2019 (8) TMI 408 - HC - Income Tax

Revision u/s 263 - assessment orders passed by AO stated to be erroneous or prejudicial to the interest of revenue - AO not considered entitlement for deduction under Section 80IB on the duty drawback receipts - HELD THAT - There is no indication in the assessment order that the Assessing Officer considered the assessee's entitlement for deduction under Section 80IB of the Act on the duty drawback receipts and that he had taken note of the decision in India Gelatin and Chemicals Ltd., P.S. Apparels, Eltek SGS (P) Ltd., Metro Tyres, etc. and granted the benefit. As mentioned earlier, AO had not dealt with this issue while completing the assessment. Therefore, at this juncture, the assessee is precluded from raising a contention that the Assessing Officer adopted one of the two views that were available at the relevant time. Be that as it may, it has to be seen as to whether the CIT(A) was justified in its reasoning while passing an order under Section 263 of the Act and directing the Assessing Officer to withdraw the deduction allowed under Section 80IB of the Act. At the relevant point of time, the decision in Jameel Leathers and Uppers held the field. This decision was clearly against the assessee. It is not the case of the assessee that they distinguished this decision before the Assessing Officer, he had considered the grounds raised by them and then granted the benefit of deduction under Section 80IB of the Act. Therefore, before us the assessee cannot contend that the Assessing Officer took note of the fact that the decision in Jameel Leathers and Uppers was distinguished by the Tribunal in the case of P.S.Apparels. In the absence of any finding to the said effect in the assessment order, we cannot be called upon to infer that the Assessing Officer did so. Major claim for deduction under Section 80IB was relating to the duty drawback receipts. Therefore, the Assessing Officer having not applied his mind to the said issue, it would be too late for the assessee to now contend that the Assessing Officer had adopted the decisions which were in favour of the assessee at the relevant time. In the case of M/s.Sakthi Footwear, this Court held that the mandate of law in Section 80IB of the Act is that unless the source of the profit is the undertaking, the assessee is not eligible to claim deduction and mere commercial connection between the income and the industrial undertaking would not be sufficient. - Decided against assessee.

Issues Involved:
1. Legality of the Commissioner of Income Tax's (CIT) action under Section 263 of the Income Tax Act.
2. Tribunal's confirmation of the CIT's order without addressing the appellant's submissions.
3. Eligibility of duty drawback receipts for deduction under Section 80IB of the Income Tax Act.

Issue-wise Detailed Analysis:

Issue 1: Legality of the CIT's action under Section 263 of the Income Tax Act

The primary question was whether the CIT was right in invoking Section 263 of the Income Tax Act, which allows the CIT to revise any order passed by the Assessing Officer if it is erroneous and prejudicial to the interests of the revenue. The assessment in question pertained to the assessment year 2003-2004, where the assessee, engaged in manufacturing and exporting hosiery garments, had claimed a deduction under Section 80IB, including duty drawback receipts.

The CIT noted that the deduction under Section 80IB on duty drawback receipts was not correct as per the provisions of the Act and thus deemed the assessment order erroneous and prejudicial to revenue interests. The CIT directed the Assessing Officer to revise the assessment order to withdraw the deduction allowed on the duty drawback receipts. The Tribunal upheld this decision, noting that the Assessing Officer had not discussed the issue of duty drawback receipts in the assessment order, which was a significant oversight.

Issue 2: Tribunal's confirmation of the CIT's order without addressing the appellant's submissions

The appellant argued that the Tribunal confirmed the CIT's order without considering their submissions and without rendering any findings on whether duty drawback is entitled to deduction under Section 80IB. The Tribunal, however, took note of several decisions, including those from the Supreme Court and High Courts, which were against the assessee's claim. The Tribunal found that the Assessing Officer had failed to apply his mind to the issue of duty drawback receipts, leading to an erroneous order.

The Tribunal referenced the Supreme Court's decision in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax, which held that an order is prejudicial to the revenue if it is erroneous. The Tribunal thus concluded that the CIT was justified in invoking Section 263, as the Assessing Officer's order was both erroneous and prejudicial to the interests of the revenue.

Issue 3: Eligibility of duty drawback receipts for deduction under Section 80IB

The core issue was whether duty drawback receipts could be considered profits derived from an industrial undertaking eligible for deduction under Section 80IB. The Supreme Court in Liberty India vs. Commissioner of Income Tax had already settled this issue, stating that duty drawback receipts are incentives and not profits derived from the business of the industrial undertaking. Therefore, they do not qualify for deduction under Section 80IB.

The Tribunal applied this precedent, concluding that duty drawback receipts are ancillary profits and not directly derived from the industrial undertaking's business. This decision was pivotal in answering the substantial question of law against the assessee.

Conclusion:

The High Court dismissed the appeals, affirming the Tribunal's decision. The substantial questions of law were answered against the assessee, confirming that:

1. The CIT was justified in invoking Section 263 due to the erroneous and prejudicial nature of the assessment order.
2. The Tribunal's confirmation of the CIT's order was valid despite not addressing each submission by the appellant in detail.
3. Duty drawback receipts do not qualify for deduction under Section 80IB as they are not profits derived from the industrial undertaking.

The appeals were dismissed, and the substantial questions of law were answered against the assessee, with no costs awarded.

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