2010 (1) TMI 53 - AT - Income Tax

Reopening of assessment - any change of opinion while initiating the reassessment proceedings u/s. 147 - assumption of jurisdiction u/s. 147 is bad in law - In the case before us the show-cause notice issued by the learned CIT u/s. 263 of the Act and the order passed by him constituted a material on the basis of which the AO formed belief that the excess deduction u/s. 80HHC has been allowed. Therefore, reopening of assessment cannot be treated based on mere change of opinion. Hence, the AO was justified in reopening the assessment u/s.147. HELD THAT - Excess deduction u/s. 80HHC has been claimed and allowed within the meaning of sub-cl. (iv) of cl. (c) of Expln. 2 to s. 147. Hence, the income to the extent of deduction allowed u/s. 80-IB had escaped assessment. In this case reassessment proceedings have been initiated within four years from the end of asst. yr. 2001-02 and hence the case falls under main s. 147. We are also aware of the legal position that at the time of reopening of the assessment the AO has to record the reasons for assumption of jurisdiction on the basis of material available on record. Hon'ble Supreme Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. 2007 (5) TMI 197 - SUPREME COURT has held that the expression reasons to believe in s. 147 would mean cause or justification. If the AO has a cause or justification to know or suppose that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. What is required is reason to believe but not the established fact of escapement of income. In this case the assessee received a consideration of Rs 12 lakhs on the sale of right to purchase an open plot in Pune and disclosed it as income for the asst. yr. 1996-97. The Asstt. CIT assessed the income and passed order u/s.143(3). The Dy. CIT issued a notice u/s 154 stating that the long-term gain on sale of right to purchase an open plot was to be treated as casual income and brought to tax at forty per cent. The Dy. CIT passed an order in 2000 stating that he had reason to believe that income of the petitioner had escaped assessment within the meaning of s. 147 and proposed to reassess the income for asst. yr. 1996-97. On a writ petition it has been held that the value of the land had not been determined nor the issue relating to whether the income was to be treated as capital gain or casual income been addressed by the AO. He did not apply his mind and failed to record good and proper reasons for passing the order under s. 143(3). On facts, it was not a mere change of opinion in recording reasons for issuing notice u/s 148 by the AO. Therefore, the AO was justified in issuing the notice u/s 148. Whether an issue arises from the order of CIT(A) which can be agitated in cross-objections raised by the assessee? HELD THAT - Considering the matter on record, it is clear that an aggrieved party can file memorandum of cross-objection only when an issue has been decided against the cross-objector. The assessee by way of cross-objection is not seeking relief to which it is entitled to but seeking cancellation of reassessment proceeding so that additional tax relating to escaped income may not be fastened on him and hence the assessee is attempting to avoid payment of due tax to Revenue. Under these circumstances, assessee cannot be permitted to raise a ground not arising from the order of CIT(A) that too by way of cross-objections. Consequently, the decision of NTPC Ltd. 1996 (12) TMI 7 - SUPREME COURT cannot be pressed into service for getting the assessment annulled in appeal filed by the Revenue. In view of above discussions we are of the considered opinion that the cross-objection filed by the assessee with an objective to get the assessment annulled is not maintainable and deserves to be dismissed. Thus, We hold that the cross-objection by the assessee is to be dismissed on merits as well as on maintainability as the issue raised does not arise from the order of CIT(A). Appeal filed by the Revenue - Disallowance u/s. 80HHC - Interest of FDR - HELD THAT - In the case before us, the income has been derived from the same undertaking and repeated deductions u/s. 80-IB and 80HHC have been claimed. Therefore, the issue is squarely covered by the decision of the Special Bench in the case of Hindustan Mint Agro Products 2009 (6) TMI 124 - ITAT DELHI-C . Respectfully following the decision of the Special Bench of the Tribunal, it is held that the amount of deduction allowed u/s. 80-IA/80-IB shall be reduced from the eligible profits and on the balance amount deduction u/s. 80HHC will be allowable. Therefore, the ld CIT(A) was not justified in allowing deduction u/s. 80-IB and 80HHC on the same gross profit. We, therefore, set aside the order of the learned CIT(A) and restore the order of the AO. Netting of interest received on FDRs - The assessee debited to P L a/c the bank interest of Rs. 49,31,123 after reducing the interest earned of Rs. 4,06,803 on fixed deposits and claimed deduction u/s. 80HHC without reducing the 90 per cent of the interest from the profits. The AO following various decisions treated the interest received earned on deposits not derived from export business. He accordingly treated the interest received as income from other sources. Since the AO has not examined the nature of interest as well as the netting of interest, we set aside the issue to the file of the AO with the directions to examine the claim of the assessee in the light of decision of Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equip 2007 (1) TMI 86 - HIGH COURT, DELHI after affording the assessee a reasonable opportunity of being heard. In nutshell, the appeal filed by the Revenue is allowed for statistical purposes and the cross-objection filed by the assessee is dismissed.

