Ita/91/2010 Of Commissioner Of Income Tax, Kottayam v. M/S.d.c.mills Private Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC &THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU TUESDAY, THE 12TH DAY OF JULY 2016/21ST ASHADHA, 1938 ITA.No. 91 of 2010------------------AGAINST THE ORDER IN I.T.A.696/2008 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 10-08-2009 APPELLANT/RESPONDENT:--------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT:---------------------- M/S D.C MILLS PVT. LTD., VALAVANAD, ALAPPUZHA. R1 BY ADV. SRI.SUKUMAR NAINAN OOMMEN R1 BY ADV. SRI.SHERRY SAMUEL OOMMEN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON31-5-2016, THE COURT ON 12-7-2016 DELIVERED THE FOLLOWING: I.T.A.No.91 of 2010 APPENDIX PETITIONER'S ANNEXURES: ANNEXURE A: ASSESSMENT ORDER U/S 143(3)DATED 23.3.2006. ANNEXURE B: ORDER UNDER SECTION 263 OF THECIT, KOTTAYAM DATED 18-3-2008. ANNEXURE C: ITAT'S ORDER IN ITANO.696/COCH/2008 DATED 10-8-2009. ANTONY DOMINIC & DAMA SESHADRI NAIDU, JJ. -----------------------------------I.T.A.No.91 of 2010----------------------------------- Dated this the 12[th] day of July, 2016 JUDGMENT Antony Dominic, J. 1. This appeal is filed by the Revenue calling inquestion the order passed by the Income Tax AppellateTribunal, Cochin Bench in ITA.696/08. question the order passed by the Income Tax AppellateTribunal, Cochin Bench in ITA.696/08. 2.The respondent assessee owns three 100% exportoriented units, viz., PVC Unit, Traditional Mats Unitand Pathirapally Unit. All the three units, being100% export oriented units, were eligible for thebenefit provided under section 10B of the Income TaxAct, 1961. oriented units, viz., PVC Unit, Traditional Mats Unitand Pathirapally Unit. All the three units, being100% export oriented units, were eligible for thebenefit provided under section 10B of the Income TaxAct, 1961. 3.In the assessment year 2003-04, the PVC unit andTraditional Mats unit returned profit while thePathirapally Unit returned loss. While completingthe assessment, the assessing officer permitted theassessee to set off the loss incurred at thePathirapally Unit against the profit of the PVC Unitand the Traditional Mats Unit. On the basis that thesaid order was erroneous and prejudicial to theTraditional Mats unit returned profit while thePathirapally Unit returned loss. While completingthe assessment, the assessing officer permitted theassessee to set off the loss incurred at thePathirapally Unit against the profit of the PVC Unitand the Traditional Mats Unit. On the basis that thesaid order was erroneous and prejudicial to the interests of the Revenue, the Commissioner of IncomeTax assumed jurisdiction under section 263 of theIncome Tax Act and passed Annexure B order, holdingthat the assessee was not entitled to set off loss ofone 100% export oriented unit against the profit oftwo other 100% export oriented units. According tothe Commissioner, such set off would result in givingthe assessee 100% deduction from the profit of theprofit earning units and that such deduction would goagainst the intention of the legislature as envisagedin the second proviso to sub-section (1) of section10B. 4.The assessee challenged this order of the Commissioner before the Income Tax Appellate Tribunalin ITA.696/08 and the Tribunal held that the order ofthe assessing officer was not erroneous andprejudicial to the interests of the Revenue and that,therefore, in the facts and circumstances of thecase, the assumption of jurisdiction under section263 of the Act by the Commissioner was held to beimproper. Reading of the order shows that thereasoning adopted by the Tribunal is that the view ITA.91/10 taken by the assessing officer is one of the possibleviews and that in such a case, the power of revisionunder section 263 of the Act could not have beeninvoked. 4.The assessee challenged this order of the Commissioner before the Income Tax Appellate Tribunalin ITA.696/08 and the Tribunal held that the order ofthe assessing officer was not erroneous andprejudicial to the interests of the Revenue and that,therefore, in the facts and circumstances of thecase, the assumption of jurisdiction under section263 of the Act by the Commissioner was held to beimproper. Reading of the order shows that thereasoning adopted by the Tribunal is that the view ITA.91/10 taken by the assessing officer is one of the possibleviews and that in such a case, the power of revisionunder section 263 of the Act could not have beeninvoked. 5.Aggrieved by the aforesaid order of the Tribunal, theRevenue has filed this appeal and the substantialquestion of law raised is whether, on the facts andcircumstances of the case and on interpretation ofsection 10B of the Act, the Tribunal is right in lawin holding that the order of the assessing officer isnot erroneous and prejudicial to the interest of theRevenue.Revenue has filed this appeal and the substantialquestion of law raised is whether, on the facts andcircumstances of the case and on interpretation ofsection 10B of the Act, the Tribunal is right in lawin holding that the order of the assessing officer isnot erroneous and prejudicial to the interest of theRevenue. 