M/S. Village Antique & Ethinic, B v. Income Tax Officer, Ward-3(1), Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D. B. Income Tax Appeal No. 109/2018 M/s. Village Antique & Ethinic, B-141, Vidhyut Nagar, Queens Road,Jaipur. …….AppellantVersus Income Tax Officer, Ward-3(1), Jaipur. …….Respondents For Appellant(s) : Mr. Sarvesh Jain.For Respondent(s): Mr. Anuroop Singhi with Mr. Aditya Vijay, Mr. N.S. Bhati. HON'BLE MR. JUSTICE MOHAMMAD RAFIQ HON'BLE MR. JUSTICE GOVERDHAN BARDHAR Judgment REPORTABLE 26/09/2018 (Per Hon’ble Mr. Justice Mohammad Rafiq) This is assessee’s appeal against the judgment dated16.06.2017 passed by the Income Tax Appellate Tribunal, JaipurBench (SMC), Jaipur (for short ‘the ITAT’), dismissing the appealfiled by it against the order dated 10.03.2016 passed by theCommissioner of Income Tax (Appeals), Aligarh at Jaipur (CampOffice), [for short ‘the CIT(A)’], whereby also the appeal filed by theappellant-assessee was dismissed, confirming the order dated08.03.2013 passed by the Income Tax Officer, Ward-3(1), Jaipur (forshort ‘the Assessing Officer’). The appellant is engaged in the business of manufacturingand exports of wooden handicraft items. During the AssessmentYear 2008-09, the appellant filed the returns claiming deduction ofRs. 46,77,076/- under Section 10BA of the Income Tax Act, 1961(for short ‘the Act’), which was allowed by the Assessing Officer. The case was selected for scrutiny and the original assessment wascompleted under Section 143(3) of the Act on 19.11.2010 at thereturned income. Later on, it was noticed that the assessmentunder Section 143 (3) of the Act was completed for the AssessmentYear 2008-09 on 19.11.2010 at the total income of Rs. 8,46,320/-by allowing deduction under Section 10BA of the Act at Rs.46,77,076/- as claimed by the assessee. The total business incomewas computed at Rs. 50,11,332/- before allowing the said deduction.Thus, 93.33% of the total income was allowed as deduction. Perusalof the assessment records revealed that Duty Draw Back amountingto Rs. 17,02,681/- was included in the business income of Rs.50,11,332/-. The Assessing Officer, therefore, issued notice underSection 148 of the Act on 29.03.2012 to the appellant-assessee.The appellant-assessee through its authorised representative videletter dated 03.04.2012 stated that the original return filed on30.09.2008 may be treated as the return filed in response to thenotice under Section 148 of the Act. Subsequently, on change ofincumbent, notices under Sections 143(2) and 142(1) of the Actwere issued on 26.12.2012 along with the show cause letterrequiring the assessee to show cause as to why the deduction underSection 10BA of the Act claimed and allowed at Rs. 46,77,076/-instead of Rs. 30,86,971/-, which was in excess of Rs. 15,88,601/-may not be disallowed and added to total income of the appellant-assessee. The appellant-assessee through its authorisedrepresentative submitted letter dated 16.01.2013 stating that thereis no restriction in any of the sub-sections of Section 10BA of the Actwhile working out the profits of the business, the amounts receivedon account of Duty Draw Back (DDB) and Duty Entitlement Pass Book (DEPB) are to be excluded for allowing the deduction underthis Section. It was further stated that the profits of the businesswere derived from the export of eligible articles. A request wasmade to drop the proceedings initiated under Section 148 read withSection 147 of the Act. It was also submitted that the benefit underSection 10BA of the Act was also allowable as certified by theauditors and the same may be allowed and not be added to thetaxable income. Book (DEPB) are to be excluded for allowing the deduction underthis Section. It was further stated that the profits of the businesswere derived from the export of eligible articles. A request wasmade to drop the proceedings initiated under Section 148 read withSection 147 of the Act. It was also submitted that the benefit underSection 10BA of the Act was also allowable as certified by theauditors and the same may be allowed and not be added to thetaxable income. The Assessing Officer did not find the explanationfurnished by the appellant-assessee as convincing and maintainedthat the receipts of Duty Draw Back were not eligible for deductionunder Section 10BA of the Act as the same were not derived fromthe export of eligible articles or things which was the prime conditionof eligibility for such deduction. The appellant-assessee had