnover for the purpose of computing deduction u/s 80 HHC. After considering the above points, and taking the total income as per this order the deduction u/s 80HHC is computed at Rs.5,82,20,000/- as per Annexure enclosed to this order which forms a part and parcel of the body of the order instead of Rs.5,82,57,000/- as claimed by the assessee in its return.”
In view of the above, the learned Counsel for the assessee took us through the computation part of the gross total income whereby deduction/s 80HHC of the Act was allowed at Rs. 5,82,20,000/- and the relevant portion of the computation was referred by the learned Counsel by the assessee which reads as under: -
“GROSS TOTAL INCOME 1,199,671,4321 Less: Deduction under chapter VIA Under Sec. 80G 294,000 Under Sec. 80IA 38,588,193 Under Sec. 80HHC 58,220,000 97,102,193 As per para 14 & annexure 1,10,25,69,238 Total Taxable Income 1,10,25,69,238
The learned Counsel for the assessee again took us through the computation of the claim of deduction under section 80HHC of the Act computed by the AO wherein this claim is given at item No. 17 as under: - “17. Deduction U/s 90 HHC to which the assessee is entitled (Item 14 minus 16) 58,220”
Further, the learned Counsel for the assessee drew our attention to the total profit of the business computed by the AO at item No.5 which reads as under: - “5. Total Profits of the Business 1,02,9,511”
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According to the learned Counsel the AO has computed total profit of business as under: - “3. Total profits of the business 000 Profits and gains of business or profession 11,99,671
Less: Deduction claimed under section 80IA being 30% of profit of new industrial 38,588 Less:90% of the sums referred to in section 28(iiia), (iiib) and (iiic). 20,049 Less: 90% of Rent, interest and other services 1,11,523 10,29,511
He drew our attention to specific claim of deduction under section 80(IA) of the Act being 30% of the total profit of new industrial undertaking at Rs. 3,85,88,000/- which is reproduced above. In view of the above, the learned Counsel for the assessee argued that once the AO has computed the claim of deduction under section 80(IA) of the Act, he has formed an opinion and there is no error in the opinion of the AO while reducing the claim of deduction. The learned counsel for the assessee stated that this is merely a change of opinion and nothing else. For this learned Counsel for the assessee relied on various case laws. 7. On the other hand the learned CIT DR supported the reopening and argued that after the amendment in provision of section 147 of the Act with effect from 1989 the completed assessment can be reopened within 4 years of the passing of the assessment order u/s 143(3) of the Act if the AO has reason to believe that income of the assessee has escaped assessment. In this case, the assessment was reopened by the AO on account of excessive allowance of deduction u/s 80HHC of the Act and this happened because while computing deduction u/s 80HHC of the Act by the assessee not excluded the profit of undertaking in respect to which deduction u/s 80IA of the Act was claimed and already allowed as required under section 80IA(9) of the Act. According to the learned CIT DR the language used in section 80IA(9) of the Act is very clear which provides that the profit of the industrial undertaking claimed and allowed
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u/s 80IA of the Act further shall not be considered while computing deduction under any other provisions of this chapter VIA. According to the learned CIT DR the wrong claim of deduction under section 80HHC of the Act allowed while passing assessment under section 143(3) of the Act constitutes sufficient material for the AO to have reasoned to believe that income has escaped assessment while framing original assessment order. Accordingly, he urged for confirming the reopening. 8. We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee company has claimed deduction u/s 80IA of the Act at Rs.3,85,88,193/- as shown in the computation of income annexed with the original assessment order. The AO in his assessment order u/s 143(3) of the Act dated 19-02-2001, while calculating deduction u/s 80HHC of the Act has computed deduction at Rs.3,85,88,193/- from profit of business. We find that the AO himself has allowed deduction after considering all the material before him and now by reopening the assessment it is desired to reduce the deduction claimed u/s 80IA of the Act at Rs. 12,86,26,000/-, which would amount to change of opinion based on same set of facts. Even otherwise on merits also the assessee has been allowed deduction u/s 80IA(9) of the Ac at Rs. 3,85,88,193/- only and not the amount of Rs. 12,86,26,000/-. From the above it is clear that even as per the provisions of section 80IA(9) of the Act the amounts of profits and gains of an industrial undertaking in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed. Here, the AO has correctly reduce the amount of claim of deduction Rs.3,85,88,193/-. This issue is covered by the decision of Hon’ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd(320 ITR 561) (SC).
