Deduction under Section 80HHC cannot be allowed ignoring the restrictive clause contained in Section 80-IA

Commissioner Of Income Tax-I, … vs M/S Abhishek Industries Limited. on 20 December, 2012

ITA No. 312 of 2011

PUNJAB AND HARYANA HIGH COURT AT CHANDIGARH

ITA No. 312 of 2011

Date of Decision: 20.12.2012

Commissioner of Income Tax-I, Ludhiana

…….. Appellant

Versus

M/s Abhishek Industries Limited.

…… Respondent

CORAM: HON’BLE MR. JUSTICE SURYA KANT

HON’BLE MR. JUSTICE R.P. NAGRATH

Present:- Mr. Rajesh Katoch, Advocate

for the appellant.

Mr. Akshay Bhan, Advocate

for the respondent.

R.P. NAGRATH, J.

This appeal filed by Commissioner of Income Tax-I, Ludhiana under Section 260A of the Income Tax Act, 1961 (for brevity ‘IT Act’) challenges the order dated 29.04.2011 passed by the Income Tax Appellate Tribunal, Bench ‘A’, Chandigarh (ITAT).

2. The facts of the case in brief are that Joint Commissioner, Income Tax, Range-I, Ludhiana, the Assessing officer (AO) passed the assessment order dated 28.12.2006 under Section 143(3) of the IT Act in ITA No. 312 of 2011 respect of the respondent-assessee for the assessment year 2004-05. The Commissioner of Income Tax (CIT) exercising his revisional powers under Section 263 of IT Act, found the assessment order to be prima-facie erroneous and prejudicial to the interest of revenue as the relief granted under Section 80 IA, was not deducted from the profits and gains of the business before computing relief under Section 80 HHC of the IT Act. The respondent-assessee was, thus, served with a show cause notice dated 18/20.02.2009 under Section 263 of IT Act.

3. After hearing the respondent-assessee by the Revisional Authority in its order dated 18.03.2009 (Annexure A-2) observed as under:-

“3.1.1 For the sake of coherence second arguments put forth by the assessee company is discussed at first place. Sub Section 9 of Section 80IA is reproduced as under:- “(9) Where any amount of profits and gains of an (undertaking) or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading “C. – Deductions in respect of certain incomes”, and shall in no case exceed the profits and gains of such eligible business of (undertaking) or enterprise, as the case may be.

3.1.2 Very plain reading of sub Section makes it amply clear that where any amount of profits and gains in the case of an assessee is claimed and allowed u/s 80IA deduction to the extent of such profits and gains shall not be allowed under this Chapter i.e. Chapter VI-A. Section 80HHC also falls in Chapter VI-A, therefore, deduction u/s 80HHC is not ITA No. 312 of 2011  to be computed on profits & gains of an industrial undertaking on which deduction u/s 80IA has been allowed.

4. It was also found that due to non-application of correct law, deduction under Section 80HHC has been allowed in excess, which has resulted into lesser taxable income and thus the order is prejudicial to the interest of revenue. To this extent the order of AO was set aside and it was directed to compute the deduction under Section 80HHC after giving due opportunity of being heard to the assessee.

5. The ITAT allowed appeal of the assessee-respondent thus concluding that:-

“17. The issue raised in the present appeal is identical to the issue raised before the Hon’ble Delhi High Court in CIT Vs. Honda Siel Power Products Ltd. in ITA Nos. 1376/09 & 1382/09, judgment dated 5th July, 2010. In the facts of the present case before us and elaborated by us in the paras hereinabove, the Assessing Officer had allowed the deduction u/s 80IA & 80HHC of the Act without resorting to the provisions of Section 80IA(9) of the Act. Merely because the issue does not find mention in the assessment order, there is no presumption that no enquiry was made by Assessing Officer, especially in view of the various aspects of deductions allowable under Section 80IA & 80HHC of the Act were elaborately considered and decided by Assessing Officer, as referred to by us in paras hereinabove. Further, the issue was covered in favour of the assessee by the orders of Tribunal at the relevant time and the Assessing Officer having taken such a view, cannot be said to be incorrect application of law. In the totality of facts and circumstances and following the ratio laid by the Hon’ble Delhi High Court in the case of CIT, Delhi Vs. Honda Siel Power Products Ltd ITA No. 312 of 2011 (supra), we find no merit in the order of CIT as the view taken by the Assessing Officer was one of the view and accordingly the same could not be held to be erroneous and prejudicial to the interest of justice. Accordingly, we cancel the order passed by the CIT (A) u/s 263 of the Act. The ground of appeal raised by the assessee is thus allowed.