claimeddeduction under Section 10BA of the Act at Rs. 46,77,076/-. Thetotal business income was computed at Rs. 50,11,332/- beforeallowing the said deduction. Thus, 93.33% of total income wasallowed as deduction. However, on verification of the assessmentrecords, it was found that the Duty Draw Back amounting to Rs.17,02,681/- were included in the total business income of Rs.50,11,332/-. The receipts on Duty Draw Back were not eligible fordeduction under Section 10BA of the Act as per the judgmentrendered by the Supreme Court inLiberty India Vs.Commissioner of Income Tax, (2009) 9 SCC 328, as the samewere not derived from the export of eligible articles or things.Therefore, while allowing deduction under Section 10BA of the Act,the profit and gain from export of eligible articles is to be determinedat Rs. 33,08,651/- by reducing the amount of Duty Draw Back of Rs. 17,02,681/- from total business income of Rs. 50,11,332/- and93.33% thereof, which worked out at Rs. 30,86,971/-, is eligible forallowing the deduction under Section 10BA of the Act as against Rs.46,77,076/- as claimed by the appellant-assessee. It was furthernoted that since the appellant-assessee had willfully concealed itsincome and given inaccurate particulars of income by way ofclaiming excess deduction under Section 10BA of the Act, the penalprovisions envisaged under Section 271 (1) (c) of the Act wereclearly attracted in the case and the penalty proceedings wereordered to be initiated separately. Being aggrieved, the appellant-assessee filed appealbefore the CIT(A) against the aforesaid order passed by theAssessing Officer. The first argument of the appellant-assessee wasthat the Assessing Officer had erred in law as well as in facts ininitiating the proceedings under Section 148 read with Section 147of the Act on the strength of subsequent judgment of the SupremeCourt without forming requisite belief “as to escapement of income”.This argument was rejected by the CIT(A) holding that the AssessingOfficer in its earlier order had not considered issue of allowability ofdeduction under Section 10BA of the Act in respect of Duty DrawBack because had he considered this issue, there would have beensome query in this regard but no such query has been indicated bythe appellant-assessee. The Assessing Officer could not apply hismind as there was no evidence that he had formed his opinion onthis issue. It cannot be alleged that the re-assessment proceedingshave been initiated on the basis of change of opinion. The second argument of the appellant-assessee beforethe CIT(A) was that the Assessing Officer had erred in law as well as The second argument of the appellant-assessee beforethe CIT(A) was that the Assessing Officer had erred in law as well as in facts in treating the benefit of Rs. 15,88,601/- on DEPB and DDBnot allowable under Section 10BA of the Act to the assessee firm.Even this argument was rejected by the CIT(A) by relying upon thejudgment of the Supreme Court in Liberty India (supra), holdingthat duty draw back and such other incentives are not profits derivedfrom the eligible business and accordingly exemption under Section10BA of the Act cannot be allowed in respect of Duty Draw Back andother export incentives. The argument of the appellant-assesseewas that the judgment of the Supreme Court in Liberty India(supra) was in respect of deduction under Section 80IA of the Actand the same cannot be applied to the case of exemption underSection 10BA of the Act, was not accepted by the CIT(A), which intaking that view relied upon the judgment of ITAT Bench Mumbai inthe case of Tessitura Moti India Pvt. Ltd. Vs. ITO, 2013 TIOL56 ITAT-Mum, which was delivered in the context of Section 10B ofthe Act and the judgment of the ITAT Bench Jodhpur in the case ofITO Vs. V.J. Home Pvt. Ltd. 125 TTJ 215 (Jodh) wherein thejudgment of the Supreme Court in the case of Liberty India(supra) was relied and held that Duty Draw Back and DEPBincentives are not profit and gains derived by the industrialundertaking and hence no exemption is available under Section10BA of the Act on such incentives. The appeal of the appellant-assessee was dismissed by the CIT(A) vide judgment dated10.03.2016.The appellant-assessee thereafter filed second appealbefore the ITAT assailing the aforesaid judgment passed by theCIT(A). The ITAT concurred with the view taken by the CIT(A) anddismissed the appeal of the appellant-assessee vide impugned judgment dated 16.06.2017. Thereafter, the appellant-assesseefiled