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TMI Blog2004 (11) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 5,71,25,919 ----------- Balance 19,16,516 ----------- 30 per cent. of the book profit &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts were fully verified and the block assessment was framed under section 158BD on September 25, 2000, accepting the return of the assessee. On September 19, 2003, the Assessing Officer issued the impugned notice under section 148 of the Act observing that the income chargeable to tax for the assessment year 1997-98 had escaped assessment within the meaning of section 147 of the Act. The assessee was, therefore, required to furnish a return of income within 30 days from the service of that notice. The assessee complied with the said notice and filed the return on October 13, 2003 and also requested that a copy of the reasons recorded for initiation of proceedings under section 147 of the Act be supplied to it so that it may file objections against the same. The Assessing Officer duly supplied the reasons, which read as under: "Reasons for issuance of notice under section 148 Winsome Textiles Industries Ltd. Assessment year 1997-98 1. The assessee filed return of income on 21st November, 1997, declaring loss of Rs. (-) 1,15,89,039. The assessee did not avail of deduction in the normal computation of income under Chapter VI-A, i.e., deduction under section 80-IA as gross total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,55,633 was allowed to be set off and the balance taxable income remained at Rs. 87,32,400. The assessee went in appeal before the Commissioner of Income-tax (Appeals) who deleted all the additions except the addition of Rs. 35,000 on account of estimated leave encashment. The income determined after appeal effect of the order of the Commissioner of Income-tax (Appeals) was loss (-) Rs. 1,06,06,159 that pertained to depreciation. 3. On close scrutiny of the record, it is believed that income chargeable to tax has escaped assessment within the meaning of section 147. It is also found that the assessee has not disclosed fully and truly all material facts necessary for his assessment for the assessment year 1997-98. 4. The computation of total income as given in the return is reproduced below: Rs. Rs. Profit as per profit and loss account 5,90,42,435 Add: (i) Depreciation considered separately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 1,37,796 (v) Interest 1,88,849 8,25,97,755 ------------------------- &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 5,71,25,919 the Act -------------- Book profit under section 115JA 19,16,516 -------------- 30% of book profits & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits for the eligible unit, i.e., Winsome Spinners, have not been worked out as per the provisions of section 80-IA, on the following points: (i) Depreciation: The quantum of depreciation as per the Income-tax Act would be much higher than taken by the assessee as per the Companies Act. (ii) Applicability of section 80-IA(7): The profits are to be determined taking into account the provisions of section 80-IA(7) wherein such eligible unit is deemed to be the only source of income. (iii) Profits derived from industrial undertaking: Profits derived from industrial undertaking only are eligible for deduction. (iv) Applicability of section 80-IA(10) Interest-Diversion of borrowed funds by WTL to Winsome Spinners The provisions of section 80-IA(10) are attracted wherein the Assessing Officer has to examine whether the profits of eligible business are inflated. The computation of profits of Rs. 5,71,25,919 (i.e., Rs. 571.25 lakhs) as determined by the assessee is given below: -------------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 591.62 171.34 ---------------------------------------- 3035.69 930.73 ---------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 20.85 Less: Provision for taxation - - ---------------------------------------- Net profit after tax 571.25 20.85 Balance brought forward from previous 21.15 0.30 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.' That means, in other words, for the purpose of determining the quantum of 'tax holiday' profits under section 80-IA, the taxable income of the eligible business of the industrial undertaking, etc., is to be ascertained as if such undertaking were an independent unit owned by the assessee concerned and the assessee had no other source of income. Consequently, the unabsorbed losses, unabsorbed depreciation, etc., relating to the eligible industrial undertaking, etc., are to be taken into account in determining the quantum of deduction under section 80-IA even though these may actually have been set off against the profits of the assessee from other sources. The assessee has failed to furnish the following details along with income-tax return: (i) The profit and loss account of Winsome Spinners for the initial assessment year, i.e., assessment year 1995-96 and subsequent assessment year 1996-97 as per the Income-tax Act. (ii) The profit and loss acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to use the import entitlements itself or sell the same to others. It sold the import entitlements that it had earned to others. Its total income for the assessment year 1979-80 included the sale proceeds for such import entitlements and it claimed relief under section 80HH of the Income-tax Act, 1961, in respect of the sale proceeds of the import entitlements. The Tribunal held that the relief could not be granted. Although for earlier years, i.e., assessment years 1975-76 and 1976-77, a Division Bench of the High Court had held that the income which the assessee made by selling the import entitlements was not a profit and gain which it had derived from its industrial undertaking, on a reference for the assessment year 1979-80, the Division Bench held in favour of the assessee, on the basis of the retrospective amendment to section 28 of the Act by the Finance Act, 1990, making such receipts taxable as business profits. On appeal to the Supreme Court: Held, reversing the decision of the High Court, that the provisions of section 28 as amended made no difference. The word 'derived' is usually followed by the word 'from' and it means: 'get, to trace from a source; arise from, origi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board could not be said to have been derived from the industrial undertaking. The immediate source of interest was the deposit itself. In other words, the immediate and effective source of the interest was the deposit and not the industrial undertaking. The fact that the amount was assessable as business income would not be sufficient to hold that the interest income was derived from the actual conduct of the business of the industrial undertaking. Hence, the interest could not be treated as income