IN HIGH COURT OF DELHI AT NEW DELHI Decided on : 28.04.2015 ITA 263/2015, C.M. APPL.7337/2015 ITA 264/2015, C.M. APPL.7349/2015 ITA 265/2015, C.M. APPL.7351/2015 SHRI LAL MAHAL LIMITED Appellant Versus COMMISSIONER OF INCOME TAX Respondent Through : Sh. Salil Aggarwal, Sh. Prakash Kumar and Sh. Ravi Pratap Mall, Advocate, for appellant. Ms. Suruchii Aggarwal, Sr. Standing Counsel and Sh. Abhishek Sharma, for revenue. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) % Issue notice. 1. Ms. Suruchii Aggarwal, Sr. Standing Counsel accepts notice. With consent of learned counsel for parties, matter was heard finally. 2. following two questions of law are sought to be urged by assessee in this appeal under Section 260-A of Income Tax Act, 1961 (hereafter referred to as Act ): (a) Whether in given facts of case, assessment could have ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 1 been completed by invoking 153A of Income Tax Act; (b) Whether amendment to Section 80HHC(3) by inserting three provisos with retrospective effect from 01.04.1998 could have been invoked to disallow amounts in respect of concluded assessments for AY 1999-2000 in assessee s case. 3. admitted facts are that assessee is exporter entitled to benefits of Section 80HHC. Its assessment was finalized for AY 1999-2000 when returns were processed under Section 143(1). search operations were conducted in assessee s premises on 18.06.2003. In meanwhile, on 01.06.2003, provisions of Chapter XIV were brought into force with effect from 01.06.2003. In circumstances, search operations were to be and were conducted in accordance with its provisions. 4. Based upon materials collected, Assessing Officer (AO) issued notice under Section 153A to assessee on 31.05.2005. In response, assessee, through letter, intimated on 27.08.2005 that it stood by original returns which had been processed under Section 153(1). However, AO thereafter proceeded to finalize assessment under Section 153A. Whilst doing so, he disallowed certain amounts in sense that all deductions permissible under Section 80HHC and granted originally (to tune of `11,17,71,086/-), deduction actually permitted pursuant to these proceedings was `5,31,80,520/-. CIT(A) on being approached by assessee rejected its contentions and gave full effect to AO s order in light of retrospective amendment to Section 80HHC which had come into force by then by Taxation Laws (Amendment) Act, 2005 with effect from 01.04.1998. appeal to Income Tax Appellate Tribunal (ITAT) met with similar fate. ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 2 5. It is contended at outset by assessee that disallowance sought to be made was solely on basis of retrospective amendment to Section 80HHC(3) by virtue of Taxation Laws (Amendment) Act, 2005 since it was brought into force with retrospective effect. It is contended that this amendment was challenged on both substantive basis as well as on ground of its unreasonable retrospective operation, before Gujarat High Court in Avani Exports and Ors. v. CIT 2013 (348) ITR 391. Learned counsel relied on said decision to say that classification made by said amendment as between those assessees who had export turnover of more than ` 10 crores and those who had less than that amount was held to be unreasonable so far as retrospective operation of amendment is concerned. Learned counsel submits that ruling of Gujarat High Court was carried in appeal to Supreme Court which by its order dated 30.03.2015 in CIT-5 and Anr. v. M/s. Avani Exports and Anr. (SLP(C) 9273/2013 decided on 30.03.2015) upheld reasoning. 6. Learned counsel for Revenue did not dispute legal position but submitted that first question of law, i.e. as to completion of assessment, does not arise. It was submitted that since ruling of Gujarat High Court has been indeed allowed with some modification by Supreme Court, decision in this appeal should be confined to that question alone. 7. Section 80HHC to extent it is relevant is as follows: [Deduction in respect of profits retained for export business. 69 80HHC. 70[(1) Where assessee, being Indian company or person (other than company) resident in India, is engaged in business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 3 subject to provisions of this section, be allowed, in computing total income of assessee, [a deduction to extent of profits, referred to in sub-section (1B),] derived by assessee from export of such goods or merchandise : Provided that if assessee, being holder of Export House Certificate or Trading House Certificate (hereafter in this section referred to as Export House or Trading House, as case may be,) issues certificate referred to in clause (b) of sub-section (4A), that in respect of amount of export turnover specified therein, deduction under this sub-section is to be allowed to supporting manufacturer, then amount of deduction in case of assessee shall be reduced by such amount which bears to 74[total profits derived by assessee from export of trading goods, same proportion as amount of export turnover specified in said certificate bears to total export turnover of assessee in respect of such trading goods]. XXXXXX XXXXXX XXXXXX (2)(a) This section applies to all goods or merchandise, other than those specified in clause (b), if sale proceeds78 of such goods or merchandise exported out of India are 79[received in, or brought into, India] by assessee 80[(other than supporting manufacturer)] in convertible foreign exchange 81[, within period of six months from end of previous year or, 82[within such further period as competent authority may allow in this behalf].] 