an application before the ITAT seeking recall/rectification ofaforesaid judgment, but that application was also dismissed by theITAT vide order dated 16.01.2018. Hence, this appeal. This Court vide order dated 24.04.2018 admitted the present appeal on the following substantial questions of law: “i) Whether learned ITAT were right in upholdingthe action of assessing officer in initiation of re-assessment proceedings u/s 148 of the IT Act,1961 and consequent assessment made u/s143(3)/147 of the IT Act, 1961? ii) Whether learned lower authorities were justifiedin holding that deduction u/s 10BA of the IT Act,1961 is not available to the appellant on DEPB andDDB received by appellant and thereby confirmingdisallowance of deduction to the extent of Rs.15,88,601/- u/s 10BA of the IT Act, 1961?” Mr. Sarvesh Jain, learned counsel for the appellant- assessee argued that Section 147 of the Act empowers theAssessing Officer to reopen an assessment if he has “reason tobelieve” that income has escaped assessment. However, in thepresent case, the appellant-assessee had furnished all the details asper query raised by the Assessing Officer, which was duly consideredby him during the course of original assessment. In the auditreport, the claim was made in Form 56H which revealed that theprofit of the assessee firm was eligible for deduction under Section10BA of the Act. The Assessing Officer, during the course of theassessment proceedings under Section 143(3) of the Act, videquestionnaire issued to the appellant-assessee, had asked to explainwhether conditions as laid down for claiming of deduction underSection 10BA of the Act were fulfilled to which a detailed reply wassubmitted by the appellant-assessee and the Assessing Officer, after considering the reply, allowed the deduction under Section 10BA ofthe Act. The Assessing Officer therefore on the basis of merechange of opinion could not have reviewed the assessment in thegarb of re-assessment. Learned counsel, in support of thisargument, relied upon the judgment of the Supreme Court inCommissioner of Income Tax, Delhi Vs. Kelvinator of IndiaLimited, (2010) 2 SCC 723 and Indra Company Limited Vs.ITO, (1971) 80 ITR 559 (Cal.), wherein it was held that wherethe assessee had disclosed all the material facts and the revenue didnot file any appeal against the order of the assessment grantingrelief to the assessee, the assessment cannot be reopened on thesame issue following a later Supreme Court judgment. It is arguedthat in fact in the present case, the judgment of the Supreme Courtin Liberty India (supra) was pronounced on 31.08.2009 which wasprior to passing of assessment order under Section 143(2) on19.11.2010. There was thus no material with the Assessing Officerto reopen the assessment and he erred in law in reopening theassessment only on the basis of mere change of opinion. Mr. Sarvesh Jain, learned counsel submitted that theAssessing Officer has failed to appreciate the fact that the DEPB andDDB are inextricably linked to the export business of the appellant-assessee and they have to be regarded as part of profits from exportbusiness only. The main object of DEPB/DDB is to neutralize theincidence of input cost of raw material and other manufacturingcosts. It is basically part and parcel of trading and manufacturingactivity and can be considered as part of trading activity of exportsonly, reducing the cost of raw material and production expenses. Itis in the nature of a rebate or remission on the purchase price of raw material and cost of manufacturing expenses and production. Thehandicraft industry has to survive in global competition and has tocompete with dealers and manufacturers of various other countries.For this purpose, DEPB and DDB have been granted to exporters likethe appellant to reduce the cost of production/manufacturing so thattheir handicraft articles can be exported in the global market atcompetitive rates. It is argued that the lower authorities have failedto appreciate that the said amounts of DEPB and DDB have beenseparately disclosed in the Profit and Loss Account with a view tomake a true and full disclosure of the relevant facts to the concernedoutside world. Therefore, the said amounts of DEPB and DDB areparts of profits of the export business carried on by the assessee andthe same have rightly been considered as eligible for grant ofdeduction under Section 10BA of the Act. It is argued that grant ofdeduction under Section 10BA of the Act to the