BANSAL IMPEX v. COMMISSIONER OF INCOME TAX
[Citation -2007-LL-1119-3]

Citation 2007-LL-1119-3
Appellant Name BANSAL IMPEX
Respondent Name COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 19/11/2007
Assessment Year 2001-02
Judgment View Judgment
Keyword Tags profits and gains of business • duty entitlement pass book • infrastructure development • reasonable opportunity • industrial undertaking • restricting deduction • income from business • new industrial unit • interest of revenue • computing deduction • gross total income • eligible business • legal requirement • fresh assessment • positive profit • export business • export turnover • business profit • cash assistance • total turnover • special bench • export profit • customs duty • depb credits • nil income
Bot Summary: 21st April, 2003 was issued after selective scrutiny process under s. 143(2)(i) specifically for deduction under s. 80-IB. Deduction under s. 80-IB has been directed to be not admissible on duty drawback and incentives, that too without granting any opportunity not to talk of reasonable, as also without raising said issue in the impugned notice under s. 263. As the AO has allowed the deduction under s. 80HHC, and s. 80-IB o n the profit shown by the assessee, meaning thereby without reducing therefrom the deduction allowed under s. 80-IB, the CIT held that order of the AO was erroneous insofar as prejudicial to the interest of the Revenue. CIT 1 SOT 490, in support of the proposition that wherein in earlier years deduction under s. 80HHC was allowed on export profit as computed by the assessee as per mode specified in s. 80HHC(3)(b) of the Act which was a possible view, assessment order adopting such possible view in the year under consideration could not be said to be erroneous CIT has no jurisdiction to invoke s. 263 of the Act. The CIT in his order under s. 263 observed that as per provisions of s. 80-IA(9) and s. 80-IB(13), deduction under s. 80HHC is to be computed on the eligible business profit after reducing therefrom the portion of profit on which deduction has been availed by the assessee under this section. 27th April, 2007 reported at 111 TTJ(SB) 274, wherein it was held that there is no ambiguity in s. 80-IA to the effect that deduction claimed and allowed under s. 80-IA should be deducted from the profits and gains of business before computing relief under s. 80HHC of the Act. In view of the above discussion, keeping in view the decisions of the Rajasthan High Court and Tribunal, Special Bench as discussed hereinabove, we do not find any reason to interfere in the directions of CIT for allowing deduction under s. 80HHC of the Act on the amount of eligible profit, after reducing therefrom the deduction allowable under s. 80-IB. With reference to claim of deduction on duty drawback under s. 80-IA, Hon ble Delhi High Court in case of CIT vs. GB Exports Ltd. 201 CTR 30: 286 ITR 603 had held that duty drawback on exports flowing under the scheme formulated by the Government does not amount to profit and gains derived from industrial undertaking. With regard to learned CIT(A) s action for not allowing deduction with reference to the incentive received by the assessee and claimed under proviso to s. 80HHC(3) we found that because of the insertion of 5th proviso to s. 80HHC(3) by Taxation Laws Act 2005, with retrospective effect from 1st April, 1998, the assessee cannot be declined deduction.


This is appeal filed by assessee against order of learned CIT, Moradabad dt. 31st March, 2005 for asst. yr. 2001-02, in matter of order passed under s. 263 of IT Act, 1961. Following grounds of appeal have been raised by assessee: "The CIT, Moradabad (hereinafter referred to as learned CIT) has erred both in relation with facts and features of case of appellant/assessee firm as well as in relation with law (read with relative ruling pronounced by competent Courts) while initiating impugned proceedings under s. 263 vide notice dt. 27th Jan., 2005 and while issuing order under s. 263 dt. 31st March, 2005 wherein: (1) Deductions under ss. 80HHC and 80-IB have been directed to be restricted by provisions of sub-s. (9A) of s. 80-IA which was non-existent in law, whereby desiring deduction under s. 80HHC to be computed/allowed with reference to resultant Income from business after reducing deduction under s. 80-IB, that too without discussing and/or countering merits or otherwise of arguments especially rulings of competent Courts cited and relied upon by appellant/assessee firm in its reply dt. 28th March, 2005, whereas factually order under s. 143(3)(i) dt. 21st April, 2003 was issued after selective scrutiny process under s. 143(2)(i) specifically for deduction under s. 80-IB. (2) Deduction under s. 80-IB has been directed to be not admissible on duty drawback and incentives, that too without granting any opportunity