Appellant:the Principal Commissioner Of Income Tax-I, Bhopal v. Respondent:m/S Kilpest India Limited

THE HIGH COURT OF MADHYA PRADESH: JABALPUR(Division Bench) ITA No. 70/2016 APPELLANT:The Principal Commissioner of Income Tax-I, Bhopal Versus RESPONDENT:M/s Kilpest India Limited ------------------------------------------------------------------------------------------- Coram: Hon’ble Shri Justice Ajay Kumar Mittal, Chief JusticeHon’ble Shri Justice Vijay Kumar Shukla, Judge ------------------------------------------------------------------------------------------- Appearance: Shri Sanjay Lal, Advocate for the appellant. None for the respondent. ------------------------------------------------------------------------------------------- JUDGMENT (Oral)[07.01.2020] Per: Ajay Kumar Mittal, Chief Justice: This appeal under Section 260-A of the Income Tax Act, 1961 (forshort “the Act”) has been preferred by the Revenue being aggrieved by anorder dated 21.09.2015 passed by the Income Tax Appellate Tribunal, IndoreBench, Indore (hereinafter referred to as “the Tribunal”) in ITA No.175/Ind/2014 whereby the order of the Commissioner of Income Tax(Appeals) [for brevity “the CIT(A)”] allowing the relief to the assesseeunder Section 80-IA of said Act has been affirmed and the appeal of theRevenue has been dismissed. 2.The appeal was admitted on 20.06.2017 for determination of thefollowing two substantial questions of law:- A.Whether on the facts and in the circumstances of case,the ITAT erred in upholding the order of CIT(A) whichthe Ld. CIT(A) held that the Unit-II was eligible forclaiming deduction u/s 80-IA of the Act, where it had notfiled form No.10CCB alongwith return of income inoriginal assessment proceedings? the ITAT erred in upholding the order of CIT(A) whichthe Ld. CIT(A) held that the Unit-II was eligible forclaiming deduction u/s 80-IA of the Act, where it had notfiled form No.10CCB alongwith return of income inoriginal assessment proceedings? B.Whether on the facts and in the circumstances of thecase, the ITAT erred in upholding the order of CIT(A) inwhich the Ld. CIT(A) held that the Unit-II was eligiblefor claiming deduction u/s 80-IA of the Act, when theprofits shown by the Unit-II in respect of sales toconsumption of raw material clearly showed that theprofit claimed by Unit-II for deduction u/s 80-IA of theAct was erroneous? case, the ITAT erred in upholding the order of CIT(A) inwhich the Ld. CIT(A) held that the Unit-II was eligiblefor claiming deduction u/s 80-IA of the Act, when theprofits shown by the Unit-II in respect of sales toconsumption of raw material clearly showed that theprofit claimed by Unit-II for deduction u/s 80-IA of theAct was erroneous? 3.Briefly stated, the facts of the present case, as mentioned in appealmemo, are that the respondent-assessee engages in the business offormulation of pesticides, insecticides and micro-nutrient fertilizers. Theoriginal assessment of the respondent for the assessment year 2004-05 wascompleted under Section 143(3) of the Act vide order dated 26.06.2006accepting the returned income wherein deduction of `16,71,579/- underSection 80-IA of the Act was claimed and determining the book profit underSection 115JB of the Act at `14,68,371/-. The said assessment was re-opened by the Assessing Officer under Section 147 of the Act by issuingnotice dated 30.03.2011 under Section 148 of the Act. The Assessing Officervide order dated 29.12.2011 (Annexure A-1) disallowed the deduction asclaimed under Section 80-IA of the Act inter alia on the ground that neitherthe audit report in Form No.10CCB was filed with the return nor during thecourse of assessment proceedings and even the audit report in FormNo.10CCB which was filed with the written submissions was incomplete as no separate audited financial statements of Unit-II were attached and furtherthe assessee did not furnish detail to justify the consumption of rawmaterials and production (month-wise) for the Unit-I and Unit-II, whereas asper profit & loss account of Unit-II, the net profit was shown at a veryhigher figure of `96,67,206/- which on comparison with the combinedaccount of Unit-I and Unit-II was found to be disproportionate, as theproportionate value of sale of Unit-II showed a very low figure of`38,30,063/-. It was also held that the assessee had concealed the particularsof income and furnished inaccurate particulars of income within the meaningof Section 271(1)(c) of the Act. Thus, the Assessing Officer added theamount of `16,71,579/- which was claimed by the assessee as deductionunder Section 80-IA of the Act. The order of re-assessment was assailed bythe respondent-assessee before the CIT(A)-I, Bhopal in first appeal, whichwas allowed vide order dated 02.12.2013 (Annexure A-2) with the directionto allow the deduction under Section 80-IA of the Act, as claimed by theassessee. Against the order of the CIT(A)-I second appeal was carried by theRevenue before the Tribunal, which has been dismissed vide order dated21.09.2015 (Annexure A-3). In this background, the order of the Tribunalhas been assailed in this appeal. 