ZODIAC CLOTHING COMPANY LTD,MUMBAI vs. DCIT 7(3), MUMBAI

आदेश / O R D E R Per Ashwani Taneja (Accountant Member):

2 Zodiac Clothing Co. Ltd. “The Ld. CIT(A) erred in confirming the reopening of the assessment u/s.147 of the Income Tax Act 1961. The Ld. CIT(A) erred in confirming the exclusion of duty drawback amounting to Rs.1,17,05,577/- while computing the deduction u/s.80IA of the Income Tax Act, 1961.”

3.1. In this case, the brief facts are that the original assessment for the above assessment year was completed u/s 143(3) on 01.02.2000. Subsequently, the assessment was reopened by issuing notice u/s 148 dated 06.11.2000 and thereafter assessment was framed on 26.02.2001 u/s 143 r.w.s.

3 Zodiac Clothing Co. Ltd. 3.2. Accordingly, re-assessment order was framed by the AO in the second round vide order passed u/s 143(3) r.w.s. 254 of the Act, dated 02.12.2007, wherein it was mentioned that copy of ‘Reasons’ recorded was provided to the assessee. In this assessment order all the additions were repeated, as were made in assessment order passed in first round. The assessee challenged this order before the Ld. CIT(A). In the appeal order, reopening as well as additions on the merits were upheld by Ld. CIT(A).

3.3. Being aggrieved, the assessee has filed an appeal before the Tribunal. Ld. Counsel has vehemently argued her case on the opening as well as on the merits of the case. With respect to reopening, it has been argued by her that reopening has been done by the AO without following the directions of the Hon’ble Tribunal as were given in the first round and without following mandate of the law. In this regard, she drew our attention on the copy of ‘Reasons’ recorded as well as on the assessment order, to point out various lapses and fallacies committed by the AO. Her arguments can be summarised as under:-

(i) The Tribunal had given specific and clear direction to the AO to furnish the copy of the ‘Reasons’ and to meet all the objections of the assessee by way of speaking order, but the AO failed to dispose of and meet the objections filed by the assessee and proceeded with the framing of the reassessment order without following the procedure as prescribed by Hon’ble Supreme Court.

4 Zodiac Clothing Co. Ltd. (ii) It has been further submitted that the ‘Reasons’ are based upon change of the opinion of the AO. The AO has relied upon, in the ‘Reasons’ recorded, the judgment of Hon’ble Supreme Court in the case of Sterling Foods Ltd. 237 ITR 579 which was always available with the AO at the time of framing of the original assessment order u/s 143(3), and therefore, there was no change in facts and no fresh material had come into the possession of the AO, and therefore, ‘Reasons’ have been recorded contrary to the provisions of law, as requisite conditions for regarding ‘Reasons’ were not present. It has been further submitted that this issue was examined in detailed by the AO while passing original order u/s 143(3). Therefore, it cannot be said to be a case of escapement income, in as much as, a conscious decision was taken by the AO while accepting the claim of the assessee in the assessment order passed u/s 143(3) originally.

(iii) It has been also submitted that by reopening the case of this year, the Revenue has adopted contrary stand. It was further submitted that in the other years, the Tribunal has accepted the claim of the assessee on merits. It was thus submitted by her that this kind of approach of the AO of taking different view in different years shall lead to a chaotic situation causing undue hardship to the assessee.

It was requested that in view of the above submissions, reopening being illegal in the eyes of law, needs to be quashed. Reliance has been placed on few judgments in support of her claim which we shall deal with in our findings.

5 Zodiac Clothing Co. Ltd. 3.4. On the other hand, Ld. DR has supported the orders of lower authorities and submitted that ‘Reasons’ recorded are in accordance with law and need to be upheld. But in response to the query from the bench he was not able to show from the assessment order whether the objections filed by the assessee was disposed of by the AO by passing a speaking order.

3.5. We have heard both the parties and carefully examined the submissions, and also gone through the orders of lower authorities, material placed before us for our consideration and judgments relied upon before us. In our considered view reopening of the assessment is not sustainable, as the ‘Reasons’ recorded are invalid in the eyes of law on the following grounds.