not to talk of reasonable, as also without raising said issue in impugned notice under s. 263. (3) Deduction under s. 80HHC has been directed to be not admissible on t h e fictional premise that profits from export business are not positive (after reducing export incentives), which defies stipulated formulae under said section, that too without granting any opportunity, not to talk of reasonable, as also without raising said issue in impugned notice under s. 263. (4) Therefore, impugned notice, proceedings as well as order under s. 263 are bad in law, and therefore, prayed to be quashed as void ab initio. (5) appellant prays for grant of permission to add/alter/insert/ modify/rectify/withdraw suitably any part of grounds of appeal at any time before or during course of hearing of this appeal." Rival contentions have been heard and record perused. Facts in brief are that assessee is engaged in business of manufacture and export of handicrafts. It filed its return at nil wherein deduction was claimed under ss. 80HHC and 80-IB of IT Act, 1961. In course of assessment under s. 143(3), AO stated that besides claim of deduction under s. 80HHC, assessee had for first time claimed deduction under s. 80-IB. Since this claim of deduction was not supported by any documentary evidence, AO stated that it appears to be inadmissible. Accordingly, notice under s. 143(2) was issued. AO further stated that necessary documents were filed in support of claim of deduction under s. 80-IB. After discussing with assessee, AO stated that claim of deduction under s. 80-IB appears to be admissible, hence allowed. assessment was completed at nil income as shown by assessee. There was no discussion in assessment order as to computation o f deduction under s. 80-IB of Act as well as s. 80HHC of Act. Subsequently, CIT issued notice under s. 263 of Act wherein he stated that AO has accepted claim of deduction under ss. 80-IB and 80HHC of Act o n figures mentioned by assessee. As per CIT, deduction under s. 8 0 H H C is to be allowed on business profit after reducing therefrom deductions allowed under s. 80-IB of Act. He referred to provisions of sub-s. (13) of s. 80-IB and sub-s. (9A) of s. 80-IA of Act, according to which for computing deduction under these sections, portion of profit on which assessee has claimed deduction under s. 80-IA/IB of Act is to be reduced and on balance amount of business profit, deduction under s. 80HHC is to be computed. As AO has allowed deduction under s. 80HHC, and s. 80-IB o n profit shown by assessee, meaning thereby without reducing therefrom deduction allowed under s. 80-IB, CIT held that order of AO was erroneous insofar as prejudicial to interest of Revenue. Accordingly, assessee was asked to show why assessment made by AO should not be enhanced. Subsequently, order under s. 263 was passed, AO should not be enhanced. Subsequently, order under s. 263 was passed, wherein in addition to revise computation of deduction under s.80-IB, CIT also declined deduction in respect of income from DEPB credits, on plea that assessee was not having positive profit from business as defined in cl. (baa) o f Explanation to s. 80HHC(3) of Act. He found that assessee has suffered loss of Rs. 53.91 lacs; this loss cannot be converted into profit by adding 90 per cent of export incentives as per proviso to s. 80HHC(3)(c) of Act. After referring to decision of Hon ble Supreme Court in case of IPCA Laboratory Ltd. vs. Dy. CIT (2004) 187 CTR (SC) 513: (2004) 266 ITR 521 (SC), he declined deduction of export incentives, in view of assessee having negative income. Accordingly, CIT held that order passed by AO was erroneous insofar as prejudicial to interest of Revenue, same was cancelled and AO w s directed to make fresh assessment de novo after providing reasonable opportunity of being heard. Aggrieved by above order of CIT under s. 263, assessee approached us for further adjudication. It was argued by learned Authorised Representative that CIT has directed for restricting deduction under proviso to sub-s. (9A) of s. 80-IA which was non-existence in law. He referred certain decisions of Tribunal in which deduction was allowed under s. 80-IB without reducing deduction allowed under s. 80HHC out of eligible business profit. He also relied on decision of Hon ble Supreme Court in case of Madideep Engg. & Packaging (India) (P) Ltd. 163 ITR 337 [sic-correct citation is Jt. CIT vs. Mandideep Eng. & Pkg. Ind. (P) Ltd. (2007) 210 CTR (SC) 614: (2007) 292 ITR 1 (SC) Ed.] and decision of Hon ble Allahabad High Court in case of CIT vs. Lucky Laboratories Ltd. (2006) 200 CTR (All) 305: (2005) 149 TAXMAN 273 (All). Reliance was also placed on decision of Tribunal, Delhi Bench in case Dy. CIT vs. Eltek Sgs (P) Ltd. (2006) 10 SOT 178 (Del) and Tribunal Bangalore Bench in case Mittal Clothing Co. vs. Dy. CIT (2005) 4 SOT 