4.It is stated that though the tax effect involved in the appeal is only`5,84,158/- which is below the prescribed monetary limit for filing appealbefore the High Court in view of the CBDT’s circular No.21/2015 dated10.12.2015 but since the proceedings under Section 147 of the Act wereinitiated at the instance of the Revenue Audit Party, therefore, the appeal iscovered under the exceptions provided in the circular dated 10.12.2015. However, a preliminary objection was raised in this regard by the learnedcounsel for the assessee at the time of motion hearing, which was declinedby order dated 22.03.2017 and thereafter, the appeal was admitted on thesubstantial questions of law, as noted above. However, today, nobody haschosen to appear on behalf of the assessee. 5.Learned counsel for the appellant has vehemently argued that theCIT(A) as well as the Tribunal both erred in not properly appreciating thatthe assessee had failed to fulfill the requirement of filing Form No.10CCBalong with the return of income in the original assessment proceedings andtherefore, could not have been allowed deduction under Section 80-IA of theAct at the time of reassessment. As prescribed under Section 80-IA(7) of theAct, the requirement of filing audited report in Form No.10CCB ismandatory and therefore, could not have been dispensed with merely on theground that the same relief was granted in the immediately preceding year.He further argued that the Unit-II in its profit & loss account showed profitof `96,67,206/-, consumption of raw material as `31,36,696/- and sale ofUnit-II as `1,67,56,520/- after deducting all other overheads, whereas oncomparison with the combined accounts shown for Unit-I and Unit-II, theproportion of sales of Unit-II comes to only `38,30,063/- which is on verylower side and thus, the profit shown is apparently erroneous and theAssessing Officer has also recorded a finding that even if any reasonableamount is added to the sales shown for Unit-II to cover up the overheadsthen also it shows loss instead of profit shown by Unit-II. Thus, on thisground also the deduction under Section 80-IA of the Act was not allowable.On these premises, it was prayed that the appeal be allowed and the impugned orders passed by the CIT(A) and the Tribunal be set asiderestoring the order of the Assessing Officer. 6.We have heard learned counsel for the appellant and perused theimpugned orders. 7.Broadly, the following two issues arise for consideration in thisappeal:- appeal:- impugned orders passed by the CIT(A) and the Tribunal be set asiderestoring the order of the Assessing Officer. 6.We have heard learned counsel for the appellant and perused theimpugned orders. 7.Broadly, the following two issues arise for consideration in thisappeal:- appeal:- (a)Whether the assessee, who had failed to file the audit report atthe time of original assessment was entitled to present it duringthe course of reassessment proceedings and, thus, entitled toclaim deduction under Section 80-IA of the Act in view of thecondition envisaged in sub-section (7) of Section 80-IA of theAct? the time of original assessment was entitled to present it duringthe course of reassessment proceedings and, thus, entitled toclaim deduction under Section 80-IA of the Act in view of thecondition envisaged in sub-section (7) of Section 80-IA of theAct? (b)Whether the Tribunal had rightly allowed deduction underSection 80-IA of the Act in respect of profits shown by Unit-IIwhen the profits of that Unit were not in proportion of sales toconsumption of raw material therein? Section 80-IA of the Act in respect of profits shown by Unit-IIwhen the profits of that Unit were not in proportion of sales toconsumption of raw material therein? 8.Taking up the first broad issue, the answer would require discussion ofthe following points:- the following points:- (i)Whether the assessee who fails to file the audit report underSection 80-IA(7) of the Act along with the original return ofincome filed under Section 139 of the Act but presents the sameduring the course of assessment proceedings under Section 143of the Act, is entitled to deduction under Section 80-IA thereof. Section 80-IA(7) of the Act along with the original return ofincome filed under Section 139 of the Act but presents the sameduring the course of assessment proceedings under Section 143of the Act, is entitled to deduction under Section 80-IA thereof. (ii)If answer to issue (i) above, is in affirmative, then whether thesaid benefit is admissible in the reassessment proceedings whenno audit report had been filed during the original assessmentproceedings but was presented only in reassessmentproceedings. said benefit is admissible in the reassessment proceedings whenno audit report had been filed during the original assessmentproceedings but was presented only in reassessmentproceedings. 