6. In this appeal filed by CIT against the above order of the ITAT, following substantial question of law has been proposed:-

“Whether, on the facts and circumstances of the case, the Hon’ble ITAT has erred in law in cancelling the order dated 18.03.2009 of CIT-I, Ludhiana passed u/s 263 by holding that it does not contain any firm decision that the order of the Assessing Officer passed under Section 143(3) of the Act was erroneous in the eyes of law when the CIT in his order u/s 263 has clearly brought out that plain reading of the sub- section 9 of Section 80IA of the I.T. Act makes it amply clear that where any amount of profits and gains in the case of an assessee is claimed and allowed u/s 80IA deduction to the extent of such profits and gains shall not be allowed under this Chapter i.e. Chapter VI-A. Section 80HHC also falls in Chapter VI-A, therefore, deduction u/s 80HHC is not be computed on profits and gains of an industrial undertaking on which deduction u/s 80IA has been allowed?

It is stated that the tax effect involved in this case is ` 96,92,017/-.

7. We have heard learned counsel for the parties and have given our thoughtful consideration to the proposition involved.

8. The counsel for appellant submits that this Court has settled the position of law while interpreting Section 80 IA(9) of the IT Act in three recent judgments. The first judgment is M/s Friends Castings (P) Ltd. Vs. Commissioner of Income Tax, ITA No. 456 of 2010, decided on ITA No. 312 of 2011 -5 20.09.2010. The Tribunal in that case had held that the issue was squarely covered by the decision of ITAT Special Bench ‘C’, New Delhi in favour of the revenue and against the assessee in the case of ACIT, Range II, Moradabad v. M/s Hindustan Mint. & Agro Products Pvt. Ltd. Chandausi, passed in ITA No. 1537, 1538 and 1539 (DEL)/2007 for the assessment years 2001-02, 2003-04, 2004-05 dated 23.06.2009. This Court agreed with the view of the Tribunal and dismissed the appeal of assessee. The aforesaid view was followed by this Court in Asian Exim International v. Commissioner of Income Tax, Jalandhar, Punjab, ITA No. 469 of 2010, decided on 18.04.2011 and Commissioner of Income Tax (Central), Ludhiana v. M/s Davinder Exports, Guru Nanak Dev Nagar, Rahon Road, Ludhiana, ITA No. 371 of 2007, decided on 21.04.2011.

9. The respondent’s counsel on the other hand vehemently contended that there was a consistent contrary view of different Benches of the Income Tax Tribunals and also the High Courts and since the view taken by AO was one of the possible views, the revisional powers could not be invoked by CIT. To support his contention, reliance is placed upon the judgment of Hon’ble Delhi High Court in Commissioner of Income Tax v. Honda Siel Power Products Ltd., (2011) 333 ITR 547, which is directly relating to the issue in hand. In that case also the Commissioner took up the case in exercise of his powers under Section 263 of IT Act on the application of the provisions of Sections 80HHC, 80-IB(13) read with Section 80-IA(9) of IT Act. The Delhi High Court held as under:-