derived from an industrial undertaking for purposes of relief under section 80HH.' The hon'ble High Court while pronouncing this judgment has applied the following decisions which are as under: (1) Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC); (2) Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951 (Bom); (3) J.K. Trust v. CIT/CEPT [1953] 23 ITR 143 (Bom); and (4) Sterling Foods v. CIT [1984] 150 ITR 292 (Karn) and many other High Court cases. The hon'ble Gauhati High Court in the case of North East Gases Pvt. Ltd. v. CIT [1996] 220 ITR 372 has held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997-98 1996-97 1997-98 1996-97 --------------------------------------------------------------------- (1) (2) (3) (4) (5) --------------------------------------------------------------------- (figures in lakhs) --------------------------------------------------------------------- Shareholders funds Share capital & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 4742.46 4175.12 Investments 813.02 813.03 Current assets Loans and advances Inventories 1040.21 386.30 1975.40 1253.36 Sundry debtors 661.76 222.92 1136.82 599.66 Cash and bank balances 171.71 58.59 303.97 120.81 Loans and advances 170.52 225.93 427.58 445.92 Tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The WTL has raised working capital demand loan of Rs. 14.43 crores (A.Y. 1997-98) and the funds have been diverted to Winsome Spinners. In this process, the profits of WTL have been reduced, because the interest which should have been debited to Winsome Spinners has been claimed in WTL. The provisions of section 80-IA(10) become applicable, because the course of business has been so arranged that the business transacted between two units produces to the assessee more than the profits which might be expected to arise in eligible business. The assessee has arranged the affairs in such a way that higher deduction is available to the eligible units. It is not known what exactly the amount has been utilised during the whole year on account of funds taken from WTL. However, on an average if we take an amount of Rs. 8 crores, the interest at 18 per cent, comes to Rs. 1.44 crores. That means the profit of Winsome Spinners got inflated by Rs. 1.44 crores. (b) Inflation of expenses in WTL unit: The expenses in WTL unit have been inflated to show more profits in the eligible unit, i.e., Winsome Spinners. It is interesting to see that out of total sale of Rs. 100.34 crores, the sale of elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 1.29 3.83 5.12 Processing and dyeing 6.09 195.43 201.52 expenses Other manufacturing 2.08 7.05 9.13 Administration and other expenses Vehicle expenses .71 10.34 11.05 Rent .85 8.31 9.16 Printing and staff 1.50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; - .20 .20 Selling expenses Commission and 47.06 43.43 90.49 brokerage Foreign homeling 60.33 93.87 154.20 Advertise and other 1.06 5.80 6.82 selling expenses Financial expenses Interest on term loan 377.21 163.85 541.06 Interest on working 237.76 164.50 402.26 capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed January 29, 1998, but also in the orders under sections 143(3) and 158BD dated January 18, 2000, and September 25, 2000, respectively. Thus, it was contended that the satisfaction recorded by the Assessing Officer regarding the inadmissibility of this claim was merely a case of change of opinion on the same facts. It was further contended that the assessee had fully and truly disclosed all material facts necessary for its assessment in the light of the original return which was supported by audited accounts as also certificate of the auditors in respect of deduction under section 80-IA. The assessee, therefore, claimed that the observation in the reasons recorded that there was non-disclosure on the part of the assessee to disclose fully and truly all material facts for assessment was unwarranted and not based on the facts of the case. The objections of the assessee were overruled by the Assessing Officer vide order dated January 30, 2004. In respect of validity of the notice, the Assessing Officer has observed as under: "(a) Invalid notice As per the provisions of section 147 read with section 151, the initiation of proceedings vide notice under section 148 dated September 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04. In view of this factual position, counsel argued that there is no basis for attributing any failure to the assessee to disclose fully and truly the necessary facts for its assessment. Counsel, therefore, contended that since there was no failure on the part of the assessee to make a full and true disclosure of material facts, the impugned notice issued after the expiry of four years from the end of the assessment year, is clearly barred by limitation in view of the proviso to section 147. For this purpose, he placed reliance on the judgment of this court in Duli Chand Singhania v. Asst. CIT [2004] 269 ITR 192, which was followed in Mahavir Spinning Mills Ltd. v. CIT [2004] 270 ITR 290 (P&H). He also placed reliance on the judgment of the Supreme Court in CIT v. Foramer France [2003] 264 ITR 566. Mr. Akshay Bhan also contended that the deduction under section 80-IA in the computation of income under section 115JA had been rightly claimed and allowed and, thus, there was no escapement of income. Mr. D.S. Patwalia, appearing on behalf of the Revenue, on the other hand, supported the impugned order. He contended that the reassessment has still to be completed and the assessee can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn. The records of the Department were produced by counsel for the Revenue on May 27, 2004, from where it was duly verified that the profit and loss account for the assessment year had been duly filed with the return. Similarly, the depreciation chart for the assessment year 1997-98 giving particulars required for computation of depreciation is also available on record. The limitation of four years provided in the proviso to section 147 has been made applicable only to cases where assessments have already been completed under sub-section (3) of section 143 or under section 147. There is a specific purpose behind it. Where the return is processed under section 143(1)(a), the Assessing Officer has no jurisdiction to examine the genuineness of the claims made in the return of income. He has only limited powers of making adjustments on the basis of information available in the return. However, when an assessment is made under section 143(3) of the Act, the Assessing Officer has very wide power to examine the genuineness of the claims made in the return and require the assessee to furnish whatever information the Assessing Officer deems necessary. In the present case, the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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