ASSISTANT COMMISSIONER OF INCOME TAX v. MAHALAXMI CHEMICAL WORKS
[Citation -2006-LL-0217-5]

Citation 2006-LL-0217-5
Appellant Name ASSISTANT COMMISSIONER OF INCOME TAX
Respondent Name MAHALAXMI CHEMICAL WORKS
Court ITAT
Relevant Act Income-tax
Date of Order 17/02/2006
Assessment Year 1995-96, 1996-97, 1998-99
Judgment View Judgment
Keyword Tags reassessment proceedings • income chargeable to tax • reopening of assessment • depreciation allowance • computing deduction • interest-free loan • issuance of notice • change of opinion • service of notice • statutory limit • issue of notice • total turnover • bank overdraft • central excise • closing stock • special bench • sugar factory • indirect cost • interest paid • modvat credit • excise duty • sales-tax
Bot Summary: On Bank overdraft of Rs. 4,01,817 as part of indirect costs attributable to exports while re-computing the deduction under s. 80HHC. The CIT(A) erred in considering the interest received on bank fixed deposits of Rs. 22,06,414 as assessable under the head Income from other sources when the AO has correctly assessed it under the head Business income. Bank fixed deposits of Rs. 31,44,870 as assessable under the head Income from other sources when the AO has correctly assessed it under the head Business income. Before coming to the merit of the case, the learned counsel for the assessee had challenged reopening of the assessment under s. 148(1) of the IT Act, 1961 and also that assessments are time-barred because notice under s. 143(2) of the Act were issued in all the cases, after expiry of one year from the date of filing of a letter in response to the notice under s. 148(1), wherein, the assessee had submitted that return filed originally should be treated as the one filed in response to notice under s. 148(1). While completing the assessment under s. 148(1), the AO accepted the claim of the assessee about interest and did not make any addition, by observing as under: 3.2 The issue of interest disallowance in asst. On Explanation of the return, it transpired that the assessee has claimed excess deduction under s. 80HHC. The assessee while calculating under s. 80HHC did not account for export freight, insurance, excise and octroi duty paid, remuneration to partners, interest paid, depreciation as part of direct cost and indirect cost attributable to exports. On the question as to whether reassessment proceedings are invalid because under s. 143(2) was issued more than 12 months after the issue of notice under s. 148, the learned CIT(A) observed as under: As the regard the issue, of notice under s. 143(2) after one year, this, as well as the other issue regarding change of opinion, had not been raised before the AO at the time of reassessment. CIT 123 TAXMAN 226(Mag) for the proposition that provisions under s. 143(2) are mandatory and non-issuance of notice under this sub-section shall render order passed under s. 143(3) as invalid.


These are appeals filed by assessee as well as Revenue against order of learned CIT(A). Revenue in its appeals in ITA Nos. 2258, 2259 and 2260/Mum/2003 for asst. yrs. 1995-96, 1996-97 and 1998-99, has raised following grounds: "Grounds of appeal in ITA No. 2258/Mum/2003 (i) On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO to exclude amount of sales-tax and L/C opening charges from total turnover for computing deduction under s. 80HHC. (ii) On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO to reduce net profit declared by assessee by net amount of excise duty paid (total amount paid less amount of refund received) arid to consider profits so arrived to adopt as profit of business for computing deduction under s. 80HHC. (iii) On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO for calculation of s. 80HHC deduction whereas he is silent about quantification of deduction. (iv) On facts and in circumstances of case and in law, learned CIT(A) has erred in not appreciating that amount of central excise, modvat credit, sales-tax payment, sales, closing stock and depreciation are all verifiable items. Grounds of appeal in ITA No. 2259/Mum/2003 (i) On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO to exclude amount of sales-tax and L/C opening charges from total turnover for computing deduction under s. 80HHC. (ii) On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO to reduce net profit declared by assessee by net amount of excise duty paid (total amount paid less amount of refund received) and to consider profits so arrived to adopt as profit of business for computing deduction under s. 80HHC. (iii) On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO for calculation of s. 80HHC deduction whereas he is silent about quantification of deduction. (iv) On facts and in circumstances of case and in law, learned CIT(A) has erred in not appreciating that amount of central excise, modvat credit, sales-tax