2010 (1) TMI 876 - AT - Income Tax

Income escaping assessment on the basis of change in law - held that - reopening is valid in law as the same is based on certain materials that have come to the possession of the AO subsequent to completion of assessment u/s 143(3) of the Act and this material which is in the form of amendment of Act has led the AO to believe that income has escaped assessment. This is the view which any reasonable person would take and it cannot be said that there is change of opinion or that there is no escapement of income. Income treated as income from other sources - payment of interest should be allowed to be adjusted as admissible expenses u/s.57(iii) of the Act Held that - if interest income is treated as income from other sources 10% of the income may be allowed as indirect cost for earning such interest If the AO comes to conclusion that the interest income from FDRs is income from other sources the alternative ground raised by the assessee may be considered as per law after giving reasonable opportunity to the assessee appeal is partly allowed

Summary

Issues Involved:
1. Reopening of assessment under Section 147 of the Income-tax Act, 1961.
2. Taxability of profits on transfer of DEPB under Section 28(iiid).
3. Computation of deduction under Section 80HHC.
4. Treatment of sales tax collected on sale of DEPB.
5. Treatment of interest income as income from other sources.

Detailed Analysis:

1. Reopening of Assessment under Section 147:
Issue: The validity of reopening the assessment under Section 147 after four years from the end of the relevant assessment year.

Analysis:
The assessee argued that the reopening was invalid as it was done after four years and all facts were disclosed during the original assessment. The Tribunal, however, upheld the reopening, noting that the amendment by the Taxation Laws Amendment Act, 2005, provided the AO with new material to believe that income had escaped assessment. The Tribunal distinguished the case from Sesa Goa Pvt. Ltd. and other cited cases, emphasizing that the reopening was based on new material (amendment of the Act) and not merely a change of opinion.

Conclusion: The reopening of assessment was deemed valid as it was based on new material subsequent to the original assessment.

2. Taxability of Profits on Transfer of DEPB under Section 28(iiid):
Issue: Whether the entire sale proceeds of DEPB entitlements should be treated as income under Section 28(iiid).

Analysis:
The Tribunal referred to the Special Bench decision in M/s Topman Exports and M/s Kalpataru Colours and Chemicals, which held that the face value of DEPB should be considered under Section 28(iiib) and only the profit on transfer (excess of sale price over face value) under Section 28(iiid). The Tribunal directed the AO to re-compute the deduction under Section 80HHC accordingly.

Conclusion: The AO was directed to follow the Special Bench ruling and re-compute the deduction, treating the face value of DEPB under Section 28(iiib) and the profit on transfer under Section 28(iiid).

3. Computation of Deduction under Section 80HHC:
Issue: Proper computation of deduction under Section 80HHC in light of DEPB entitlements.

Analysis:
The Tribunal reiterated that the AO should re-compute the deduction under Section 80HHC following the Special Bench's view, which does not allow for separate deductions for individual expenses related to the sale of DEPB.

Conclusion: The AO was instructed to re-compute the deduction under Section 80HHC as per the Special Bench's decision, ensuring the assessee is given a reasonable opportunity to be heard.

4. Treatment of Sales Tax Collected on Sale of DEPB:
Issue: Whether sales tax collected on the sale of DEPB should be considered as profit on transfer of DEPB under Section 28(iiid).

Analysis:
The Tribunal did not provide a separate detailed analysis for this issue but implied that the AO should follow the Special Bench's approach in re-computing deductions, which inherently addresses the treatment of sales tax collected.

Conclusion: The AO should consider the Special Bench's ruling in the re-computation process, implicitly addressing the treatment of sales tax collected.

5. Treatment of Interest Income as Income from Other Sources:
Issue: Classification of interest income earned on bank FDs as income from other sources versus business income.

Analysis:
The Tribunal noted the necessity of determining the nature of the bank deposits. If deposits were for business purposes, netting of interest should be allowed per Lalsons Enterprises. If not, the AO should disallow the claim, following the Special Bench's decisions in Topman Exports and Kalpataru Colours and Chemicals.

Conclusion: The issue was remitted back to the AO to ascertain the nature of bank deposits and decide accordingly, allowing for netting of interest if deposits were for business purposes.

Summary:
The Tribunal addressed multiple appeals concerning the reopening of assessments, taxability of DEPB profits, and computation of deductions under Section 80HHC. The Tribunal upheld the reopening of assessments based on new material (amendment of the Act) and directed the AO to re-compute deductions in line with the Special Bench's decisions, ensuring the assessee is heard. The treatment of sales tax collected and interest income was also remitted back to the AO for determination based on specific guidelines. The appeals were partly allowed for statistical purposes.