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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 ..... 47 of the Act have been initiated to reassess the income for the assessment year 1997-98 which is alleged to have escaped assessment. The assessee-company filed its return of income for the assessment year 1997-98 on November 21, 1997. The computation of income under the Act resulted in loss of Rs. 1,15,89,039. However, computation of income under section 115JA was made as under: (Rs.) Profit as per profit and loss account 5,90,42,435 Less: Profit under section 80-IA(2)(iv)(b) of the Act 5,71,25,919 ----------- Balance 19,16,516 ----------- 30 per cent. of the book profit 5,74,955 ----------- Accordingly, the assessee declared income of Rs. 5,74,955 in its return. The return was processed under section 143(1)(a) on January 29, 1998, wherein an addition of Rs. 1,000 was made. The intimation under section 143(1)(a) was subsequently modified vide order under section 154 of the Act dated September 15, 1999, making additions of Rs. 6,50,000 and Rs. 2,27,802 whereby loss computed in the computation of income at Rs. 1,15,89,039 stood reduced to Rs. 1,07,11,237. Thereafter, regular assessment under section 143(3) was framed on January 18, 2000, wherein various additions/disallowances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avail of deduction in the normal computation of income under Chapter VI-A, i.e., deduction under section 80-IA as gross total income was loss (-) Rs. 1,15,89,039. However, the assessee declared income at Rs. 5,74,955 under section 115JA, after availing of deduction under section 80-IA of Rs. 5,71,25,919. 2. The assessment was framed under section 143(3) vide order dated January 18, 2002, by making the following additions: Rs. (i) Disallowance on account of provision for bonus 47,68,023 (ii) Disallowance on account of estimated leave encashment 3,39,454 (iii) Unutilised MODVAT 1,41,77,182 (iv) Disallowance of foreign exchange difference 89,000 ----------- 1,93,73,659 ----------- The income was determined under section 143(3) at Rs. 2,59,86,033 before allowing set off unabsorbed depreciation at Rs. 99,70,510. The assessed income after set off of unabsorbed depreciation is Rs. 1,61,15,530. The assessment was rectified under section 154 wherein the brought forward depreciation (after giving appeal effect for the assessment year 1996-97) of Rs. 1,72,55,633 was allowed to be set off and the balance taxable income remained at Rs. 87,32,400. The assessee went in appeal before the Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80-IA(2)(iv)(b) to the tune of Rs. 5,71,25,919. This appears to be contradictory. If the assessee has negative gross total income, there is no question that the assessee should reduce profits under section 80-IA(2)(iv)(b), for calculation of profit under section 115JA. The reduction of profits under section 80-IA would arise, if the primary condition of section 80-IA is fulfilled. Once the assessee has not availed of deduction under section 80-IA in his computation of total income, it is not understood how the assessee is reducing the profits eligible for deductions under section 80-IA(2)(iv)(b). The computation of book profits should have been as under: Rs. Net profit as per profit and loss account (before tax) 5,96,92,435.00 30% of book profits 1,79,07,730.50 Tax at 43 per cent. 77,00,324 Without prejudice to the above, even 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s II and III of Schedule VI to the Companies Act, 1956, as reduced by 'the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub-clause (b) or sub-clause (c) of clause (iv) of sub-section (2) of section 80-IA, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent, of the profits and gains under sub-section (5) of section 80-IA.' The above provision nowhere mentions that the depreciation is to be taken under the Companies Act. In fact, the profits are to be determined as per the Income-tax Act. (ii) Applicability of section 80-IA(7): The amount of deduction is to be governed by section 80-IA(7) which is reproduced below: 'Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (5) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit and loss account as per the Income-tax Act for the assessment year 1995-96. Assessment year 1996-97 and assessment year 1997-98. It may be pointed out that even no details are available in the returns for the assessment year 1995-96 and assessment year 1996-97 also. The deduction is available only for the profit derived from any business of an industrial undertaking. The word 'derived' has a narrow meaning. (iii) Profits derived from industrial undertaking: The assessee has included other income of Rs. 6.54 lakhs that includes interest income Rs. 1.02 lakhs, misc. income Rs. 1.57 lakhs, rent received Rs. 0.14 lakhs, insurance claims Rs. 4.48 lakhs. This deduction should be worked out after excluding these items. For this, we discuss the meaning of 'derived from'. Meaning of 'derived from': Now the issue has been settled by the hon'ble Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579. In that case- The assessee was engaged in processing prawns and other sea food, which it exported. It also earned some import entitlements granted by the Central Government under an Export Promotion Scheme. The assessee was entitled to use the import entitlements i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC); (2) CIT v. Wheel and Rim Co. of India Ltd. [1977] 107 ITR 168 (Mad); (3) National Organic Chemical Industries Ltd. v. Collector of Central Excise [1997] 106 STC 467 (SC). The hon'ble Madras High Court in the case of CIT v. Pandiyan Chemicals Ltd. [1998] 233 ITR 497 has explained the meaning of derived. It has been held that profits and gains eligible for deduction under section 80HH must be derived from the actual conduct of the business. The expression "derived from" should be given a restricted meaning and whenever the Legislature wants to give a wider expression, the Legislature employs the expression "attributable to" and the use of the expression derived from indicates that the