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TMI Blog2012 (4) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... d in interfering with the order passed by the Commissioner. Tribunal is right in holding that the entire cess can be claimed against taxable income? - the composite income derived from sale of tea grown and manufactured by the assessee cess payable on green tea leaves is allowable as a business expenditure in computing the composite income under Rule 8 of the Income Tax Rules,1962. - INCOME TAX APPEAL NO.5818 OF 2010 - - - Dated:- 1-2-2012 - DR.D.Y.CHANDRACHUD, M.S.SANKLECHA, JJ. Mr.Vimal Gupta for the Appellant. Mr.Percy J.Pardiwala, Senior Advocate with Mr.Nishant Thakkar and Mr.Rajesh Poojari i/b. Mulla Mulla for the Respondent. ORAL JUDGMENT (PER DR.D.Y.CHANDRACHUD, J.) : This appeal by the Revenue under Section 260A of the Income Tax Act, 1961, has raised the following two substantial questions of law : (a) Whether in the facts and circumstances of the case and in law, the Tribunal is right in setting aside the order passed by the Commissioner of Income Tax under Section 263 of the Act, holding that the jurisdiction under Section 263 has not been invoked properly? and (b) Whether in the facts and circumstances of the case and in law, the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the aforesaid deductions, an appropriate part of the expenditure would have to be allocated to the units. As regards agency commission, the assessee had stated that an amount of Rs.35.59 crores has already been allocated in arriving at the profit derived from the eligible units that was included under the head of advertisement. The assessee stated that there was no omission on its part and the amount should not once again be allocated in arriving at the profits of the units in respect of which a deduction was sought under Sections 80I, 80IA and 80HH. The Commissioner held that the interest and agency commission which relate to the whole of the business would have to be allocated to the eligible units. During the course of the hearing before the Commissioner, pursuant to the notice under Section 263, a query was raised to the effect that cess which has been imposed on green leaf tea was required to be claimed entirely against the agricultural income in view of the decision of the Gauhati High Court in Jorehaut Group Ltd. Vs. Agricultural Income Tax Officer.1997 (226) ITR 622 The assessee in its reply dated 27 March 2003 relied upon the provisions of Rule 8 of the Income Tax Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and each and every item in relation to those deductions, was enquired into by the Assessing Officer. In this view of the matter, and after relying upon the decision of the Mumbai Bench in the case of Wockhardt Ltd. delivered on 24 February 2006, the Tribunal held that the exercise of the jurisdiction under Section 263 was not warranted. 6. In assailing the judgment of the Tribunal, Counsel appearing on behalf of the Revenue submitted that (i) There is a fundamental error in the approach of the Tribunal when it held that each item of expenditure pertaining to research and development was enquired into by the Assessing Officer and to which the assessee had submitted a reply following which the Assessing Officer had accepted the claim with regard to the deductions. As a matter of fact, the reply which was furnished by the assessee during the course of the assessment proceedings would indicate that the assessee had not furnished a detailed explanation which would have enabled the Assessing Officer to determine either the existence or absence of nexus. Moreover, as a matter of fact, and exfacie, the assessment order would indicate that this aspect was not considered by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon by the Commissioner was based on the special provisions contained in the legislation in the State of Assam and would have no bearing on the matter; (ii) The jurisdiction under Section 263 is conditioned by twin requirements that (a) The order of assessment must be erroneous; and (b) The order of assessment must be prejudicial to the interests of the Revenue. Where the Assessing Officer has taken a possible view, the exercise of jurisdiction under Section 263 would not be warranted; (iii) It is a well settled principle of law that the expression derived from for the purposes of Sections 80I, 80IA and 80HH does not have the same meaning as the expression attributable to . The expression derived from postulates a direct nexus with the income or, as the case may be, the expenditure; (iv) The Assessing Officer had, during the course of the assessment proceedings, conducted an enquiry, in the course of which, the assessee had submitted its reply. Having considered the claim of the assessee, the Assessing Officer had proceeded to accept it and it cannot be postulated that there was no application of mind; (v) The Tribunal has, in the course of its decision, come to the conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth the requirement of the order being erroneous and being prejudicial to the interests of the Revenue, must be fulfilled. 10. Several judgments of the High Courts had considered the ambit of the jurisdiction under Section 263 before the issue was comprehensively determined by the Supreme Court in Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax (supra). A judgment of a Division Bench of this Court in Commissioner of Income Tax vs. Gabriel India Ltd.,(1993) 203 ITR 108 (Bom) held that an order cannot be termed as erroneous unless it is not in accordance with law. Moreover, the Division Bench held that if the Assessing Officer acting in accordance with the law has made a certain assessment, it cannot be branded as erroneous by the Commissioner simply because the order should have been written more elaborately or because the Commissioner in substitution of his own judgment for that of the Assessing Officer holds that the decision is erroneous. The Division Bench held that an order of the Assessing Officer to be erroneous must be one which is not in accordance with law or an order which has been passed without making an enquiry