MILAN LABORATORIES (INDIA),THANE vs. ACIT CIR 1, THANE

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार/ PER Rajendra A.M.- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order, dated 24/03/2008, of the CIT-I,Thane the assessee has filed the present appeal.Besides filing the original grounds of appeal the assessee has also filed additional grounds.During the course of hearing before us,the Authorised Representative(AR)contended that additional grounds were legal in nature,that no enquiry about facts is required to adjudicate the grounds.The Departmental Representative (DR) left the issue to the discretion of the bench. We have gone through the additional grounds and we find that further enquiry about the facts of the case is not required to be made and the grounds are purely legal in nature.Therefore,we admit the same. In its application filed for condonation of delay,the assessee had stated that because of the wrong advise of the CA the appeal could not be filed in time,that after getting the order giving effect to the 263 order the assessee was advised to file the appeal against the revisionary order,that the delay was not intentional,that there was reasonable cause, the application is accompanied by affidavit of the professional who had advised the assessee to file the appeal. Brief facts: 2.Assessee is a manufacturer and exporter of pharmaceutical products.It filed its return of income on 29/11/2003,declaring income of Rs. 8.14 lakhs after claiming deduction of Rs.2.46 crores u/s.80HHC of the Act. While completing the assessment, u/s.143 (3) of the Act, on 17/02/ 2006,the AO determining the income of the assessee at Rs. 1.30 crores. He found that the assessee was in receipt of our income to the extent of boobies 5.60 crores consisting of 863/M/09-Milan Laboratories Excise Rebate claim (Rs.3.60 crores) and DEPB Refund (Rs. 2.53 crores).The AO directed the assessee to file further details and justification about claim made by it u/s.80HHC. Accordingly,a fresh working of the deduction,in light of amendment of 2006 of the Finance Act and the guidelines issued by the CBDT in that regard,was made.As against the claim, made by the assessee u/s. 80HHC,of Rs. 2.46 crores claimed by the assessee in its return the AO restricted into Rs. 1.24 crores. He computed the income of the assessee as under: Profits & gains of business or profession Rs.2,55,12,919/- Less: Deduction u/s.80HHC as discussed in the Rs.1,24,94,090/- body of the assessment order --------------------- Total income Rs.1,30,18,829/- Rounded off to Rs.1,30,18,830/- ============= 3.The CIT issued a show cause notice,u/s.263 of the Act,to the assessee asking it as to why the revisionary provision of the Act should not be invoked, as the deduction allowed by the AO, amounting to Rs. 1.24 crores,was erroneous and prejudicial to the interest of revenue.He re -worked the 80HHC deduction and observed that profit derived by the assessee from export business was negative, that the assessee was not entitled to get the reduction, that profit after deduction of incentives (at the rate of 90%) was showing negative figures, that the section had been amended by Taxation Laws (Amendment) Act, 2005 with retrospective effect,that the proviso to subsection 3 talked about set off of the losses computed under clause (a)/(b)/(c), that any surplus arising after the set of the loss had to be dealt in accordance with the third proviso, that assessee was required to provide necessary and sufficient evidence to prove that he had an option to choose either the duty drawback or the DEPB scheme,that the assessee would get benefit in respect of DEPB license sale in certain conditions only, that the assessee had not produced any evidence in that regard, that the AO had erroneously allowed the deduction u/s. 80HHC.He further referred to clause (iiid) of section 28 and held that the assessee had claimed deduction on the basis of amount of benefit accrued under DEPB scheme, that only a small part of the licence had been sold during the year,that as per the balance sheet DEPB receivable had been shown at Rs. 2.20 crores,that it had shown moderate credit as loans and advances in the balance sheet,that it had received interest of Rs. 5.43 lakhs from various sources, that it had netted the interest,the treatment given by the assessee to the interest was not as per law,that it had claimed excess deduction u/s.80HHC,that the AO had not conducted proper enquiries in respect of DEPB refund,Excise rebate,modvate credit and 863/M/09-Milan Laboratories interest income,that he had completed the assessment without application of mind.As stated earlier, the CIT issued a notice u/s.263 of the Act to the assessee. 