“18. From the aforesaid discussion, it is apparent that the ITA No. 312 of 2011

expression prejudicial to the interest of revenue appearing in Section 263 has to be read in conjunction with the expression “erroneous” and that every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the revenue. In cases where the AO adopts one of the courses permissible in law or where two views are possible and the ITO has taken one view, the CIT cannot exercise his powers under Section 263 to differ with the view of the AO even if there has been a loss of revenue. Of course, if the AO takes a view which is patently unsustainable in law, the CIT can exercise his powers under Section 263 where a loss of revenue results as a consequence of the view adopted by the AO. It is also clear that while passing an order under Section 263, the CIT has to examine not only the assessment order, but the entire record of the profits. Since the assessee has no control over the way an assessment order is drafted and since, generally, the issues which are accepted by the Assessing Officer do not find mention in the assessment order and only those points are taken note of on which the assessee’s explanations are rejected and additions / disallowances are made, the mere absence of the discussion of the provisions of Section 80IB(13) read with Section 80IA (9) would not mean that the AO had not applied his mind to the said provisions. As pointed out in Kelvinator of India’s case (supra) [CIT Vs. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del) (FB)] , when a regular assessment is made under Section 143(3), a presumption can be raised that the order has been passed upon an application of mind. No doubt, this presumption is rebuttable, but there must be some material to indicate that the AO had not applied his mind.

23…….Consequently, we are of the view that the decisions cited by the learned counsel for the Revenue, wherein assessment orders were found to be erroneous for want of an ITA No. 312 of 2011

enquiry or proper enquiry, would have no application to the present appeals. It is also true that the validity of an order under s. 263 has to be tested with regard to the position of law as it exists on the date on which such an order is made by the CIT. From the narration of facts in the Tribunal’s order, it is clear that on the date when the CIT passed his orders under s. 263, the view taken by the AO was in consonance with the views taken by several Benches of the Tribunals. Therefore, the conclusion of the Tribunal that the CIT could not have invoked his jurisdiction under s. 263 of the said Act was correct. As a result, we answer the question against the Revenue and in favour of the assessee by holding that the Tribunal was correct in law in cancelling the order passed by the CIT under s. 263 and in restoring the order of the AO by holding that the AO had taken a possible view at the relevant point of time. The appeals are accordingly dismissed………..”

10. The Department filed Special Leave to Appeal against the above judgment of Delhi High Court, which was dismissed by the Hon’ble Supreme Court.

11. In the case in hand also there was no specific discussion in the order passed by AO as to whether for granting relief under Section 80 HHC, the profits and gains of the business for which relief was granted under Section 80IA, was required to be reduced or not, but separate deductions have been allowed under both these provisions in the assessment order. It is, thus, submitted that the present case is fully covered by the decision of the Delhi High Court and thus, the instant appeal deserves to be dismissed. 12. It, thus, emerges that for exercising revisional powers by the ITA No. 312 of 2011  Commissioner under Section 263 of the IT Act, the position of law on the subject as prevalent on the date when the order is passed has to be applied. In Honda Siel Power Products Ltd.’s case (supra), the assessment under Section 143 (3) of the IT Act was completed by AO on 18.03.2004. CIT passed order in that case under Section 263 of IT Act on 20.02.2006. There might be a conflict of view on the interpretation of relevant provisions by various Benches of Tribunal at the relevant time but the present is a case in which the assessment order is dated 28.12.2006 and CIT passed the order on 18.03.2009, when the proposition of law had been well settled by the Special Bench (Chennai) of the Tribunal on 27.04.2007 in the case of Asstt. CIT Vs. Rogni Garments & Ors, (2007) 294 ITR 15 (Chennai), as also noticed by the Delhi High Court in Honda Siel Power Products Ltd.’s (supra). The Special Bench (Chennai) in Rogini Garments’ case (supra) held as under:-

“42…….Section 80HHC is part of Chapter VI-A. Hon’ble jurisdictional High Court in the case of CIT v. Sharon Vancers P. Ltd. T.C. (A) No. 62 of 2004 dt. 26.02.207, has made it clear that it is not correct to say that Section 80HHC of the Act is a self contained provision. The deduction cannot be allowed ignoring the restrictive clause contained in Section 80-IA(9). The restrictive clause in Section 80-IA makes it abundantly clear that wherever deduction under any other section of Chapter VI-A(C) is claimed, the computation will be subject to the restrictions laid down in Section 80-IA (9). It precludes ‘pro tanto’, all the deductions of such profits and gains claimed under Chapter VI-A(C). Section 80HHC is part of Chapter VI-A(C). It is not a self- contained provision. There is absolutely no ambiguity on this aspect. We are therefore of the opinion that relief under ITA No. 312 of 2011  Section 80-IA should be deducted from the profits and gains of the business before computing relief under Section 80HHC of the Act. 13. We are, further, of the firm view that nothing should be left at the whims and fancies of the AO while making assessment of income tax on the questions purely of law. Otherwise, it will bring ridicule to the system of assessment and end up with dangerous results. If for example one AO takes a particular view point, out of the two possible views while interpreting the provisions and the AO of another area takes the other possible view, that would lead to anomalous situations. The Tribunal has held in this case that the AO adopted one of the two possible views and therefore, there was nothing wrong. What restrained the Tribunal to discuss and determine the scope of plain meaning of the provisions of Section 80IA(9) ? The decision of ITAT was always subject to challenge either by the department or the assessee before the higher forums.