“4. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987 , re- opening could be done under above two conditions and fulfilment of the said Page 8 of 13
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conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1-4-1989], 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 re-open the assessment. Therefore, post 1-4-1989 , power to reopen 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 reopen. 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 reassess. But reassessment has to be based on fulfilment 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 must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989 , Assessing Officer has power to reopen, 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- Page 9 of 13
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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 31-10- 1989, which reads as follows :
"7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression 'reason to 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." [Emphasis supplied].”
We find from this judgment of Hon’ble Supreme Court that even after substitution of section 147 by Direct Tax Laws (Amendment) Act, 1987, concept of 'change of opinion' must be treated as an in-built test to check abuse of power by AO and therefore, after 1-4-1989, AO has power to reopen, provided there is 'tangible material' to come to conclusion that there is escapement of income from assessment; and reasons must have a live link with formation of belief. Hon’ble Supreme Court has reiterated the position and clearly held that the reopening is possible only when there is tangible material available before the AO.
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Further, this issue is covered by the decision of Hon’ble Bombay High Court in the case of Lupin Ltd. Vs. ACIT [2014] 224 Taxman 225 (Bombay) wherein it is held as under: - “14 We also find force in the submission of Mr. Pardiwala that the initiation of re-assessment proceedings for the Assessment Year 2005-06 is merely based on a "change of opinion". On a perusal of the reasons for initiating to assessment proceedings, we find that it is not even the case of Respondent No. 1 that any new tangible material was brought to his notice which led him to believe that income had escaped assessment. As stated earlier, all material facts were disclosed by the Petitioner in proceedings that were undertaken under sections 142(1) r/w 143(2), which finally culminated in the assessment order dated 30th December 2008 under section 143(3). It is therefore evident that Respondent No. 1 after passing the original assessment order dated 30th December 2008 has changed his opinion and issued the impugned notice under section 148. The reasons for the impugned notice as well as the impugned order proceed on the basis that a patent is a capital asset and hence expenditure incurred towards filing of patent applications should have been treated as capital expenditure. Since it was treated as a revenue expenditure, there was computation of excessive loss which resulted in income escaping assessment. Therefore now, despite the fact that in the original assessment order this very expenditure was allowed as a revenue expenditure, Respondent No. 1 now seeks to treat the same as a capital expenditure. This to our mind is nothing but a "change of opinion", and hence Respondent No.1 had no jurisdiction to re-open the assessment proceedings.”
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We find from the above judgment that in the case during original assessment an expenditure was allowed as a revenue expenditure, revenue’s further contention that the same be treated as capital expenditure and in that eventuality, reopening will tantamount to change of opinion In the present case before us from the facts of the case it is clear that the assessee has claimed deduction u/s 80IA of the Act at Rs.3,85,88,193 only and the same was reduced while computing deduction u/s 80HHC of the Act by the AO during original assessment proceedings Hence in the present case there is clear change of opinion while reopening the completed assessment u/s 143(3) of the Act Hence, we allow this jurisdictional issue of assessee’s appeal and quash the reassessment proceedings. 10. Since we have quashed the reassessment proceedings and allowed the ground raised regarding reopening, we need not to go into the other grounds of this appeal of the assessee. Similarly, the Revenue’s appeal in ITA No. 443/Mum/2006, the grounds raised on merits need not any adjudication. Similarly the CO No. 101/Mum/2006 arising out of Revenue’s appeal in ITA No.443/Mum/2006 is on merits, hence, need no adjudication. Accordingly, the appeal of assessee in ITA No.2179/Mum/2006 is allowed and Revenue’s appeal in ITA No. 443/Mum/2006 and CO. 101/Mum/2006 both are dismissed. 11. In the result, the appeal of assessee in ITA No.2179/Mum/2006 is allowed and Revenue’s appeal in ITA No. 443/Mum/2006 and CO. 101/Mum/2006 both are dismissed. Order pronounced in the open court on 13-04-2017.
Sd/- Sd/- (RAMIT KOCHAR) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated:13-04-2017 Sudip Sarkar /Sr.PS
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Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT (A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, Assistant Registrar //True Copy// ITAT, MUMBAI
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