Commissioner Of Income Tax-I,Ludiana v. Versus

ITA No. 581 of 2009 ITA No. 582 of 2009ITA No. 583 of 2009 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH -1- 1.ITA No. 581 of 2009Date of Decision 16.03.2010 Commissioner of Income Tax-I,Ludiana ---Appellant Versus M/s Saluja Exim Ltd., Ludhiana,(Now M/s SEL Manufacturing Co. Ltd.GT Road, Dhandari Kalan, Ludhiana) ---Respondent 2. ITA No. 582 of 2009Commissioner of Income Tax-I,Ludiana ---Appellant Versus M/s Saluja Exim Ltd., Ludhiana,(Now M/s SEL Manufacturing Co. Ltd.GT Road, Dhandari Kalan, Ludhiana) ---Respondent 3.ITA No. 583 of 2009 Commissioner of Income Tax-I,Ludiana ---Appellant Versus M/s Saluja Exim Ltd., Ludhiana,(Now M/s SEL Manufacturing Co. Ltd.GT Road, Dhandari Kalan, Ludhiana) ---Respondent CORAM:HON'BLE MR. JUSTICE M.M. KUMARHON'BLE MR. JUSTICE JITENDRA CHAUHAN Present:Mr. Vivek Sethi, Advocatefor the Revenue-appellant Ms. Radhika Suri, Advocate,for the assessee-respondent. 1.To be referred to the Reporters or not? 2.Whether the judgment should be reported in the Digest? M.M. Kumar, J. This order shall dispose of ITA Nos. 581 to 583 of 2009 whichhave been decided by the Income Tax Appellate Tribunal,Chandigarh Bench 'A', Chandigarh (for brevity 'the Tribunal) by acommon order dated 30.09.2008 in respect of assessment years2002-03 and 2003-04. Revenue has approached this Courtchallenging the aforesaid order calming that the followingsubstantial questions of law would arise for determination of thisCourt: (i) Whether on the facts and in law, the Hon'ble Income TaxAppellate Tribunal was justified in holding that theinvoking of Section 263 of the Act was not justifiedignoring the fact that the order of the Assessing Officerpassed u/s 143(3) on 30.03.2006 was erroneous in so faras it was prejudicial to the interest of the Revenue?Appellate Tribunal was justified in holding that theinvoking of Section 263 of the Act was not justifiedignoring the fact that the order of the Assessing Officerpassed u/s 143(3) on 30.03.2006 was erroneous in so faras it was prejudicial to the interest of the Revenue? (ii) Whether on the facts and in law, the Hon'ble Income Tax -3- Appellate Tribunal was justified in considering the issuerelating to the quantum of exclusion under clause (iv) ofthe Explanation below section 115JB(2) of the IncomeTax Act, for computation of 'Book Profits' in the light ofthe decisions in the case of DCIT Vs. SyncomeFormulations (I) Ltd 106 ITD 193 (mum) (SB) and ACITVs. Ajanta Pharma Ltd. 21 SOT 101 (Mum) whereas thesaid decision has been reversed by the Hon'ble BombayHigh Court in ITA No. 1005 of 2008 dated 07.05.2009 inthe case of CIT-9 Vs. M/s Ajanta Pharma Ltd.? It is appropriate to mention that assessment was finalizedunder Section 143(3) of the Income Tax Act, 1961 (for brevity 'theAct'). However, the Commissioner of Income Tax exercising powerunder Section 263, has taken the view that the Assessing Officerwhile computing 'book profits' chargeable to tax under Section115JB of the Act, has reduced the profits of export business withoutany justification. According to the Commissioner, 'eligible profits ofbusiness' as computed in accordance with the provision of Section80HCC (1B) was alone to be reduced to the extent of 50% only.After issuing show cause notice, the Commissioner cancelled theassessment framed under Section 143(3) by the Assessing Officeron the limited issue of re-computing the 'Book Profit' after excludingonly eligible profits of business computed in accordance with the provisions of Section 80HHC (1B) of the Act. provisions of Section 80HHC (1B) of the Act. Aggrieved by the order of the Commissioner, assesseeapproached the Tribunal challenging the invocation of power underSection 263 by the Commissioner in addition to the direction issuedby him to the Assessing Officer for re-computing the 'Book Profits'in accordance with the provision of Section 80HCC (1B) of the Act,making them eligible to the extent of 50%. The Tribunal placedreliance on the judgment delivered by Special Bench in the case ofDCIT v. Syncome Formulations (I) Ltd 106 ITD 193 (Mum)(SB); and ACIT v. Ajanta Pharma Ltd. 21 SOT 101 (Mum). Itis appropriate to mention that in those decisions, the Tribunal hasconsidered the issue relating to computation of 'Book Profit' for thepurposes of Section 115JB and in relation to clause (iv) ofExplanation to Section 115JB of the Act. It has been observed thatthe amount referred therein is the amount of profit eligible fordeduction under Section 80HHC irrespective of the percentage ofthe profits that are eligible for deduction ultimately. The MumbaiBench of the Tribunal in the case of Ajanta Pharma Ltd. (supra) hasheld that amount to be reduced in terms of clause (iv) of theExplanation of Section 115JB(2) is not governed by sub-section (1B)of Section 80HCC in the absence of any reference to it in clause (iv)of Explanation