83 [Explanation. For purposes of this clause, expression competent authority means Reserve Bank of India or such other authority as is authorised under any law for time being in force for regulating payments and dealings in foreign exchange.] ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 4 (b) This section does not apply to following goods or merchandise, namely : (i) mineral oil ; and (ii) minerals84 and ores 85[(other than84 processed minerals and ores specified in Twelfth Schedule)]. 86 [Explanation 1. sale proceeds referred to in clause (a) shall be deemed to have been received in India where such sale proceeds are credited to separate account maintained for purpose by assessee with any bank outside India with approval of Reserve Bank of India. Explanation 2. For removal of doubts, it is hereby declared that where any goods or merchandise are transferred by assessee to branch, office, warehouse or any other establishment of assessee situate outside India and such goods or merchandise are sold from such branch, office, warehouse or establishment, then, such transfer shall be deemed to be export out of India of such goods and merchandise and value of such goods or merchandise declared in shipping bill or bill of export as referred to in sub-section (1) of section 5087 of Customs Act, 1962 (52 of 1962), shall, for purposes of this section, be deemed to be sale proceeds thereof.] 88 [(3) For purposes of sub-section (1), (a) where export out of India is of goods or merchandise manufactured 89[or processed] by assessee, profits90 derived from such export shall be amount which bears to profits90 of business90, same proportion as export turnover in respect of such goods bears to total turnover of business carried on by assessee; (b) where export out of India is of trading goods, profits derived from such export shall be export turnover90 in respect of such trading goods as reduced by direct costs and indirect costs attributable to such export; (c) where export out of India is of goods or merchandise manufactured 91[or processed] by assessee and of trading goods, 92profits derived from such export shall, ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 5 (i) in respect of goods or merchandise manufactured 91[or processed] by assessee, be amount which bears to adjusted profits of business, same proportion as adjusted export turnover in respect of such goods bears to adjusted total turnover of business carried on by assessee; and (ii) in respect of trading goods, be export turnover in respect of such trading goods as reduced by direct and indirect costs attributable to export of such trading goods : Provided that profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, same proportion as export turnover bears to total turnover of business carried on by assessee : 93 [Provided further that in case of assessee having export turnover not exceeding rupees ten crores during previous year, profits computed under clause (a) or clause (b) or clause (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 clause (iiid) or clause (iiie), as case may be, of section 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 clause (a) or clause (b) or clause (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 clause (iiid) of section 28, same proportion as export turnover bears to total turnover of business carried on by assessee, if ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 6 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 clause (a) or clause (b) or clause (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 clause (iiie) of section 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 :] 94 [Provided also that in case computation under clause (a) or clause (b) or clause (c) of this sub-section is loss, such loss ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 7 shall be set off against amount which bears to ninety per cent of (a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as case may be, or b) any sum referred to in clause (iiid) or clause (iiie), as case may be, of section 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.] Explanation. For purposes of this sub-section, (a) adjusted export turnover means export turnover as reduced by export turnover in respect of trading goods ; (b) adjusted profits of business means profits of business as reduced by profits derived from business of export out of India of trading goods as computed in manner provided in clause (b) of sub-section (3) ; (c) adjusted total turnover means total turnover of business as reduced by export turnover in respect of trading goods ; (d) direct costs means costs directly attributable to trading goods exported out of India including purchase price of such goods ; (e) indirect costs means costs, not being direct costs, allocated in ratio of export turnover in respect of trading goods to total turnover ; (f) trading goods means goods which are not manufactured 95[or processed] by assessee.] 