payment, sales, closing stock and depreciation are all verifiable items. Grounds of appeal in ITA No. 2260/Mum/2003 (i) On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO to exclude amount of sales-tax and L/C opening charges from total turnover for computing deduction under s. 80HHC. (ii) On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO to reduce net profit declared by assessee by net amount of excise duty paid (total amount paid less amount of refund received) and to consider profits so arrived to adopt as profit of business for computing deduction under s. 80HHC. (iii) On facts and in circumstances of case and in law, learned CIT(A) has erred in directing AO for calculation of s. 80HHC deduction whereas he is silent about quantification of deduction. (iv) On facts and in circumstances of case and in law, learned CIT(A) has erred in not appreciating that amount of central excise, modvat credit, sales-tax payment, sales, closing stock and depreciation are all verifiable items. (v) On facts and in circumstances of case and in law, learned CIT(A) has erred in allowing depreciation allowance of Rs. 17,900 without giving base of these findings for asst. yr. 1998-99." Following grounds have been raised by assessee in ITA Nos. 2436, 2437 and 2438/Mum/2003 for asst. yrs. 1995-96, 1996-97 and 1998-99, which are reproduced as under: "Grounds of appeal in ITA No. 2436/Mum/2003 (i) CIT(A) failed to appreciate that AO has erred in issuing notice under s. 148 dt. 27th Oct., 1999 for asst. yr. 1995-96. (ii) CIT(A) failed to appreciate that AO has erred in issuing notice under s. 143(2) dt. 12th Sept., 2001 after lapse of more than 12 months in response to appellant s letter dt. 4th Dec., 1999 filed in pursuance of notice under s. 148 dt. 27th Oct., 1999. (iii) CIT(A) failed to appreciate that AO has erred in continuing reassessment proceedings under s. 147 when all reasons for initiating reassessment proceedings were found to be incorrect and non-existent. (iv) CIT(A) failed to appreciate that AO has erred in passing assessment order under s. 143(3) r/w s. 147. (v) CIT(A) failed to appreciate that AO has erred in including excise duty of Rs. 25,73,352 incurred by appellant on goods exported out of India as part of direct costs attributable to exports while recomputing deduction under s. 80HHC. (vi) CIT(A) failed to appreciate that AO has erred in considering remuneration to partners of Rs. 2,00,000 as part of "indirect costs attributable to exports." Grounds of appeal in ITA No. 2437/Mum/2003 "(i) CIT(A) failed to appreciate that AO has erred in issuing notice under s. 148 dt. 27th Oct., 1999 for asst. yr. 1996-97. (ii) CIT(A) failed to appreciate that AO has erred in issuing notice under s. 143(2) dt. 12th Sept., 2001 after lapse of more than 12 months in response to appellant s letter dt. 4th Dec., 1999 filed in pursuance of notice under s. 148 dt. 27th Oct., 1999. (iii) CIT (A) failed to appreciate that AO has erred in continuing reassessment proceedings under s. 147 when all reasons for initiating reassessment proceedings were found to be incorrect and non-existent. (iv) CIT(A) failed to appreciate that AO has erred in passing assessment order under s. 143(3) r/w s. 147. (v) CIT(A) failed to appreciate that AO has erred in including excise duty of Rs. 15,10,092 incurred by appellant on goods exported out of India as part of direct costs attributable to exports while recomputing deduction under s. 80HHC. (vi) CIT(A) failed to appreciate that AO has erred in considering remuneration to partners of Rs. 2,00,000 as part of indirect costs attributable to exports . (vii) CIT(A) failed to appreciate that AO has erred in considering interest paid. on Bank overdraft of Rs. 4,01,817 as part of indirect costs attributable to exports while re-computing deduction under s. 80HHC. (viii) CIT(A) erred in considering interest received on bank fixed deposits of Rs. 22,06,414 as assessable under head Income from other sources when AO has correctly assessed it under head Business income ." Grounds of appeal in ITA No. 2438/Mum./2003 "(i) CIT(A) failed to appreciate that AO has erred in issuing notice under s. 148 dt. 27th Oct., 1999 for asst. yr. 1998-99. (ii) CIT(A) failed to appreciate that AO has erred in issuing notice under s. 143(2) dt. 12th Sept., 2001 after lapse of more than 12 months in response to appellant s letter dt. 4th Dec., 1999 filed in pursuance of notice under s. 148 dt. 27th Oct., 1999. (iii) CIT(A) failed to appreciate that AO has erred in continuing reassessment proceedings under s. 147 when all reasons for initiating reassessment proceedings were found to be incorrect and non-existent. (iv) CIT(A) failed to appreciate that AO has erred in passing assessment order under s. 143(3) r/w s. 147. (v) CIT(A) failed to appreciate that AO has erred in including excise duty of Rs. 8,76,618 incurred by appellant on goods exported out