9.Before considering the first point with regard to non-fulfillment ofrequirement of filing the audit report in Form No.10CCB by the assesseeand the question as to whether the condition envisaged under Section 80-IA(7) of the Act for claiming deduction in respect of profits and gains ismandatory or directory, it would be apt to refer to the relevant provisions ofthe Act, which read, thus:- “Deductions in respect of profits and gains from industrialundertakings or enterprises engaged in infrastructure development,etc. - 80-IA. (1) Where the gross total income of an assessee includes anyprofits and gains derived by an undertaking or an enterprise from anybusiness referred to in sub-section (4) (such business being hereinafterreferred to as the eligible business), there shall, in accordance with andsubject to the provisions of this section, be allowed, in computing the totalincome of the assessee, a deduction of an amount equal to hundred percent of the profits and gains derived from such business for tenconsecutive assessment years. *** ****** (7)The deduction under sub-section (1) from profits and gains derivedfrom an undertaking shall not be admissible unless the accounts of theundertaking for the previous year relevant to the assessment year forwhich the deduction is claimed have been audited by an accountant, asdefined in the Explanation below sub-section (2) of section 288, and theassessee furnishes along with his return of income, the report of such auditin the prescribed form duly signed and verified by such accountant.” *** ****** (7)The deduction under sub-section (1) from profits and gains derivedfrom an undertaking shall not be admissible unless the accounts of theundertaking for the previous year relevant to the assessment year forwhich the deduction is claimed have been audited by an accountant, asdefined in the Explanation below sub-section (2) of section 288, and theassessee furnishes along with his return of income, the report of such auditin the prescribed form duly signed and verified by such accountant.” 10.We proceed to examine the condition envisaged under Section 80-IA(7) of the Act, whether it is mandatory or directory in view of thelanguage of the provision that the deduction under sub-section (1) fromprofits and gains derived from an undertaking shall not be admissible unlessthe relevant accounts for which deduction is claimed have been audited andthe assessee has furnished the same along with his return of income. It is no longer res integra. A similar issue with regard to the requirement of filingaudit report with the return in terms of selfsame Section 32AB(5) of the Actfor claiming deduction under Section 32AB(1) of the Act came up forconsideration in an appeal under Section 260A of the Act before a FullBench of the Punjab and Haryana High Court in a decision reported in(2002) 254 ITR 6 (P&H) (Commissioner of Income Tax vs. PunjabFinancial Corporation). The Bench held that Section 32AB(5) of the Act isnot mandatory and the Assessing Officer has the discretion to entertain theaudit report even though the same has not been filed with the return butpresented during the course of assessment proceedings and give benefit ofthe deduction to the assessee in terms of Section 32AB(1) of the Act. TheBench further took note of the provision under Section 139 of the Act whichprovides for filing of revised return and rectification of defect in the returnand, therefore, the requirement of filing the duly audited report along withthe return was held to be not mandatory. Be it noted, the provision underSection 32AB(5) of the Act is similar to Section 80-IA(7) of the Act.Therefore, we are unable to take any different view in the matter than theone arrived at by the Punjab and Haryana High Court in Punjab FinancialCorporation (supra). In view of the above, the first point under issue No.(a) is held inaffirmative. In other words, where the assessee files the audit report in FormNo.10CCB before completion of the assessment, we do not find any reasonto hold that the condition envisaged under Section 80-IA of the Act had notbeen fulfilled. 11.Analysing whether the said benefit is admissible in case ofreassessment proceedings as well, it would be expedient to reproducerelevant portion of Sections 147 and 148 of the Act, which read, thus:- “Income escaping assessment. 