1 AFR Reserved Income Tax Appeal No. 734 of 2007 Commissioner of Income Tax & Another ...... Appellant Vs. M/s Rashid Exports Industries ...Respondent And Income Tax Appeal No. 598 of 2011 Commissioner of Income Tax...... Appellant & Another Vs. Asian Handicrafts ....... Respondent Hon'ble Tarun Agarwala,J. Hon'ble Vinod Kumar Misra,J. (Per:Tarun Agarwala,J.) 1. Both appeals are being decided together since it involves same questions of law. For facility, facts in Income Tax Appeal No. 734 of 2007 is being taken into consideration. 2. assessee is manufacturer and exporter. For assessment year 2001-02, assessee filed his return showing nil income claiming deductions under Sections 2 80HHC and 80-IB of Income Tax Act,1961 (hereinafter referred to as Act). return of income was processed under Section 143(1) of Act and notice under Section 142(1) of Act was issued. computation of total income was checked and deduction claimed under Sections 80HHC and 80-IB of Act was scrutinized. assessing authority, accordingly, computed total income at nil after allowing deductions under Sections 80-IB and 80HHC of Act. Assessing Officer concluded as under: In response to discussion during assessment proceedings, assessee has filed copies of Balance Sheet & Profit & Loss Account for period ending 31/03/1992 and it is found that this firm was not constituted after splitting up old business. assessee was specifically asked when this firm was entitled for deduction u/s 80 IB since its establishment, then why it did not claim deduction u/s 80 IB prior to this year. In response to this, assessee has submitted that in earlier years, there was 100% deduction 3 u/s 80HHC of I.T.Act, 1961 and no income was left liable for assessment and this, it did not claim u/s 80IB of I.T.Act, 1961 in earlier year. On going through all documents submitted and produced, it is seen that assessee qualifies for deduction u/s 80IB as per proviso (I) of sub-section (3) of section 80IB of I.T.Act, 1961. In view of above discussion, deduction u/s 80IB of I.T.Act, 1961 is therefore allowed and A.Y. 1992-93 is initial assessment year. In view of above observations, total income is computed as under: Net Profit as Per Profit and Loss Account = 3,4135,688 Add dep for separate Consideration = 34,05,139 Total Rs. 3,75,40,827 Add 1. Donation 75,800 2. Disallowance out of foreign Tour as per para 2 above = 4,17,564 3. Disallowance out of vehicle Maintenance & running expenses vide para 3 above = 1,57,935 4. Disallowance out of Car dep vide Para 4 above = 83,877 5. Disallowance as per Para 6 above=1,17,677 8,52,853 3,83,93680 Less: 4 6. Depreciation allowable = 34,04,286 3,49,89,394 Less : Claim u/s 80G = 75,800 3,49,13,594 Business income Eligible for deduction u/s 80IB & 80HHC Deductions 80HHC = 2,79,30,875 Being 80% of Rs. 3,49,13,594 80 IB = 87,28,398 Being 25% of Rs. 3,49,13,594 Total = 3,66,59,273 But restricted to Gross = 3,49,13,594 Total income NIL --------------- Assessment is completed on total income at NIL. Tax payable works out at NIL. Allow credit of Rs. 35,00,000/-. Allowed interest u/s 244(A) of I.T.Act, 1961. Issue copy of order, ND & refund voucher to assessee. Tax refundable comes as under- Income Nil Tax Nil Adv tax 35,00,000 244A 7,00,000 42,00,000 3. From aforesaid, it is clear that deductions under Sections 80-IB and 80 HHC of Act was given from profits and gains computed at Rs. 3,49,13,594.00. computation further indicates that 5 Assessing Authority granted deductions upto maximum of 100% of profits and gains as provided under Section 80-IA(9) of Act. 4. It transpires that Commissioner of Income Tax did not agree with assessment order contending that for purpose of calculation of deductions under Section 80HHC of Act, Assessing Officer adopted same figures of profit as adopted for purpose of deduction under Section 80- IB of Act. Commissioner of Income Tax held that for purpose of calculation of deduction under Section 80HHC and 80-IB of Act income from business was taken to Rs.3,49,13,594.00 and both deductions were allowed after taking this amount without considering provision of Section 80-IA (9) of Act, which are applicable to Section 80- IB of Act by virtue of Section 80-IB(13) of Act. Commissioner, accordingly, held that approach of Assessing Officer was incorrect and consequently, deductions given was prejudicial to interest of revenue. Commissioner of Income Tax, accordingly, cancelled assessment order 6 and directed Assessing Officer to make fresh assessment de-novo after providing reasonable opportunity of hearing to assessee. 5. assessee, being aggrieved, filed appeal before Tribunal, which was allowed and order of Commissioner of Income Tax passed under Section 263 of Act was set aside. Tribunal held that Commissioner of Income Tax was not justified in revising order of Assessing officer under Section 263 of Act. Department, being aggrieved by said order, has filed present appeal under Section 260-A of Act proposing that following substantial question of law arises for consideration; (1) Whether on facts and in circumstances of case, Tribunal is justified in holding that deduction u/s 80-HHC and 80-IB on same figure of profit without reducing deduction allowed u/s 80-HHC ? (2) Whether on facts and in circumstances of case, Tribunal is justified in 7 holding that Duty Draw Back received by assessee is income derived from Industrial Undertaking and also eligible for deduction u/s 80-IB of Act? (3) Whether on facts and in circumstances of case, Tribunal is justified in holding that CIT has erred in revising order of Assessing authority u/s 263 in respect of controversy raised above? 