in undue haste. Similarly, an order cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iry in undue haste. The exposition of law in the judgment of the Division Bench, to the extent to which it confined the jurisdiction under Section 263 only to these categories stands modified by the law laid down by the Supreme Court in Malabar Industrial Company. The judgment of the Supreme Court clearly does not warrant a restriction of the jurisdiction under Section 263 only to a situation where the judgment of the Assessing Officer is contrary to law or where the Assessing Officer has not made any enquiry in undue haste. The Supreme Court has in Malabar Industrial Company observed that the Commissioner has to be satisfied of the existence of two conditions, namely, (i) The order of the Assessing Officer sought to be revised is erroneous; and (ii) The order of the Assessing Officer is prejudicial to the interests of the revenue. If one of those requirements is absent, recourse cannot be had to Section 263. Moreover, it has been held that every kind of mistake or error of the Assessing Officer cannot warrant the exercise of jurisdiction under Section 263 and it is only when an order is erroneous that the section would be attracted. The Supreme Court held that an incorrect assump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to the deduction claimed under Sections 80I and 80IA, the Assessing Officer called upon the assessee to disclose inter alia the allocation of scientific capital expenses as well as the expenditure under Section 35(1). In its reply dated 9 February 2001, the assessee dealt with the issue of the head office expenses and stated that since the deduction admissible under Section 80HH is on the basis of profits derived from the industrial undertaking (which has a narrower scope than the words attributable to ) the common unallocated head office expenses could not be regarded as being derived from the units in question. As regards the issue of capital expenditure on scientific research, the assessee stated as follows: The capital expenditure on scientific research cannot be reduced from the profits of eligible undertaking as these have not been incurred at the undertakings. Further, these expenses are not directly linked to the operations of the undertaking. 14. The Assessing Officer in the order of assessment held that the unallocated head office expenses needed to be apportioned to determine the quantum of profits derived from an industrial undertaking. According to the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at the units in respect of which deduction under Sec. 80I/IA has been claimed are those in respect of which the company already possesses the requisite knowhow. Therefore, expenditure incurred on Scientific Research cannot be allocated in determining the profits from these units. 15. The explanation tendered by the assessee on 25 March 2003, in the aforesaid terms, upon the issuance of a notice to show cause was, therefore, at variance with what was stated before the Assessing Officer. Before the Assessing Officer, the contention of the assessee was that the expenditure on scientific research could not be reduced from the profits of the eligible undertaking as it was not incurred at the undertaking and was not moreover, directly linked with the operation of the undertaking. In the proceedings under Section 263, the assessee stated that research on a particular product preceded its commercial production and the products which were being manufactured at the units in respect of which a deduction under Section 80I/80IA had been claimed were those for which the assessee already possessed the requisite knowhow. Consequently, it was submitted that expenditure incurred on scientific r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no direct nexus between the expenditure incurred under the head in question and the business of the undertakings with reference to which the deduction was claimed. As we have noted earlier, all that the assessee stated was that the capital expenditure on scientific research had not been incurred at the undertakings and is not directly linked with the operations of the undertakings. Besides this statement, the assessee within whose knowledge, the facts pertaining to the business of the undertaking and the nature of the research expenditure rested, came forth with no detailed explanation. As a matter of fact, as we have noted earlier, in the course of the proceedings under Section 263, the explanation which was tendered by the assessee on 25 March 2003, was not that the research was not undertaken at the units, but that the products which were being manufactured by the units were those in respect of which the Company already possessed the requisite knowhow. Be that as it may, the fundamental basis on which the Tribunal has proceeded which is that there was due application of mind by the Assessing Officer during the course of the enquiry is erroneous. As a matter of fact, as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the Revenue that the recourse which was taken to the jurisdiction under Section 263 was in order and that the Tribunal was not justified in interfering with the order passed by the Commissioner. Both the requirements of Section 263 have been fulfilled. The Commissioner was justified in coming to the conclusion that the order of the Assessing Officer is erroneous. As a result of an erroneous order passed by an Assessing Officer, where the Revenue is losing tax lawfully payable by an assessee, the order is prejudicial to the interests of the Revenue. Both the requirement of Section 263, as laid down in Malabar Industrial are fulfilled. 19. On the issue of allocation of cess on green leaves, we are in agreement with the view which has been taken by the Tribunal. Rule 8 of the Income Tax Rules, 1962 stipulates that income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. Rule 8 provides for a legal fiction for determining what part of the income of an assessee, who engages in the growing of tea leaves and the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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