147.If the Assessing Officer has reason to believe that any incomechargeable to tax has escaped assessment for any assessment year, he may,subject to the provisions of sections 148 to 153, assess or reassess suchincome and also any other income chargeable to tax which has escapedassessment and which comes to his notice subsequently in the course ofthe proceedings under this section, or recompute the loss or thedepreciation allowance or any other allowance, as the case may be, for theassessment year concerned (hereafter in this section and in sections 148 to153 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 orthis section has been made for the relevant assessment year, no action shallbe taken under this section after the expiry of four years from the end ofthe relevant assessment year, unless any income chargeable to tax hasescaped assessment for such assessment year by reason of the failure onthe part of the assessee to make a return under section 139 or in responseto a notice issued under sub-section (1) of section 142 or section 148 or todisclose fully and truly all material facts necessary for his assessment, forthat assessment year: Provided that where an assessment under sub-section (3) of section 143 orthis section has been made for the relevant assessment year, no action shallbe taken under this section after the expiry of four years from the end ofthe relevant assessment year, unless any income chargeable to tax hasescaped assessment for such assessment year by reason of the failure onthe part of the assessee to make a return under section 139 or in responseto a notice issued under sub-section (1) of section 142 or section 148 or todisclose fully and truly all material facts necessary for his assessment, forthat assessment year: Provided further that nothing contained in the first proviso shall apply ina case where any income in relation to any asset (including financialinterest in any entity) located outside India, chargeable to tax, has escapedassessment for any assessment year: Provided also that the Assessing Officer may assess or reassess suchincome, other than the income involving matters which are the subjectmatters of any appeal, reference or revision, which is chargeable to tax andhas escaped assessment. *** ******” Issue of notice where income has escaped assessment. 148.(1) Before making the assessment, reassessment or recomputationunder section 147, the Assessing Officer shall serve on the assessee anotice requiring him to furnish within such period, as may be specified inthe notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous yearcorresponding to the relevant assessment year, in the prescribed form andverified in the prescribed manner and setting forth such other particularsas may be prescribed; and the provisions of this Act shall, so far as maybe, apply accordingly as if such return were a return required to befurnished under section 139: *** ******” According to the aforesaid provisions before making assessment/reassessment or recomputation under Section 147 of the Act, the AssessingOfficer shall serve on the assessee a notice requiring him to furnish a returnof his income or income of any person in respect of which he is assessableduring the previous year corresponding to the relevant assessment year evenwhere a return had been furnished earlier under Section 139 or Section142(1) of the Act, within such period as may be specified in the notice. Theeffect of return filed in response to notice under Section 148(1) of the Act isthat it shall be treated as if such return was a return required to be furnishedunder Section 139 of the Act. Accordingly, the Assessing Officer shall serve anotice under Section 143(2) of the Act within the period of limitationprovided thereunder from the end of the financial year in which the return isfurnished by the assessee to make the assessment under Section 147 readwith Section 143(3) of the Act. In view of the above, it may be safelyconcluded that the basic purpose of Section 148 of the Act is merely toempower the Assessing Authority with the machinery for assessment.Fundamentally, both the assessment and reassessment need the samemachinery. In other words, the provisions relating to regular assessmentsshall apply to the assessment made pursuant to the notice of reassessment.Once that is so, all the essential traits and requirements of procedureembodied for framing of regular assessment under the Act would also apply to reassessment proceedings as well. Therefore, the audit report furnished atthe time of reassessment proceedings could not be ignored by the AssessingOfficer while adjudicating the issue of admissibility of deduction underSection 80-IA of the Act. The point No.(ii) noticed above is decidedaccordingly. to reassessment proceedings as well. Therefore, the audit report furnished atthe time of reassessment proceedings could not be ignored by the AssessingOfficer while adjudicating the issue of admissibility of deduction underSection 80-IA of the Act. The point No.(ii) noticed above is decidedaccordingly. 