2010 (3) TMI 1104 - AT - Income Tax

Taxation of interest income under the head Income from other sources - while computing the profits of business of 100 per cent Export Oriented Unit (EOU) of the assessee-company - Regard to additional ground - order of assessment framed by the AO is without jurisdiction as no notice u/s 143(2) was issued and served after the assessee had filed the return of income in pursuance of notice u/s 148 - HELD THAT - It becomes clear from the submissions of the ld. counsel that all the facts are available on record and no new fact is required to be found for giving a finding on this ground. In the case of NTPC 1996 (12) TMI 7 - SUPREME COURT , the Hon'ble Supreme Court held that the view that the Tribunal has to confine itself only to issues arising out of the appeal before the CIT (A) takes too narrow a view of the powers of the Tribunal. Thus, it is clear that the Tribunal can entertain a new ground, more particularly when it is only a question of law although the discretion is vested in the Tribunal in this regard. Further, the additional ground was taken up 15 months after the aforesaid Finance Act was enacted and there is no explanation on record for the delay thereafter. Nonetheless, since it is purely a question of law to be decided on the basis of facts available on record, the ground is admitted for adjudication in the interest of justice. Reopening of the assessment u/s 147 - interest on the fixed deposits - CIT (A) uphold the reopening of the assessment u/s 147. It was prayed that the assessment made thereafter may be cancelled. HELD THAT - We have perused the signatures on assessment order and in the reasons recorded by the AO. On prima facie perusal of these two signatures, we are of the view that they have been made by the same person, being full in the assessment order and in initial in the recorded reasons. However, we qualify our aforesaid observation by stating that we are not handwriting experts and it is only our prima facie view. Notwithstanding the aforesaid observation, we also mention that all acts done in discharge of official duty are assumed to be done in regular course unless proved otherwise, and the onus of such proof is on the party which disputes the fact. Apart from making only a verbal submission, no evidence was brought on record by way of opinion of hand-writing expert, report of hand-writing expert, record from the Additional CIT, etc. Therefore, we have no reason whatsoever to agree with the ld. counsel that this note was not initialed by the AO. Further, only initialing the note is sufficient for the purpose of the Act so as to assume jurisdiction. Therefore, this argument is dismissed. Validity of issuance of notice u/s 148 - exemption u/s 10B - HELD THAT - No addition is permissible in the intimation and no opportunity is to be granted to the assessee. Therefore, intimation being no assessment, there is no question of change of opinion. It may be mentioned here that in this and succeeding years, the AO had granted deduction to the assessee u/s 10B in respect of interest income. However, he took a different stand in AY 2001-02 and held that interest on fixed deposits was to be taxed under the residuary head. This order was confirmed by the CIT (Appeals) on 3-3-2003 in Appeal. The AO did not take any action u/s 147 on passing assessment order for AY 2001-02, but waited for the order of CIT (Appeals) in the matter before recording his note u/s 147 on 17-3-2003. These background facts cannot be ignored while deciding whether jurisdiction was validly assumed by him for issuing notice u/s 148. Once his altered stand was fortified by the order of the ld. CIT (A), he recorded the note to the effect that interest income of ₹ 16,49,441 has escaped assessment. In other words, he had information of law in his possession that the aforesaid income has escaped assessment. Thus, according to us, he was justified in doing so. Objections in this regard - The background facts only go to support his reasons and are not intended to supplant the reasons. Even if subsequent orders of the AO and the ld. CIT (Appeals) are ignored, the facts do lead to a prima facie inference that interest income was wrongly considered as profits and gains of business of export. The AO was not required to prove his case to the hilt at that point of time. What is required at the time of recording reasons is that there should be some reason which has alive nexus with the formation of the belief. These ingredients exist in this case. Therefore, we do not find any force in the argument of the ld. counsel as the facts of the case of Jamna Lal Kabra are quite distinguishable 1967 (4) TMI 36 - ALLAHABAD HIGH COURT . We may once more proceed to examine the argument of the ld. counsel in respect of change of opinion , on which significant emphasis was laid by him. it is clear that the facts of that case are also distinguishable as assessment was made in that case after detailed scrutiny and u/s 143(3). The Hon'ble Court clearly mentioned that the principle of change of opinion will have no application where there was no formation of opinion at all and it seems to us that this part of the judgment applies even to an assessment made u/s 143(3). We have already held that processing u/s 143(1)(a) and an order u/s 154 thereon do not lead to inference of application of mind. Therefore, there could be no question of change of opinion. Thus, it is held that the ld. CIT(A) was right in holding that the AO properly assumed jurisdiction u/s 147 and consequently notice issued u/s 148 was valid in law. Therefore, ground No. 1 is dismissed. Non-issuance and non-service of notice u/s 143(2) - We are of the view that none of the parties can be forced do anything which is impossible. The tenor of the order, which speaks of issuance of notices u/s's 148, 143(2) and 142(1) leads to an irresistible conclusion of fact that notice u/s 143(2) was served on the assessee in due course just as other notices were admittedly served on him. Therefore, on peculiar facts of this case, we are of the view that the notice has been served on the assessee. Otherwise, he has been given full opportunity of being heard under this section as well as section 142(1). Thus, this ground is also dismissed. Computing the profits of business - Interest income taxable under the head Income from other sources - eligible for set off - The facts of the case are that the assessee carries on the business of an EOU. For this purpose, overdraft facilities were taken from the bank to meet liquidity requirements. Subsequently when the assessee earned the profit, the money so generated was placed in fixed deposits with the bank. The case of the ld. counsel is that the deposits were placed with a view to reduce the interest liability and, therefore, interest income partakes the character of profits and gains of business. On the other hand, the case of the ld. DR is that there is no linkage between the borrowings from the bank and placing fixed deposits with the bank. The interest earned from the bank did not have direct or proximate connection with the business of export of the EOU. Therefore, interest so received was taxable under the residuary head. In the case of Monarch Tools (P.) Ltd. 2002 (10) TMI 53 - MADRAS HIGH COURT it was held that when own funds are kept in deposits with the banks, interest thereon did not have any direct or proximate connection with the business. It was mentioned that interest received by a company, which carries business, from deposits and loans could only be taxed as income from other sources. The ratio of this decision is applicable to the instant case and it also follows that if it is not business income, the interest income cannot be said to have been derived from the EOU. In a nutshell, it is held that the ld. CIT (A) was right in holding the interest income to be taxable under the residuary head and not the income derived from the EOU. Therefore, the interest was not liable to be deducted from the total income of the assessee. In the result, the appeal is dismissed.