6.We heard senior counsel for the Revenue and thelearned counsel for the assessee.learned counsel for the assessee. 7.Section 10B incorporates special provisions inrespect of 100% export oriented units and in so faras the assessment year 2003-04 is concerned, as perthe proviso to sub-section (1), for the assessmentyear beginning from 1[st] April, 2003, the deductionunder the section shall be 90% of the profits andrespect of 100% export oriented units and in so faras the assessment year 2003-04 is concerned, as perthe proviso to sub-section (1), for the assessmentyear beginning from 1[st] April, 2003, the deductionunder the section shall be 90% of the profits and gains derived by an undertaking from export of sucharticles or things. While the entitlement of theunits of the assessee for the benefit of the sectionis not disputed by the Revenue, its contention isthat for the purpose of section 10B, each unit shouldbe separately treated since the word used in thesection is 'an undertaking' and that, therefore, setoff of loss of one unit against the profit of anotheris not permissible. 8.However, the question that is required to beconsidered is whether, in the facts of this case, theCommissioner was justified in assuming jurisdictionunder section 263 of the Act. Section 263 of the Actempowers the Commissioner to call for and examine therecord of any proceeding under the Act, and if heconsiders that any order passed therein by theassessing officer is erroneous in so far as it isprejudicial to the interest of the Revenue, he may,after giving the assessee an opportunity of beingheard and after making or causing to be made suchenquiry as he deems necessary, pass such orderthereon as the circumstances of the case justify. This power includes the power to order enhancing ormodifying the assessment or cancelling the assessmentand directing fresh assessment. 9.The celebrated decision explaining the scope ofsection 263 of the Act is that of the Apex Court inMalabar Industrial Co. Ltd. v. Commissioner ofIncome-tax [243 ITR 83]. In that judgment, themeaning of the term 'prejudicial to the interest ofthe Revenue' and the cases where this power wasinvoked have been explained as follows: This power includes the power to order enhancing ormodifying the assessment or cancelling the assessmentand directing fresh assessment. 9.The celebrated decision explaining the scope ofsection 263 of the Act is that of the Apex Court inMalabar Industrial Co. Ltd. v. Commissioner ofIncome-tax [243 ITR 83]. In that judgment, themeaning of the term 'prejudicial to the interest ofthe Revenue' and the cases where this power wasinvoked have been explained as follows: “7. There can be no doubt that the provisioncannot be invoked to correct each and every typeof mistake or error committed by the AssessingOfficer; it is only when an order is erroneous thatthe section will be attracted. An incorrectassumption of facts or an incorrect application oflaw will satisfy the requirement of the order beingerroneous. In the same category fall orderspassed without applying the principles of naturaljustice or without application of mind. 8. The phrase 'prejudicial to the interests of therevenue' is not an expression of art and is notdefined in the Act. Understood in its ordinarymeaning it is of wide import and is not conferred(confined) to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy and Co. v. S. P. Jain,(31 ITR 872) : (AIR 1957 Cal 244), the High Courtof Karnataka in Commissioner of Income-tax,Mysore v. T. Narayana Pai, (1975) 98 ITR 422, theHigh Court of Bombay in Commissioner of Income-tax v. Gabriel India Ltd., 203 ITR 108 : (1994 TaxLR 116) and the High Court of Gujarat inCommissioner of Income-tax v. Smt. Minalben S.Parikh, (1995) 215 ITR 81 treated loss of tax asprejudicial to the interests of the revenue. 9. Mr. Abaraham relied on the judgment of theDivision Bench of the High Court of Madras inVenkatakrishna Rice Company v. Commissioner ofIncome-tax, (1987) 163 ITR 129 interpreting"prejudicial to the interests of the revenue". TheHigh Court held, "In this context, it must beregarded as involving a conception of acts ororders which are subversive of the administrationof revenue. There must be some grievous error inthe Order passed by the Income-tax Officer,which might set a bad trend or pattern for similarassessments, which on a broad reckoning, theCommissioner might think to be prejudicial to theinterests of Revenue Administration". In our viewthis interpretation is too narrow to meritacceptance. The scheme of the Act is to levy andcollect tax in accordance with the provisions ofthe Act and this task is entrusted to the Revenue.If due to an erroneous order of the Income-taxOfficer, the revenue is losing tax lawfully payableby a person, it will certainly be prejudicial to theinterests of the revenue.” ITA.91/10 10.These principles have been re-iterated by the ApexCourt in its judgment in Commissioner of Income Taxv. Amitabh Bachan [2016 (3) KLT SN.4 (C.No.3) SC],where the court inter alia held thus:Court in its judgment in Commissioner of Income Taxv. Amitabh Bachan [2016 (3) KLT SN.4 (C.No.3) SC],where the court inter alia held thus: “There can be no doubt that so long as theview taken by the Assessing Officer is a possibleview the same ought not to be interfered with bythe Commissioner under S.263 of the Act merelyon the ground that there is another possible viewof the matter. Permitting exercise of revisionalpower in a situation where two views are possiblewould really amount to conferring some kind of anappellate power in the revisional authority. This isa course of action that must be desisted from.” 11.Having regard to these principles, if, as found bythe Tribunal, the assessing officer has adopted oneof the courses permissible in law and it has resultedin loss of revenue or where two views are possibleand the ITO has taken one view with which theCommissioner does not agree, such a case cannot betreated as an erroneous order prejudicial to theinterest of the Revenue unless the view taken by theITO is unsustainable in law. In so far as this case 11.Having regard to these principles, if, as found bythe Tribunal, the assessing officer has adopted oneof the courses permissible in law and it has resultedin loss of revenue or where two views are possibleand the ITO has taken one view with which theCommissioner does not agree, such a case cannot betreated as an erroneous order prejudicial to theinterest of the Revenue unless the view taken by theITO is unsustainable in law. In so far as this case is concerned, reading of the order passed by theTribunal shows that it has concluded that the viewtaken by the assessing officer is one of the possibleviews. The Tribunal arrived at this conclusionrelying on the judgment of the Bombay High Court inHindustan Unilever Limited v. Deputy Commissioner ofIncome Tax and Union of India [325 ITR 102] where, onidentical facts, the court has held thus: “23. The fourth and final ground which hasweighed with the Assessing Officer in re-openingthe assessment is that the assessee claimed adeduction of Rs.14.53 crores under Section 10B.The deduction was restricted to Rs.11.11 crores inthe order. While re-opening the assessment, theAssessing Officer has proceeded on the basis thatSection 10B provides an exemption and that inrespect of the Crab Stick Unit the assessee hadsuffered a loss of Rs.1.33 crores. The AssessingOfficer has observed that since the income of theunit was exempt from taxation, the loss of theunit could not have been set off against the normalbusiness income. However, this was allowed by theassessment order and it is opined that theassessee's income to the extent of Rs.1.33 croreshas escaped assessment. 24. There is merit in the submission which hasbeen urged on behalf of the assessee that theAssessing Officer has while re-opening theassessment ex-facie proceeded on the erroneouspremise that Section 10B is a provision in thenature of an exemption. Plainly, Section 10B as itstands is not a provision in the nature of anexemption but provides for a deduction. Section10B was substituted by the Finance Act of 2000with effect from 1 April 2001. Prior to thesubstitution of the provision, the earlier provisionstipulated that any profits and gains derived by anassessee from a 100 per cent Export OrientedUndertaking, to which the section applies “shallnot be included in the total income of theassessee”. The provision, therefore, as it earlierstood was in the nature of an exemption. Afterthe substitution of Section 10B by the Finance Actof 2000, the provision as it now stands providesfor a deduction of such profits and gains as arederived by a 100 per cent Export OrientedUndertaking from the export of articles or thingsor computer software for ten consecutiveassessment years beginning with the assessmentyear relevant to the previous year in which theundertaking begins to manufacture or produce.Consequently, it is evident that the basis on whichthe assessment has sought to be re-opened isbelied by a plain reading of the provision. TheAssessing Officer was plainly in error inproceeding on the basis that because the income isexempted, the loss was not allowable. All the four units of the assessee were eligible under Section10B. Three units had returned a profit during thecourse of the assessment year, while the CrabStick unit had returned a loss. The assessee wasentitled to a deduction in respect of the profits ofthe three eligible units while the loss sustained bythe fourth unit could be set off against the normalbusiness income. In these circumstances, thebasis on which the assessment is sought to be re-opened is contrary to the plain language of Section10B. “ 12. This judgment was followed by the Bombay High Courtin The Commissioner of Income Tax v. GalaxySurfactants Ltd. [343 ITR 108] and it was held thus: units of the assessee were eligible under Section10B. Three units had returned a profit during thecourse of the assessment year, while the CrabStick unit had returned a loss. The assessee wasentitled to a deduction in respect