2012 (12) TMI 687 - AT - Income Tax

Re-opening of Assessment reworked out the deduction u/s 80HHC and book profit u/s 115JB - Held that - Considering the excessive claim of the assessee u/s. 80HHC while computing the Book Profit u/s 115JB AO initiated the reopening of assessment to bring the income to tax which is escaped from assessment. Being so, the reopening of assessment is valid - against the assessee. Deduction u/s.80HHC by adopting the book profit in place of the profits of the business while computing the chargeable book profit u/s. 115JB - Held that - As decided in Ajanta Pharma Ltd v CIT 2010 (9) TMI 8 - SUPREME COURT export profits computed under the provisions of sec. 80HHC based on profits of business or profession cannot be substituted into the computation scheme as prescribed in sec. 115JB which is an alternative computation to the normal computation of income. The deduction under clause (iv) of Explanation for the export profits should not be phased out as provided in sub-section (1B) of sec. 80HHC because, 115JB is an independent code and it covers full export profits as the eligible profits for the purposes of book profits tax and no phasing is required to be carried out - in favour of assessee. Deferred tax provision pursuant to AS 22 - unascertained liability hence warrants adjustments by way of addition to the book profits - Held that - After insertion of clause (h) in the Explanation-1 to section 115JB with retrospective effect vide Finance Act, 2008 with effect from 1.4.2001, this issue has to be decided against the assessee as in view this clause the book profit shown in the Profit and Loss Account in the relevant previous year prepared under subsection (2) of section 115JB to be increased, inter alia by the amount of deferred tax and the provisions therefor - against assessee. Reopening of assessment - excess grant of deduction u/s 80HHC - Held that - Though the original assessments have been completed u/s 143(3) of the Act. The assessing officer has considered all the materials available on the record at the time of completing the original assessment and granted deduction u/s 80HHC. The AO is precluded to reconsider the same after four years from the expiry of the original assessment year to consider the same to bring the escaped income into taxation. Had it been within four years, the assessing officer could have reopened the assessment under clause (b) to explanation 2 to proviso 2 of Section 147 of the I.T. Act. In these assessment years, the assessment was reopened after four years, in our opinion, the reassessment is bad in law - in favour of assessee. Brought forward loss/ Unabsorbed Depreciation allowance of amalgamating companies - whether eligible for set off under sec. 72A while computing relief u/s 80HHC - Held that - This ground doesn t required adjudication as already held that the reopening is bad in law in these assessment years. Being so, we refrain ourselves from adjudicating this issue. Interest income - whether a part of business profits assessable u/s 28 to 44 - Held that - The deposit made by the assessee in the bank and interest earned on it cannot be considered as income from business much less income from export earning, it cannot be considered as income from export earnings, as there is no nexus between export business and interest income. Interest income was earned from the deposits made by the assessee with the bank and not from export business - in favour of revenue. Conversion charges - whether eligible profits for computing deduction u/s 80HHC r.w. clause (iv) of Explanation to sec. 115JB - Held that - As decided in CIT Versus K. RAVINDRANATHAN NAIR 2007 (11) TMI 10 - SUPREME COURT OF INDIA 90% of conversion charges has to be reduced from the gross total income to arrive at the business profit and it has to be included in the total turnover in the formula of arriving at the business profit in terms of clause (baa) of the Explanation to section 80HHC(3) of the Act. Accordingly, the Assessing Officer is directed to recompute the deduction u/s. 80HHC - partly in favour of revenue. Sales tax and excise duty - whether deleted from total turnover for computing deduction u/s. 80HHC - Held that - As decided in Commissioner of Income-Tax Versus Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME COURT just as interest, commission, etc., do not emanate from the turnover so also excise duty and sales tax do not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover such taxes had to be excluded - against revenue. Interest relatable to an acquisition of capital asset - whether permissible deduction u/s 36(1)(iii)? Held that - As decuided in DCIT vs. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT OF INDIA Section 36(1)(iii)it is a code by itself. It makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business - in favour of assessee. Provisions for unascertained liabilities - Held that - In view of the retrospective amendment vide Finance Act, 2009 wherein there is an insertion of clause (i) with retrospective amendment from 1.4.2001 wherein the amount or amounts set aside as provision for diminution in the value of revenue assets has to be added to the book profit. In view of this, this issue is decided against the assessee. DEPB benefits accrued - whether deducted for computing export profits both u/s 80HHC and clause (iv) of Explanation to sec. 115JB - Held that - As decided in Topman Exports v CIT 2012 (2) TMI 100 - SUPREME COURT OF INDIA the face value would be assessable under 28(iiib) and the profit under 28(iiid) and in case the exporter (having export turnover in excess of Rs. 10 crores) is unable to fulfil the conditions specified in Third Proviso it is only the profits earned on the sale of DEPB benefits to the extent of face value should be allowed to the assessee in terms of First proviso under subsection (3) without applying the conditions stipulated in Third Proviso - in favour of the assessee. Depreciation on demolished assets - Held that - As decided in Natco Exports vs. DCIT 2002 (6) TMI 168 - ITAT HYDERABAD-A as for discarded assets the adjustment required to be made under the concept of block of assets for the purposes of allowing depreciation is to reduce the monies receivable consequent to such discarding from the block. In the case of the assessee, as no money whatsoever was payable to him on handing over the ponds constructed on leased land to the owners of land, there can be no amount whatsoever that can be reduced from the block of assets. Hence, the block continues at its written down value - in favour of assessee. Addition of imported entitlements - Held that - Agreeing with the findings of the CIT(A) that the import entitlements are contingent in nature and accrue only in the year of actual import of raw materials and real income to be taxed even though in book keeping, an entry is made about hypothetical income which doesn t materialize - against revenue.

