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TMI Blog2005 (11) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... al return on 31-12-1991 declaring income of Rs. 16,05,85,900. In this return deductions under sections 80HH and 80-I were not claimed. A revised return was thereafter filed on 30-3-1993 declaring total income of Rs. 8,71,85,950. In the said return the deductions under sections 80HH and 80-I of the Act were claimed with reference to the profits derived from Factory No. III at Kankroli, Distt. Udaipur, Rajasthan. In the course of assessment proceedings the Assessing Officer issued notice under section 142(1) and a letter of requisition dated 3-12-1993 directing the assessee to furnish details and explanations supporting its claim for deductions under sections 80HH and 80-I of the Act. The assessee by its letter dated 7-2-1994 submitted the explanations, information and documents to support its claim of these deductions. Thereafter by an order dated 31-3-1994 the Assessing Officer completed the assessment under section 143(3) assessing total income of Rs. 20,64,75,230. In para 23 of the said order the Assessing Officer discussed the assessee's submissions with regard to deductions under sections 80HH and 80-I and allowed the claims after being satisfied that the conditions laid down i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er sections 80-I 80HH, in view of the opinions expressed in the commentaries on Income-tax by M/s. Sampath and Iyengar Kanga and Palkhiwala. Thereafter in Para I(b) of the show-cause notice the CIT observed that since the provisions of section 80HH were having precedence over section 80-I, no deduction was permissible under section 80-I. 5. In clause II(a) the CIT observed that under sections 80-I(9) and 80HH(6) and (7) the Assessing Officer was required to personally determine the reasonable profits attributable to new industrial undertaking which the Assessing Officer had failed to do. In Para II(b) the CIT observed that although in the impugned assessment the Assessing Officer had made addition on account of understatement of sale of tyres to close business associates, yet the Assessing Officer accepted the working of profits of the new industrial undertaking as made by the assessee which resulted in determination of excessive profit relatable to eligible undertaking. According to the CIT the income of the new industrial undertaking was required to be determined by the Assessing Officer personally and he should not have accepted the assessee's working of profits of the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then the assessee did not have sufficient profits for the assessment year 1991-92 after taking into consideration the brought forward business losses and depreciation. He, therefore, held that in view of the inadequacy of business income for assessment year 1991-92 in respect of the said new industrial undertaking the assessee was also not eligible to deduction under section 80HH of the Income-tax Act. The CIT accordingly directed the Assessing Officer to withdraw the deductions under sections 80-I and 80HH. 9. At the time of hearing the Ld. A/R submitted that the CIT invoked the provisions of section 263 even though the order passed by the Assessing Officer was not erroneous and prejudicial to the interest of the revenue. According to him the order of the Assessing Officer could be revised if and only if it was erroneous as well as prejudicial to the interest of the revenue. He argued that an order resulting in loss of revenue can be revised under section 263 only if an erroneous order has been passed by the Assessing Officer. Referring to the show-cause notice dated 9-9-1994 the Ld. A/R submitted that in the said notice the CIT had not even suggested that the order passed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 1986-87 to 1991-92. The A/R argued that in all the returns filed from assessment year 1985-86 onwards the assessee consistently disclosed the facts about setting up of Factory No. III as new independent industrial undertaking eligible for deductions under sections 80HH 80-I. These returns were filed much prior to completion of the assessment for assessment year 1991-92 and therefore, the existence of Factory No. III as a new industrial undertaking was made known to the Department much prior to completion of assessment for assessment year 1991-92. 11. Referring to the Assessing Officer's letter of requisition dated 3-12-1993 the A/R pointed out that the Assessing Officer had specifically required the assessee to furnish the details of establishment of new Industrial Undertaking, its location and address, date of establishment of the undertaking and the date from which new undertaking had begun manufacture of article etc. He further pointed out that the assessee by its letter dated 7-2-1994 had furnished details and explanations to the said queries before the Assessing Officer The assessee also furnished documents and evidences to support its explanations. The A/R further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1985-86 since the notification was issued by the Central Government only on 19-12-1986. 