to Section 115JB (2) of the Act. The Tribunal aftermaking reference to the aforesaid judgment observed in para 11 asunder: -5- “In this case, the plea of the assessee is thaton the dispute relating to the quantum ofexclusion under clause (iv) of the Explanationbelow Section 115JB(2), the interpretationplaced by the assessee as well as by theAssessing Officer in the order passed u/s 143(3)is supported by the decisions of the Tribunal inthe case of Ajanta Pharma Ltd. (supra) andSyncome Formulations (I) Ltd. (supra). We haveperused the said decisions, copies of which areon record and find that the stand of the assesseeis justified. The assessment framed by theAssessing Officer by excluding the book profitseligible for deduction under Section 80HHC interms of clause (iv) of the Explanation to Section115JB(2) is in tune with the aforesaid twodecisions of the Tribunal. On this basis, factuallyspeaking, it can be deduced that the view takenby the Assessing Officer while framing theassessment u/s 143(3) on 30.03.2006 is apossible view. No decision to the contrary hasbeen brought to our notice and in any case, itcannot be said that view of the Assessing Officerwas un-sustainable in law. We also find that the ITA No. 581 of 2009 ITA No. 582 of 2009ITA No. 583 of 2009 -6- Commissioner has neither in the show causenotice dated 14.3.2008 and nor in the impugnedorder dated 31.03.2008 made reference to anyjudicial order to support his interpretation, whichis contrary to that of the Assessing Officer. Inany case, having regard to the fact that the viewadopted by the Assessing Officer was a possibleview in the light of the cited Tribunal decisions,though rendered subsequently, the same in our considered opinion, does not enable theCommissioner to invoke Section 263 in the faceof the law laid down by the Hon'ble SupremeCourt in the case of Malabar Industrial Co. Ltd.(supra).” On the other issue, as to whether the Commissioner waswithin his power to invoke Section 263, the Tribunal answered theissue against the Revenue, it has been held that the questionconcerning powers of the Commissioner to invoke Section 263 is nolonger res-integra. The Tribunal has placed reliance on thejudgment of Hon'ble the Supreme Court rendered in the case ofMalabar Industrial Co. Ltd. v. C.I.T., [2000] 243 ITR 83 (SC), andhas held for valid invocation of Section 263, the twin conditions arerequired to be satisfied simultaneously (a) that the order in questionshould be erroneous; and (b) it should be prejudicial to the interest -7- On the other issue, as to whether the Commissioner waswithin his power to invoke Section 263, the Tribunal answered theissue against the Revenue, it has been held that the questionconcerning powers of the Commissioner to invoke Section 263 is nolonger res-integra. The Tribunal has placed reliance on thejudgment of Hon'ble the Supreme Court rendered in the case ofMalabar Industrial Co. Ltd. v. C.I.T., [2000] 243 ITR 83 (SC), andhas held for valid invocation of Section 263, the twin conditions arerequired to be satisfied simultaneously (a) that the order in questionshould be erroneous; and (b) it should be prejudicial to the interest -7- of the Revenue. Both the conditions are required to be satisfiedsimultaneously and absence of any one of them would not besufficient for exercising power under Section 263. The Tribunal,thus, concluded that where the Assessing Officer has adopted oneof the two courses permissible in law then revisional power underSection 263 of the Act cannot be invoked by the Commissionermerely because the Commissioner prefers the other view than theone taken by the Assessing Officer. It is pertinent to mention that in the case of C.I.T v. Max IndiaLtd., [2007] 295 ITR 282 (SC), Hon'ble the Supreme Court hasclarified that the position of law as it stood on the date when theAssessing Officer had passed the order has to be taken intoconsideration. No subsequent change in law could constitute basisfor exercise of power under Section 263 of the Act. The views ofHon'ble the Supreme Court are discernible from para 10 of MalabarCompany's case (supra) which discusses Section 80HHC and readthus: “In our view at the relevant time two viewswere possible on the word “profits” in theproviso to section 80HHC(3). It is true that videthe 2005 amendment the law has been clarifiedwith retrospective effect by insertion of theword “loss” in the new proviso. We express noopinion on the scope of the said amendment of2005. Suffice it to state that in this particularcase when the order of the Commissioner was ITA No. 581 of 2009 ITA No. 582 of 2009ITA No. 583 of 2009 -8- passed under section 263 of the Income-tax Act,1961, two views on the said word “profits”existed. In our view the matter is squarelycovered by the judgment of this court in thecase of Malabar Industrial Co. Ltd. v. CITreported in [2000] 243 ITR 83; as also by thejudgment of