Summary

Issues Involved:
1. Validity of the reopening of assessment under section 147 of the Income-tax Act.
2. Jurisdiction of the Assessing Officer due to non-issuance/service of notice under section 143(2).
3. Classification of interest income under "Income from other sources" versus business income.

Detailed Analysis:

1. Validity of the Reopening of Assessment under Section 147:

The assessee challenged the reopening of the assessment under section 147. The original return was processed under section 143(1)(a) and later revised under section 154. The Assessing Officer recorded reasons on 17-3-2003, stating that the interest income of Rs. 16,49,441 should be assessed as "Income from other sources" and not part of export turnover for deduction under section 10B. Approval was obtained from the Additional Commissioner of Income-tax on 21-3-2003.

The assessee argued that the reopening was based on a change of opinion, which is not permissible. The Assessing Officer had already considered the interest income during the original assessment and the subsequent rectifications under section 154. The assessee cited the case of CIT v. Kelvinator of India Ltd. to support this argument.

The Tribunal noted that the processing of the return under section 143(1)(a) does not involve the formation of an opinion, and therefore, there is no question of a change of opinion. The Tribunal also observed that the Assessing Officer had new information from the appellate order for assessment year 2001-02, which justified the reopening. The Tribunal held that the reopening was valid as the Assessing Officer had "reason to believe" that income had escaped assessment.

2. Jurisdiction Due to Non-Issuance/Service of Notice under Section 143(2):

The assessee contended that the assessment under section 143(3), read with section 147, was invalid as no notice under section 143(2) was issued or served after the return was filed in response to the notice under section 148. The assessee relied on the decisions in CIT v. Pawan Gupta and Smt. Bandana Gogoi v. CIT, which held that such a notice is essential for making an assessment after scrutiny.

The Tribunal examined the case record and found an office copy of the notice under section 143(2) dated 21-4-2003. However, there was no evidence of the service of this notice. The Tribunal noted that the issue was not raised before the lower authorities and was brought up after a significant delay. The Tribunal concluded that the notice under section 143(2) was served on the assessee, considering the overall circumstances and the fact that other notices were admittedly served. The Tribunal dismissed this ground.

3. Classification of Interest Income:

The assessee argued that the interest income of Rs. 16,49,441 should be set off against the interest expenditure of Rs. 19,60,038 while computing the profits of the EOU, and not taxed under "Income from other sources." The assessee contended that there was a nexus between the interest earned and the interest paid, as the funds were borrowed for business purposes and the interest income was used to reduce the interest burden.

The Tribunal referred to various judicial precedents, including CIT v. Sterling Foods and Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that the words "derived from" imply a direct and proximate connection between the income and the business activity. The Tribunal found that the interest income did not have a direct nexus with the EOU's export activities and was rightly classified under "Income from other sources."

The Tribunal also noted that the assessee had accepted a similar finding in the subsequent year, and the principle of consistency demanded the same treatment. The Tribunal upheld the decision of the CIT (Appeals) and dismissed the appeal.

Conclusion:

The Tribunal dismissed the appeal, upholding the reopening of the assessment under section 147, the jurisdiction of the Assessing Officer despite the contention of non-service of notice under section 143(2), and the classification of interest income under "Income from other sources."