6. We have heard Sri Shubham Agrawal, learned counsel for appellant and Sri R.R.Agrawal, learned Senior Counsel assisted by Sri Suyash Agrawal, learned counsel for respondent as well as Sri Piyush Agrawal, learned counsel for respondent in connected appeal. 7. Lengthy arguments were made on issue of method of deduction that is permissible under Sections 80HHC and 80-IB of Act and, in this regard, learned counsel for appellant has cited decisions given by various High Court in their favour. While considering decisions on 8 question of applicability of deduction under Section 80HHC and 80-IB of Act, we find that there are divergence of opinions of various High Courts. However, in instant case, we are of opinion that proposed questions of law nos. 1 and 2 does not arise for consideration by this Court at this stage. In our opinion, only issue which we are required to decide is whether Commissioner of Income Tax was justified in revising order of Assessing Authority under Section 263 of Act on ground that assessment order was prejudicial to interest of revenue . In event Court upholds order of Commissioner of Income Tax passed under Section 263 of Act, in that event, issue with regard to manner and method of granting deductions under Sections 80HHC and 80-IB of Act will be considered by Assessing Authority pursuant to order of Commissioner of Income Tax passed under Section 263 of Act. In event Court holds that Commissioner committed error in revising order of Assessing Authority under Section 263 of 9 Act, in that event answering question nos. 1 and 2 would only be academic exercise in which case it is not necessary for Court to answer those questions. 8. On issue of exercise of powers under Section 263 of Act there is catena of decisions given by various Courts including this Court as well as by Supreme Court and, it is not necessary to dwell in detail all those decisions. It is sufficient for this Court to consider one judgment given by Supreme Court in Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax, (2000) 243 ITR 83 (SC), wherein Supreme Court explained provision of Section 263 of Act as under: To consider first contention, it will be apt to quote Section 263(1) which is relevant for our purpose. 263. Revision of orders prejudicial to revenue - (1) Commissioner may call for and examine record of any proceeding under this Act, and if he considers that any order passed therein by Assessing Officer is erroneous insofar as it is prejudicial to interests of revenue, he may, 10 after giving assessee opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as circumstances of case justify, including order enhancing or modifying assessment, or cancelling assessment and directing fresh assessment. Explanation... bare reading of this provision makes it clear that prerequisite to exercise of jurisdiction by Commissioner suo moto under it, is that order of Income-tax Officer is erroneous insofar as it is prejudicial to interests of revenue. Commissioner has to be satisfied of twin conditions, namely, (i). order of Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to interests of revenue. If one of them is absent -- if order of Income-tax Officer is erroneous but is not prejudicial to revenue or if it is not erroneous but is prejudicial to revenue recourse cannot be had to Section 263(1) of Act. There can be no doubt that provision cannot be invoked to correct each and every type of mistake or error committed by Assessing Officer; it is only when order is erroneous that 11 section will be attracted. incorrect assumption of facts or incorrect application of law will satisfy requirement of order being erroneous. In same category fall orders passed without applying principles of natural justice or without application of mind. 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 of tax. High Court of Calcutta in Dawjee Dadabhoy & Co. Vs. S.P. Jain (1957) 31 ITR 872, High Court of Karnataka in Commissioner of Income- tax, Mysore Vs. T. Narayana Pai (1975) 98 ITR 422, High Court of Bombay in Commissioner of Income-tax Vs. Gabriel India Ltd. (1993) 203 ITR 108 and High Court of Gujarat in Commissioner of Income-tax Vs. Smt. Minalben S. Parikh (1995) 215 ITR 81 treated loss of tax as prejudicial to interests of revenue. Mr. Abaraham relied on judgment of Division Bench of High Court of Madras in Venkatakrishna Rice Company Vs. Commissioner of Income-tax (1987) 163 ITR 129 interpreting prejudicial to interests of revenue. High Court held (page 138): In this context, it must be regarded as 12 involving conception of acts or orders which are subversive of administration of revenue. There must be some grievous error in Order passed by Income-tax Officer, which might set bad trend or pattern for similar assessments, which on broad reckoning, Commissioner might think to be prejudicial to interests of Revenue Administration. In our view this