3.1.In its response,vide its letter dated 4/10/2007, the assessee filed detailed submission.It was argued that as per the amended law the assessee had option to choose either duty drawback DEPB scheme,that the rate of drawback credits attributable to the customs duty was higher than the rate of credit allowable under the true entitlement pass book scheme, that its products were notified in appendix 28A of the Handbook of procedures in product group, chemical, product code -62, as per the Handbook no export had to be allowed under D EPB scheme unless the DEPB rate of the concerned export was notified, that the drawback credit attributable to the custom duty was higher than the rate of credit allowable under the DEPB scheme, that though the duty drawback was higher it had opted for D EPB, that Excise rebate was refund on export which resulted in reduction of cost of raw material consumed, modvate credit was taken to profit and loss account by way of excise refund of Rs. 3.06 crores, that the interest income was on account of fixed deposit/term deposit with the bank as margin money for opening Line of credit for the purpose of import. 3.2.After considering the submission of the assessee,the CIT held that the assessee had not satisfied by additional conditions laid down in the third proviso to subsection(iii) of section 80HHC,that the assessee had claimed deduction on accrual basis not on actual sale basis, that receipt of DEPB licence was not sufficient to accept the claim of the assessee for benefit on accrual basis,that Department had challenged the inclusion of excise duty for the turnover purposes before the Hon’ble Apex Court in the case of production chemicals, that the interest income was to be excluded from the profit of the business for the purpose of deduction and same was to be treated as income from other sources. He directed the AO to examine the claim with reference to the amended provisions. He further directed the AO to ensure that assessee was not entitled to get deduction u/s.80HHC with reference to Excise rebate.He issued directions about moderate credit and interest income also. 4.Before us,the Authorised Representative(AR)argued that there was no mistake in the order passed by the AO u/s.143 (3) of the Act, that the assessment proceedings started in the month of August,25 and completed in the month of February, 2006, that the AO had applied his mind, that the assessee had submitted all the details from time to time in connection with the claim made u/s.80HHC of Rs. 1.74 crores (70% of Rs. 2.49 crores),that the AO restricted the deduction after verifying all the details and applying the law prevalent at the time, that additional conditions as provided in proviso 3 to amended subsection 3 to the section 3 863/M/09-Milan Laboratories 80HHC were fulfilled, that the assessee had an option to choose either the drawback scheme or the DEPB scheme,that drawback credit attributable to customs duty was higher than the rate of credit allowable under the DEPB, that it was entitled to take the refund of DEPB as per section 145 of the Act,that it had sold DEPB Rs. 2.53 crores during the year, that the assessee had exported goods worth Rs.27.10 crores,that the interest income was considered after netting the interest expenditure vis a vis interest income,that the CIT ignored the netting off of interest.It was further argued that the order suffered from lack of basic jurisdiction,that the CIT had given specific direction to the AO as to how to compute the income in pursuance of this revisionary order,that the CIT had issued show cause notice to the company,that the order was passed in case of a firm,that it was a jurisdictional and legal issue as to whether show cause notice and the order can be in two different entities i.e., a corporate entity and a partnership firm,that he had left no discretion with the AO,that such an order was bad in law, that there was difference of opinion in the views of the AO and the CIT,that the AO had taken one of the possible use, that in the earlier year the Tribunal had restored back the issue of value of DEPB to the file of the AO that the order of the AO was neither erroneous not prejudicial to the interest of revenue.He relied upon the cases of Avani Exports(119 DTR 352), Jitendra Chandralal Navlani & Others(writ petition No.1069 of 2016-Hon’ble Bombay High Court), Nico Extrutions Ltd. (ITA/ 3662/ Mumbai/2014-AY.2009-10,dated 08/07/2016) ACG Associated Capsules Pvt.Ltd.