12.Adverting to the factual matrix in the present case, it is noticed thatthe findings recorded by CIT(A) and the Tribunal indicate that the assesseewas carrying on its business since 1973-74 and had set up a new unit in1997-98 and had been claiming deduction under Section 80-IA of the Actsince then which was allowed by the Department. In the assessment years2001-02 and 2002-03 also the assessee claimed the deduction under Section80-IA(2) of the Act, which was allowed. Considering thus, the Tribunaldismissed the appeal holding that the same relief was granted on the basis ofthe decision of the ITAT in the immediately preceding year and the facts ofthe present case also remain the same. The relevant extract of the orderpassed by the Tribunal reads thus:- “2.1The facts, in brief, are that, during the relevant period, the assesseecompany was carrying on the business of formulation of pesticides andinsecticides since 1973-74. The assessee set up a new unit in 1997-98 tomanufacture micronutrient fertilizers and had been claiming deduction u/s80-IA since then which was allowed by the Department. The learnedCIT(A) perused the assessment order framed u/s 143(3) for the A.Ys2001-02 and 2002-03 wherein the claimed deduction u/s 80-IA(2) of theAct was allowed to the assessee. However, vide assessment order dated23.12.2010 the learned Assessing Officer disallowed the claimeddeduction on the ground that the assessee did not furnish the audit reportin Form No.10CCB. The assessee approached the learned CIT(A) whoafter examining the facts allowed the claim which is under challengebefore this Tribunal. We find that there uncontroverted finding in theimpugned order (para 4.3) that the audit report was filed and the requirement of section 80-IA(7) of the Act has been duly met with. Unit-IIwas separate and independent unit from the existing unit and the new unitcommenced its production during A.Y. 1997-98. The manufacturing ofmicronutrient fertilizers even has not been disputed by the AssessingOfficer. It is not the case that the unit in dispute is part of earlier unit or itsexpansion. There is an uncontroverted finding in the impugned order thatthe assessee was maintaining separate accounts for both the units whichare duly audited. Since the assessee has duly fulfilled the requirements ofsection 80-IA(7) of the Act by filing the audit report before framing theassessment, we are of the view that the Assessing Officer wronglydisallowed the claim of the assessee. As per provisions of section 80-IA(7), requiring filing of audit report alongwith the return is notmandatory rather it is directory and if the audit report is filed at any timebefore framing the assessment, the required conditions are considered tobe fulfilled. Our view is fortified by the decision in CIT vs. ACEMultitaxes Systems (P) Ltd. (2009) 317 ITR 307 (Kar.); CIT vs. MedicapsLimited (2010) 323 ITR 554 (MP); AKS Alloys Pvt. Ltd. (2012); 18Taxman.com 25(Mad.); CIT vs. A.N. Arunachalam; 75 Taxman 529(Mad.). The sum and substance of these decisions is that audit report canbe filed with the revised return or at any stage up to framing ofassessment. In view of these facts and judicial pronouncements, we findno justification to interfere with the impugned order. Our view is furtherfortified by the decision from Delhi High Court in CIT vs. ContimeterElectricals Pvt. Ltd.; 317 ITR 249. In view of these facts, we find no meritin the appeal of the Revenue. It is dismissed. 3.Since the relief has been granted on the basis of the decision of theITAT in the immediately preceding year and facts remain the same,therefore, respectfully following the order of the Tribunal, we sustain theorder of the learned CIT(A) in allowing relief u/s 80-IA of the Act to theassessee.” 13.That apart, a perusal of the order passed by the Assessing Officerindicates that the assessee had filed audit report in Form No.10CCB dated21.10.2004 along with the written submissions on 25.08.2011 showing profitof the eligible undertaking and deduction under Section 80-IA of the Act. Itis, thus, clear that the said requirement of filing audit report was dulyfulfilled by the asssessee during the course of the reassessment proceedings or for that matter before framing the reassessment by the Assessing Officerwhen the proceedings were re-opened. At the time of passing of the order,there was material before the Assessing Officer to rely upon the audit reportduly filed by the assessee in Form No.10CCB as contemplated under Section80-IA(7) of the Act. Once the accounts of the assessee for the relevant yearwere examined and the audit report was submitted at the time ofreassessment proceedings, it could not have been discarded by the AssessingOfficer on the ground that no separate audited financial statements wereattached in the original assessment proceedings. There is nothing to showthat the Assessing Officer had doubted the correctness of the said auditreport so as to make it necessary for the assessee to have submitted separateaudited financial statements of Unit No.II and in absence of which the auditreport had been incomplete. 