13. The A/R however submitted that when the return for assessment year 1985-86 was filed Distt. Udaipur was included in the Eighth Schedule and therefore, new industrial undertaking situated in the said District was eligible to claim under section 80HH of the Act. The assessee's disclosure made in the return for assessment year 1985-86 was based on the provisions of section 80HH read with the Eighth Schedule of the Income-tax Act, 1961 and not on the basis of Notification dated 19-12-1986. During the course of hearing the Ld. A/R conceded that Village Kankroli was situated in Raj Samund Block of District Udaipur which was in excluded category of the Notification dated 19-12-1986 and therefore, not eligible for deduction under section 80HH. However referring to the Circular No. 484 dated 1-5-1987 the Ld. A/R argued that the Board had clarified that the industrial undertaking situated in the excluded Blocks were eligible to claim deduction under section 80HH up to 10-9-1986 because the Taxation Laws (Amendment Misc. Provisions) Act, 1986 received Presidential assent on the said date. He also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 80-I then deductions were permissible under both the sections. In support the A/R relied on the decisions in CIT v. Mittal Appliances (P.) Ltd. [2004] 270 ITR 65 (MP),J.P. Tobacco Products (P.) Ltd. v. CIT [1998) 229 ITR 123 (MP), CIT v. Nima Specific Family Trust [2001] 248 ITR 292 (Bom.) CIT v. S.B. Oil Industries (P.) Ltd. [2005] 274 ITR 495 (Punj. Har.). The A/R argued that the order of CIT holding the Assessing Officer's order as erroneous was based on his interpretation of the Income-tax Act but the same was specifically unapproved in these decisions. He therefore submitted following these judgments of the High Courts, the order of the Assessing Officer could not be said to be erroneous. The A/R submitted that since the view taken by the Assessing Officer in his assessment order being the permissible and sustainable view in law, the order of the Assessing Officer could not be termed as erroneous within the meaning of section 263 of the Act and therefore, the CIT's direction to withdraw deduction under section 80-I was legally untenable. 15. Referring the CIT's finding that under sections 80-I(9) and 80HH(6) and (7) the Assessing Officer should have personally de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's computation without verification or without application of mind. According to the Ld. A/R the Assessing Officer conducted proper enquiries before completion of assessment with regard to determination and computation of profits of the new industrial undertaking. The A/R submitted that when the assessment was framed by the Assessing Officer after conducting due enquiries and after verifying the books of account and other materials then it could not be held by the CIT that the Assessing Officer did not personally ascertain determine the profit of the undertaking. The A/R submitted that it might be a case that left to himself, the CIT might have allocated higher expenditure attributable to new undertaking thereby reducing eligible profits. However in such case it would only amount to substitution of the CITs opinion for that of the Assessing Officer. Referring to the show-cause notice and the impugned order under section 263 the A/R submitted that the CIT had not pointed out any specific defect or infirmity in the basis of allocation of expenses and revenue amongst different units or in the statements furnished by the assessee. The CIT merely summarized the figures of expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Licences granted under the Factories Act and the Central Excise Law the A/R argued that the Factory No. III was recognized as distinct and different industrial undertaking. The A/R stated that the said factory was established with substantial capital outlay and with new technology and it employed requisite number of persons and satisfied the conditions laid down in sections 80HH 80-I. The Ld. A/R further submitted that merely because factory No. III produced the same products, could not disentitle the said undertaking from availing deductions permissible in sections 80HH 80-I. In support of this proposition the Ld. A/R relied on the decision of the Apex Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 and CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367. He also relied on the decision of the Madras High Court in the case of Super Spinning Mills Ltd. v. CIT [2002] 125 Taxman 331. He also pointed that the Assessing Officer had allowed the deductions under sections 80HH 80-I to the assessee in assessment years 1992-93 to 1994-95 on the same set of facts and these orders were never made subject-matter of revision by the department thereby acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stries [1997] 95 Taxman 557 wherein the High Court had held that in working out the deductions under sections 80HH and 80-I the earlier year's losses could not be deducted from the current year's income. The A/R also submitted that in the assessee's own case in the subsequent assessment year i.e., 1992-93 the CIT(A) had directed the Assessing Officer not to set off such losses and allow deduction under section 80HH with reference to the profit of assessment year 1992-93, following the decision of the Calcutta High Court. He stated that an appellate order for assessment year 1992-93 was accepted by the department. The Ld. A/R therefore submitted that when the jurisdictional Calcutta High Court had held that in computing the deductions under section 80HH past losses which were set off against other income in earlier years, could not be taken into consideration, then the CIT was unjustified in directing the Assessing Officer to disallow the deduction under section 80HH on the ground of inadequacy of business income. 