the Calcutta High Court in the caseof Russell Properties P. Ltd. v. A. Chowdhury,Addl. CIT [1977] 109 ITR 229 at 243. At this stage we may clarify that underparagraph 10 of the judgment in the case ofMalabar Industrial Co. Ltd. v. CIT [2000] 243ITR 83 this court has taken the view that thephrase “prejudicial to the interests of theRevenue” under section 263 has to be read inconjunction with the expression “erroneous”order passed by the Assessing Officer. Every lossof revenue as a consequence of an order of theAssessing Officer cannot be treated asprejudicial to the interests of the Revenue. Forexample, when an Income-tax Officer adoptedone of the courses permissible in law and it hasresulted in loss of revenue; or where two viewsare possible and the Income-tax Officer hastaken one view with which the Commissionerdoes not agree, it cannot be treated as anerroneous order prejudicial to the interests ofthe Revenue, unless the view taken by theIncome-tax Officer is unsustainable in law.According to the learned Additional SolicitorGeneral, on an interpretation of the provision of ITA No. 581 of 2009 ITA No. 582 of 2009ITA No. 583 of 2009 -9- ITA No. 581 of 2009 ITA No. 582 of 2009ITA No. 583 of 2009 -9- section 80HHC(3) as it then stood the viewtaken by the Assessing Officer wasunsustainable in law and therefore theCommissioner was right in invoking section 263of the Income-tax Act. In this connection, he hasfurther submitted that in fact the 2005amendment which is clarificatory andretrospective in nature itself indicates that theview taken by the Assessing Officer at therelevant time was unsustainable in law. We findno merit in the said contentions. Firstly, it is notin dispute that when the order of theCommissioner was passed there were two viewson the word “profits” in that section. Theproblem with section 80HHC is that it has beenamended eleven times. Different views existedon the day when the Commissioner passed theabove order. Moreover, the mechanics of thesection have become so complicated over theyears that two views were inherently possible.Therefore, subsequent amendment in 2005 eventhough retrospective will not attract theprovision of section 263 particularly when asstated above we have to take into account theposition of law as it stood on the date when theCommissioner passed the order dated March 5,1997, in purported exercise of his powers underSection 263 of the Income-tax Act.”(EmphasisAdded).taken by the Assessing Officer wasunsustainable in law and therefore theCommissioner was right in invoking section 263of the Income-tax Act. In this connection, he hasfurther submitted that in fact the 2005amendment which is clarificatory andretrospective in nature itself indicates that theview taken by the Assessing Officer at therelevant time was unsustainable in law. We findno merit in the said contentions. Firstly, it is notin dispute that when the order of theCommissioner was passed there were two viewson the word “profits” in that section. Theproblem with section 80HHC is that it has beenamended eleven times. Different views existedon the day when the Commissioner passed theabove order. Moreover, the mechanics of thesection have become so complicated over theyears that two views were inherently possible.Therefore, subsequent amendment in 2005 eventhough retrospective will not attract theprovision of section 263 particularly when asstated above we have to take into account theposition of law as it stood on the date when theCommissioner passed the order dated March 5,1997, in purported exercise of his powers underSection 263 of the Income-tax Act.”(EmphasisAdded). Once the aforesaid legal position is clear and the law whichwas applicable on the date when the Assessing Officer passed the ITA No. 581 of 2009 ITA No. 582 of 2009ITA No. 583 of 2009 -10- order has to determine the erroneous nature of the order passed bythe Assessing Officer then it is obvious that the judgment of theBombay High Court in ACIT v. Ajanta Pharma Ltd. (2009) 223 ITR (Bom.) 441, would not be attracted to the facts of the presentcase. On that basis the order passed by the Commissioner on31.03.2008 cannot be justified by any subsequent pronoucement oflaw and consequently the order of the Assessing Officer cannot beheld to be erroneous as law applicable on the date of passing orderby the Assessing Officer has to be applied. Admittedly on that date,two views were possible and according to Hon'ble the SupremeCourt, the mechanics of the section have become so complicatedover the years that two views were inherently possible. Accordingly,we find that the order of the Tribunal does not suffer from any legalinfirmity warranting interference of this Court. The appeals arewholly and without merit and are, thus liable to be dismissed. As a sequel to the above discussions, appeals are dismissed. (M.M. KUMAR)JUDGE March 16, 2010Atul (JITENDRA CHAUHAN) JUDGE