DCIT,CIRCLE-1, KOLKATA, KOLKATA vs. M/S CHEVIOT CO. LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA [Before Shri Mahavir Singh, JM & Shri M. Balaganesh, AM]

I.T.A No. 530/Kol/2012 Assessment Year: 2003-04 Deputy Commissioner of Income-tax, Vs. Cheviot Co. Ltd. Circle-1, Kolkata. (PAN: AABCC2380H) (Appellant) (Respondent) & C.O. No. 44/Kol/2012 In I.T.A No. 530/Kol/2012 Assessment Year: 2003-04 Cheviot Co. Ltd. Vs. Deputy Commissioner of Income-tax, Circle-1, Kolkata. (Cross Objector) (Respondent) & I.T.A No. 531/Kol/2012 Assessment Year: 2004-05 Deputy Commissioner of Income-tax, Vs. Cheviot Co. Ltd. Circle-1, Kolkata. (PAN: AABCC2380H) (Appellant) (Respondent) & C.O. No. 45/Kol/2012 In I.T.A No. 531/Kol/2012 Assessment Year: 2004-05 Cheviot Co. Ltd. Vs. Deputy Commissioner of Income-tax, Circle-1, Kolkata. (Cross Objector) (Respondent)

Date of hearing: 22.12.2015 Date of pronouncement: 20.01.2016

For the Revenue: Shri Anil Kr. Pande, JCIT, Sr. DR For the Assessee: Shri Manish Tiwari, FCA

ORDER Per Shri Mahavir Singh, JM: Both the appeals of revenue and Cross Objections by assessee are arising out of separate orders of CIT(A)-I, Kolkata in Appeal No.376/CIT(A)-I/Circle-1/10-11 and 423/CIT(A)-I/Circle-1/09-10 both dated 16.12.2011 respectively. Assessments were framed by DCIT, Circle-1, Kolkata u/s. 143(3)/147 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2003-04 and u/s. 143(3)/251/254/147/143(3)

2 ITA No.530 & 531/K/2012 & CO Nos. 44&45/K/2012 M/s. Cheviot Co. Ltd. AY 2003-04 & 2004-05 of the Act for AY 2004-05 vide its separate orders dated 24.12.2010 and 31.12.2009 respectively.

Aggrieved, assessee preferred appeal before CIT(A), who allowed the claim of the assessee in respect to exemption u/s. 10B of the Act but disallowed in respect to incentive

3 ITA No.530 & 531/K/2012 & CO Nos. 44&45/K/2012 M/s. Cheviot Co. Ltd. AY 2003-04 & 2004-05

received i.e. exclusion of receipts of External Market Assistance (EMA) by observing in para 7.2 and 7.3 as under:

“7.2 I have carefully analyzed the rival submissions. The primary reasons of the AO for denying the benefit of exemption u/s. l0B to Budge Budge 100% EOU is non-submission of the letter of the approval regarding 100% export oriented unit from the Competent Authority. In this regard the present AO in his Remand Report dt.07.7.2006 (vide para-7) has stated "So on the face of the clarificatory letter dt. 09.5.2006, the letter dt. 21.5.2006 (as stated earlier) may be treated as an approval for 100% EOU unit". Accordingly the appellant is entitled to deduction u/s.l0B in respect of profit out of Budge Budge 100% EOU. 7.3 However in the computation of the profit for the purpose of exemption u/s.l0B, the assessee has included Incentive receipt within the definition of "export turnover". In this regard it is pertinent at this stage to clarify this issue. In the Clause-© of the Explanation after sub-sec.(vii) of sec. l0B, export turnover has been defined as "the consideration in respect of export by the undertaking of eligible articles or things received or brought into, India by the assessee in convertible foreign exchange in accordance with sub-sec.(iii), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India. “According to this decision "export turnover" means the amount of convertible foreign exchange brought into India through export of articles, things or computer software as provided sub-sec.(i) thereof. Hence on strict interpretation of this definition of the "export turnover", there is no scope of including any other item not specifically mentioned in this definition. The AO is accordingly directed to recalculate the admissible amount of exemption u/s.l0B excluding the receipt of any incentive amount in respect of such export.” 5. Aggrieved, assessee preferred appeal before Tribunal and Tribunal in ITA No. 2010/Kol/2006 vide order dated 25.05.2007 allowed the claims of the assessee in respect to exemption u/s. 10B of the Act but in respect to incentive received by way of EMA the matter was remitted back to the AO to verify the factual claim of the assessee whether it has not included the incentive amount in the export turnover or not by observing in para 8.3 as under:

“8.3. Section 10B refers to the profits and gains derived by a 100% EOU from export and then goes on to lay down the method of computation of such profits with reference to “the profits of the business of the undertaking”. The profits of the business of the undertaking would include its entire business income. Now, it can hardly be disputed that the incentive by way of External Market Assistance was paid by the Jute Manufactures Development Council at the specified rate of the FOB value realized because of the export by the 100% EOU of the jute goods manufactured by it. Such incentive indisputably forms part of the profits of the business of the 100% EOU under section 28 of the Act. Therefore, the External Market Assistance has to be taken into account in computing the profits of the business of the 100% EOU. The assessee claims to have done so but according to the CIT(A), the assessee has included the incentive amount in the export turnover which the assessee says it has not. In such circumstances, it is deemed fit to remand the matter back to the AO to verify the factual claim of the assessee that it has not included the incentive amount in the export turnover and has only taken the same into account in computing the profits of the business of the 100% EOU. If the assessee’s said claim is factually correct, its computation should be accepted. Needless to mention, the AO should allow adequate opportunity of being heard to the assessee. We direct accordingly.”

4 ITA No.530 & 531/K/2012 & CO Nos. 44&45/K/2012 M/s. Cheviot Co. Ltd. AY 2003-04 & 2004-05

“However, as per direction of the Hon’ble ITAT, hearing was fixed on 12.7.2007 when Shri P. K. Jain, A/R of the assessee, appeared and filed a written submission vide letter dated 12.7.2007. In the above letter, the assessee has agreed to pay the tax arising out of disallowance of deduction u/s. 80HHC in view of amended provision of section 80HHC and also CBDT’s Circular No. 2/2006 dated 17.01.2006. It has also been explained with reference to the record that incentive received by the assessee has not been included in the export turnover. So, as per Hon’ble ITAT’s direction, assessee is to get exemption u/s. 10B on account of incentive.” Subsequently, the AO issued notice u/s. 148 of the Act dated 16.03.2010 after recording the following reasons:

“REASONS OF ISSUE NOTICE U/S. 148 OF THE I. T. ACT IN THE CASE OF M/S. CHEVIOT COMPANY LIMITED PAN AABCC2380H ASSESSMENT YEAR 2003-04 In this case assessee has been allowed a total exemption of rs.11,77,92,580/- u/s. 10B on profit of its 100% EOU at Budge Budge being an eligible undertaking. It has come to my notice that an amount of rs.1,75,69,837/- being external market assistance in respect of this unit has been credited in the P&L A/c below the line and is not included and/or forming part of total income. This amount is also not included in the profit of the unit eligible for exemption u/s. 10B. However, exemption u/s. 10B on this amount has been claimed by the assessee and allowed in the assessment. Another important aspect that has come to notice is the determination of the quantum of exemption u/s. 10B. In form No. 56G the Chartered Accountant has certified as under:

Profit as per P/L A/c 13,52,33,592/- Related income of earlier years (gross) not included in above profit 1,75,69,837/- and appearing below the line, now added Profit of the undertaking 15,28,03,429/- Export turnover of the undertaking 24,01,84,164/- Total turnover of the undertaking 24,01,84,164/- Eligible profit of the undertaking 152803429x240184164/240184164 15,28,03,429/- (Profit x Export turnover/total turnover) Exemption u/s. 10B @ 90% of Rs.152803429 13,97,80,670/-

P&L A/c of the business eligible for exemption is as under: Income Sales Sch-11 25,88,79,464/- Related income 1,70,71,108/- 27,59,50,572/- Expenditure Raw material and finished goods Sch-12 4,40,81,967/- Manufacturing and other expenses Sch-13 8,94,62,635/- Interest Sch-14 45,373/- Depreciation 71,27,005/- 14,07,16,980/- Profit before taxation 13,52,33,592/-

It is seen that related income of Rs.1,70,71,108/- includes an income of Rs.1,66,74,805/- (Rs. 1,10,15,747/- relating to assessment year 2003-04 and Rs.56,95,058/- relating to earlier years) being External Market Assistance (EMA) and exchange gain (net) Rs.3,96,303/-. This income of Rs.1,70,71,108/- is surely forming part of profit before taxation Rs.13,52,33,592/-.