19. In conclusion the A/R submitted that the Assessing Officer had completed the assessment after calling for information, documents and explanations regarding the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A/R, therefore, submitted that the order of the Assessing Officer being neither erroneous nor prejudicial to the interest of the revenue within the meaning of section 263, the CIT was unjustified in directing to withdraw the deductions under sections 80-I and 80HH of the Act. 20. Sri B.D. Kaler the Ld. CIT D/R on the other hand fully supported the order of the CIT. He argued that the CIT was well justified in holding that the deduction under section 80-I was wrongly allowed because the said deduction resulted double deduction in respect of the same profits. He argued that when the new industrial undertaking situated in a backward district commenced production then it could claim deduction only under one section i.e., 80HH and not under sections 80HH 80-I According to him since provisions of section 80HH had precedence over section under section 80-I, the deduction was permissible only under section 80HH and therefore, the CIT was well justified in holding that the assessee was not entitled to deduction under section 80-I of the Act. He further stated that the finding of the CIT was certainly based on his interpretation of the Income-tax Act and in his capacity as a Superviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e show-cause notice dated 9-9-1994 the Commissioner however only held that the order under section 143(3) dated 31-3-1994 was 'prejudicial' to the interest of the revenue. In the said show-cause notice dated 9-9-1994 the Commissioner nowhere indicated that in his opinion the order was 'erroneous' nor the CIT mentioned any grounds on which he held the order as 'erroneous'. In the present case the CIT therefore assumed jurisdiction under section 263 only on the ground that the order under section 143(3) was prejudicial to the interest of the revenue without in any manner indicating in his notice that the said order was 'erroneous' as contemplated under section 263 of the Act. In our opinion an infirmity was committed by the CIT in issuing the notice under section 263 of the Act. Be that as it may, in the impugned order under section 263, the CIT discussed various facts and issues in coming to conclusion that the order of the Assessing Officer was prejudicial to the interest of the revenue. We find that some of the reasons and grounds were discussed for the first time in the order under section 263 and these were not mentioned in the Notice dated 9-9-1994. In particular the Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking during the assessment year 1985-86. 23. From the facts on record and submissions made by the A/R we however find that from assessment year 1985-86 onward the assessee had consistently disclosed in the computation statement that Factory No. III was set up as a new industrial undertaking eligible for deductions under sections 80HH 80-I. We also find that in the letter dated 3-12-1993 the Assessing Officer had required the assessee to give specific information regarding establishment of the Factory No. III as new industrial undertaking and also required the assessee to prove that it fulfilled the conditions laid down in sections 80HH and 80-I. We also note that the assessee by its letter dated 7-2-1994 furnished its explanations and documentary evidences to prove that the said Factory No. III was set up as a new industrial undertaking and commenced production in March 1984 relevant to assessment year 1985-86. We also note that the said factory No. III was given a new Factory Licence and Central Excise Licence. The Central Excise authorities also certified the first dispatch from the said factory took place only on 29-3-1984. We are therefore satisfied that before the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification dated 19-12-1986 the Central Government notified list of Backward Districts and District Udaipur was included therein. We also note that the Raj Samund Block of Udaipur District where Factory No. III is situated was in excluded category of the said Notification. We however note that the CBDT in its Circular No. 484 dated 1-5-1987 had clarified that all areas specified in the Eighth Schedule continued to enjoy the benefit of section 80HH if the Industrial Undertaking had begun manufacture before 10-9-1986. We therefore find that factory No. III situated in Raj Samund Block of Udaipur District was eligible for deduction under section 80HH since it began production in March 1984 as certified by the Central Excise Authorities. 25. In the impugned order the CIT observed that new factory No. III manufactured Tyres and Tubes which were also manufactured by factory Nos. I II and therefore, no new business was started. According to CIT, Factory No. III was therefore not eligible for reliefs under sections 80HH 80-I. In other words according to the CIT Factory No. III merely represented expansion of assessee's existing business and therefore, not eligible for beneficial deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Super Spinning Mills Ltd. v. CIT [2002] 125 Taxman 331. We also find that in the assessee's own case for assessment years 1992-93 to 1994-95 the department has allowed deduction under sections 80-I 80HH in respect of profits derived by Factory No. III. We are therefore satisfied that the order of the Assessing Officer allowing deductions under sections 80HH and 80-I considering Factory No. III as new industrial undertaking was supported by various judicial decisions wherein it was held that for claiming the deductions it was not necessary to manufacture a new or different product. We therefore find that on this issue also the order of the Assessing Officer could not be considered as erroneous. 