M.k.road, Mumbai 20 v. M/S Design & Automation

-1- IN THE HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. Income Tax Appeal No.147 of 2002 The Commissioner of Income Tax ) City VI,Mumbai, Ayakar Bhavan ) M.K.Road, Mumbai 20 ) ..Appellant vs. M/s Design & Automation ) Engineers (Bombay) Pvt.Ltd. ) 61, Dr.S.S.Rao Road, Parel, ) Mumbai 400 012 ) ..Respondents Mr.Parag Vyas i/b Mr.P.S.Sahadevan for appellant. Mr.A.K.Jasani for respondent. Judgment Reserved on : 10.9.2008 Judgment delivered on: 19.9.2008 CORAM: Dr.S.RADHAKRISHNAN & CORAM: Dr.S.RADHAKRISHNAN &S.J.KATHAWALLA JJ. 19th September,2008 S.J.KATHAWALLA JJ. 19th September,2008 J U D G M E N T (Per S.J.KATHAWALLA J.) J U D G M E N T (Per S.J.KATHAWALLA J.) 1. The above appeal is filed by the Revenue impugning the order dated 24th August, 2001 passed by ITAT, Mumbai Bench in I.T.A.No.2536/Mum/1999 filed by the Assessee for the Assessment Year 1995-96. 2. The above appeal was admitted by this Court on 11th August, 2004 on the following substantial question of law. "Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in -2- upsetting the order passed by the CIT under section 263 of the Income Tax Act, 1961?" 3. The relevant facts giving rise to the present appeal are set out hereunder. i) The assessee is engaged in the business of exporting garments as well as sales in the domestic market. ii) For the Assessment Year 1995-96 the assessee filed return of income on 30th November, 1995 declaring the total income at Rs.3,51,020/- The return of income was processed under sec.143(1)(a) on 18th October, 1996. Notice under section 143(2) was issued to the assessee on 7th August, 1996. iii) Vide Department’s letter dated 30th October,1996 the assessee was asked to file the details and to explain the reasons for increase in the expenses. The assessee by their letter dated 5th November, 1996 filed details of the export sales, local sales, job work charges received, purchases, duty drawback, sale of export entitlements, job work charges paid and other expenses and also reasons for increase in the expenses. It was also explained that during the year gross profit ratio had increased as -3- compared to earlier year. The Assessing Officer by his order dated 13th December, 1996 recorded the aforesaid facts and further recorded that all the remittances out of the exports have been received by the assessee before the end of the year and there was no outstanding as on 31st March, 1995. The Assessing Officer has further recorded that the copies of the audit report in form No.3CD, audit report in form no.10CCAC and working of deductions under sec.80HHC have been filed along with the return of income. As the sales and purchases were supported, books of account audited, statutory audit reports in form Nos.3CA, 3CD and 10CCAS had been filed, the book results were accepted. After discussion the Assessing Officer computed the total income whereunder the net profit pertaining to the export business of the assessee was computed at Rs.65,07,090/- and the net profit pertaining to local business of the assessee was computed at Rs.3,69,491/- and the assessee was allowed deduction under sec.80HHC of Rs.65,07,090/- i.e. the entire net profit of the assessee pertaining to his export business. iv) Thereafter a notice under section 263 of the Income Tax Act, 1961 was issued by the Commissioner of Income Tax to the assessee on the ground that the assessment order under sec.143(3) dated 31st December, 1996 was erroneous -4- as the assessee was entitled to only proportionate deduction in the light of section 80 HHC(3) of the Act, and proposing suitable action. The assessee was given an opportunity to be heard in the matter. The CIT(A) by its order dated 30th March, 1999 accepted the fact that the business of the assessee was computed at Rs.3,69,491/- and the assessee was allowed deduction under sec.80HHC of Rs.65,07,090/- i.e. the entire net profit of the assessee pertaining to his export business. iv) Thereafter a notice under section 263 of the Income Tax Act, 1961 was issued by the Commissioner of Income Tax to the assessee on the ground that the assessment order under sec.143(3) dated 31st December, 1996 was erroneous -4- as the assessee was entitled to only proportionate deduction in the light of section 80 HHC(3) of the Act, and proposing suitable action. The assessee was given an opportunity to be heard in the matter. The CIT(A) by its order dated 30th March, 1999 accepted the fact that the assessee is involved in both export and domestic sales and is maintaining separate