Summary

Issues Involved:
1. Validity of reopening assessments under Section 147/148.
2. Deduction under Section 80HHC while computing book profits under Section 115JB.
3. Treatment of deferred tax provision under Section 115JB.
4. Reassessment validity concerning brought forward business loss and allowances.
5. Interest income classification and its impact on business profits.
6. Inclusion of conversion charges in eligible profits for Section 80HHC.
7. Exclusion of sales tax and excise duty from total turnover for Section 80HHC.
8. Allowability of interest on capital assets under Section 36(1)(iii).
9. Treatment of provisions for unascertained liabilities under Section 115JB.
10. DEPB benefits and their computation under Section 80HHC and Section 115JB.
11. Depreciation on demolished assets.
12. Non-recognition of import entitlements under Advance License Scheme.

Issue-wise Detailed Analysis:

1. Validity of Reopening Assessments under Section 147/148:
The Tribunal upheld the reopening of assessments, stating that the Assessing Officer (AO) had jurisdiction to issue notice under Section 148 for bringing to tax income escaping assessment due to excessive deduction claims under Section 80HHC while computing book profits under Section 115JB. The Tribunal referenced the Supreme Court's decision in Rajesh Jhaveri Stock Brokers (P) Ltd., which permits reopening if the AO notices that income has escaped assessment.

2. Deduction under Section 80HHC while Computing Book Profits under Section 115JB:
The Tribunal allowed the assessee's claim for 100% deduction of export profits under clause (iv) of Explanation to Section 115JB, referencing the Supreme Court's decision in Ajanta Pharma Ltd. The Court held that the deduction should be computed based on book profits without phasing out as provided in sub-section (1B) of Section 80HHC.

3. Treatment of Deferred Tax Provision under Section 115JB:
The Tribunal rejected the assessee's claim, citing the retrospective amendment to Section 115JB by the Finance Act, 2008, which mandates adding the amount of deferred tax to the book profits.

4. Reassessment Validity Concerning Brought Forward Business Loss and Allowances:
The Tribunal held the reassessment invalid as it was initiated after four years from the end of the relevant assessment year without any failure on the part of the assessee to disclose material facts. The Tribunal referenced the Delhi High Court's decision in CIT vs. Purolator India Ltd., emphasizing the necessity of full and true disclosure of primary facts.

5. Interest Income Classification and Its Impact on Business Profits:
The Tribunal ruled that interest income from deposits cannot be considered as business income or income from export earnings. This decision aligns with the Madras High Court's judgment in Dollar Apparels vs. ITO, which held that interest income does not emanate from business turnover.

6. Inclusion of Conversion Charges in Eligible Profits for Section 80HHC:
The Tribunal directed that 90% of conversion charges should be excluded from the profits of the business under clause (baa) of Section 80HHC, following the Supreme Court's decision in Ravindranathan Nair. However, only the net conversion income, after deducting related expenses, should be considered.

7. Exclusion of Sales Tax and Excise Duty from Total Turnover for Section 80HHC:
The Tribunal ruled in favor of the assessee, referencing the Supreme Court's decision in CIT vs. Lakshmi Machine Works, which held that excise duty and sales tax should not form part of the total turnover for Section 80HHC purposes.

8. Allowability of Interest on Capital Assets under Section 36(1)(iii):
The Tribunal allowed the assessee's claim for interest deduction on borrowed capital for acquiring capital assets, referencing the Supreme Court's decision in DCIT vs. Core Health Care Ltd., which held that Section 36(1)(iii) does not distinguish between capital borrowed for revenue or capital purposes.

9. Treatment of Provisions for Unascertained Liabilities under Section 115JB:
The Tribunal upheld the disallowance of provisions for doubtful debts and diminution in the value of investments, citing the retrospective amendment to Section 115JB. However, it allowed provisions for gratuity, leave encashment, and bonus, following the Bombay High Court's decision in CIT v Echjay Forgings P Ltd.

10. DEPB Benefits and Their Computation under Section 80HHC and Section 115JB:
The Tribunal ruled in favor of the assessee, stating that DEPB benefits should be considered under Section 28(iiib) and profits from their sale under Section 28(iiid). This decision aligns with the Supreme Court's ruling in Topman Exports v CIT.

11. Depreciation on Demolished Assets:
The Tribunal allowed the assessee's claim for depreciation on demolished assets, referencing the Hyderabad Tribunal's decision in Natco Exports v DCIT, which held that no adjustment is required if no money is receivable on discarding the assets.

12. Non-recognition of Import Entitlements under Advance License Scheme:
The Tribunal upheld the assessee's method of not recognizing import entitlements until actual import, emphasizing that only real income should be taxed. This decision aligns with the Supreme Court's ruling in Godhra Electrical Co. Ltd. vs. CIT.