14. In Commissioner of Income Tax v. Max India Ltd., (2007) 295 ITR 282 (SC), it was observed that on the date when CIT passed the revisional order under Section 263 of the I.T. Act on 05.03.1997, there were two views on the word ‘profits’ in Section 80HHC(3). The Hon’ble Supreme Court held that problem with Section 80HHC of the IT Act is that it has been amended 11 times. Different views existed on the day when CIT passed the above order. Moreover, the mechanics of the Section having become so complicated over the years that two views were inherently possible. Therefore, subsequent amendment in 2005 inserting the word ‘loss’ in the new proviso even though retrospective, will not attract the provision of Section 263 particularly when the Commissioner ITA No. 312 of 2011  passed the order dated 05.03.1997, in purported exercise of his powers under Section 263 of the IT Act. Therefore, the above case will not provide any help to the respondent-assessee as the amendment in the provision was clearly made to remove an ambiguity which had arisen on account of interpretation of the said provision. That case, however, did not involve the interpretation of sub Section (9) of Section 80IA of the Act.

15. Should we not adopt a uniform interpretation to the plain meaning of the section instead of leaving it to the absolute and arbitrary discretion of AO to accept one of the two possible views in preference to the other?

16. The respondent-assessee, in the present case, had in its return of income tax, claimed deduction under Section 80IA at ` 12.01 crores and Section 80HHC of the IT Act at ` 5.75 crores and declared the total income of ` 82.47 lacs. The AO allowed the deduction under Section 80IA to the tune of ` 14.04 crores and deduction under Section 80HHC to the tune of ` 2.42 crores. The CIT on perusal of the assessment order found the assessment order to be both erroneous and prejudicial to the interest of Revenue and rightly so as deduction under Section 80HHC was allowed on eligible profits of business without reducing the profits of business on which deduction under Section 80IA had been allowed.

There was, thus, contravention of Section 80IA (9), which clearly indicates the extent of restriction to which the deduction under other provision of Chapter VI-A of IT Act can be allowed in cases where relief has been given on the profits and gains under Section 80IA of IT Act. ITA No. 312 of 2011

17. In Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, (2000) 243 ITR 83 (SC), it was held as under:-

” An incorrect assumption of facts or an application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind……………..

The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue…….

The phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer.

On the facts of that case, the matter was decided by Hon’ble Supreme Court in favour of the revenue observing as under:-

“The Commissioner noted that the ITO passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the ITO failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant-company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts, the conclusion that the order of the ITO was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly ITA No. 312 of 2011 held that the exercise of the jurisdiction by the Commissioner under section 263(1) was justified.

18. The respondent also relied upon the judgment reported as Commissioner of Income Tax v. Deepak Mittal (2010) 324 ITR 411 (P&H). That judgment did not deal with any conflict on the interpretation of Sections 80IA and 80IB on the one hand and Section 80HHC of the IT Act on the other. This Court in that case found that exercise of revisional jurisdiction on the ground of change in opinion by reappraisal of evidence was wholly without any justification, being not within the parameters of revisional jurisdiction of the Commissioner. That case would, thus, not help the respondent.

19. In view of the above discussion, we allow this appeal, set aside the order dated 29.04.2011 of Income Tax Appellate Tribunal, 1Chandigarh Bench ‘A’, Chandigarh and restore that of Commissioner of Income Tax-I, Ludhiana dated 18.03.2009 (Annexure A-2)

( SURYA KANT ) ( R.P. NAGRATH ) JUDGE JUDGE

December 20, 2012