of India as part of direct costs attributable to exports while recomputing deduction under s. 80HHC. (vi) CIT(A) failed to appreciate that AO has erred in considering remuneration to partners of Rs. 2,00,000 as part of indirect costs attributable to exports . (vii) CIT(A) failed to appreciate that AO has erred in considering interest paid on Bank overdraft of Rs. 47,587 as part of indirect costs attributable to exports while re-computing deduction under s. 80HHC. (viii) CIT(A) erred in considering interest received on. bank fixed deposits of Rs. 31,44,870 as assessable under head Income from other sources when AO has correctly assessed it under head Business income . (ix) CIT(A) failed to appreciate that claim for depreciation allowance being option, AO has erred in thrusting depreciation allowance of Rs. 17,900 on appellant." Before coming to merit of case, learned counsel for assessee had challenged reopening of assessment under s. 148(1) of IT Act, 1961 (in short "Act") and also that assessments are time-barred because notice under s. 143(2) of Act were issued in all cases, after expiry of one year from date of filing of letter in response to notice under s. 148(1), wherein, assessee had submitted that return filed originally should be treated as one filed in response to notice under s. 148(1). On reopening of assessment for all these years, AO recorded following reasons: "During course of assessment proceedings for asst. yr. 1997-98 it w s found that assessee was given interest-free loan amounting to Rs. 16,59,627. This loan it is further, seen are containing asst. yr. 1998-99 also and assessee has not charged any interest on these loans. This contrast with fact that assessee has paid interest of Rs. 10,981. Therefore, interest paid by assessee deserves to be disallowed equivalent to amount of interest receivable at rate of 14 per cent of loan amount given. interest receivable comes to Rs. 2.32 lakhs since assessee has paid interest amounting to Rs. 10,981. Therefore, entire amount of Rs. 10,981 has to be disallowed. This view has been supported by numerous Court decisions. In support of this contention reliance is placed as mentioned below: (a) Triveni Engineering Works Ltd. vs. CIT (1987) 167 ITR 742 (All); (b) CIT vs. H.R. Sugar Factory (1990) 87 CTR (All) 132: (1991) 187 ITR 363 (All); (c) Phaltan Sugar Works Ltd. vs. CIT (1995) 127 CTR (Bom) 359: (1994) 208 ITR 989 (Bom) and Phaltan Sugar Works Ltd. vs. CIT (1995) 127 CTR (Bom) 397: (1995) 216 ITR 479 (Bom). Therefore, in view of abovementioned facts income amounting to Rs. 10,981 has escaped assessment and case was reopened under s. 147 of IT Act, 1961." AO recorded similar reasons for other years except change of figures relating to disallowance of interest. However, while completing assessment under s. 148(1), AO accepted claim of assessee about interest and did not make any addition, by observing as under: "3.2 issue of interest disallowance in asst. yr. 1997-98 was not contested by Department and, hence, contention of assessee is accepted. However, on Explanation of return, it transpired that assessee has claimed excess deduction under s. 80HHC. assessee while calculating under s. 80HHC did not account for export freight, insurance, excise and octroi duty paid, remuneration to partners, interest paid, depreciation as part of direct cost and indirect cost attributable to exports. assessee was querred vide letter dt. 13th Feb., 2002 on this issue." AO made addition by re-computing deduction under s. 80HHC of Act. Before learned CIT(A), assessee challenged reopening of assessment on ground, that issue on which assessment was reopened was finally dropped and no addition on that account was made. Once very basis of escapement of income does not survive, then reassessment proceedings will also not survive. learned CIT(A) considered first submission of assessee and upheld reopening by observing as under: "I have considered submissions of appellant. Admittedly, reassessment proceedings were initiated on issue of interest-free loans advanced to related parties. However, while framing assessment, AO realised that subsequent to issue of notice, CIT(A) had decided issue in favour of appellant and Department had accepted decision of CIT(A). Therefore, no disallowance was made on this account. However, while examining case, AO realised that computation of deduction made in earlier assessment order had some errors and he proceeded to examine issue to correct error. provisions of s. 147 empowers AO, if any income chargeable to tax has escaped assessment to reassessed such income and also any other income chargeable to tax which is escaped assessment and w h i c h came to his notice, subsequently, in course of reassessment proceedings. Punjab and Haryana High Court in case of Vipan Khanna vs. CIT (2002) 175 CTR (P&H) 335: (2002) 255 ITR 220 (P&H) has held that even after t h