626 (Bang). In support of proposition that mere brief order of AO cannot turn it to be erroneous and prejudicial to interest of Revenue, he relied on decision of Tribunal, Delhi Bench in Motilal Bimalchand Jain (HUF) vs. CIT (2006) 201 CTR (Del) 150: (2006) 150 TAXMAN 13 (Del), wherein it was held that writing order in detail may be legal requirement, but order not fulfilling this requirement cannot be said to be erroneous and prejudicial to interest of Revenue. Reliance was also placed on decision of Tribunal, Delhi Bench in case of Eureka Sales Corporation vs. Asstt. CIT (2005) 1 SOT 490 (Del), in support of proposition that wherein in earlier years deduction under s. 80HHC was allowed on export profit as computed by assessee as per mode specified in s. 80HHC(3)(b) of Act which was possible view, assessment order adopting such possible view in year under consideration could not be said to be erroneous, therefore, CIT has no jurisdiction to invoke s. 263 of Act. On other hand, learned Departmental Representative relied on various decisions referred by CIT in his order under s. 263 and submitted that AO has not applied his mind nor given any reasoning for allowing claim of deduction under s. 80-IB without referring to sub-s. (13), which has rendered order of AO erroneous and prejudicial to interest of Revenue. Accordingly, he supported order passed by CIT under s. 263 of Act. We have considered rival contentions, carefully gone through orders of authorities below and also deliberated on various case law referred b y CIT in his order under s. 263 as well as cited by learned Authorised Representative during course of hearing before us in context of factual matrix of case. bare reading of provisions of s. 263 makes it clear that prerequisite to exercise of jurisdiction by CIT suo motu under it, is that order of ITO is erroneous insofar as it is prejudicial to interests of Revenue. CIT has to be satisfied of twin conditions, namely, (i) order of AO sought to be revised is erroneous; and (ii) it is prejudicial to interests of Revenue. If one of them is absent if order of ITO is erroneous but is not prejudicial to Revenue or if it is not erroneous but is prejudicial to Revenue recourse cannot be had to s. 263(1). There can be no doubt that provision cannot be invoked to correct each and every type of mistake or error committed by AO. However incorrect application of law will satisfy requirement of order being erroneous. phrase prejudicial to interests of Revenue is not expression of art and is not defined in Act. Understood in its ordinary meaning it is of wide import and is not confined to loss Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. Applying scope of s. 263 to facts and circumstances of instant case we found that while passing order AO has not applied correct provisions of Act as prevailing during relevant assessment year under consideration. From record, we found that in instant case assessment was framed by AO under s. 143(3) dt. 21st April, 2003, wherein assessee s claim for deduction under ss. 80HHC and 80-IB was allowed on very same figure as claimed by assessee. Return of income at nil was accepted without discussing allowability of assessee s claim under s. 80-IB which was filed for first time. AO has also not discussed assessee s allowability with respect t o various incentives received by him, while computing deduction under s. 80HHC. order of AO appears to be non-speaking and is silent on these aspects. Thus it can be said that order of AO was erroneous insofar as prejudicial to interest of Revenue. Now we will discuss merits of order passed by CIT under s. 263. From record, we found that in return of income, assessee has claimed deduction under ss. 80-IB and 80HHC on business income of Rs. 14.43 lacs. AO has allowed deduction so claimed. CIT in his order under s. 263 observed that as per provisions of s. 80-IA(9) and s. 80-IB(13), deduction under s. 80HHC is to be computed on eligible business profit after reducing therefrom portion of profit on which deduction has been availed by assessee under this section. As per provisions of s. 80-IA(9)/80-IB(13), where any amount of profit of undertaking is claimed and allowed under this section, deduction to extent of such profit and gains shall not be allowed under any other provisions of this chapter under head C-Deduction in respect of certain incomes , and shall in no case exceed profit and gains of such eligible business of undertaking. Under s. 80-IA of Act, deduction is allowable in respect of profit and gains from industrial undertaking engaged in infrastructure development etc., equal to 100 per cent of profit and gains derived from such business for ten consecutive assessment years. Sub-s. (9) provides for computation procedure which clearly provides that deduction to extent of such profit and gains shall not be