Summary

Issues Involved:
1. Assumption of jurisdiction under Section 147 of the IT Act.
2. Computation of deduction under Section 80HHC after reducing the amount of deduction allowed under Section 80-IB.
3. Netting of interest received on FDRs against the interest paid to the bank.

Issue-wise Detailed Analysis:

1. Assumption of Jurisdiction under Section 147:

The assessee challenged the reopening of the assessment under Section 147, arguing it was based on a mere change of opinion without any fresh material. The original assessment was made under Section 143(3), allowing deductions under Sections 80HHC and 80-IA based on the assessee's claims. The AO later noticed that deductions were claimed on the gross total income without reducing the profits to the extent of deduction allowed under Section 80-IA, leading to excess allowance. The assessee contended that the reopening was invalid as it was based on the same material available during the original assessment, citing various judicial precedents to support the argument.

The Revenue argued that the original assessment order did not consider the simultaneous claim of deductions under Sections 80HHC and 80-IA, hence there was no change of opinion. The Tribunal found that the AO had allowed deductions without proper examination and application of mind. The Tribunal held that the reopening was justified as it was based on fresh material in the form of a show-cause notice issued by the CIT under Section 263, which constituted a valid reason to believe that income had escaped assessment. The Tribunal dismissed the cross-objection on merits and maintainability as the issue did not arise from the CIT(A)'s order.

2. Computation of Deduction under Section 80HHC after Reducing Deduction under Section 80-IB:

The AO reduced the amount of deduction under Section 80-IB from the profits of the business to compute the deduction under Section 80HHC. The CIT(A) allowed the assessee's claim that deductions under Sections 80HHC and 80-IB should be allowed on the gross total income without reducing the amount of deduction under Section 80-IB. The Tribunal found that the issue was covered by the decision of the Special Bench in the case of Hindustan Mint & Agro Products (P) Ltd., which held that deductions under Sections 80-IA/80-IB and 80HHC should not be allowed on the same profit. The Tribunal set aside the CIT(A)'s order and restored the AO's order, holding that the amount of deduction allowed under Section 80-IA/80-IB should be reduced from the eligible profits for computing deduction under Section 80HHC.

3. Netting of Interest Received on FDRs against Interest Paid to the Bank:

The assessee claimed deduction under Section 80HHC without reducing 90% of the interest earned on FDRs from the profits, arguing that the interest earned should be netted against the interest paid to the bank. The AO treated the interest received as income from other sources. The CIT(A) directed the AO to treat the interest on FDRs as business income and allow netting of the interest received against interest paid. The Tribunal referred to the decision of the Delhi High Court in the case of Shri Ram Honda Power Equip, which held that the word 'interest' in the Explanation to Section 80HHC connotes 'net interest'. The Tribunal set aside the issue to the AO to examine the nature of interest and the claim of netting in light of the Delhi High Court's decision.

Conclusion:

The appeal filed by the Revenue was allowed for statistical purposes, and the cross-objection filed by the assessee was dismissed.