books of account and that the export profits are clearly identifiable. However, in his opinion the deductions can be granted only as per provisions of section 80HHC(3)(a). CIT(A) has, therefore, held that in order to arrive at the amount deductible under section 80HHC in the case of assessee doing export business as well as some other domestic business the fraction of "export turnover" to "total turnover" would be applied to the profit computed by the assessee under the head "profits and gains of business profession". CIT(A) has in his order recorded that though the assessee has quoted the decision of ITAT wherein it has been held that if the export profits were clearly identifiable, then, such profits were available for deductions, he would differ with the same due to the above statutory provision. CIT(A) has, therefore, held that since the Assessing Officer has not followed the above provision of law in the order under sec.143(3) dated 31st March, 1996 while allowing the deductions under section 80HHC and as -5- deduction allowed is higher than what is allowable, the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue. CIT(A), therefore, recalculated the deductions under sec.80HHC and held that the assessee is eligible for deduction under sec.80HHC to the extent of Rs.41,91,131/- as against Rs.65,07,090/- allowed by the Assessing Officer. v) The assessee being aggrieved by the order of the CIT(A) dated 30th March, 1999 appealed before the Appellate Tribunal. The Appellate Tribunal by its order dated 24th August, 2001 came to the finding that the view taken by the Assessing Officer was a possible view and, therefore, it cannot be concluded that the order of the Assessing Officer was erroneous and was prejudicial to the interest of the Revenue. The Tribunal recorded that reliance was placed by the assessee before the CIT(A) on the decision reported in the case of V.D.Swami and Co. Ltd. Vs. Dy.Commissioner of Income Tax reported in (1993) 44 ITD 91 and in the case of Bajaj Tempo Ltd. Vs. Commissioner of Income Tax reported in 196 ITR 188. The Tribunal recorded that the scope of interference under sec.263 is not to set aside merely unfavourable orders and bring to tax some money to the treasury nor is the section meant to get -6- sheer escapement of revenue. It is taken care of by other provisions of the Act. It was recorded that section 263 is to be invoked not as a jurisdictional corrective or as a review of subordinate order in exercise of supervisory powers but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the revenue. The Appellate Tribunal after taking into consideration the entire conspectus of the case, came to a finding that since the view taken by the Assessing Officer was a possible view and considering the decisions relied upon by the assessee the condition precedent for invoking aside merely unfavourable orders and bring to tax some money to the treasury nor is the section meant to get -6- sheer escapement of revenue. It is taken care of by other provisions of the Act. It was recorded that section 263 is to be invoked not as a jurisdictional corrective or as a review of subordinate order in exercise of supervisory powers but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the revenue. The Appellate Tribunal after taking into consideration the entire conspectus of the case, came to a finding that since the view taken by the Assessing Officer was a possible view and considering the decisions relied upon by the assessee the condition precedent for invoking jurisdiction under section 263 did not exist and the order of the CIT(A) was quashed. vi) Being aggrieved by the order of the Appellate Tribunal dated 24th August, 2001 the above appeal was filed by the Revenue which was admitted on 11th August, 2004 on the substantial question of law set out in paragraph 2 above. 4. The Advocate appearing for the Revenue conceded before us that the view taken by the Assessing Officer was a possible view. However, he contended that the Assessing Officer has not given any reasons for allowing deductions to the assessee under section 80HHC in respect of the entire net profit of Rs.65,07,090/- pertaining the export business of the assessee. The order is, therefore,passed -7- without application of mind. The Advocate for the Revenue stated before us that except for this submission he has no other submission to make. 5. The Advocate for the Assessee on the other hand contended that there is no substance in the contention of the Advocate for the Revenue that the Assessing Officer has not applied his mind