allowed under other provisions of Chapter VI-A on which assessee has claimed and allowed deduction under s. 80-IA. There exists no ambiguity in mandate of statute in context of s. 80-IA(9). subscription of section makes it very clear that where any amount of profit and gains is claimed and allowed under s. 80-IA for any assessment year, deduction to extent of such profit and gains shall not be allowed under any other provisions of Chapter VI-A. condition laid down in sub-s. (9) is mandatory condition for availing deduction. As per sub-s. (13) of s. 80-IB, provisions of sub-s. (5) and sub ss. (7) to (12) of s. 80-IA shall apply to eligible business under this section. Thus, in view of specific restrictions provided under s. 80-IA(9), definition of business profit as contained in cl. (baa) to s. 80HHC(ivc) has to be constituted in light of restrictions. Most of case law cited by learned Authorised Representative are in context of provisions of s. 80-I and not under s. 80-IA of Act. As there was no such restrictions in s. 80-I, various Benches of Tribunal as well as High Courts have consistently taken view that while computing deduction under s. 80-I, eligible profit is not to be reduced by any other deduction claimed and allowed under Chapter VI-A. In case of Mandideep Engg. & Packaging (I) (P) Ltd. (supra) decided by Hon ble Supreme Court on which heavy reliance was placed by learned Authorised Representative, we found that controversy was with respect to deduction claimed under s. 80-I and not under s. 80-IA of Act wherein it was held that both provisions of ss. 80HHC and 80-IA are independent of each other, therefore, new industrial unit can claim deduction under both sections on gross total income independently. Furthermore, other cases relied on by learned Authorised Representative have been dealt with by Tribunal, Special Bench in case of Asstt. CIT vs. Rogini Garments in ITA No. 963/Mad/2005 vide order dt. 27th April, 2007 [reported at (2007) 111 TTJ (Chennai)(SB) 274], wherein it was held that there is no ambiguity in s. 80-IA to effect that deduction claimed and allowed under s. 80-IA should be deducted from profits and gains of business before computing relief under s. 80HHC of Act. Hon ble Rajasthan High Court in case of CIT vs. Ruchi Ram & Sons (2004) 191 CTR (Raj) 472: (2004) 271 ITR 444 (Raj) clearly held that sub-s. (9A) has been inserted in s. 80-IA w.e.f. 1st April, 1999, therefore, while dealing with asst. yr. 1995-96, this restriction was held to be not applicable. In instant case before us, relevant asst. yr. is 2001-02, therefore, there is no reason for not applying provisions of sub-s. (9) of s. 80-IA which is very much clear and unambiguous. In view of above discussion, keeping in view decisions of Rajasthan High Court and Tribunal, Special Bench as discussed hereinabove, we do not find any reason to interfere in directions of CIT for allowing deduction under s. 80HHC of Act on amount of eligible profit, after reducing therefrom deduction allowable under s. 80-IB. With reference to claim of deduction on duty drawback under s. 80-IA, Hon ble Delhi High Court in case of CIT vs. GB Exports Ltd. (2006) 201 CTR (Del) 30: (2006) 286 ITR 603 (Del) had held that duty drawback on exports flowing under scheme formulated by Government does not amount to profit and gains derived from industrial undertaking. This gain arises to assessee on scheme for refund of duty drawback. Therefore, deduction under s. 80-I is not allowable on amount of duty drawback. Similar view has been taken by Hon ble Delhi High Court in case of CIT vs. Ritesh Industries (2004) 192 CTR (Del) 81: (2005) 274 ITR 324 (Del). In case of Nahar Exports Ltd. vs. CIT (2006) 204 CTR (P&H) 464: (2007) 288 ITR 494 (P&H), Hon ble Punjab & Haryana High Court held that deduction under s. 80-IA is not eligible on income from sale of import licenses. Hon ble Madras High Court in case of CIT vs. Jameel Leathers & Uppers (2000) 246 ITR 97 (Mad) held that cash assistance, duty drawback and import license nomination premium is not eligible for deduction under ss. 80HH and 80J of IT Act, 1961. No contrary decision of n y High Court was brought to our notice by learned Authorised Representative which supports contention that duty drawback and other incentives are eligible for deduction under s. 80HH/80-I/80-IB of Act. Keeping in view submission of learned Authorised Representative that CIT had not allowed proper opportunity to assessee before directing AO to decline deduction on such incentive, in interest of justice we direct AO to allow due opportunity to assessee before deciding these issues de novo. So far as allowability of deduction on DEPB credits, while computing deduction under s. 80HHC is concerned, in view of insertion of 5th proviso to s. 80HHC, we are inclined to agree with learned Authorised Representative that there