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Income Tax Appellate Tribunal, “F” Bench, Mumbai
Before: Shri Jason P. Boaz (AM) & Shri Sandeep Gosain (JM)
O R D E R Per Sandeep Gosain, Judicial Member :-
The present appeal has been filed by the assessee against the order passed by learned CIT u/s. 263 of the I.T. Act on the following grounds:-
The Grounds of Appeal raised herein are all without prejudice to one another:
1. “The learned CIT was not justified in initiating revision proceedings u/s 263 of the Act. The initiation of the revision proceedings as also the order u/s 263 are illegal and invalid.
2. The learned CIT was not justified in holding that" ... it is clear that if any part of plant/machinery is not used in manufacturing activity, such a part of plant/machinery does not qualify for allowance of additional depreciation. He has also erred in holding that" ... production of power does not amount to manufacture or production of any article or thing for the purpose of see: 32(1)(iia) which provides for additional depreciation".
3. The learned CIT has failed to fully appreciate the submissions made before him in this regard. He was not justified in holding that the order of 2 Ultramarine & Pigments Limited the learned AO allowing depreciation to the extent of Rs. 1,65,04,000/- is erroneous insofar as it is prejudicial to the interest of revenue within the meaning of section 263 of the Income-tax Act, 1961.
The learned CIT was not justified in holding that considering profit of Rs. 1,15,91,571/- for computation of income u/s 10A without enquiries has resulted in error within the meaning of section 263 and that this has also caused prejudice to the revenue. He has erred in setting aside this issue to the file of the AO. He has grossly erred in not considering and not even referring to the binding decisions of the jurisdictional High Court and Tribunal which were relied upon before him in this regard.
The-appellant craves leave to add to, to alter or to amend the above Grounds of Appeal.”
2. Brief facts of the case are that the return of income showing total income of Rs. 33,429,990/- was filed on 26.9.2009. The return was accompanied by audited balance sheet and return was processed u/s. 143(1) of the Act on 2.3.2011. Subsequently the case was selected under CASS and notice u/s. 143(2) was issued on 18.8.2010. Ultimately, after considering the case the assessment order u/s. 143(3) was passed on 20.12.2011. Later on notice u/s. 263 of the Act was issued vide show-cause letter dated 4/2/2013 and reply of the assessee was sought. The assessee filed his reply before learned CIT(A) and learned CIT after considering the submissions of the assessee, passed order u/s. 263 of the Act on 15.2.2013.
3. Aggrieved by the order of learned CIT u/s. 263 the present appeal has been filed before us on the grounds mentioned hereinabove.
Ground No. 1 4. Ground No. 1 relates to the jurisdiction and maintainability of the order u/s. 263 of the Act therefore we thought it fit to decide the said issue firstly. Before us, learned AR representing the assessee referred to the show cause notice issued by CIT(A) and the operational portion of the notice dated 04.02.2013 is reproduced as under: “A perusal of records shows that the assesee had claimed and was allowed depreciation of Rs.11,05,66,720/ - which included additional
3 Ultramarine & Pigments Limited depreciation of Rs.1,65,04,000/- on "Windmill". However, this "windmill" was not used in any manufacturing activity. Therefore, this do s not qualify for additional depreciation. Also, the as o e had claimed deduction of profit derived from the Unit Lapiz Digital Services of Rs.4,74,76,455/- out of which profit of Rs.1,15,91,571/- was not derived from export of articles such as sundry receipts of Rs.1,08,68,525/- and sundry balance written back was Rs.7,23,046/-. These receipts are not derived from export of article, things or computer software. No deduction is allowable on this income u/s.10A.
Having regard to material on record, it is clear that the Assessment Order dated 20.12.2011 passed by the Assessing Officer for A.Y. 2009-10 is erroneous and prejudicial to the interest of Revenue because income is under assessed by an amount of Rs.1,15,91,571/-. Therefore, it is clear that provisions of law as contained u/s 263 of the Income Tax Act,1961 are clearly attracted to the facts of this case.”
ld. AR further submitted that after receiving the afore mentioned show cause notice, the assessee filed detail reply which is mentioned in page no. 03 to 05 of the paper book and the same is reproduced below for reference. “Your Honour has first raised the issue of the allowance of additional depreciation of Rs. 1,65,04,000/- on windmill. Your Honour has stated: “However, this "windmill" was not used in any manufacturing activity. Therefore, this does not qualify for additional depreciation".
