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TMI Blog2004 (4) TMI 596X X X X Extracts X X X X X X X X Extracts X X X X ..... l or the issue that assessee was at all entitled to deduction u/s 80HHC or not was not a subject-matter of appeal filed by the assessee before CIT(A). A matter may have many aspects and the above-mentioned two factors may be the aspects of the matter but not entire ';matter'; itself. The ';matter'; in the present case is ';deduction u/s 80HHC. Therefore, we hold that assessment order so as it relates to deduction u/s 80HHC had merged with the order of CIT(A), therefore, exercise of power by Commissioner of Income-tax u/s 263 was even not available under Explanation (c) to section 263(1). We, therefore, hold that order u/s 263 is not a valid order in the eyes of law. Having held that powers under section 263 having been exercised wrongly by CIT as the assessment order had merged with the appellate order, it is not necessary to consider the other aspects of the matter that when CIT was wrong in holding that assessee did not have positive profit from export activity as per provisions of section 80HHC(1), therefore, the assessee is not entitled at all for deduction u/s 80HHC under the proviso to section 80HHC(3) as the same will be of academic interests only. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned CIT (Administration) has erred in not considering that for the assessment year 1997-98 the learned CIT(A) has held with case of appellant that if there is a loss under computation under a section 80HHC(3) the same should be ignored and deduction should be allowed under proviso to section 80HHC and if learned CIT(Administration) differs on the said point he cannot be pass an order under section 263. 5. The Learned CIT (Administration) has seriously erred in applying judgment of ITAT in the case of IPCA Laboratories as the facts and issue involved in that case are completely different and not applicable to the case of appellant firm. 6. The learned CIT (Administration) has erred in ignoring that the issue of deduction under section 80HHC was considered by the CIT(A) for this year and therefore the subject matter which was before CIT(A) cannot be made the subject-matter of revision under section 263 by CIT (Administration) and therefore the learned CIT(A) had no jurisdiction under section 263 since the order of Assessing Officer had merged in order of CIT(A) on the point of deduction under section 80HHC. 7. The Learned CIT(Administration) has seriously erred in twisting law b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits as per statement of income was computed at ₹ 6,88,40,622 which includes routine disallowances which were added to profit as per profit and loss account of ₹ 6,70,68,878. The deduction under section 80HHC was claimed by the assessee at ₹ 6,80,22,712. The computation of deduction as claimed by the assessee under section 80HHC is as follows : I. Total turnover : a. export turnover 67,55,82,263 66,06,22,785 Less : export freight 12,49,59,478 10,82,277 b. sale of quota rights 66,17,05,062 II. Incentive under section 28(iiia), (iiib) and (iiic) (a) duty drawback 7,18,68,987 (b) cash incentive 7,35,544 (c) Prem on sale of imp. Licence 3,36,500 (d) Prem. on sale of import licence 3,36,500 7,29,41,031 90% of incentive ... 6,56,46,927 III. Exemption under section 80HHC : A. under proviso to section 80HHC(3) B. under section 80HHC(3)(b) (Manufacturing) Profit of the business under section 4A-exp (baa) Profit of the business As per statement 6,88,40,622 Less : 90% of incentive Rs. 6,66,20,977 90% of brokerage commission Nil Int. on FD 4,36,767 Rent 1,59,950 Misc. Incomes 44,649 Int. on loan 1,43,599 7,84,965 90% of 7,84,965 15,13,177 In proportion to export turnover: 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 7,06,468 Rs. 6,73,27,445 Rs. 53,64,843 Thus, CIT concluded in the show cause notice that where there is no positive profit arrived from the export activity at the first stage i.e. of computing formula itself then the question of going to second stage increasing the profit as per proviso to section 80HHC(3) does not arise, per say. He further mentioned that non claim of depreciation by the assessee was with a sole intention to show positive profit from export activity. The Assessing Officer was wrong in not reducing the depreciation from profits. Thus, the Assessing Officer did not make proper inquiries required in the circumstances of the case. It was incumbent on the part of Assessing Officer to further investigate the facts stated in the revised computation which he failed to do so. Thus, assessment order was erroneous as well as prejudicial to the interest of revenue. Against the show-cause notice, the impugned order under section 263 has been passed. In the order passed under section 263, the profits from the activities of export business is worked at negative figure of ₹ 1,24,30,285. For the sake of convenience the calculation mentioned in the order under section 263 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussion had taken place. The Assessing Officer accepted the view of the assessee. The view point accepted by the Assessing Officer is possible view which has been accepted in the aforementioned decision of jurisdictional High Court and Apex Court that is in CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd. (1989) 177 ITR 443(Bom.) and CIT v. Mahendra Mills (2000) 243 ITR 56respectively. Therefore, the Learned counsel contended that the view taken by the Assessing Officer being one of the possible view, the assessment order does not become erroneous. For this proposition, he placed reliance on the following decisions: (i) Amrit Steels Ltd. v. Dy. CIT (2001) 79 ITD 498(Delhi) (ii) Blue Dart Express Ltd. v. Joint CIT (2000) 75 ITD 414(Mum.) (iii) CIT v. Gabrial India Ltd. (1993) 203 ITR 108(Mum.) (iv) CIT v. G.M. Mittal Stainless Steel (P.) Ltd. (2003) 263 ITR 255(SC) He further contended that the appeal was filed before CIT(A) with regard to computation of deduction under section 80HHC. Therefore, the assessment order had merged with the order of CIT(A) and thus also order under section 263 was not validly passed by the CIT. For this purposes he placed reliance on the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot does not alter the assessable income of the assessee as the deduction under section 80HHC is allowable to the assessee. Thus, learned counsel of the assessee con- cluded that powers under section 263 have not been validly exercised by the CIT, therefore, the impugned order should be quashed. 