8. second, third and fourth proviso to Section 80HHC(3) were introduced by Taxation Laws (Amendment) Act, 2005 but with retrospective effect from 01.04.1998. 9. After discussing nature of amendment and noticing that ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 8 provision, i.e. Section 80HHC(3) as existing have been interpreted by several judicial decision, Gujarat High Court observed as follows: 10. After hearing learned counsel for parties and after going through impugned amendment, we find that classification based on export turnover is recognized way of classification throughout world. We find substance in contention of learned counsel for Revenue that progressive levy is based on income classification in terms of both, basis of taxation and rate of tax, and on this ground, same cannot be said to be arbitrary. In this connection, we may profitably refer to following observations of Supreme Court in case of KERALA HOTEL AND RESTURANT ASSOCIATION VS. STATE OF KERALA reported in MANU/SC/0170/1990 : AIR 1990 SC 913 dealing with question in detail: XXXXXX XXXXXX XXXXXX 12. After hearing learned counsel for parties, we are of view that benefit based on pendency of proceedings of assessment and discrimination based thereon definitely violates Article 14 of Constitution of India. In matter of completion of assessment, assessees have little role to pay. After assessees have submitted their returns within time fixed by law, if for any reason respondent delays in making assessment, taking advantage of their own delay, Revenue cannot deprive class of assessees of benefit whereas other assessees of same class whose assessment have already been completed would get benefit. We, therefore, find that discrimination based on two classes, first, whose assessments have become final and secondly, whose assessment are pending, definitely violates Article 14 of Constitution of India as there is no rationale nexus with object of amendment, and, therefore, such classification fails test of Article 14 of Constitution, being case of 'palpable arbitrariness'. ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 9 13. We fully agree with submissions made by learned counsel for petitioners that burden was upon Revenue to prove that restrictions imposed by amending Act are reasonable. We find that Revenue has failed to discharge that burden by pointing out reason for making classification based on above two aspects which have no reasonable connection with object of amendment. XXXXXX XXXXXX XXXXXX 19. After hearing learned counsel for parties and after going through decisions cited at bar, we are of view that although in taxing statute laxity is permissible and after giving benefit to assessee based on some specific conditions, such benefit can definitely be curtailed but same must be effective from future date and not from earlier point of time. If after inducing citizen to arrange his business in manner with clear stipulation that if existing statutory conditions are satisfied, in that event, he would get benefit of taxation and thereafter, Revenue withdraws such benefit and imposes new condition which citizen at that stage is incapable of complying whereas if such promise was not there, citizen could arrange his affairs in different way to get similar or at least some benefit, such amendment must be held to be arbitrary and if not, ingenious artifice opposed to law. In case before us, object of amendment, as it appears from statements of Finance Minister while moving bill, is to get rid of alleged wrong decision of Tribunal interpreting then provision of Statute in way beneficial to assesses, which according to Finance Minister, was never intention of legislature. If such be position, Revenue has definitely right to challenge decision of Tribunal as wrong one before higher forum; but on plea of delay in disposal of appeal if filed, without challenging decision of Tribunal before High Court or Supreme Court, Revenue cannot curtail such benefits by proposing amendment, incorporating new provisions in Statute from anterior date. According to existing law enacted by Parliament itself, wrong orders passed by Tribunal should be ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 10 challenged by aggrieved party before appropriate High Court and if such party is still aggrieved by order of High Court, he should move Supreme Court. 10. Court thereafter noticed that legislation was not just amendment of taxing statute creating new provision retrospectively. Recognising that legislature could confer benefits prospectively or retrospectively and noticing several past judgments, Court held as follows: 24. In case before us, it is not one where executive has failed to carry out object of Parliament necessitating exercise of control by retrospective amendment what executive ought to have achieved. In present case, according to Finance Minister presenting Bill, valid piece of legislation has been wrongly interpreted by Tribunal. We have already pointed out that according to existing law, if valid piece of legislation is wrongly interpreted by Tribunal, aggrieved party should move higher judicial forum for correct interpretation. As pointed by