e amendment to s. 147 with effect from 1st April, 1989 AO is not empowered to carry out general review of his own order under s. 143(3) making inquiry into various other issues in reassessment proceedings. In instant case, however, AO has not undertaken general review of various issues in t h e reassessment. issue of excessive deduction under s. 80HHC was deleted from return accompanying documents and AO was not out of jurisdiction to correct anomaly and ensure correct amount of deduction was allowed to appellant. appellant has also relied on decision of Delhi High Court in case of Kelvinator of India Ltd. which states that even after 1st April, 1989, reassessment cannot be based on mere change of opinion. In this decision, Delhi High Court held that AO does not have power to review his own order in garb of reassessment. Mere change of opinion cannot be basis of reassessment. In this case, before me, facts are different in that t h e particular issue of excise duty had not been examined in earlier assessment. Thus, it cannot be said that reassessment was done on mere change of opinion." On question as to whether reassessment proceedings are invalid because under s. 143(2) was issued more than 12 months after issue of notice under s. 148, learned CIT(A) observed as under: "As regard issue, of notice under s. 143(2) after one year, this, as well as other issue regarding change of opinion, had not been raised before AO at time of reassessment. appellant subjected itself to reassessment proceedings. Since issue was not challenged at stage of assessment, it cannot be raised at appellate stage." Thus, learned CIT(A) did not entertain this ground of assessee on t h e plea that this issue was not raised before AO. learned CIT(A), however, deleted addition made on account of computation under s. 80HHC. Before us, learned counsel for assessee submitted that proceedings under s. 148(1) are bad because basis on which, notice under s. 148(1) was issued, did not survive as AO did not make any addition on account of disallowability of interest. AO had not gone into nexus between interest bearing borrowings invested into interest-free advances. Without this, it could not be said that any part of interest is disallowable and, therefore, income has escaped assessment. Regarding assessment having become time-barred, learned counsel for assessee submitted that notices under s. 143(2) were issued in all these cases on 27th Oct., 1999. These were received on 14th Nov., 1999 and assessee had furnished reply on 6th Dec., 1999 to effect that return already filed should be treated as one filed in response to notice under s. 148(1). Therefore, notice under s. 143(2) should have been issued on/or before 5th Dec., 2000. They were, in fact, issued on 12th Sept., 2001. He relied on decision of Special Bench in case of Raj Kumar Chawla vs. ITO (2005) 92 TTJ (Del)(SB) 1245: (2005) 94 ITD 1 (Del)(SB) and also Division Bench of Tribunal in case of Uma Polymers (P) Ltd. vs. Asstt. CIT (2002) 123 TAXMAN 226 (Mumbai)(Mag) for proposition that provisions under s. 143(2) are mandatory and non-issuance of notice under this sub-section shall render order passed under s. 143(3) as invalid. Against this, learned Departmental Representative submitted that for t h e validity of reassessment, what has to be seen is, whether AO has information in his possession on basis of which he could have re-opened assessment. If that information has nexus with reopening of assessment, then reopening would be justified. It is immaterial as to what happens during course of assessment proceedings. It is possible that quantum of escapement of income may increase. It may go down or it may not survive at all. AO will see facts as they were available before him at time of reopening of assessment. He would not be concerned with facts discovered subsequently. At time when he reopened assessment, he had with him, assessment order for asst. yr. 1997-98, according to which, part of interest paid on borrowed funds were treated as disallowable as funds were used for non-business purposes. Regarding assessment having become time-barred, learned Departmental Representative submitted that these provisions would not be applicable to proceedings under s. 148. learned Departmental Representative relied on decision of Delhi Bench in Poonam Rani Singh vs. Dy. CIT (2006) 99 TTJ (Del) 1167: (2005) 97 ITD 390 (Del), for proposition that re-opening could not be held invalid merely because in ultimate analysis, no escapement is found. We have considered rival submissions and material on record. So far as re-opening of assessment is concerned, we are of view that AO was justified in re-opening of assessment because at that point of time, when he re-opened assessment, he had with him assessment order for asst. yr. 1997-98 which became basis for forming opinion that part of interest paid on borrowed fund needed