interpretation is too narrow to merit acceptance. scheme of Act is to levy and collect tax in accordance with provisions of Act and this task is entrusted to Revenue. If due to erroneous order of Income-tax Officer, revenue is losing tax lawfully payable by person, it will certainly be prejudicial to interests of revenue. phrase prejudicial to interests of revenue has to be read in conjunction with erroneous order passed by Assessing Officer. Every loss of revenue as consequence of order of Assessing Officer cannot be treated as prejudicial to interests of revenue, for example, when Income-tax Officer adopted one of courses permissible in law and it has resulted in loss of revenue; or where two views are possible and Income-tax Officer has taken one view with which Commissioner does not agree, it cannot be treated as erroneous order prejudicial to 13 interests of revenue unless view taken by Income-tax Officer is unsustainable in law. It has been held by this Court that where sum not earned by person is assessed as income in his hands on his so offering, order passed by Assessing Officer accepting same as such will be erroneous and prejudicial to interests of revenue. Rampyari Devi Saraogi Vs. Commissioner of Income-tax (1968) 67 ITR 84 and in Smt. Tara Devi Aggarwal Vs. Commissioner of Income-tax, West Bengal (1973) 88 ITR 323 9. From aforesaid, assessment order can be revised under Section 263 of Act if assessment order is based on incorrect assumption of fact or incorrect application of law or where order was passed without application of mind. If any of these conditions exists, Commissioner is still required to be satisfied that order is not only erroneous but is prejudicial to interests of revenue. Both these conditions are required to exist before exercising powers under Section 263 of Act. Supreme Court held that even if order is erroneous but is not prejudicial to interests of revenue in which 14 case recourse to Section 263(1) of Act could not be taken. Thus, even if order is erroneous, Section 263 of Act cannot be invoked unless it is found that order is also prejudicial to interest of revenue. Supreme Court further held that phrase prejudicial to interests of revenue has to be read in conjunction with erroneous order passed by Assessing Officer and thus every loss of revenue as consequence of erroneous order of Assessing Officer could not be treated as prejudicial to interest of revenue. Supreme Court further held that where two views are possible and Income Tax Officer has taken one view same cannot be treated as erroneous order which is prejudicial to interest of revenue merely because Commissioner does not agree with order unless view taken by Income Tax Officer was not sustainable in law. 10. In light of aforesaid pronouncement, Sri Shubham Agrawal, Advocate urged that Assessing Officer did not consider nor mentioned provision of 15 Section 80-IB (13) read with Section 80-IA(9) of Act and assessment order was, therefore, passed in complete ignorance of provisions and, therefore, assessment order granting deductions was passed on incorrect application of law. learned counsel urged that consequently, Commissioner of Income Tax was justified in holding that order of Assessing Officer was erroneous and prejudicial to interest of revenue. 11. On other hand, Sri R.R.Agrawal, learned Senior Counsel for assessee submitted that Assessing Officer considered all provisions and, after detailed discussions, made assessment order under Section 143(3) of Act granting maximum deduction permissible as provided under Section 80-IA (9) of Act. It was urged that mere fact that Sections 80 IA (9) and 80-IB (13) were not indicated in assessment order does not make assessment order erroneous or prejudicial to interest of revenue. 12. Having heard learned counsel for 16 parties, we find from reading of assessment order that Assessing Officer has discussed in detail deductions sought to be claimed by assessee under Sections 80HHC and 80-IB of Act and, after considering provisions, computed income after granting deductions as per Section 80-IA(9) of Act on amount of profits and gains upto extent of 100% of amount of profits and gains. assessment order indicates that deductions calculated was more than 100% of profits and gains but Assessing Officer restricted deductions only to extent of 100% of amount of profits and gains. 13. object of amending section 80-IA by Finance (No.2) Act, 1998, as is evident from memorandum explaining provisions in Finance (No.2) Bill, 1998 ([1998] 231 ITR (St.) 252), is that it was noticed that certain assessees were claiming more than 100 percent deduction on profits and gains of same undertaking, when they were entitled to deductions under more than one section under heading C of Chapter VI-A. With 17 view to prevent taxpayer taking undue advantage of existing provisions of Act, section 80-IA was amended by Finance (No.2) Act, 1998, so that deductions allowed under section 80-IA and various sections under heading C of Chapter VI-A are restricted to profits of business of undertaking/enterprise. 