(343ITR89) and Max India Ltd.(295/282)and assessee’s own case for the AY.2002-03 (ITA/997/Mumbai/2007, dated 21/08/2009). The Departmental Representative(DR)contended that order of the AO was not only erroneous but prejudicial to the interest of revenue, that CIT had restored back the matter to file of AO,that the AO did not apply his mind while passing order u/s.143(3), that the AO had allowed deduction without verifying the facts, that it was not known as to whether the assessee had filed the letters before AO with regard to deduction,that no harm was caused to the assessee by remanding the issue to the file of the AO. With regard to condonation of delay,he argued that the assessee ahd taken a conscious decision not to file appeal, it had not explained the delay satisfactorily 5.We have heard the rival submissions and perused the material before us. We find that in the case of Avani Exports (supra) the Hon’ble Supreme Court has held that amended provisions would be effective from the AY. 2004 -05, that for the earlier years the law existing at that time would be applicable,that at the time of passing of revisionary order the CIT did not have benefit of the said judgment. One of the reasons cited by the CIT in his order was that the AO 863/M/09-Milan Laboratories had ignored the provisions of amendment while granting deduction to the assessee u/s.80HHC. Considering these facts,we are of the opinion that order of the AO could not be categorised erroneous and prejudicial to interest of revenue. The AO had called for details about the direction claimed and had restricted the claim while passing 143 (3) order. It is not the case that stand taken by the AO was against the law or was not one of the possible views. The remanding back of the issue by the Tribunal in the earlier AY.to the file of the AO clearly proves that issue was debatable. Hence, the argument raised by the assessee about debatable duty of the issue, in our opinion, deserves to be upheld.As far as the issue of excise duties concerned it is found that the CIT had referred to the filing of SLP by the Department before the Hon’ble Supreme Court.It clearly shows that at that point of time issue stood decided in favour of the assessee and if the AO had allowed the deduction it cannot be said that his order was erroneous.We find that while dealing with the issue of interest, the CIT has not considered the argument about netting of off the interest. Besides the interest had accrued on the items that were directly related with the exports.We find that the CIT had not commented upon first-degree relationship of the interest and the deduction claimed.We further find that while passing the order the CIT had specifically mentioned that the AO should ‘ensure’ that assessee ‘should not get’ deduction with regard to Excise duty.In our opinion, such an instruction is not approved by the provisions of law.No AO, even if he is convinced about the allowability of any claim/deduction,would decide the issue in favour of the an assessee,if the CIT instructs him to pass the assessment order in a particular manner.The absence of discretion with the AO vitiates the revisionary proceedings. In the case of Nico Extrutions Ltd. (supra) the Tribunal had cancelled and order passed by the CIT wherein he had taken away the discretion from the AO and had directed the AO to pass a fresh order in a particular manner.We also find that the show cause notice to revise the order was issued in the name of a corporate assessee,but the revisionary order was passed in the name of the firm.We find that in the case of Jitendra Chandralal Navlani & Others(supra)the Hon’ble Court has held that such an order cannot be held to be a valid order. 5.1.In our opinion,a matter has to be decided on merits rather on the technicalities .In the case under consideration,we find that on merits all the three issues have to be adjudicated in favour of the assessee.Basic principles of jurisprudence state that end of justice meet if cases are decided on merits.In the case before us,the scale is in favour of the assessee as far as merit is concerned,even if issue of jurisdiction is not looked in to.Considering the peculiar facts of the case,we condon the delay in filing the appeal.

863/M/09-Milan Laboratories On the basis of above discussion,we held that order passed by the CIT, u/s.263 of the Act,is not valid. On merits it cannot be endorsed. Therefore, reversing the same, we decide the effective ground of appeal as well as the additional grounds in favour of the assessee.