TMI Blog2010 (4) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... payment was made and received by the National Housing Bank (Not the date on which certificate was issued). This was within a period of six months from the date of the transfer of the asset. Consequently, the provisions of Section 54EC were complied with by the assessee. There is absolutely no basis in the ground for reopening the assessment. – (iv) - The loss incurred by the eligible unit under Section 10B: - All the four units of the assessee were eligible under Section 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of Section 10B. – Notice issued u/s 148 set aside - Writ Petn. No. 85 of 2009 - - - Dated:- 1-4-2010 - Mr.Percy J. Pardiwala, senior Advocate with mr.Nishant Thakkar and Mr.Rajesh Poojari i/by M/s.Mulla Mulla C.B.C. for the petitioner. Ms.Suchitra Kamble i/by Mr.Suresh Kumar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the computation of income enclosed with the return of income filed by the assessee, the business income included in the total income determined by the assessee is at Rs.18,15,59,78,868/. In the same computation of income, while determining the business income, the assessee has deducted an amount of Rs. 10,84,07,449/as loss of Plantation division. However, in the computation of business income in the assessment order passed u/s. 143(3) of the Act, the assessee was again allowed a deduction of Rs.10,84,07,449/as loss of Plantation division. Therefore, the assessee was wrongly allowed the deduction of Rs.10,84,07,449/as loss of Plantation division in the assessment order passed u/s. 143(3) of the Act. Thus, the assessee's income to the extent of Rs. 10,84,07,449/has escaped the assessment. On perusal of the records, it is also noticed that in the computation of long term capital gain on sale of Bhandup land enclosed with the return of income filed by the assessee, the assessee has claimed exemption u/s.54EC of the Act of Rs. 3,07,50,000/being invested in 5.10% National Housing Bank Capital Gains Bonds and the same claim of exemption was allowed in the assessment order passed u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormal business income in the accounts, is not allowable. However, the same was allowed in the assessment order. Thus, the assessee's income to the extent of Rs.1,33,49,654/has escaped the assessment." 4. The petitioner communicated its objections to the reopening of the assessment on 6th October 2008. An order was passed thereon by the Assessing Officer on 14th November 2008, overruling the objections. The challenge in these proceedings is to the notice reopening the assessment for assessment year 2004-2005. The reopening of the assessment, it may be noted has taken place within a period of four years of the end of the relevant assessment year. 5. The reasons on the basis of which the assessment is sought to be reopened have been extracted earlier. Before dealing with the challenge in these proceedings, it would be appropriate to summarize the basis for reopening the assessment. The first reason, according to the Revenue, is that the loss of Rs.10.84 crores in respect of which the assessee had claimed a deduction, as emanating from the Plantation division, is wrongly set off and income to the extent of Rs.10.84 crores has escaped assessment. Secondly, according to the Revenue, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come is deemed to be income liable to tax. Rule 8, therefore, which is subordinate legislation, stipulates a method of segregating the agricultural income from the business income, by applying the proportion of 60:40. 9. The genesis of Rule 8 has been explained in the judgment of the Supreme Court in Commissioner of Income Tax V/s. Williamson Financial Services and Others{[2008] 297 ITR 17 (S.C.)}. In the case before the Supreme Court, the assessee grew and manufactured tea, which was then exported. The assessee claimed that the deduction under Section 80HHC was liable to be granted against the entire tea income before applying Rule 8(1). The Assessing Officer rejected the claim and held that the deduction would be allowed only after apportionment between agricultural income and nonagricultural income. The Tribunal restored the order of the Assessing Officer, which had been interfered with by the Commissioner (Appeals), while the High Court in turn reversed the decision of the Tribunal. The Supreme Court observed that Rule 8 refers to cases of integrated income. Where the income of the assessee arises partly from agriculture and partly from manufacture, the profits which arise fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome for the purposes of the Act and, for the purposes of Rule 8 must of necessity take into account the expenditure incurred by the assessee for the purposes of business and Rule 8 requires the computation of such income as if it were income derived from the business. Exfacie, the legal fiction which is created by Rule 8(1) requires the computation of the income derived from the sale of tea "as if it were income derived from business" and that can only be after taking into account the expenditure which is incurred by the assessee for the purposes of earning the income. Consequently, the loss, if any, that is sustained by the assessee on account of its business operations involving the manufacture and sale of tea would be allowable and all that the assessee has done was to segregate the overall loss that was sustained by attributing only 40 per cent. of the loss to the business activity of the manufacture and sale of tea. Counsel submitted that the notice for reopening the assessment proceeds on the basis that the loss of Rs.10.84 crores is entirely to be disallowed. This, it was urged is an inference which has been drawn by the Assessing Officer without even a plausible basis in la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a legal fiction is created by the legislature or, as in this case, in subordinate legislation, the legal fiction has to be given force and effect so as to operate within the area in which it was intended to operate. In applying a legal fiction, it is trite law that one cannot allow the imagination to boggle. A legal fiction has to be carried to its logical conclusion. In computing the income from the sale of tea as if it was income derived from business, for the purposes of Rule 8, it is impossible to comprehend as to how the expenditure incurred by an assessee, wholly and exclusively, for the purposes of business should be disregarded. Obviously, the expenditure cannot be disregarded. The principle which must govern is well settled and only a brief reference to authority on the subject would be necessary. 