(i) This is second round of proceedings. In the first round, when the matter had reached before the Tribunal, it was sent back to the AO for furnishing ‘Reasons’ by the AO to the assessee and for meeting the objections of the assessee upon the ‘Reasons’, by passing speaking order. It is noted that the facts on record reveal that the AO failed to dispose the objections of the assessee, much less by passing a speaking order. The law was clarified way back by Hon’ble Supreme Court in the case of G.K.N. Driveshafts (supra) that it is mandatory for the AO to follow the procedure of furnishing the ‘Reasons’ and meeting objections by passing speaking order. The judgment of Hon’ble Supreme Court has been followed time and again by various courts. It is noted that Hon’ble Bombay High Court has followed the said judgment in the 6 Zodiac Clothing Co. Ltd. case of Trends Electronics in 2013 dated 16.09.2015, following it earlier decisions in the case of Videsh Sanchar Nigam Ltd 340 ITR 66, and held that law laid down by the Hon’ble Supreme Court in the case of G.K.N. Driveshafts, supra is clear and mandatory and it is to be strictly followed by the AO before framing the reassessment order. It has been held that powers given to AO for reopening of a completed assessment under the Income Tax Act, is an exceptional power and whenever Revenue seeks to exercise such power, it must strictly comply with all the requisite conditions. No contrary judgment has been brought to our notice by the Revenue. Thus, we find that the framing of the reassessment order is illegal on this ground itself.

(ii) Ld. Counsel has submitted that the ‘Reasons’ were recorded in absence of any fresh tangible material, and these were based upon the change of the opinion of the AO. Copy of ‘Reasons’ recorded has been enclosed as PB 30 filed by the assessee, and reproduced hereunder for the sake of ready reference:-

“M/s ZODIAC CLOTHING CO.LTD. ASSESSMENT YEAR 1997-98 The assessee has filed the return of Income declaring total income of Rs.95,43,994/- on 28.11.1996. In the said Return of Income, the assessee has claimed deduction u/s.80IA to the extent of Rs.77,79,455/-. The Total income of the assessee for A.Y.1996-97 was assessed u/s 143(3) of the Act, vide order dated 01.02.2000 at Rs.1,43,44,000/-, wherein the deduction u/s.80IA was allowed at Rs.82,37,354/-.

7 Zodiac Clothing Co. Ltd. The deduction u/s.80IA has been claimed in respect of Yelhanka Branch of the assessee-company. A perusal of the Income figures of this Unit Shows other Income of Rs.12144736/- which consists of duty Draw Back amount to Rs.11705577/-. The assessee has included this amount for claiming deduction u/s.80IA. Duty Draw back in the case of the assessee is not derived from the industrial unit. It arises out of the policy of the Government of India to allow such Duty Drawback to the assessee. Thus, it is only attributable to the industrial unit and not derived from the industrial unit. The Supreme Court in the case of M/s. Sterling Food Ltd. reported in 237 ITR 579 held that the income from sale of import license available to the assessee in lieu of the exports made arose out of the policy of the Government of India and not from the Industrial Unit. The Court further went ahead and stated that the income for such sale of import licenses would not be income derived from the industrial unit and benefits u/s.80HH would not be available on the same. Following the same logic, it cannot be said that the Excise Duty Drawback which is available to the assessee is derived from the Industrial Unit. It is clearly derived from the policy of the Government of India wherein the government has decided to compensate the exporter from the Excise Duty paid by him. Thus, the Excise Duty drawback available to the assessee through would be attributable to the Industrial Unit, is certainly not derived from the Industrial Unit. In view of the above, this income shall not form part of the income eligible for deduction u/s 80IA because deduction u/s 80IA is available only in respect of profits derived from the industrial unit. Thus, it is clear that income chargeable to tax has escaped assessment in so far as the income has been deducted by excess claim of deduction u/s 80IA. The income escaping assessment because of excess claim of deduction is more than Rs.25,000/- as required by the provisions of Section 149(I)(b)(ii) of the Act.

