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2012 (7) TMI 647 - AT - Income TaxInitiation of re-assessment proceedings - excessive claim allowed u/s. 80HHE - No assessment u/s. 143(3) and only the return was processed u/s. 143(1) - Held that - As per clause (b) of Explanation 2 to proviso to section 147 where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, the AO is entitled to reopen the assessment - as decided Rajesh Jhaveri Stock Brokers (P) Ltd 2007 (5) TMI 197 - SUPREME COURT that the Assessing Officer is having jurisdiction to issue notice u/s 148 for bringing to tax income escaping assessment on the ground that the assessee claimed excessive relief or deduction - against assessee. Reducing deduction claimed by the assessee u/s. 80HHE - grounds raised by assessee against aggregation of the profits of the 100% EOU with the losses of the training division for purposes of calculating the deduction u/s 80HHE - Held that - From the business profits figure the AO has reduced 90% of the commission, brokerage, etc. as also interest receipt which he has considered to be income from other sources and has arrived at a figure and thereafter applied the formula to determine the 80HHE deduction ignoring assessee s contention that the total turnover of only the eligible business should be taken note of for the purpose of applying the formula laid down in sub-section (3) - the view canvassed on behalf of the assessee is to be preferred over the view put forth on behalf of the income tax department as it is only the profits of the eligible business which have to be split in the same proportion as the export turnover in the said business bears to the total turnover in the said business Thus, the total turnover for the purpose of section 80HHE only the turnover of the computer software both in Indian and abroad has to be considered and turnover of business not connected with software business cannot be considered to include in the total turnover. Similarly amount received towards employee s compensation cannot form part of the total turnover - in favour of assessee.
Issues Involved:
1. Initiation of re-assessment proceedings under Section 147 of the Income-tax Act, 1961. 2. Reduction of deduction claimed under Section 80HHE of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Initiation of Re-assessment Proceedings under Section 147: The first common ground in these appeals concerns the initiation of re-assessment proceedings to consider the excessive claim allowed under Section 80HHE of the Income-tax Act, 1961. The facts are considered for the assessment year 1999-2000, where there was no scrutiny assessment, and the return of income was processed under Section 143(1) on 29.3.2000. The Assessing Officer issued a notice under Section 147 on 31.3.2004, within four years from the end of the relevant assessment year. The assessee contended that the notice under Section 147 was issued without any new reasons or fresh material indicating escapement of income. The assessee argued that all necessary information was already with the Assessing Officer, and the re-assessment was merely a re-calculation based on existing records, which is not permissible without new material. The Department argued that since there was no assessment under Section 143(3), the issue of excessive deduction under Section 80HHE was not considered initially. Hence, the reopening of the assessment was valid. The Department relied on the Supreme Court judgment in the case of Rajesh Jhaveri Stock Brokers (P) Ltd., which held that the Assessing Officer has jurisdiction to issue notice under Section 148 for bringing to tax income escaping assessment on the ground of excessive relief or deduction claimed by the assessee. The Tribunal held that since there was no assessment under Section 143(3) and only the return was processed under Section 143(1), the reopening of the assessment within four years was valid. The Tribunal noted that under clause (b) of Explanation 2 to the proviso to Section 147, the Assessing Officer is entitled to reopen the assessment if it is noticed that the assessee has claimed excessive deduction. Therefore, the ground relating to the reopening of the assessment was decided against the assessee. 2. Reduction of Deduction Claimed under Section 80HHE: The second common ground pertains to the reduction of the deduction claimed by the assessee under Section 80HHE on several grounds, including setting off losses of other divisions against the profit of the software division, inclusion of turnover of other divisions in the total turnover, inclusion of employees' compensation in the total turnover, and consideration of profit on sale of fixed assets in the total turnover. The assessee argued that the turnovers and profits of the 100% Export Oriented Unit (EOU) for computer software should be considered independently of other divisions, as separate books of account are maintained for each division. The assessee contended that the income tax department had accepted the independence of the 100% EOU software division in previous years and that the operations of the computer software division are statutorily required to be kept isolated and independent of other operations. The Department supported the lower authorities' order and relied on the Tribunal's decision in the case of DCIT vs. EDS Electronics Data Systems (India) (P) Ltd., arguing that the profits of the eligible business should include the profits of all businesses carried on by the assessee. The Tribunal, after considering the provisions of Section 80HHE and the rival arguments, held that the profits eligible for deduction under Section 80HHE should be derived from the eligible business only. The Tribunal noted that the expression "profits of the business" in sub-section (3) refers only to the profits of the eligible business mentioned in sub-section (1). Therefore, the profits of the eligible business should be split in the same proportion as the export turnover bears to the total turnover of the eligible business. The Tribunal concluded that the departmental authorities were incorrect in taking the profits of the eligible business as relating to the whole business of the assessee. For the purpose of computing deduction under Section 80HHE, the profit of the 100% EOU computer software has to be considered. The Tribunal also held that the total turnover for the purpose of Section 80HHE should only include the turnover of the computer software business and not the turnover of other unrelated businesses. Amounts received towards employees' compensation and profit on sale of fixed assets should not form part of the total turnover. Conclusion: In conclusion, the Tribunal upheld the validity of the re-assessment proceedings initiated under Section 147. However, it ruled in favor of the assessee regarding the computation of deduction under Section 80HHE, stating that only the profits and turnover of the eligible computer software business should be considered, excluding unrelated business activities and non-operational income. The assessee's appeals were partly allowed.
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