5 ITA No.530 & 531/K/2012 & CO Nos. 44&45/K/2012 M/s. Cheviot Co. Ltd. AY 2003-04 & 2004-05 In other words, the income of Rs.1,66,74,805/- being EMA is embedded in the profit of Rs.13,52,33,592/- on which exemption u/s. 10B was claimed and there is no doubt about it. The income of Rs.1,66,74,805/- being external market assistance is not eligible for exemption u/s. 10B. The reason is that the profit is not derived from export of article or things outside India. It cannot be said that this profit springs out from export of any article or thing outside the country. Therefore, the profit fails to satisfy the basic condition 'profits and gains from export of article or thing' as provided in sub-section (1) of section 10B. The income is also not derived and received in/brought into India in convertible foreign exchange in order to satisfy the condition of sub-section (3) of section 10B. Above all, this income is excluded by the assessee to determine the 'Export Turnover' and 'Total Turnover' for computation of exemption u/s 10B but not excluded from profit of Rs. 13,52,33,592/- being the net profit of the business. The Principle of deduction of an amount from numerator and denominator has not been followed here. In this case, there are two numerators i. e. profit & export turnover and both are required to be reduced by Rs.1,66,74,805 to arrive at the correct figure of exemption u/s 10B but assessee reduced only one numerator being export turnover by the said amount. The export profit is accordingly, to be considered at Rs.11,85,58,787/ (Rs.13,52,33,592/- minus Rs.1,66,74,805/-) and considering same export turnover & total turnover as reported in Form No. 56G, the eligible profit will be Rs.11,85,58,787/- for the purpose of exemption u/s. 10B. In that case, exemption allowable to the assessee is 90% of Rs.11,85,58,787/- which comes to Rs.10,67,02,908/-. Thus, It is seen that in assessment, excess exemption to the extent of Rs.1,10,89,672/- was allowed by allowing an aggregated amount of Rs. 11,77,92,580/- and thereby taxable income of identical amount has escaped assessment. In view of the above, I have reason to believe mat the amount of excess exemption Rs,1,10,89,672/- claimed by the assessee and allowed in the order of assessment for which identical amount of income has escaped assessment for the assessment year 2003- 04. Therefore, to assess the said income and also any other incc.ne chargeable to tax which has escaped assessment and which comes to the notice subsequently in the assessee of the proceedings u/s. 147 of the IT Act or recomputed the depreciation or any other allowance as the case may be for the assessment year 2003-04, a proceedings u/s. 147 of the IT Act is initiated by issue of a notice u/s 148 of the IT Act.” The AO framed reassessment u/s. 143(3) r.w.s. 147 of the Act vide his order dated 24.12.2010 and disallowed the claim of exemption u/s. 10B of the Act and also excluded the receipts of EMA from exemption u/s. 10B of the Act. Aggrieved, assessee preferred appeal before CIT(A), who deleted the addition and allowed exemption u/s. 10B of the Act but confirmed the exclusion of receipts of EMA from the claim of exemption u/s. 10B of the Act. Aggrieved, now assessee is in second appeal before Tribunal.