Apex Court in case of Pritvi Cotton Mills Ltd (supra), legislature does not possess or exercise power to reverse decision in exercise of judicial power. Thus, we are of view that principles laid down in case of R. C. Tobacco (P) Ltd. (supra) has no application to facts of present case. impugned amendment granting benefit restricting it to class of assessee whose turnover is less than Rs. 10 Crore is permissible prospectively but way it has been enacted, it takes away enjoyed right of class of citizen who availed of benefit by complying with requirements of then provisions of law. 25. On consideration of entire materials on record, we, therefore, find substance in contention of learned counsel ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 11 for petitioners that impugned amendment is violative for its retrospective operation in order to overcome decision of Tribunal, and at same time, for depriving benefit earlier granted to class of assessees whose assessments were still pending although such benefit will be available to assessees whose assessments have already been concluded. In other words, in this type of substantive amendment, retrospective operation can be given only if it is for benefit of assessee but not in case where it affects even fewer section of assesses. 26. We, accordingly, quash impugned amendment only to this extent that operation of said section could be given effect from date of amendment and not in respect of earlier assessment years of assessees whose export turnover is above Rs. 10 Crore. In other words, retrospective amendment should not be detrimental to any of assesses. writ- applications are, thus, disposed in terms of above order. In facts and circumstances, there will be, however, no order as to costs. In view of above order passed in writ-applications, Civil Applications do not survive and are disposed of accordingly. 11. Revenue filed several appeals before Supreme Court by special leave, claiming direction against operative part of Gujarat High Court in Avani Exports extracted above. After noticing reasoning of High Court, Supreme Court stated that entitlement of benefits to exporters with turnover of more than `10 crores was premised upon conditions spelt out in third and fourth proviso brought in through amendments. Court discussed these aspects as follows: ..................the amendment also carved out two categories of exporters, namely, those whose export is less than Rs. 10 crores per year and those exporters whose exports turn over is more ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 12 than Rs. 10 crores per annum. Insofar as entitlement of these benefits to exporter having turn over of more than Rs. 10 crores p.a. is concerned, two conditions contained in third and fourth proviso to said amendment were to be satisfied for claiming benefits. Those were: (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. All respondents in these SLPs, who are exporters, belong to second category. They filed writ petitions challenging conditions mentioned in third and fourth proviso to Section 80 HHC(3). In fact it was their precise contention that these conditions are severable and therefore these two conditions should be declared ultra vires and severed. rationale behind seeking such prayer was obvious inasmuch as writ petitioners did not want entire Notification to be declared ultra vires which was to their advantage. What they wanted was that benefit of amended provision be accorded, without insisting on aforesaid conditions. 12. Subsequently, Court extracted operative portion of Gujarat High Court judgment which has been reproduced above. Supreme Court recorded its conclusion and reasoning in following terms: We find that in essence High Court has quashed severable part of third and fourth proviso to Section 80HHC(3) and it becomes clear therefrom that challenge which was laid to conditions contained in said provisos by respondent has succeeded. However, to make position crystal clear, we substitute direction of High Court with following direction: Having seen twin conditions and since 80HHC benefit is not ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 13 available after 1.4.05, we are satisfied that cases of exporters having turnover below and those about 10 cr, should be treated similarly. This order is in substitution of judgment in Appeal. With aforesaid clarification all these SLPs including that of assesses fled against judgment of M.P. High Court are disposed of. 13. In light of above developments, this Court is of opinion that appellants are entitled to reliefs claimed by them to extent it is admissible in line with final order of Supreme Court. Accordingly, substantial question of law (b) relating to rejection made is answered in favour of assessee. matter shall be re-examined by AO in light of Supreme Court s final order. Since this Court has already ruled upon merits of disallowance made, question as to whether assessments could have been made under Section 153A is rendered academic; same is accordingly kept open. appeals are allowed in above terms. S. RAVINDRA BHAT (JUDGE) R.K. GAUBA (JUDGE) APRIL 28, 2015 ajk ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 14 Shri Lal Mahal Limited v. Commissioner of Income-tax