appellant-assesseehas been accepted by the Assessing Officer himself who hasaccepted such claim on the entire income except on the amount ofDEPB and DDB. Mr. Sarvesh Jain, learned counsel argued that the lowerauthorities have failed to appreciate the fact that the sale proceedsof DEPB licences are now treated as business income by virtue ofamendment to Section 28 of the Act, especially Section 28(iii) (c),(d) of the Act which specifically states that income from DEPB andDDB will be income chargeable to income tax under the head profitsand gains of business or profession. The Judgment of the SupremeCourt in the case of Liberty India (supra) is in the context ofdeduction under Section 80IA whereas the claim of the appellant-assessee is in relation to deduction under Section 10BA of the Act. Mr. Sarvesh Jain, learned counsel argued that the lowerauthorities have failed to appreciate the fact that the sale proceedsof DEPB licences are now treated as business income by virtue ofamendment to Section 28 of the Act, especially Section 28(iii) (c),(d) of the Act which specifically states that income from DEPB andDDB will be income chargeable to income tax under the head profitsand gains of business or profession. The Judgment of the SupremeCourt in the case of Liberty India (supra) is in the context ofdeduction under Section 80IA whereas the claim of the appellant-assessee is in relation to deduction under Section 10BA of the Act. Therefore, the ratio of the judgment in Liberty India (supra)would not be applicable to the present case. In Liberty India(supra), the Supreme Court dealt with provisions of Section 80IA ofthe Act wherein no formula was laid down for computing the profitsderived by the undertaking whereas sub-section (4) of Section 10BAof the Act has provided formula for computation of profit derived bythe undertaking from the export. Further sub-section (1) of Section10BA of the Act specifies that the deduction under Section 10BA ofthe Act is allowed out of the profits and gains derived by theundertaking from the export out of India. It is, therefore, arguedthat the wordings used in this Section are, “profits of the business ofthe undertaking”, which are always the net profit as declared by theundertaking and computed in terms of Section 28 of the Act.Learned counsel in support of this argument relied upon thejudgment of this Court in the own case of the appellant-assesseebeing D.B. Income Tax Appeal No. 65/2011, Commissioner ofIncome Tax-I Vs. Village Antique and Ethnic decided on22.08.2017, though in respect of different assessment year wherededuction under Section 10BA was allowed to the assessee by theAssessing Officer, which was reversed by the CIT(A) but the ITATrestored back the deduction and the Revenue filed appealthereagainst before this Court. The aforesaid appeal was admittedon the substantial question of law that whether the view taken bythe CIT(A) that the assessment order as regards deduction underSection 10BA of the Act was erroneous and prejudicial to the interestof the Revenue for having been made without proper verification andwhether the ITAT was justified in setting aside the order passed bythe CIT(A). The aforesaid question was answered by the Co- ordinate Bench of this Court in favour of the appellant-assessee andagainst the Revenue vide judgment dated 22.08.2017. Learnedcounsel in support of his arguments relied upon the judgments ofthe Supreme Court in Topman Exports Vs. Commissioner ofIncome Tax, Mumbai, (2012) 3 SCC 593; Commissioner ofIncome Tax Vs. Meghalaya Steels Limited, (2016) 6 SCC 747. Mr. Anuroop Singhi, learned counsel for the respondentopposed the appeal and supported the judgment passed by the ITATwhich has upheld the judgment of the CIT(A) and the view taken bythe Assessing Officer and submitted that the appeal be, therefore,dismissed. In support of his arguments, learned counsel relied uponthe judgments of the Supreme Court in Liberty India (supra);Assistant Commissioner of Income Tax Vs. Rajesh JhaveriStock Brokers Pvt. Ltd., (2008) 14 SCC 208; RaymondWoollen Mills Ltd. Vs. Income Tax Officer and Ors., (2008) 14SCC 218; T.S. Balaram Vs. Volkart Brothers, Bombay, (1971)2 SCC 526; judgments of this Court in CIT, Jaipur Vs. M/s. NashFashions (D.B. Income Tax Appeal No. 464/2009 along withother connected matter decided on 29.05.2007); RanjanaJohari Vs. Assistant Commissioner of Income Tax, Circle-6,Jaipur (D.B. Income Tax Appeal No. 61/2016 decided on23.10.2017). This Court vide order