6. On the other hand, the ld. Departmental Representative pleaded that grant of depreciation is not at the option of assessee. It was mandatory for the Assessing Officer to consider current depreciation while computing deduction under section 80HHC. He in this regard referred to Explanation (baa) to section 80HHC wherein profit of the business has been defined as profits of the business as computed under the head Profit and gains of business or profession . The profit under the head Profit and gains of business or profession includes sections 30 to 43D and section 32 of the Act is part thereof, therefore depreciation has to be considered for computing profit of the business within the meaning of section 80HHC. He contended that section 80HHC has been held to be a separate code by the jurisdictional High Court. Thus, he pleaded that the case law relied upon by the learned counsel of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon'ble Supreme Court in the case of CIT v. Shri Arbuda Mills Ltd. (1998) 231 ITR 50. 10. He further contended that powers under section 263 can be invoked even in a case where the issue is debatable. For this purpose, he placed reliance on the decision in the case of CIT v. M.M. Khambhatwala (1992) 198 ITR 144 (Guj.). 11. He further contended that as per decision of Hon';ble Madras High Court in the case of Jeyar Consultant Investment (P.) Ltd. v. CIT (2003) 259 ITR 250, deduction under section 80HHC cannot be claimed in absence of business profit. Thus, the learned D.R. pleaded that power under section 263 has been rightly invoked by CIT, therefore, order under section 263 should be upheld. 12. In reply, the Learned Counsel submitted that reliance by Learned D.R. on the decision of Jeyar Consultant Investment (P.) Ltd.'s case (supra) has been misplaced as the decision relates to a period prior to insertion of proviso to section 80 HHC(3). After insertion of proviso to section 80HHC(3), the position of law has been changed. He further contended that on the issue of merger, Explanation (c) to section 263 has been taken care in the decisions relied upon by him. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mandhana Exports (P.) Ltd. (supra) and Royal Cushion Vinyl Products Ltd. (supra). Therefore, we find no force in this contention of the assessee. We find that the case-law relied upon by Learned Counsel in this regard has no application to the present case as the period considered by Hon'ble Bombay High Court and Supreme Court in the cases of Shri Someshwar Sahakari Sakhar Karkhana Ltd. (supra) and Mahendra Mills (supra) respectively is prior to omission of section 34 of the Act. Therefore, case-law relied upon in this regard is not relevant to the present case, as for the period with which we are concerned, section 34 is not on the statute book. 15. Now coming to the contention regarding merger of the assessment order with the order of CIT(A). It will be relevant to give the chronology of the events. Assessment in the present case was framed vide assessment order dated 30-3-1999 passed under section 143(3) of the Act. Against the said assessment order an appeal was filed by the assessee on 29-4-1999 before CIT(A). In the grounds of appeal, the assessee agitated the computation of section 80HHC done by Assessing Officer on the ground that Assessing Officer erred in deducting a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation for the purpose of computing profit and gains of business. Therefore, it is the contention of the Learned D.R. that section 263 permits CIT to invoke his powers under that section. On the other hand, it is the claim of the assessee that once section 80HHC had been subject-matter of appeal before the CIT(A), then, the assessment order has merged with the order of CIT(A) and CIT cannot exercise his powers under section 263. 17. We have carefully considered the rival submissions. We find that there is a merit in the case of the assessee. It has been demonstrated by the above-mentioned chronology of events that computation of deduction under section 80HHC was a subject-matter of appeal before CIT(A). The CIT(A) has given some findings on the computation of deduction under section 80HHC. Therefore, the assessment order had merged with the order of CIT(A). Thus, under Explanation (c) to section 263(1), such action of CIT was not permissible. The word 'matter' is certainly a word of wide import and represents a subject or situation that you need to think about, discuss or deal with. Thus, it is difficult to accept the submission of the Learned D.R. that the issue of deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of 11 months was not a specific aspect which was agitated before the AAC nor did he give any direction on this aspect of the matter but he had this aspect kept open for adjudication by him even though not taken by the assessee. Then, on that, he could have allowed 5 per cent or 2 per cent depreciation and should have directed the ITO to compute the same on such basis as he considered fit and proper, namely, 11 months or 12 months on the view that the employee of the assessee was on leave for one month and as such could not be said to be entitled to this accommodation. If that is the position, then, in our opinion, once the appeal has been preferred before the AAC on any aspect of the quantum of depreciation, the Commissioner cannot assume jurisdiction, otherwise an anomalous position would arise. The Income-tax Officer has been directed by the AAC to fix depreciation at a certain percentage, indicated by the AAC, without any further direction that it should be confined to 11 months or 12 months. But, now, if further consideration is superimposed by the Commissioner by rectification made by the Income-tax Officer as a result of the order passed by the Commissioner under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction under section 80HHC was subject-matter of appeal before CIT(A) thus Explanation (c) to section 263(1) has no application to the facts of present case. 19. Having held that powers under section 263 having been exercised wrongly by CIT as the assessment order had merged with the appellate order, it is not necessary to consider the other aspects of the matter that when CIT was wrong in holding that assessee did not have positive profit from export activity as per provisions of section 80HHC(1), therefore, the assessee is not entitled at all for deduction under section 80HHC under the proviso to section 80HHC(3) as the same will be of academic interests only. Here also, we find that this view of CIT is not is accordance with law. Section 80HHC(3) provides the mode of computation of eligible profit for deduction under section 80HHC. Even if there is no positive profit as computed as per clauses (a), (b) and (c) of section 80HHC(3) and there is a negative profit, the same has to be increased by 90 per cent of the incentives referred to in clauses (iiia), (iiib) and (iiic) of section 28 of the Act. It is nobody's case that the export incentive received by the assessee does no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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