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TMI Blog2016 (7) TMI 1005X X X X Extracts X X X X X X X X Extracts X X X X ..... material cost of the Rifampicin undertaking and should rather be excluded from the profits and gains of this industrial undertaking while computing deduction under section 80-IB. 2. (ii) The learned CIT(A) erred in confirming that the value of advance license is not any profit/gains derived from any industrial undertaking and shall not be eligible for deduction under section 80-IB. 2. (iii) The learned CIT(A) failed to appreciate that advance license scheme which is meant to reduce the cost of goods to be exported and therefore, it is directly related to the activity of the industrial undertaking and hence, need to be considered for determining the profit under section 80-IB." 2. The brief facts of the case are that the assessee is a limited company and is engaged in the business of manufacture and sale of formulations and bulk drugs. Assessment u/s 143(3) was completed on 30.3.2006 assessing the total income at Rs. 58,77,06,709/- under normal provisions and Rs. 78,68,15,426/- as book profits u/s 115JB of the Income Tax Act, 1961 (in short "the Act"). As tax on total income under normal provisions was more than tax on book profits, the assessment was completed under normal pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is entitled to a deduction of 30% of profits subject to the fulfillment of certain conditions. For determining the quantum of deduction, profits and gains of the eligible business shall be computed as if such profits and gains were the only source of income of the assessee during the relevant previous year. In this case, assessment was completed u/s. 143(3) on 30.03.2006 determining taxable income at Rs. 58,77,06,709/-. On verification of the case records, it is seen that assessee company has claimed deduction u/s.80lB amounting to Rs. 214.44 lakhs being 30% of profits and gains of Rs. 714.80 lakhs in respect of Rifampicin Manufacturing unit. The profits and gains of Rs. 719.80 lakhs was arrived at after reducing the export incentive of Rs. 368 lakhs earned by the Rifampicin unit for the purpose of computing 80 lB deduction. In the assessement, the profit determined from Rifampicin unit was determined at Rs. 7,41,25,014/- and deduction under section 80IB was allowed on it @ 30% amounting to Rs. 2,22,37,504/-. It is seen that export benefit of Rs. 763.26 lakhs was shown under the head other income in the profit and loss account. It is also seen that the export benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007 before the Assessing Officer in respect of reasons for reopening. The Ld. AR further argued that the Assessing Officer has not considered the legal submissions made by the assessee and has wrongly reopened the assessment in violation of the provisions of the Act as well as the judicial pronouncements. The Ld. AR further argued that the CIT(A) has also erred in confirming the reopening of the assessment u/s 147 without appreciating that reopening of assessment is not permitted under the facts of the present case. 4. The Ld. AR relied upon the detailed submissions made by the assessee before the CIT(A) and, apart from taking other grounds, the Ld. AR challenged the order of Assessing Officer of reopening on the ground that the Assessing Officer ought to have passed a separate speaking order disposing of the objections raised by the assessee and in case the Assessing Officer did not pass any speaking order regarding disposing of the objections raised by the assessee, then, reopening is invalid u/s 148. In this respect, the Ld. AR relied upon the following judgments : i) GKN Driveshafts India Ltd., (2003) 259 ITR 19 (SC) ii) Tupperware India Pvt. Ltd., ITA 415 of 2015 (Del. HC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing order shall be treated as bad in law and void ab initio. It was further argued by the Ld. AR that even while disposing of the objections in the reassessment order, the Assessing Officer did not give any finding as to how he has come to the conclusion that he has valid reasons for reopening of the assessment. 7. On the other hand, the Ld. DR relied upon the orders passed by the Assessing Officer as well as the CIT(A). Further, it was argued by the Ld. DR that notice u/s 142(1) and copy of reasons recorded was given to the assessee on 29.9.2008 but even inspite of receipt of the copy of reasons recorded, the assessee has not made any compliance. However, after sufficient gap of almost a month notice has been given to the assessee on 26.11.2008 and vide this notice assessee has been told that he had not complied with the earlier notice u/s 141(1) dated 29.9.2008. It was argued by the Ld. DR that on 3.12.2008 the assessee had filed adjournment and sought time and even on 5.12.2008, the assessee did not make any compliance and instead, vide letter dated 12.12.2008, the assessee filed the objection. The Ld. DR further submitted that as per Sec. 153(2) the time barring date of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court in G.K.N. Driveshafts (India) Ltd. (supra) as mandatorily requiring the AO to comply with the procedure laid down therein and to dispose of the objections to the reopening order with a speaking order, the CIT(A) committed an error in not quashing the reopening order and the consequent assessment. 12. At the outset it requires to be factually noticed that the reopening order of the AO only refers to the report of Statutory Auditor under Section 44AB of the Act which report was already enclosed with the return filed by the Assessee. Therefore, factually, there was no new material that the AO came across so as to have "reasons to believe that the income had escaped assessment". 13. As far as the legal requirement is concerned, the Court finds that the decision in CIT v. Orient Craft Ltd. (supra) answers the question squarely in favour of the Assessee in the facts of the present case. In Orient Craft Ltd. this court considered the decisions of the Supreme Court in CIT v. Kelvinator India Ltd. (2010) 320 ITR 561 and Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra). 