of the profits ofthe three eligible units while the loss sustained bythe fourth unit could be set off against the normalbusiness income. In these circumstances, thebasis on which the assessment is sought to be re-opened is contrary to the plain language of Section10B. “ 12. This judgment was followed by the Bombay High Courtin The Commissioner of Income Tax v. GalaxySurfactants Ltd. [343 ITR 108] and it was held thus: “5. At the outset, while dealing with thesubmission which has been urged on behalf of theRevenue, it must be noted that Section 10B whenit was originally introduced by the Finance Act,1988, with effect from 1 April 1989, provided foran exemption of the profits and gains derived bythe assessee from a hundred percent exportoriented undertaking. The earlier provisionspecifically stipulated that profits and gainsderived by an assessee from a hundred percentexport oriented undertaking to which the sectionapplies shall not be included in the total income ofthe assessee. Section 10A as at present stands, came to be substituted by the Finance Act, 2000with effect from 1 April 2001. The section as itnow stands, is not a provision for exemption, but aprovision which enables an assessee to claim adeduction. As it now stands, the sectioncontemplates a deduction of such profits and gainsas are derived by a hundred per cent exportoriented undertaking from the export of articlesand things or computer software for a period often consecutive assessment ears beginning withthe assessment year relevant to the previous yearin which the undertaking begins to manufacture orproduce such articles or things or computersoftware, as the case may be. The deduction hasto be allowed from the total income of theassessee. In Hindustan Lever Ltd. vs. DeputyCommissioner of Income Tax [(2010) 325 ITR 102(Bom)] a Division Bench of this Court consideredthe provisions of Section 10B, while considering apetition challenging the action of the AssessingOfficer in purport to reopen the assessment underSection 148. The Division Bench noted that uponthe substitution of the provision by the FinanceAct, 2000, Section 10B was no longer a provisionfor exemption, but a provision for deduction. TheDivision Bench observed as follows: Plainly, section 10B as it stands is not a provision inthe nature of an exemption but provides for adeduction. Section 10B was substituted by theFinance Act of 2000 with effect from April 1, 2001.Prior to the substitution of the provision, theearlier provision stipulated that any profits and Plainly, section 10B as it stands is not a provision inthe nature of an exemption but provides for adeduction. Section 10B was substituted by theFinance Act of 2000 with effect from April 1, 2001.Prior to the substitution of the provision, theearlier provision stipulated that any profits and gains derived by an assessee from a 100 per centexport oriented undertaking, to which the sectionapplies “shall not be included in the total income ofthe assessee”. The provision, therefore, as tiearlier stood was in the nature of an exemption.After the substitution of section 10B by theFinance Act of 2000, the provision as it now standsprovides for a deduction of such profits and gainsas are derived by a 100 per cent export orientedundertaking from the export of articles or things orcomputer software for ten consecutive assessmentyears beginning with the assessment year relevantto the previous year in which the undertaking beginsto manufacture or produce. Consequently, it isevident that the basis on which the assessment hassought to be reopened is belied by a plain reading ofthe provision. The Assessing Officer was plainly inerror in proceeding on the basis that because theincome is exempted, the loss was not allowable. Allthe four units of the assessee were eligible underSection 10B. Three units had returned a profitduring the course of the assessment year, while theCrab Stick unit had returned a loss. The assesseewas entitled to a deduction in respect of the profitsof the three eligible units while the loss sustainedby the fourth unit could be set off against thenormal business income. In these circumstances,the basis on which the assessment is sought to bereopened is contrary to the plain language ofSection 10B. This decision of the Division Bench has beenfollowed by another Division Bench of this Court inthe case of Commissioner of Income Ax II vs. Patni Computers Systems Ltd. Income Tax Appeal2177/10 decided on 1 July 2011.” 13.Reading of the judgments of the Bombay High Courtcertainly will lead to the conclusion that the viewtaken by the assessing officer allowing set off isone of the possible views. In such a case, havingregard to the principles laid down by the Apex Courtin its judgment in Malabar Industrial Co. Ltd.(supra), the Commissioner could not have assumedjurisdiction under section 263 of the Act. Therefore,we confirm the order of the Tribunal. Answering the question of law framed in favour of theassessee and against the Revenue, the appeal isdismissed. Sd/- ANTONY DOMINIC, Judge. Sd/- DAMA SESHADRI NAIDU, Judge. kkb.