dated 24.04.2018, while admittingthis appeal, framed the first question of law to the effect thatwhether learned ITAT was right in upholding the action of theAssessing Officer in initiation of re-assessment proceedings underSection 148 of the IT Act, 1961 and consequent assessment madeunder Section 143(3) /147 of the IT Act, 1961. On hearing learned counsel for the parties and perusing the material on record, we findthat the questionnaire issued to the appellant-assessee during theassessment proceedings and the assessment order dated19.11.2010 passed on that basis make it clear that no informationwith regard to DEPB or Duty Draw Back was furnished by theappellant. There was indeed no adjudication on that aspect of thematter and, therefore, the concurrent view taken by the lowerauthorities cannot be faulted with. The appellant failed to show fromthe record whether the Assessing Officer has indeed considered theissue of allowability of deduction under Section 10BA of the Act inrespect of Duty Draw Back. Had this issued been actuallyconsidered, some query would certainly have been raised on thisaspect and reply thereto, if any, would also have been submitted bythe appellant. Obviously, the Assessing Officer did not apply hismind to this aspect of the matter. Since the appellant failed to pointout that the Assessing Officer formed any opinion on this issue, itcannot be held that initiation of re-assessment proceedings underSection 148 of the Act was based on mere change of opinion. It isonly when the Assessing Officer later realised that the deductionunder Section 10BA of the Act was not allowable in respect to DutyDraw Back and that exemption of Rs. 15,88,601/- was allowed onaccount of this mistake, he initiated re-assessment proceedings byrecourse to Section 148 of the Act vide notice dated 29.03.2012.Thus, the aforesaid question of law is answered in favour of theRevenue and against the appellant-assessee. Coming now to the second question of law framed by thisCourt that whether learned lower authorities were justified in holdingthat the deduction under Section 10BA of the IT Act, 1961 is not available to the appellant on DEPB and DDB received by appellantand thereby confirming disallowance of deduction to the extent ofRs. 15,88,601/- under Section 10BA of the IT Act, 1961, we find thatthe CIT(A) relying upon the judgment of the Supreme Court inLiberty India (supra) held that Duty Draw Back and other suchincentives are not profits derived from the eligible business andaccordingly exemption under Section 10BA of the Act cannot beallowed in respect of Duty Draw Back and other export incentives.The argument of the appellant-assessee has been that the judgmentof the Supreme Court in Liberty India (Supra) arose out of thededuction under Section 80IA and the same cannot be extended tothe exemption under Section 10BA of the Act. The CIT(A), in thisbehalf, has relied on the judgment of the ITAT Bench Mumbai in thecase of Tessitura Moti India Pvt. Ltd. (supra), judgment of theITAT Bench Jodhpur in the case of ITO Vs. V.J. Home Pvt. Ltd.(supra). But the appellant has now before this Court relied onjudgments of the Supreme Court in Topman Exports (supra);Commissioner of Income Tax Vs. Meghalaya Steels Limited(supra). In fact, the Co-ordinate Bench of this Court referring toaforesaid two judgments as also another judgment of this Court inCIT Jaipur Vs. Suresh Kumar Bajoria (D.B. Income Tax AppealNo. 294/2008 decided on 18.05.2017) remanded the matterback to the Assessing Officer to reconsider the entire material allover again. In yet another judgment in the case of M/s. MaharaniArt Emporium Vs. Income Tax Officer, Ward-1(3), Jodhpur(D.B. Income Tax Appeal No. 151/2010 decided on09.05.2018), the Co-ordinate Bench of this Court has followed thesame course of action. Therefore, while not deciding second substantial question of law framed in this appeal on merits, thisCourt deems it appropriate to adopt the same course of action. In the result, the appeal is allowed in part. Impugnedjudgments are set aside to that extent and the matter is remandedback to the Assessing Officer to decide the same afresh inaccordance with law, however, leaving it open for both the parties toraise all the contentions before the Assessing Officer. We make itclear that we have not expressed any opinion so far as the secondsubstantial question of law is concerned. Stay Application No. 1179/2018 stands disposed of. (GOVERDHAN BARDHAR),J (MOHAMMAD RAFIQ),J Manoj