to be disallowed because funds were not utilised for business purposes. facts as available to AO at time of reopening of assessment has only to be seen for justifying or otherwise re-opening of assessment. information should have direct nexus with escapement of income. information available should be relevant and belief of officer should be rational. Court can only examine as to whether process of formation of belief was in accordance with law. Adequacy of material is not relevant. It is also not relevant as to whether in ultimate analysis same amount of addition was made. It is always possible that on subsequent enquiries some more material is discovered and greater amount of escaped income is brought into light. AO is bound to make addition of greater amount and cannot confine himself to originally estimated amount when he reopened assessment. Similarly, AO is also duty bound to make addition of smaller amount if he discovers, on enquiry and investigation, that escaped income is less than what he originally estimated at time of re-opening of assessment. belief at time of reassessment of assessment is only prima facie and not final. Similarly, amount of escaped amount is also tentative and not final. There is always possibility of quantum of escaped income varying in final analysis on basis of particulars given to assessee for explaining case. It is possible that assessee may be able to explain entire amount or part of amount or AO may discover greater amount of concealed income. subsequent discovery of facts cannot undo belief judiciously formed by AO on basis of material available at that point of time. We beneficially rely on decision in case of Poonam Rani Singh (supra) referred to by learned Departmental Representative. In point No. 2 at p. 409 in para 32 Tribunal observed as under: "2. reopening cannot be held to be invalid merely because in ultimate analysis no escapement of income is found in relation to any ground on basis of which proceedings for reopening were initiated. In other words, if there was requisite material for assumption of jurisdiction at that stage but s m e could not substantiate during reassessment proceedings, then proceedings under s. 147 cannot be held to be invalid. reassessment proceedings may be initiated on one ground but reassessment may be done on any other ground, if such ground comes to notice of AO during course of assessment proceedings. It is, therefore, open to AO to consider other items even though they were not included under s. 148." Thus, merely because AO did not make any addition on account of disallowability of interest, it could not be said that reopening of assessment were invalid because in our considered view on basis of material available at time of re-opening of assessment/recording reasons, AO was justified in re-opening assessment. Thus, this ground of assessee is rejected. However, we are not satisfied with arguments of learned Departmental Representative that decision of Special Bench in Raj Kumar Chawla s case (supra) would not be applicable to facts of present case. Headnotes from that decision reads as under: "Sec. 143(2), r/w s. 148 of IT Act, 1961 Assessment Notice of Asst. yr. 1995-96 Whether return filed pursuant to notice under s. 148 must be assumed and treated to be return filed to notice under s. 139 and assessment must thereafter be made under s. 143 or 144 after complying with mandatory provisions Held, yes Whether, therefore, proviso to s. 143(2) which mandates service of notice within 12 months from end of month in which return is filed, also applies to returns filed pursuant to notice under s. 148 and it is incumbent upon assessing authority to issue notice under s. 143(2) within period as stipulated in proviso to s. 143(2) in respect of return filed pursuant to notice under s. 148 Held, yes Whether no assessment can be made if notice under s. 143(2) is not served within period prescribed by proviso under s. 143(2) and, thus, return filed will be deemed as accepted Held, yes." Thus, respectfully following above decision of Special Bench of Tribunal, we are of considered view that notice under s. 143(2) in this case should have been issued within one year of letter filed by assessee on 6th Dec., 1999. As notices under s. 143(2)(1) were issued for all years on 12th Sept., 2001, such issuance of notice is beyond statutory limit and, therefore, assessment framed in pursuance to these notices are barred by limitation. Hence, assessment for all these years are, therefore, cancelled. We do not consider it necessary to go into merits of addition done by AO and deleted by learned CIT(A) for simple reason that reassessments do not survive. In result, appeals filed by Revenue are dismissed and appeals filed by assessee are partly allowed. *** ASSISTANT COMMISSIONER OF INCOME TAX v. MAHALAXMI CHEMICAL WORKS
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