6 ITA No.530 & 531/K/2012 & CO Nos. 44&45/K/2012 M/s. Cheviot Co. Ltd. AY 2003-04 & 2004-05 in view of clause (c) of explanation to section 10B(vii) of the Act. Accordingly, he directed the AO to recalculate the admissible amount of exemption u/s. 10B of the Act by excluding incentive from export turnover. But the tribunal vide its order dated 25.05.2007 diricted that profits of the business of the undertaking would include this entire business income and the incentive by way of EMA paid by Jute Manufacturer Development Council at a specified rate of FOB value realized by way of export by 100% EOU forms part of profit of the unit as business income. Therefore, the Tribunal held that EMA has to be taken into account in computing the profit of the business but the issue was restored back to the AO for verification of assessee’s contention that it has not included EMA in the export turnover. The AO while giving appeal effect to the order of the Tribunal accepted the assessee’s contention and allowed the exemption u/s. 10B of the Act including incentive i.e. receipts of EMA. In such situation, whether the revenue on same set of facts can reopen the assessment by resorting to the provisions of section 148 r.w.s. 147 of the Act? Admittedly, in the present case, the relevant AY involved is 2003- 04 and 2004-05 and in both the years assessments were completed u/s/. 143(3) of the Act and matter travelled up to Tribunal as noted in the reasons recorded by the AO in both the years. We find from reassessment order framed u/s. 143(3) r.w.s. 147 of the Act and consequent to that the order of CIT(A), there is no finding as such that there is any failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the relevant assessment year. The CIT(A) has simply confirmed the action of AO for reopening of assessment vide para 5.3 as under: “5.3. I have gone through the submissions of the appellant and the reasons for the reopening of the assessment by the AO. There are reasons for reopening the assessment to disallow exemption claimed u/s. 10B of the Act and it squarely fits into the explanation to the section 147 of the Income Tax Act, 1961 for reopening of the assessment and thus, the action of the AO for reopening of the assessment is upheld. The appellant fails to get relief on this issue.” 8. We find that the entire issue has been deliberated upon in first round by the AO, by CIT(A) and even by Tribunal on both the issues and exemption u/s. 10B of the Act and also exemption on receipts relating to EMA. Accordingly, We find that this issue is squarely covered in favour of the assessee and against revenue by the judgment of Hon’ble Supreme Court in the case of CIT Vs. Kelvinator India Ltd. (2010) 310 ITR 561 (SC), wherein newly substituted provision of section 147 of the Act with effect from 01.04.1989 is interpreted by observing, that section 147 of the Act, as substituted w.e.f. 01.04.1989 does not postulates conferment of power upon the AO to initiate reassessment

7 ITA No.530 & 531/K/2012 & CO Nos. 44&45/K/2012 M/s. Cheviot Co. Ltd. AY 2003-04 & 2004-05 proceeding upon his mere change of opinion. Further, if ‘reason to believe’ of the AO is founded on an information which might have been received by the AO after the completion of assessment, it may be a sound foundation for exercising the power under section 147 r.w.s. 148 of the Act. It cannot be accepted that only because in the assessment order, detailed reasons have not been recorded, an analysis of the materials on the record by itself may be justifying the AO to initiate a proceeding u/s. 147 of the Act. When a regular order of assessment is passed in terms of section 143(3) of the Act, a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of section 114(e) of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceeding without any thing further, the same would amount to giving a premium to an authority exercising quasi judicial function to take benefit of its own wrong.