At the outset, Your Honour's kind attention is drawn to section 32(1)(iia) which reads as follows: in the case of any new machinery or plant (other than ships and aircraft) ,which has been acquired and installed after the 31 st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing ...
It is submitted that the only requirement of the section is that the assessee should be engaged in the business of manufacture or production of any article or thing. This condition is clearly satisfied by the assessee which is engaged in the manufacture of pigments, HOPE, surfactants, etc. A close reading of the provision brings out that there is no requirement that the windmill should be used in any manufacturing activity.
Without prejudice, it is submitted that the power situation in Tamil Nadu is not too satisfactory. This is the reason why the assessee has commissioned its own windmills so as to be able to use power for the purposes of its own manufacturing activity. Looked at from this angle, the windmills are used in the manufacturing activity.
Without prejudice to the above, it is also submitted that a windmill which generates power is itself engaged in the manufacture or production of an article or thing.
4 Ultramarine & Pigments Limited In the light of the above, it is submitted that the' assessee clearly satisfies the conditions of section 32(1)(iia) and is entitled to the said claim of additional depreciation in respect of windmills.
Further, Your Honour has stated that the profit of Rs. 1,15,91,5711- comprising of sundry receipts of Rs. 1,08,68,525/- and sundry balances written back of Rs. 7,23,046/- is not derived from export and is therefore, not eligible for deduction U/S 10A.
In this regard, it is submitted that the sundry receipts of Rs. 1,08,68,525/- comprise of the following 2 items:
Exchange fluctuation gain Rs. 1,07,60,887/-
2. Notice pay recovered Rs. 1,07,638/- Rs. 1,08,68,525/- Copies of the ledger accounts of these 2 items are enclosed at pages 1 to 19 of the Paper Book.
Similarly, sundry balances written back of Rs. 7,23,046/- comprise of provisions made for expenses which were found to be in excess and hence written back. The relevant copy of the ledger account is enclosed at page 20 of the Paper Book.
As far as exchange fluctuation gain is concerned, it is submitted that this is nothing but an accretion to the sales made by the assessee. It is clearly derived from the export of computer software. It at all any support is required in this regard, reliance is placed upon the decision of the Bombay High Court reported in 330 ITR 175, CIT v Gem Plus Jewellery India Ltd. This decision clearly says that foreign exchange fluctuation is entitled to the deduction u/s 10A. A copy of the synopsis of this decision is enclosed at pages 21 to 23 of the Paper Book. The other 2 items of notice pay and sundry balances written hack are nothing but a reduction in the expenditure. They are therefore, clearly derived from the export of software. In regard to the sundry balances written back, reliance is placed upon the decision of the Bombay Bench of the Tribunal in 19 ITR 361, Larsen & Toubro Infotech Ltd. v DCIT which has held that provisions written back qualify for deduction u/s 10A. A copy of the synopsis of this decision is enclosed at pages 24 to 26 of the Paper Book.”
5. After referring the aforementioned facts, learned AR submitted that in the show-cause notice learned CIT has mentioned that the assessee had claimed and was allowed depreciation of Rs. 11,05,66,720/- which includes additional depreciation of Rs. 1,65,04,000/- on ‘windmill’. However as per learned CIT this windmill was not used in any manufacturing activity and 5 Ultramarine & Pigments Limited therefore this does not qualify for additional depreciation. In addition it was submitted that the assessee had claimed deduction on profit derived from the unit Lapiz Digital Services of Rs. 4,74,76,455/- out of which profit of Rs. 1,15,91,571/- was not derived from export of articles such as sundry receipts of Rs. 1,08,68,525/- and sundry balance written back was Rs. 7,23,046/-. These receipts are not derived from export of article, things or computer software. Therefore no deduction is allowable on these incomes u/s. 10A of the Act. Whereas, in the order passed by learned CIT on 15.2.2013 it has been mentioned that ‘no inquiry’ was conducted by the Assessing Officer therefore the Assessing Officer was directed to examine the issue which was the subject matter of notice u/s. 263 and direction was given to conduct the required inquiry on the facts and circumstances of the case. In this respect the learned AR submitted that in case notice is given by learned CIT on one ground and order passed is based on another ground then the order passed by learned CIT u/s. 263 is liable to be set aside and in this respect learned AR relied upon the following Judgments :-
1. Star India Ltd. vs. Additional Commissioner of Income Tax “Revision --Validity – Revision on a ground different from the one stated in notice –Assessment sought to be revised on the ground that while allowing deduction under s.80HHF the expenses incurred in foreign currency for providing technical services outside India have not been reduced from export turnover and total turnover--- However, revision done on the ground that the matter needs to be examined—In any case, the CIT has not given any findings against the assesse at all and yet he has proceeded to direct the AO to examine the issue again –Revision was not therefore sustainable.” “The show-cause notice is issued on the ground that the computation is incorrect but the revision is exercised on the ground that the matter was not examined on merits. The reason which can be inferred from the revision order under section 263 (that the AO has not verified the issue) is different from the reason set out in the show-cause notice (that such expenses cannot be 6 Ultramarine & Pigments Limited allowed). If a ground of revision is not mentioned in the show-cause notice, it cannot be made the basis of the order for the reason that the assesee would have head no opportunity to meet the point. For this short reason, therefore, the revision proceedings are not legally sustainable on this issue, i.e., the notice is issued on the ground of inadmissibility of deduction, and the revision is done on the ground that he matter needs to be examined even as there are no findings about shortcomings in the proceedings before the AO.”