14. In Commissioner of Income Tax (Central), Delhi Vs. Harprasad Co. P. Limited, {(1975) 99 ITR 118 (S.C.)} the question which came up before the Supreme Court was whether a capital loss could be determined and carried forward, in accordance with the provisions of Section 24 of the Act of 1922, when the provisions of Section 12B were not applicable during the course of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed. On this basis, the Assessing Officer has formed the opinion that the loss of Rs. 10.84 crores attributable to the business activity of the assessee involving the manufacture and sale of tea was liable to be disallowed. It must be noted here that it is not the contention of the Assessing Officer that the loss which has been computed by the assessee by applying the proportion of 40 per cent. is not a fair estimate of the actual loss sustained by the assessee in its business operations. On the contrary, it is on the basis of Rule 8 that the Assessing Officer seeks to postulate that the loss attributable to the business activity of the assessee would have to be disregarded on the ground that it is not allowable expenditure. This inference which is sought to be drawn by the Assessing Officer is contrary to the plain meaning of the charging provisions of the Act; and to Rule 8, besides being contrary to the position in law laid down by the Supreme Court. The assessee was lawfully entitled to adjust the loss which arose as a result of the business activity under Rule 8. (ii) Computational Error in the Assessment Order: 16. The second ground on which the assessment is sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st appropriate remedy, that leaves the assessee with the least detriment. In the event that the Assessing Officer was to exercise the power of rectification under Section 154, the order would have to be corrected to the extent of the computational error. Exercising the power of reopening the assessment on that ground of a simple computational error is a matter of serious prejudice to the assessee since, in such an event, the entire assessment would be liable to be reopened including all other issues which come to the notice of the Assessing officer in the course of proceedings under Section 147. 18. We find that there is merit in the submission which has been urged on behalf of the assessee. Section 154 empowers the Income-tax Authorities, including an Assessing Officer, to amend any order passed by them with a view to rectify any mistake apparent from the record. The limitation for the exercise of the power is under subsection (7) of Section 154, four years from the end of the financial year in which the order sought to be amended was passed. There can be no dispute about the position that the computational error that has been made by the Assessing Officer in the present case is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is notice in the course of the proceedings, though such reasons have not been set out in the notice under Section 148. There is, therefore, merit in the submission that is urged on behalf of the assessee that before recourse can be taken to the wider power to reopen the assessment on the ground that there is a computation error, as in the present case, the Assessing Officer ought to have rectified the mistake by adopting the remedy available under Section 154 of the Act. All statutory powers have to be exercised reasonably. Where a statute confers an area of discretion, the exercise of that discretion is structured by the requirement that discretionary powers must be exercised reasonably. Indian Law is governed by the prescriptions of a written constitution. Fairness and fair treatment are norms which emanate from the guarantee of equality and non discrimination under Article 14. Constitutional norms, including non discriminatory application of law, must guide the interpretation of statutes. Statutory enactments must be read to be in conformity with constitutional norms. The exercise of powers vested by a statute must equally be consistent with constitutional norms. The remedies wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciple laid down by the Division Bench, in the facts of the present case. We, therefore, hold that in this case the Revenue has an efficacious remedy open to it in the form of a rectification under Section 154 for correcting the computational error and that consequently recourse to the provisions of Section 147 was not warranted. (iii) The investment under Section 54EC 21. The third ground for reopening the assessment relates to the exemption claimed by the assessee under Section 54EC in respect of an amount of Rs.3.07 crores invested in the National Housing Bank Capital Gains Account. The assessee transferred an immovable asset namely certain land at Bhandup on 29th September 2003. Section 54EC(1) provides that where capital gains arise from a transfer of a long term capital asset and the assessee has at any time within a period of six months after the date of such transfer, invested the whole or any part of the capital gains in a long term specified asset, the capital gains shall be dealt with in accordance with the provisions made in the Section. In order to avail of the benefit of Section 54EC, the capital gains have to be invested in a long term specified asset within a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om a 100 per cent Export Oriented Undertaking, to which the section applies "shall not be included in the total income of the assessee". The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of Section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and gains as are derived by a 100 per cent Export Oriented Undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under Section 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligibl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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