1995 (1) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Denial of benefit under Section 80HHC.
2. Non-furnishing of audit report under Section 44AB.
3. Non-creation of export profit reserve.
4. Allowance of claim under Section 80HHC after set-off of business losses.
5. Rectification of mistakes under Section 154 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Denial of Benefit under Section 80HHC:
The sole dispute in this appeal is regarding the benefit under Section 80HHC being denied to the assessee through an order passed under Section 154 of the Act. The assessee claimed a deduction of Rs. 6,03,156 under Section 80HHC for export sales, which was restricted to Rs. 5,64,973 by the Assessing Officer (AO). Subsequently, the AO noticed that the relief under Section 80HHC was wrongly allowed before the set-off of business losses and resorted to Section 154 to withdraw the allowance of Rs. 5,64,973. The assessee contended that the issues were contentious and outside the purview of Section 154. The AO did not concede and passed an order withdrawing the allowance under Section 80HHC, which was upheld by the Appellate Commissioner (AC).

2. Non-furnishing of Audit Report under Section 44AB:
The AO observed that the assessee had not furnished the audit report under Section 44AB in Form 10CCAC along with the return. The assessee argued that the audit report was enclosed and that the issue was debatable, hence outside the scope of Section 154. The Tribunal found that whether or not an audit report under Section 80HHC(4) has to be submitted along with the return is a highly contentious issue with conceivably two opinions, making it outside the scope of Section 154.

3. Non-creation of Export Profit Reserve:
The AO also noted that the assessee had not created any reserve as required in terms of the proviso to Section 80HHC. The assessee contended that the creation of an export profit reserve is not mandatory but directory, especially when there are losses. The Tribunal agreed with the assessee, stating that the creation of an export profit reserve in terms of the proviso to Section 80HHC is a debatable issue and cannot be rectified under Section 154.

4. Allowance of Claim under Section 80HHC after Set-off of Business Losses:
The AO allowed the deduction under Section 80HHC before the set-off of business losses in the original assessment order. In the rectification order under Section 154, the AO set off the business losses first and then restricted the deduction under Section 80HHC, resulting in a taxable income of Rs. 1,72,120. The Tribunal found that the sequence in which deductions under Chapter VI-A, including Section 80HHC, should be allowed is a contentious issue. The Tribunal cited various decisions supporting the view that such issues are debatable and outside the scope of Section 154.

5. Rectification of Mistakes under Section 154 of the Income Tax Act:
The Tribunal emphasized that a mistake apparent on the record must be an obvious and patent mistake, not something established by a long drawn process of reasoning on points with conceivably two opinions. The Tribunal concluded that the issues involved in the appeal were highly debatable and contentious, making them outside the scope of Section 154. The Tribunal vacated the orders of the lower authorities and allowed the assessee's appeal.

Separate Judgment by Accountant Member:
The Accountant Member agreed with the Judicial Member on the non-submission of the audit report and the non-creation of the export profit reserve but differed on the sequence of deductions. The Accountant Member opined that the gross total income should be computed after setting off brought forward deficiencies of business loss and unabsorbed depreciation. The Accountant Member concluded that the original assessment order contained a mistake of law apparent from the record, rectifiable under Section 154. The Accountant Member proposed that the appeal should be partly allowed, restricting the deduction under Section 80HHC to Rs. 1,72,120.

Third Member's Opinion:
The Third Member agreed with the Accountant Member, stating that the sequence for computing the total income for the purpose of grant of deduction under Section 80HHC was well-settled in favor of the Department. The Third Member held that the mistake in the original assessment order was apparent from the record and rectifiable under Section 154. The Third Member concluded that the appeal should be partly allowed in conformity with the majority view.

Final Order:
In conformity with the opinion of the Third Member and in accordance with the majority view, the assessee's appeal was partly allowed.