is no merit in action of CIT for directing AO to decline deduction with respect to DEPB income. We have considered rival contentions. With regard to learned CIT(A) s action for not allowing deduction with reference to incentive received by assessee and claimed under proviso to s. 80HHC(3) we found that because of insertion of 5th proviso to s. 80HHC(3) by Taxation Laws (Amendment) Act 2005, with retrospective effect from 1st April, 1998, assessee cannot be declined deduction. said amendment has now been introduced by Taxation Laws (Amendment) Act, 2005, which has received assent of President of I n d i on 28th Dec., 2005. following amendment was made with retrospective effect from 1st April, 1998: (i) in sub-s. (3) (A) after proviso, following provisos shall be inserted and shall be deemed to have been inserted, w.e.f. 1st day of April, 1998, namely: "Provided further that in case of assessee having export turnover not exceeding rupees ten crores during previous year, profits computed under cl. (a) or cl. (b) or cl. (c) of this sub-section or after giving effect to first proviso, as case may be, shall be further increased by amount which bears to ninety per cent of any sum referred to in cl. (iiid) or cl. (iiie), as case may be, of s. 28, same proportion as export turnover bears to total turnover of business carried on by assessee: Provided also that in case of assessee having export turnover exceeding rupees ten crores during previous year, profits computed under cl. (a) or cl. (b) or cl. (c) of this sub-section or after giving effect to first proviso, as case may be, shall be further increased by amount which bears to ninety per cent of any sum referred to in cl. (iiid) of s. 28, same proportion as export turnover bears to total turnover of business carried on by assessee, if assessee has necessary and sufficient evidence to prove that, (a) he had option to choose either duty drawback or Duty Entitlement Pass Book Scheme, being Duty Remission Scheme; and (b) rate of drawback credit attributable to customs duty was higher than rate of credit allowable under Duty Entitlement Pass Book Scheme, being Duty Remission Scheme: Provided also that in case of assessee having export turnover exceeding rupees ten crores during previous year, profits computed under cl. (a) or cl. (b) or cl. (c) of this sub-section or after giving effect to first proviso, as case may be, shall be further increased by amount which bears to ninety per cent of any sum referred to in cl. (iiie) of s. 28, same proportion as export turnover bears to total turnover of business carried on by assessee, if assessee has necessary and sufficient evidence to prove that, (a) he had option to choose either duty drawback or Duty Free Replenishment Certificate, being Duty Remission Scheme; and (b) rate of drawback credit attributable to customs duty was higher than rate of credit allowable under Duty Free Replenishment Certificate, being Duty Remission Scheme. Explanation For purposes of this clause, rate of credit allowable means rate of credit allowable under Duty Free Replenishment Certificate, being Duty Remission Scheme calculated in manner as may be notified by Central Government;" (B) after fourth proviso as so inserted, following proviso shall be inserted and shall be deemed to have been inserted w.e.f. 1 day of April, 1992, namely: "Provided also that in case computation under cl. (a) of cl. (b) or cl. (c) of this sub-section is loss, such loss shall be set off against amount which bears to ninety per cent of (a) any sum referred to in cl. (iiia) or cl. (iiib) or cl. (iiic), as case may, or (b) any sum referred to in cl. (iiid) or cl. (iiie), as case may be, of s. 28, as applicable in case of assessee referred to in second or third or fourth proviso, as case may be, same proportion as export turnover bears to total turnover of business carried on by assessee (ii) in Explanation occurring at end, w.e.f. 1st day of April, 1998, (I) in proviso to clause (books of accounts), for word, brackets, figures and letter and (iiic) , brackets, figures, letters and word (iiic), (iiid) and (iiie) shall be substituted and shall be deemed to have been substituted; (II) in cl. (baa), in sub-cl. (I), for word, brackets, figures and letter and (iiic) , brackets, figures, letters and word (iiic), (iiid) and (iiie) shall be substituted and shall be deemed to have been substituted ." As this amendment was not in statue book when CIT directed AO t o decline deduction with reference to such incentive under s. 80HHC, we therefore set aside this direction of CIT and direct AO to give due cognizence to above amended provision while recomputing deduction under s. 80HHC. In result, appeal of assessee is allowed in part, in terms indicated hereinabove. *** BANSAL IMPEX v. COMMISSIONER OF INCOME TAX
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