profit or gain should be derived from the conduct of the business and held as under: 'that the assessee had claimed that the interest on deposits made with the Tamil Nadu Electricity Board had to be taken into account for purposes of section 80HH. Though the assessee had to necessarily make the deposit with the Electricity Board for running the industry and the power supply would not be made without the deposit in favour of the Elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------------------------------------ Balance-sheet --------------------------------------------------------------------- Winsome Spinners Winsome Textile --------------------------------------------------------------------- Sources of funds (including figures of Winsome Spinners) --------------------------------------------------------------------- A.Y. A.Y. A.Y. A.Y. 1997-98 1996-97 1997-98 1996-97 --------------------------------------------------------------------- (1) (2) (3) (4) (5) --------------------------------------------------------------------- (figures in lakhs) --------------------------------------------------------------------- Shareholders funds Share capital 580.00 580.00 Reserves and surplus 592.40 21.14 2154.62 1723.92 Loan funds Secured loans Head office WTL 4058.92 2572.73 5774.59 4133.44 Total 634.49 1031.38 107.08 306.54 (unsecured loans) Application of funds 5285.81 3625.25 8616.29 6743.90 Fixed assets (a) Gross block 3698.07 2822.78 6162.90 5207.64 (b) Less: Dep. 237.52 77.26 1465.02 1193.79 (c) Net block 2745.52 4697.88 4013.85 (d) Capital work-in-progress 14.75 161.27 44.58 161.27 4742.46 4175.12 Investments 813.02 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 eligible unit is Rs. 43.84 crores and the assessee is showing a profit of Rs. 5.71 crores. Whereas the total profit is Rs. 5.90 crores. Prima facie it shows that the assessee has attempted to show higher profits in the unit eligible for 100 per cent, deduction. On a sale of Rs. 57 crores of old unit, i.e., not eligible for deduction, the assessee is showing profit of Rs. 19 lakhs, whereas in the new unit, the assessee is showing a profit of Rs. 5.71 crores on sale of Rs. 43.84 crores. The GP is Rs. 13.48 crores on sale of Rs. 43.84 crores (new unit). The GP is Rs. 5.45 crores, on sale of Rs. 57 crores. This shows that apart from showing higher gross profit in the new unit, the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.50. In view of the above discussion, I have, therefore, reason to believe that by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment, income of Rs. 1,73,32,775 has escaped assessment within the meaning of section 147. Permission may be granted to issue notice under section 148 of the Income-tax Act, 1961. (Sd.) Mamta Bansal, Asst. Commissioner of Income-tax, Circle 4(1), Chandigarh." On the receipt of the reasons, the assessee filed a representation in terms of letter dated December 9, 2003, challenging the validity of the notice on the ground that the proceedings under section 147 had been initiated on mere change of opinion on the part of the Assessing Officer. It was pointed out that the main plank for holding that income had escaped assessment was that deduction under section 80-IA had been wrongly claimed by the assessee while computing book profits under section 115JA as it had not been claimed in the normal computation of income. It was pointed out that the claim had been examined and accepted not only in the intimation under section 143(1)(a) dated January 29, 1998, but also in the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l material facts necessary for its assessment. He pointed out that the observation made in para. 3 of the reasons recorded that "the assessee has not disclosed fully and truly all material facts necessary for his assessment for the assessment year 1997-98" was totally baseless and against the material on record. He pointed out that the only failure attributed to the assessee in the reasons recorded was that it had failed to file with the return, the profit and loss account of Winsome Spinners for the assessment years 1995-96, 1996-97 and 1997-98. Mr. Akshay Bhan contended that for filing return for the assessment year 1997-98, the assessee was required to attach the profit and loss account of Winsome Spinners for that assessment year only. There was no requirement to furnish profit and loss accounts of earlier years. He contended that the observation of the Assessing Officer that the profit and loss account of Winsome Spinners for the assessment year 1997-98 had not been attached with the return, is factually incorrect. This fact had duly been verified from the record produced by the departmental representative before this court on May 27, 2004. In view of this factual position, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been further stated that without the profit and loss account of the assessment years 1995-96 and 1996-97, the profits and gains eligible for deduction under section 80-IA(7) could not be properly determined. It is also stated that without the depreciation chart for the assessment year 1996-97, the depreciation chart for the assessment year under consideration cannot be verified. It has been correctly pointed out by learned counsel for the assessee that there was no obligation on the part of the assessee to furnish profit and loss accounts for the assessment years 1995-96 and 1996-97 with the return for the assessment year 1997-98. Counsel for the Revenue has also not been able to point out any provision of law or rule which required furnishing of profit and loss accounts of the earlier years. In the absence of any obligation to file these documents, the assessee cannot be charged with any failure to disclose fully and truly material facts necessary for its assessment. As far as the profit and loss account for the assessment year 1997-98 is concerned, the Assessing Officer was wrong in observing that the same had not been attached with the return. The records of the Department wer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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