2. B.S. Sangwan vs. ITO “A revisional order can only be passed on ground on which assessee has been given reasonable opportunity of being heard, and it is not open to Commissioner to set out one reason for revising order but actually revise order on some other ground. “Section 263 of the Income Tax Act,1961- Revision of order prejudicial to interest of revenue (Scope of )- Assessment Year 2007-08- whether a revisional order can only be passed on ground on which assessee has been given reasonable opportunity of being hear, and it is not open to Commissioner to set out one reason for revising order but actually revise order on some other ground- Held, yes- Whether, therefore, where Commissioner initiated revisional proceedings proposing to make certain disallowances and addition, he could not pass impugned order under section 263 on ground of lack of proper enquiries made by Assessing Officer in course of assessment – Held, yes. [Para 10] [In favour of assessee]”
Vesuvius India Ltd. vs. Commissioner of Income Tax “ Section 263 of the Income Tax Act,1961-Revision –Of orders prejudicial to interest of revenue-Assessment Year 2002-03-Whether when revision order is passed on ground other than grounds for which revision proceedings are initiated, same is not sustainable in law-Held, yes-Commissioner invoked his jurisdiction under section 263 by issuing a show cause notice on ground that income on account of repairs of machinery and contract
7 Ultramarine & Pigments Limited receipts was required to be added to income assessed in hands of assessee- Subsequently he passed a revisional order on ground that Assessing Officer did not make necessary verification about aforesaid transactions- Whether since there was change in reasoning, having regard to aforesaid legal position mentioned above, impugned revisional order was not sustainable- Held, yes [in favour of assessee] “The impugned revision order is indeed not sustainable in law for the very elementary reason that the grounds on which order was subjected to revision are different, vis-à-vis the grounds on which revision proceedings were actually initiated. A plain reading of impugned revision order clearly shows that the conclusions drawn in the revision proceedings are materially different than the reasons for which revision proceedings were initiated.”
On the other hand learned Departmental Representative relied upon the order passed by learned CIT.
We have considered the rival submissions and perused the record. At the very outset we have anyalised the show-cause noticed issued by learned CIT and subsequently order passed by learned CIT which reads as under :- “In view of the above, it is clear that the AO’s order allowing for such depreciation without enquiry has resulted in error within the meaning of Section 263 of the I.T. Act,1961; this error has differently caused prejudice to the revenue because of allowance of excess depreciation to the extent of Rs.1,65,04,000/-. Accordingly, it is held that order of the AO in this regard is erroneous insofar as it is prejudicial to the interest of revenue within the meaning of section 263 of I.T. Act,1961. 7. In respect of other items viz. profit of Rs.1,15,91,571/-, the AO has allowed deduction u/s 10A without conducting any enquiry. The assessee’s reply in this regard as contained in the written reply dated 12.2.2013 is carefully considered. However, it is a fact that the AO has not conducted any enquiry in respect of these items before allowing deduction u/s 10A. In view of this, after having considered the material on record and assessee’s submissions, I am of the considered view that these items have been considered for exemption u/s 10A by the A.O. without conducting the enquiries which are prima-facie warranted on the facts and circumstances of this case. It is trite law that lack of enquiry results in error within the meaning of Sec.263 of the I.T. Act,1961. It is a fact that considering profit of Rs.1,15,91,571/- for computation of income u/s.10A without enquiries has resulted in error within the meaning of section 263
8 Ultramarine & Pigments Limited of the I.T. Act,1961. This has also caused prejudice to the revenue inasmuchas it has resulted in granting exemption without enquiries warranted on facts and circumstances of the case. Accordingly, the order the AO in respect of profit of Rs.1,15,91,571/- is also set aside to the file of the AO.