14. We also find that it is not case where assessment order is based on incorrect assumption of fact. We also find that it is not case where Assessing officer has not applied its mind to provision of Section 80- IB (13) read with Section 80-IA(9) of Act. Assessing Officer after considering matter in detail has passed assessment order by applying its mind. Assessing officer had allowed deduction under Sections 80 HHC and under Section 80-IB of Act to extent of amount of profits and gains as contemplated under Section 80- IA(9) of Act. question as to whether deduction under Section 80HHC was to be computed after reducing deduction under Section 80-IB of Act from profits and 18 gains is legal consideration. Assessing Officer allowed deduction in terms of Section 80 IA(9) of Act and, therefore, it cannot be said that Assessing Officer had not applied its mind and had failed to make enquiry. 15. contention that order of Assessing Officer was erroneous as there was incorrect application of law, namely, that deduction under Section 80HHC of Act was computed after reducing amount of deduction under Section 80 IB of Act from profits and gains is legal consideration and does not mean that there has been incorrect application of law. mere absence of discussion of provision of Section 80 IB (13) of Act read with Section 80 IA(9) would not mean that Assessing Officer had not applied its mind to these provisions or that assessment order has been passed on incorrect application of law. From perusal of assessment order it is clear that deduction has not exceeded beyond 100%, as contemplated under Section 80 IA(9) of Act. Consequently, even if Section 80 IA(9) has 19 not been mentioned in impugned order, nonetheless, impact of this section has been given effect to in assessment order. This view of ours is also supported by decision of Delhi High Court in Commissioner of Income-Tax Vs. Honda Siel Power Products, (2011) 33 ITR 547 (Del). 16. Assessing Officer granted deduction under Sections 80HHC and 80-IB of Act by taking same figure of profits. On other hand, Department's case is that deduction under Section 80 HHC of Act was required to be computed after reducing amount of deduction under Section 80-IB of Act from profits and gains. On this score, there are divergence of views taken by different High Courts. In case of Associated Capsules P Ltd. Vs. Dy. Commissioner of Income Tax and another, (2011) 332 ITR 42 (Bom) and Commissioner of Income Tax and another Vs. Millipore India P.Ltd., (2012) 341 ITR 319 (Kar), Courts have taken view that same figures of profit is required to be taken for calculating deductions under Section 80HHC of Act and under Section 20 80-IB of Act: 17. On other hand, in decision of Liberty India Vs. Commissioner of Income Tax, 2009 (225) CTR (SC) 233, Great Eastern Exports Vs. Commissioner of Income Tax, (2011) 332 ITR 14 (Del) and M/s Broadway Overseas Ltd. Vs. Commissioner of Income Tax, 2014 (265) CTR (P&H) 49, Courts have held that deduction under Section 80HHC of Act is required to be computed after reducing amount of deductions under Section 80-IB of Act from profits and gains. 18. From this, it is apparently clear that there are two views on subject in question. Supreme Court in case of Malabar Industrial Co. Ltd. (Supra) has clearly held that where two views are possible and Income Tax Officer has taken view with which Commissioner does not agree it does not mean nor it can be treated that order passed by Assessing Officer was erroneous order prejudicial to interest of revenue. Further, we find that at time when assessment order was made there 21 was no decision either by jurisdictional High Court or by any other High Court on subject. 19. In light of aforesaid, we are of view that there was no material to indicate that Assessing Officer had not applied its mind to provisions of Section 80IB(13) of Act and Section 80IA(9) of Act nor we find that Assessing Officer had passed order without application of mind or assessment order was based on incorrect application of law. assessment order, on other hand, was passed under Section 143(3) of Act by Assessing Officer on applying its mind and after due discussion and enquiry. 20. From aforesaid discussion, it is apparent that expression prejudicial to interests of revenue appearing in Section 263 of Act has to be read in conjunction with erroneous and that every loss of revenue as consequence of assessment order could not be treated as prejudicial to interest of revenue. Where Assessing Officer has adopted view, which is permissible in law or where two views are possible and Income 22 Tax Officer has taken one view, we are of view that Commissioner of Income Tax could not exercise its power under Section 263 of Act to differ from view of Assessing Officer even if there was loss of revenue. There is no doubt that provision cannot be invoked on each and every type of error committed by Assessing Officer. It is only when order is erroneous then Section 263 of Act could be invoked. 21. In light of aforesaid, we are of opinion that Tribunal was justified in setting aside order of Commissioner of Income Tax passed under Section 263 of Act. appeal fails and is dismissed. question of law as modified above is answered in favour of assessee and against Department. appeal is dismissed. Date: 11.12.2015 MAA/- (Vinod Kumar Misra,J.) (Tarun Agarwala,J.) Commissioner of Income Tax & Another v. M/s Rashid Exports Industrie