8 Zodiac Clothing Co. Ltd. In view of the above, I have reason to believe that income chargeable to tax has escaped assessment in this case, therefore, issued notice u/s.148 of the Act. Sd/- RAVINDRA KUMAR Dated. 06.1.2000 JCIT, SPL. Range-53, Mumbai”

3.6. It is noted that the aforesaid ‘Reasons’ have been recorded on 06.11.2000. The judgment of Hon’ble Supreme Court in the case of Sterling Foods (supra) was available at that time as it was dated 15.04.1999 and after considering this judgment only, claim of the assessee was accepted in the original assessment order passed u/s 143(3) of the Act. It is further noted from the material placed before us that complete particulars were furnished by the assessee in its return and in the original assessment proceedings with respect to the claim of Duty Drawback. Our attention has been drawn to various queries raised by the AO and its reply given by the assessee with respect to eligibility of the assessee to claim of deduction u/s 80IA on the amount of Duty Drawback. The claim was made by the assessee on the basis of Audit Report in which particulars were given showing computation of the deduction and compliance of various conditions as prescribed in the Act with respect to deduction u/s 80IA. Thus, we find that the ‘Reasons’ have been recorded on the basis of change of opinion of the AO, which is not permitted under the law.

3.7. It is further noted that ‘Reasons’ have been recorded in absence of any fresh tangible material coming into the possession of the AO before recording the ‘Reasons’. In this 9 Zodiac Clothing Co. Ltd. regard we place our reliance on the judgment of Hon’ble Bombay High Court in the case of Bombay Stock Exchange Ltd. (writ petition no.2468 dt. 12.06.2014) (89 CCH 118), Hon’ble Bombay High Court observed as under:

“5. It is pertinent to note that Respondent No.1 has not set out in the reasons which fact or other material was not disclosed by the Petitioner that led to income escaping assessment. In fact, on going through the reasons, we find that Respondent No.1 has come to the conclusion/belief that income had escaped assessment on the basis of the material already before him and no new tangible material has been relied upon by Respondent No.1 to come to the said conclusion/belief. This is clear from the use of the words “on perusal of the records it is noticed........”, “further perusal of statement 2 enclosed with the computation of income shows.......” and “it is further noticed......” in the impugned notice.”

3.6. Recently, Hon’ble Delhi High Court in the case of Principle CIT vs. Tupperware India Pvt. Ltd. in its order dated 10.08.2015 (ITA No.415/2015 got an occasion to analyse latest position of law available on this issue and it was held that it was mandatory for the AO to have in its possession fresh tangible material before reopening of the case. Similar view has been followed by the Hon’ble Delhi High Court in the case of Madhukar Khosla vs. ACIT 367 ITR 165 (Delhi). There are many other judgments coming from many

10 Zodiac Clothing Co. Ltd. courts of the country upholding the same view which cannot be mentioned here for the sake of brevity.

3.7. It is further to be mentioned here that the validity of the ‘Reasons’ have to be examined on the basis of the perusal of the ‘Reasons’ only and on the basis of material available with the AO and as referred to in the ‘Reasons’ at the time of recording of ‘Reasons’ only. No subsequent development or material gathered (thereafter) can be used to examine and uphold the validity of ‘Reasons’ recorded.

3.8. We find, on the basis of the perusal of the aforesaid ‘Reasons’ that requisite conditions for recording the reasons were absent, as has been discussed in detail above, and find that the impugned ‘Reasons’ are contrary to the clear position of law, and cannot be upheld. Therefore, the reopening is invalid on this ground also.

3.9. It is further noted by us that in previous and subsequent years, the assessee has been allowed relief by the Tribunal by granting deduction u/s 80IA on the amount of Duty Drawback as per details given below:-

A.Ys. date 1994-95 2870/M/13 4.05.2007 1996-97 3117/M/13 4.05.2007 1998-99 981/M/01 16.09.2005 1999-00 3307/M/2004 22.11.2007 Thus, it is noted that the assessee has been provided relief by the Tribunal, consistently, in all the previous and subsequent

11 Zodiac Clothing Co. Ltd. years. Under these circumstances, we fail to understand how it was possible for the Ld. AO to make a belief that income of the assessee has escaped from assessment, and that too without complying with the mandatory conditions as have been discussed in detail in above Para’s. Thus, viewed from this angle also, the reopening was not justified in the given facts and circumstances of the case.

3.10. In our considered view, the impugned reopening has caused undue hardship to the assessee, and the same is not sustainable in the eyes of law and facts of the case, and therefore same is held as invalid and impugned assessment order is hereby quashed. Thus, Ground no.1 pertaining to reopening is allowed.

3.11. Since appeal of the assessee has been allowed on the jurisdictional ground, we refrain ourselves from adjudicating the grounds on merits.

Order pronounced in the open court on 30th November, 2015.