at the time of allowing the deduction of Rs.65,07,090/- under section 80HHC of the Act. He has pointed out that the Assessing Officer has sought particulars from the assessee and after the assessee provided all the particulars required by the Assessing Officer and after discussion the Assessing Officer took a view that the assessee is eligible to reduction of the entire export profit amounting to Rs.65,07,.090/- under section 80HHC of the Act. The Advocate for the Assessee has also relied upon a decision of this Court in the case of Commissioner of Income Tax Vs. Gabriel India Ltd. reported in 1993 ITR 108. In that case the CIT had disagreed with the conclusion arrived at by the ITO namely that the expenditure was revenue in nature. The CIT had reopened the matter under section 263 and after hearing the assessee had directed the ITO to rehear the matter. This Court has in that decision held that in order to exercise the powers under -8- sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by ITO was erroneous in so far as it is prejudicial to the interest of the Revenue. It must be an order which is not in accordance with law or which has been passed by the ITO without making any inquiry in undue haste. This Court has in the said decision also set out that the Income Tax Officer in that case had made the inquiries in regard to the nature of the expenses incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. Evidently the claim was allowed by the I.T.O. on being satisfied with the explanation of the assessee. It was held by this Court that such a decision of the ITO cannot be held to be "erroneous" simply because in his order he did not make elaborate discussion in that regard. 6. We have considered the arguments advanced by the Advocates appearing for the Revenue as well as Assessee. been passed by the ITO without making any inquiry in undue haste. This Court has in the said decision also set out that the Income Tax Officer in that case had made the inquiries in regard to the nature of the expenses incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. Evidently the claim was allowed by the I.T.O. on being satisfied with the explanation of the assessee. It was held by this Court that such a decision of the ITO cannot be held to be "erroneous" simply because in his order he did not make elaborate discussion in that regard. 6. We have considered the arguments advanced by the Advocates appearing for the Revenue as well as Assessee. In the instant case as recorded earlier, the ITO had by his order dated 30th October, 1996 sought details/explanation from the assessee which the assessee had given by his letter dated 5th November, 1996. It is evident from the order of the Assessing Officer that he has considered all detailed particulars filed before him -9- and after discussion allowed the deduction of the entire profit earned by the assessee pertaining to his export business. We are in complete agreement with the decision of this Court in the case of Commissioner of Income Tax Vs. Gabriel India Ltd (supra) and we reject the submission of the revenue that the order of the Assessing Officer is erroneous or is passed without application of mind because in his order he has not made elaborate discussion in that regard. In any event the Revenue has admittedly not argued before the CIT or before the Tribunal that the order passed by the Assessing Officer was without application of mind. CIT(A) has set aside the order of the Assessing Officer only on the ground that the CIT did not agree with the view taken by the Assessing Officer and took a view different than that taken by the Assessing Officer. In our view it cannot be said that the Assessing Officer has not applied his mind while granting deduction to the assessee under section 80HHC as regards net profit earned by the assessee pertaining to their export business. In our view, the Tribunal is correct in its view that the view taken by the Assessing Officer was a possible view and that the condition precedent for invoking jurisdiction under section 263 by the CIT did not exist. -10- 7. In view of the above, we hold that ITAT was justified in upsetting the order passed by CIT(A) under sec.263 of the Income Tax Act, 1961. We, therefore, answer the question of law raised in this appeal in favour of the assessee and against the revenue. The above appeal, therefore, stands dismissed. However, there will be no order as to costs. (S.J.KATHAWALLA J.) (Dr.S.RADHAKRISHNAN J.) (S.J.KATHAWALLA J.) (Dr.S.RADHAKRISHNAN J.) (S.J.KATHAWALLA J.) (Dr.S.RADHAKRISHNAN J.)