26. In the show-cause notice and the order under section 263 the CIT observed that disproportionate levels of expenses and overheads between old unit and new unit led to conclusion that there was no discernible basis for determination of the profits of Factory No. III. The CIT further observed that since addition for suppression of sales were made, the Assessing Officer should have personally examined and recomputed profit of the eligible undertaking. According to the CIT since suppre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onally determine profit of the eligible undertaking. It may be a case that disproportionate levels of expenses of different units prompted the CIT to initiate enquiries under section 263. However, in the order under section 263 the CIT could not record a finding that only because of disproportionate levels of expenses, the profits of the eligible undertaking were wrongly computed. 28. It may be a case that the CIT did not agree with the basis adopted by the assessee and accepted by the Assessing Officer and left to himself he would have adopted different basis or allocated higher expenses to the new undertaking thereby reducing its profits. In exercise of power under section 263 the CIT however cannot substitute his subjective opinion in place that of the Assessing Officer. The proceedings under section 263 are not intended to enable the CIT to reframe the assessment by substituting his subjective opinion in place of the ITO. The proceedings under section 263 can only be invoked if the basis adopted by the Assessing Officer is patently wrong or the deduction or relief was allowed in contravention of statutory provisions. This view finds support in the decision of the Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We also note that such addition was not considered as part of the profit of Factory No. III and no deduction was allowed by the Assessing Officer with reference to addition made on account of alleged suppressed sales. We are therefore of the considered opinion that no prejudice was caused to the revenue because the income resulting from suppressed sale was not considered by the Assessing Officer for the purposes of computing relief under sections 80HH and 80-I. We are therefore unable to agree with the CIT's finding that the Assessing Officer allowed excessive relief to the assessee with reference to inflated profit of the said unit. 31. In the impugned order the Commissioner directed the Assessing Officer to withdraw deduction under sections 80-I ultimately on the ground that deductions both under sections 80HH and 80-I were not permissible as it resulted in double deduction of the same income and this was not permissible in law. In support of this finding the Ld. CIT relied on the commentaries and observations of Ld. Authors M/s. Sampath Iyengar and Kanga Palkhiwala. In our opinion the CIT was unjustified in initiating revision proceedings under section 263 of the Act mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unabsorbed business loss, depreciation and investment allowance relatable to factory No. III since its inception in assessment year 1985-86 and concluded that if gross total income was computed treating unit No. III as the only source of income, then there was no positive gross total income and therefore, no deduction under section 80HH was permissible. According to CIT his finding was based on provisions of section 80-I(6) of the Act and the decisions of the Kerala High Court in CIT v. Kerala Solvent Extractions Ltd. [1987] 165 ITR 174 and Gujarat High Court in Paushak Ltd. v. CIT [1994] 210 ITR 535. We however find that in the assessee's case the unabsorbed loss, depreciation and investment allowance related to factory No. III were already set off against the profits of the other-undertakings in the earlier years and no loss, depreciation or investment allowance was available for set off in the assessment year 1991-92. In fact from the facts on record we find that the assessee itself had declared total income of Rs. 8,71,85,950 even after claiming deduction under sections 80HH and 80-I and no claim was made in the return for assessment year 1991-92 or allowed in the assessment fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be considered as erroneous. In our opinion, the ratios laid down in the above mentioned judicial decisions are squarely applicable in the present case. Before the impugned order under section 143(3) were passed on 31-3-1994 the Assessing Officer called for specific information to ascertain the admissibility of the reliefs claimed under sections 80HH and 80-I of the Act. After due examination of facts, explanation and records the Assessing Officer completed the assessment. In the order the Assessing Officer discussed at length the assessee's explanations and after recording finding that the assessee satisfied the conditions laid down in sections 80HH and 80-I, he allowed these deductions. No doubt in the show-cause notice dated 9-9-2004 and in the order under section 263 the CIT raised several questions of fact and law and questioned the correctness of the order granting simultaneous deductions under sections 80HH and 80-I. However, we find that on every question raised by the CIT, conceivable more than two views were legally permissible. In fact we find that on these questions the judicial authorities have rendered several judgments in favour of the assessee. In these factua ..... X X X X Extracts X X X X X X X X Extracts X X X X
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