15. In CIT v. Orient Craft Ltd. (supra) the Revenue sought to argue, placing reliance on Rajesh J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uite rightly, is that if the revenue wants to invoke Section 147 it should play by the rules of that section and cannot bog down. In other words, the expression "reason to believe" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made under Section 143(3) and another applicable where an intimation was earlier issued under Section 143(1). It follows that it is open to the assessee to contend that notwithstanding that the argument of "change of opinion" is not available to him, it would still be open to him to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment. In doing so, it is further open to the assessee to challenge the reasons recorded under Section 148(2) on the ground that they do not meet the standards set in the various judicial pronouncements." 20. In the first place, it requires to be noted that the decision in Orient Craft Ltd. was delivered after the decision of the Full Bench in Usha International Ltd. (supra). Secondly, the subsequent decision in M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N. Driveshafts (India) Ltd. would entail nullifying the proceedings. Although the AO is required to provide reasons, receive objections and pass a speaking order thereon, only after the notice under Section 148 has been issued; these requirements are an integral part of the safeguards which have been inbuilt for ensuring that the assessments are reopened only for lawful reasons and in a transparent manner. If the said safeguards are flouted, it would invalidate the exercise of jurisdiction u/s 147 and 148." 11. From the co-joint reading of all the aforementioned judicial pronouncements it is clear that the Assessing Officer has to dispose of the objections, if filed by the petitioner, by passing a speaking order before proceeding with the assessment. It has been categorically mentioned that the Assessing Officer is bound to dispose of the objections filed by the assessee by passing a speaking order before proceedings with the assessment and further, it has also been categorically mentioned that if the Assessing Officer fails to comply with the procedure laid down thereunder, and to dispose of the objections to the reopening order with a speaking order, then, in that eventuality, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd it is quite clear that there was also some delay on the part of the assessee to file objections as the present case was a time barring case and the time barring date of this reopening proceeding was 31.12.2008. Therefore, the Assessing Officer had passed the order well within time, but at the same time we have also noticed that the Assessing Officer has violated the principles of natural justice as well as the principles laid down by the above judicial pronouncements as while passing the order of assessment u/s 143(3) r.w.s. 147 of the Act after considering the objections of the assessee, the Assessing Officer has disposed of the same in para 6 which is reproduced below : "6. The explanation offered by the assessee has been considered. The case laws cited by the assessee are also perused. The contention of assessee that as all facts were before Assessing Officer before doing the assessment u/s 143(3) and hence reopening is not justified is not acceptable. 6.1 Assessee's mere submissions that the facts related to deduction were disclosed during assessment proceedings do not absolve the assessee from its responsibility of showing correct dedcution in its' return of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer. It is trite that a matter in issue can be validly determined only upon application of mind by the authority determining the same. Application of mind is, in turn, best demonstrated by disclosure of mind, which is best done by giving reasons for the view which the authority is taking. In cases where the order passed by a statutory authority is silent as to the reasons for the conclusion it has drawn, it can well be said that the authority has not applied its mind to the issue before it nor formed any opinion. The principle that a mere change of opinion cannot be a basis for reopening computed assessments would be applicable only to situations where the Assessing Officer has applied his mind and taken a conscious decision on a particular matter in issue. It will have no application where the order of assessment does not address itself to the aspect which is the basis for reopening of the assessment, as is the position in the present case. It is in that view inconsequential whether or not the material necessary for taking a decision was available to the Assessing Officer either generally or in the form of a reply to the questionnaire served upon the assessee. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial undertaking, a view taken by the apex court in the case of Sterling Foods. In the said decision the court have further observed that to claim the benefit the assessee has to establish that the profits and gains were derived from industrial undertaking and it was just not sufficient that commercial connection between the two was established. The industrial undertaking has to be the source of profits. The business of the industrial undertaking has directly to yield the profits. The industrial undertaking should be the direct source of that profit and not a means to earn the profit. The ratio of decision of the Apex Court in the case of M/s. Cambay Electrical Supply Industrial Company Ltd. Vs. CIT Gujarat-II [ 113 ITR 84] is also very much relevant here wherein the Hon'ble Supreme Court had an occasion to examine the meaning of the word 'derived from" and "attributable to". The question in this case was whether balancing charge u/s. 41(2) was a profit attributable to the business of the assessee. The assessee had sold machinery and buildings and had earned a profit there upon. While deciding this case the Hon'ble Supreme Court stated that:- "It cannot be disputed th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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