The AO is directed to examine issues which are subject matter of notice u/s.263 and conduct enquiries required on facts and circumstances of the case. Thereafter, the AO is directed to take the decision as per law. In nutshell, the order passed by the AO is set aside to the file of the AO for considering the issues which are subject matter of notice u/s.263 afresh and take decision as per law.”
From the perusal of both show-cause notice as well as findings recorded by learned CIT while passing the order u/s. 263, we have noticed that the grounds taken by learned CIT while issuing show-cause notice is with regard to the disallowance but in the final order passed u/s. 263, the learned CIT has categorically mentioned that the Assessing Officer has not carried out any inquiry therefore direction was given to carry out necessary inquiry in this regard. We first of all referred to the judgment passed by the ITAT, Mumbai Bench in the case of Star India Ltd. (supra), wherein it has been categorically held that when the show-cause notice is issued on the ground that the computation is incorrect but the revision is exercised on the ground that the matter was not examined on the merits. The reason which can be inferred from the revision order u/s 263 is different from the reason set out in the show cause notice and therefore in that case it was held that if a ground of revision is not mentioned in the show-cause notice, then it cannot be made the basis of the order for the reason that assessee would have had no opportunity to meet the point.
Hon’ble ITAT Delhi Bench in the case of B.S. Sangwan vs. ITO (supra) has also categorically held that the commissioner started by pointing out, that he saw as, glaring illegalities in the assessment order, which was subjected to revision proceedings, but what he concluded was that the said assessment order was passed without making ‘proper requisite and desired inquiries’. Therefore, the Hon’ble ITAT has held in the above cited case that a revision order can only be passed on the ground on which the assessee has been given
9 Ultramarine & Pigments Limited a reasonable opportunity of being heard, and it is not open to the Commissioner to set out one reason ground for revising the order but actually revise the order on some other ground.
8. Considering the other judgments relied upon by learned AR, we find that the grounds mentioned by learned CIT in show-cause notice are different and the order passed by learned CIT u/s. 263 is based on another ground and therefore the assessee could not get opportunity to explain the point recorded at the time of passing the final order. Therefore, respectfully following the judgments which are based on the facts which are similar to the facts of the present case, we hold that the order passed by learned CIT u/s. 263 is bad in law and not sustainable in law. Therefore the same is quashed.
Even, otherwise on the merits of the case, the ld. CIT(A) has held that this “windmill” was not used in any manufacturing activity. Therefore as per CIT this does not qualify for additional depreciation. In this respect we are of the considered view that as per provision of section 32(1)(iia) which reads as under: “in the case of any new machinery or plant (other than ships an aircraft), which has been acquired and installed after 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing..”. From the afore mentioned reading we find that the only requirement of section is that the assessee should be engaged in the business of manufacture or production of any article or thing. This condition is clearly satisfied by the assessee who is engaged in the manufacture of pigments, HDPE etc. A close reading of the provision brings out that there is no requirement that the windmill should be used in any manufacturing activity. However, a windmill which generates power is itself engaged in the manufacturing of production of an article or thing. We found support from the judgement rendered by Hon’ble Bombay High Court in the case of Associated Bearing Co. Ltd. vs.
10 Ultramarine & Pigments Limited Commissioner of Income-tax 286 ITR 341(Bom) and from the judgement of Hon’ble Madras High Court in the case of Commissioner of Income Tax vs. Atlas Export Enterprise 373 ITR 414 (Mad). Therefore, while relying upon the judgement, we hold that the assessee clearly satisfied the conditions of section 31(1)(iia) and is entitled to the claim of additional depreciation in respect of wind mills. Since we have decided the ground No. 1 which was on the point of jurisdiction regarding passing the order u/s. 263 and given detailed findings that the order u/s. 263 itself is not maintainable, therefore there is no need to deal with the other issues.
In the result net result, appeal is allowed.
Order has been pronounced in the Open Court on 10.8.2016.