8 ITA No.530 & 531/K/2012 & CO Nos. 44&45/K/2012 M/s. Cheviot Co. Ltd. AY 2003-04 & 2004-05

This new section has made a radical departure from the original section 147 inasmuch as clauses (a) and (b) of the original section 147 have been deleted and a new proviso added to section 147. In Rakesh Aggarwal v. Asst. CIT [1997] 225 ITR 496, the Delhi High Court held that in view of the proviso to section 147 notice for reassess- ment under section 147/148 should only be issued in accordance with the new section 147, and where the original assessment had been made under section 143(3) then in view of the proviso to section 147, the notice under section 148 would be illegal if issued more than four years after the end of the relevant assessment year. The same view was taken by the Gujarat High Court in Shree Tharad Jain Yuvak Mandal v. ITO [2000] 242 ITR 612. In our opinion, we have to see the law prevailing on the date of issue of the notice under section 148, i.e., November 20, 1998. Admittedly, by that date, the new section 147 has come into force and, hence, in our opinion, it is the new section 147 which will apply to the facts of the present case. In the present case, there was admittedly no failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for the assessment. Hence, the proviso to the new section 147 squarely applies, and the impugned notices were barred by limitation mentioned in the proviso. Learned departmental counsel relied on section 153(3)(ii) of the Income- tax Act and submitted that there was no bar of limitation in view of the said provision. We do not agree. Section 153 relates to passing of an order of assessment and it does not relate to issuing of notice under section 147/ 148. Moreover, this is not a case where reassessment is sought to be made in consequence of or to give effect to any finding or direction contained in the order of the Tribunal in Boudier Christian’s case. As already stated above, Boudier Christian’s case related to the employees of the company, whereas the impugned notice has been issued to the company. Hence, it cannot be said that the proposed reassessment in consequence of the impugned notice would be in consequence of or to give effect to any find- ings of the Tribunal in Boudier Christian’s case. A direction or finding as contemplated by section 153(3)(ii) must be a finding necessary for the disposal of a particular case, that is to say, in respect of the particular assessee and in relevance to a particular assess- ment year. To be a necessary finding it must be directly involved in the disposal of the case. To be a direction as contemplated by section 153(3)(ii) it must be an express direction necessary for the disposal of the case before the authority or court vide Rajinder Nath v. CIT [1979] 120 ITR 14 (SC) ; Gupta Traders v. CIT [1982] 135 ITR 504 (All) ; CIT v. Tarajan Tea Co. (P.) Ltd. [1999] 236 ITR 477 (SC) and CIT v. Goel Bros. [1982] 135 ITR 511 (All), etc. The case of an expatriate employee was to be decided on the basis of the provisions of article XIV of the treaty, whereas corporate income was to be decided on the basis of either article III or article XVI of the treaty or section 44BB of the Act. Hence, the observations of the Tribu- nal in Boudier Christian’s case was not a direction necessary for the dis- posal of the appeal relating to the petitioner. The exigibility of income of the petitioner from manning and management contracts was never an issue directly or indirectly involved in the case of Boudier Christian. Moreover, the Tribunal in the appeal relating to the assessment of the petitioner’s own case, vide Deputy CIT v. ONGC [1999] 70 ITD 468 (Delhi) has considered

9 ITA No.530 & 531/K/2012 & CO Nos. 44&45/K/2012 M/s. Cheviot Co. Ltd. AY 2003-04 & 2004-05 the decision of the Tribunal in Boudier Christian’s case. It is settled law that an appeal is a continuation of the original proceedings and hence when the Tribunal in the appeal relating to the petitioner has considered the decision of the Tribunal in Boudier Christian’s case, the impugned notice under section 147/148 would obviously be on the basis of a mere change of opinion by the income-tax authorities, which would not be valid as held by the Supreme Court in Indian and Eastern News- paper Society v. CIT [1979] 119 ITR 996 ; Gemini Leather Stores v. ITO [1975] 100 ITR 1 (SC) and Jindal Photo Films Ltd. v. Deputy CIT [1998] 234 ITR 170 (Delhi), etc. In the decision of the Tribunal in the assessee’s own case, Deputy CIT v. ONGC [1999] 70 ITD 468 (Delhi) it has been held that the income from the contract between the parties was business income and not fee for techni- cal services. Although we are of the opinion that the law existing on the date of the impugned notice under section 147/148 has to be seen, yet even in the alternative even if we assume that the law prior to the insertion of the new section 147 will apply even then it will make no difference since even under the original section 147 notice for reassessment could not be given on the mere change of opinion as held in numerous cases of the Supreme Court, some of which have been mentioned above. Since the Tribunal in the appeal relating to the assessee-company had considered the Tribunal’s earlier decision in Boudier Christian’s case, it will obviously amount to mere change of opinion, and hence the notice under section 147/148 would be illegal.”

Sd/- Sd/- (M. Balaganesh) (Mahavir Singh) Accountant Member Judicial Member

Dated : 20th January, 2016

Jd. Sr. P.S

10 ITA No.530 & 531/K/2012 & CO Nos. 44&45/K/2012 M/s. Cheviot Co. Ltd. AY 2003-04 & 2004-05 Copy of the order forwarded to:

Asstt. Registrar.