2016 (11) TMI 1552 - AT - Income Tax

Reopening of assessment - assessment beyond the period of 4 years - Held that - In the present case, as we have already seen, evidence was produced before the AO in the course of the original assessment proceedings u/s 143(3) of the Act and the same was perused by the AO and he had not chosen to draw any conclusion that the amount claimed as deduction by the Assessee was in fact not available to the assessee. In the given circumstances, we are of the view that Explanation 1 cannot also be resorted to by the Revenue. Explanation-1 to Sec.147 cannot be read in a manner so as to override Proviso to Sec.147 of the Act. Initiation of reassessment proceedings u/s 147 of the Act is held to be illegal and consequently, order passed u/s. 147 of the Act is cancelled - Decided in favour of assessee. Treating the interest as income from other source instead of business income thereby disallowance of benefit of Sec. 10B of the Act - Held that - In the present case the assessee is a 100% EOU and has income from exports. Besides the assessee has also earned income from the interest on the margin money deposited with the bank in order to avail the packing credit facility. There is a direct nexus between interest income and the income of the business of the undertaking. Indeed the interest income does not par take the character of a profit and gains from the export of an article, but it is the income which is derived in the course of the business. In view of the definitions of Income from Profits and Gains incorporated in Sub-section (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated u/s. 10B of the Act. Hence the ground raised by the assessee is allowed. Disallowing the exemption u/s. 10B - addition holding tea blending activity as non-manufacturing - Held that - As decided in assessee s own case 2012 (7) TMI 531 - ITAT KOLKATA the blending of tea amounts to manufacture or production of tea for the purpose of exemption u/s 10B of the Act.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act.
2. Treatment of interest income as "income from other sources" versus "business income" for the purpose of Section 10B exemption.
3. Eligibility of tea blending activities for exemption under Section 10B.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147:
- The assessee challenged the reassessment proceedings initiated under Section 147 of the Income Tax Act, arguing it was barred by time and based on a mere change of opinion without any new facts. The original assessment was completed under Section 143(3), and the reassessment notice was issued after four years.
- The Tribunal found that the Assessing Officer (AO) did not allege any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The AO's reasons for reopening were based on a change of opinion regarding the nature of the assessee's activity (blending of tea) and its eligibility for exemption under Section 10B.
- The Tribunal held that reassessment proceedings initiated merely on a change of opinion are not permissible under the law, especially when the notice was issued beyond the four-year period. The reassessment order was annulled, and the appeal was allowed.

2. Treatment of Interest Income:
- The assessee claimed that interest income earned on margin money deposited with the bank for availing credit facilities should be treated as "business income" and not "income from other sources," thereby qualifying for exemption under Section 10B.
- The CIT(A) had treated the interest income as "income from other sources," relying on various judgments that indirect profits cannot be regarded as profits earned from the main business activity.
- The Tribunal, however, found that there was a direct nexus between the interest income and the business of the assessee, as the interest was earned on margin money deposited for business purposes. The Tribunal referred to the Karnataka High Court's decision in CIT & ANR Vs. Motorola India Electronics Pvt. Ltd., which allowed such interest to be considered as business income for the purpose of Section 10B exemption.
- The Tribunal held that the interest income should be treated as business income and allowed the exemption under Section 10B. The appeal on this ground was allowed.

3. Eligibility of Tea Blending Activities for Section 10B Exemption:
- The AO had disallowed the exemption under Section 10B, arguing that the activity of blending tea does not constitute manufacturing.
- The CIT(A) and the Tribunal referred to the ITAT Special Bench decision in the case of M/s Madhu Jayanti International vs. DCIT, which held that blending of tea amounts to manufacturing for the purpose of Section 10B exemption.
- The Tribunal upheld the CIT(A)'s decision, confirming that blending of tea qualifies as manufacturing and thus, the assessee is entitled to the exemption under Section 10B. The revenue's appeal on this ground was dismissed.

Conclusion:
- The Tribunal allowed the assessee's appeals regarding the validity of reassessment proceedings and the treatment of interest income as business income.
- The Tribunal dismissed the revenue's appeals, upholding the CIT(A)'s decision that blending of tea qualifies as manufacturing for Section 10B exemption.
- The combined result was that the assessee's appeals were allowed, and the revenue's appeals were dismissed.