14.Admittedly, since the audit report in Form No.10CCB was ultimatelyfiled before completion of the reassessment, we do not find any reason tohold that condition under Section 80-IA(7) of the Act had not been satisfied.Consequently, question No.(A) is answered in favour of the assessee andagainst the Revenue. 15.Now, taking up the second broad issue, as regards the argument of thelearned counsel that deduction under Section 80-IA of the Act could nothave been allowed in respect of Unit-II when the profit shown by it waserroneous as it was reflected from its sales and consumption of raw materialwhich was disproportionate to the combined accounts of the Unit-I and Unit-II is concerned, it is gathered from the findings recorded by the CIT(A) thatthe products manufactured in Unit-I and Unit-II of the assessee are altogether different and therefore, percentage of raw material consumed inboth the units and working out value of sale based on raw materialconsumed in Unit-II cannot be the same. Under these circumstances, theCIT(A) held that assessee was eligible for claiming deduction of`16,71,579/- under Section 80-IA of the Act on the profits derived fromUnit-II. The relevant extract of the finding recorded by the CIT(A) isreproduced as under:- altogether different and therefore, percentage of raw material consumed inboth the units and working out value of sale based on raw materialconsumed in Unit-II cannot be the same. Under these circumstances, theCIT(A) held that assessee was eligible for claiming deduction of`16,71,579/- under Section 80-IA of the Act on the profits derived fromUnit-II. The relevant extract of the finding recorded by the CIT(A) isreproduced as under:- “As regards profits derived from Unit-II of manufacturing ofmicronutrient fertilizers, the appellant had shown net profit of`96,67,206/- and the allowable deduction u/s 80-IA @30% works out to`29,00,162/-. But the deduction was restricted to `16,71,579/- equivalentto the total income of the appellant, which is equivalent to net profit of`55,71,932/- (30% of `55,71,932/- = `16,71,579). The productsmanufacture in Unit-I & Unit-II are entirely different as in Unit-I, theappellant was manufacturing pesticides and insecticides, whereas in Unit-II, the appellant was manufacturing micronutrient fertilizers which is atotally different product. Therefore, the AO was not correct in assumingthat the percentage of raw material consumed would be same in both theunits and calculating value of sale based on raw material consumed inUnit-II on the basis of same ratio of the raw material consumed in Unit-I.Therefore, considering the totality of facts and circumstances of the case, Iam of the considered opinion that the appellant was eligible for claimingdeduction u/s 80-IA of `16,71,579/- on the profits delivered from Unit-IIfor manufacturing of micronutrient fertilizers. Accordingly, the AO isdirected to allow deduction claimed u/s 80-IA of `16,71,579/- to theappellant.” Even though the Tribunal has not specifically discussed this aspect butthe Tribunal in para 2.1 of its order has concurred with the view of theCIT(A) that the Unit-II was separate and independent unit from the existingUnit and the assessee was maintaining separate accounts for both the unitswhich are duly audited. We find the view expressed by the CIT(A) and theTribunal to be cogent because once the assessee was maintaining separate S/ accounts for both the units and product manufactured was different and rawmaterial used was also different then it was not open to the Assessing Officerto compare the value of sales of Unit-II by combining the accounts of Unit-Iand Unit-II. Thus, we do not find any force in the submission of the learnedcounsel for the appellant that profit shown by Unit-II in respect of sales toconsumption of raw material was erroneous and therefore, deduction underSection 80-IA of the Act was not allowable to the Unit-II. Accordingly, thequestion No.(B) is also answered against the Revenue. 16.There is no illegality or perversity in the findings of fact recorded bythe Tribunal warranting interference by this Court in exercise of jurisdictionunder Section 260A of the Act, which is confined to entertaining only thoseappeals where the substantial question of law is involved. 17.In view of the foregoing discussion, we find no reason to interferewith the order impugned herein. Accordingly, we answer the substantialquestions of law against the appellant-Revenue. Resultantly, the appealstands dismissed. (Ajay Kumar Mittal) (Vijay Kumar Shukla)Chief Justice Judge