TMI Blog2017 (7) TMI 822X X X X Extracts X X X X X X X X Extracts X X X X ..... o revisit debatable issues is well settled. The re-opening of assessment under Section 147 of the Act was only on account of the orders passed by the CIT under Section 263 of the Act and for no other reason. This Court having held that there is no justification for the CIT to have invoked Section 263 of the Act, the re-opening of the assessments under Section 147 of the Act in AY 1998- 99, which is the only year for which the question was framed, was not justified.- Decided in favour of assessee. - ITA 1082/2005, ITA 690/2008, ITA 225/2009, ITA 1189/2009 AND ITA 251/2010 - - - Dated:- 20-7-2017 - MR. S.MURALIDHAR AND MR. CHANDER SHEKHAR, JJ. For The Appellant : Mr. Dileep Shivpuri, Senior Standing Counsel and Mr. Sanjay Kumar, Junior Standing Counsel, Ashok Manchanda, Senior Standing Counsel and Mr. Raghvendra Singh, Junior Standing Counsel For The Respondent : Mr. Ajay Vohra, Senior Advocate with Mr. Dushyant Monocha, Mr. Ashish Gupta and Ms. Bhavita Kumar, Advocates, Mr. Ajay Vohra, Senior Advocate with Mr. Dushyant Monocha, Mr. Ashish Gupta and Ms. Bhavita Kumar, AdvocatesJUDGMENT Dr. S.Muralidhar, J. 1. These are appeals by the Revenue under Section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s correct in law in holding that the CIT was not justified in invoking the provisions of Section 263 of the Act as the order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of the Revenue? 2. Whether the ITAT was correct in holding that for purposes of deduction under Section 80-IA of the Act the Assessee should be the small scale undertaking on the last day of the previous year relevant to the initial/first assessment year and that the said requirement need not be satisfied in the subsequent assessment. 3. Whether the ITAT was correct in law in holding that the CIT was not correct in directing the Assessing Officer to make addition on account of differences in valuation of closing stock despite the fact that the selling and administrative expenses of ₹ 6,00,222 were neither taxed in the earlier year nor added in the present year by the Assessee? 4. Whether ITAT was correct in law in deleting the addition of ₹ 70,00,000 proposed by CIT being interest receivable on the outstanding despite the fact that the Assessee was adopting mercantile system of accounting? ITA No. 251/2010 2002-03 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and computers etc.) worked out to ₹ 3.37 crores. The Assessee also applied to the Ministry of Industries for being registered as a Medium Scale Unit and it, in fact, got registered as a Medium Scale Industry ( MSI ). 6. By a subsequent notification dated 24th December, 1999 issued by the Central Government, the limit of investment in fixed assets in P M by an SSI got reduced from ₹ 3 crores to ₹ 1 crore. This became effective from 25th December, 1999. The case of the Revenue is that this notification also applied to the Assessee since it never obtained a permanent registration as an SSI unit. Further, as on 31st March, 1999, the Assessee s total investment in P M worked out to more than ₹ 6.42 crores. This increased to ₹ 19.82 crores as on 31st March, 2000 and approximately ₹ 23 crores as on 31st March, 2001. The case of the Revenue, therefore, is that the Assessee was never an SSI. 7. The case of the Assessee, on the other hand, was that it was an SSI in the initial year i.e., AY 1997-98 as was evident from the SSI registration certificate issued in its favour. Its investment in P M in terms of notification dated 1st January, 1993 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by the CIT under Section 263 of the Act for the AY 1999-00 on 11th July, 2003, the AO issued a notice under Section 148 of the Act seeking to re-open the assessment on the ground of wrongful claim of deduction by the Assessee under Section 80-IA of the Act. This notice was issued on 14th July, 2003. In response thereto, the Assessee filed a return on 13th August, 2003 declaring the same income as per the revised return. A notice was issued to the Assessee on 13th May, 2004 under Section 142 (1) of the Act requiring it to submit the details of P M in terms of Section 11B of the IDR Act. The AO held that the total investment as per these details worked out to ₹ 9,27,11,983 whereas the ceiling as per the notification dated 24th December, 1999 for an SSI was ₹ 1 crore only. By the assessment order dated 28th February, 2005, the above deduction was disallowed and added to the taxable income of the Assessee. 12. By the re-assessment order dated 14th July, 2003 for AY 1998-99, the AO re-calculated the opening value of P M for the preceding year as ₹ 75,24,787/- and after adding it to the investments in P M during the AY, calculated the total value of P M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 7th May, 2004 under Section 143 (3) read with Section 263 of the Act, the AO disallowed the deductions under Section 80-IA of the Act. The appeal filed by the Assessee against the said order was allowed by the CIT (A) by an order dated 24th March, 2005. Against the said order, ITA No. 2668/Del/2005 was filed by the Revenue before the ITAT. In the said appeal for AY 2001-02, the Assessee also filed cross objections which the Assessee subsequently withdrew as dismissed. The ITAT by the order dated 17th August, 2007 dismissed the Revenue s appeal and held that the Assessee was entitled to the deduction under Section 80-IA of the Act. 18. Against the said order, the appeal filed by the Revenue in this Court is ITA No. 690/2008. The Revenue filed a separate ITA No. 1082/2005 against the same order. By order dated 28th March, 2005, the ITAT allowed the Assessee s appeal being ITA No. 469/Del/2004 challenging the order passed by the CIT on 5th December, 2003 under Section 263 of the Act. The ITAT agreed with the Assessee that the CIT was not justified in invoking Section 263 of the Act. 19. Consequently, ITA Nos. 690/2008 and 1082/2005 were filed by the Revenue in this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, there was no occasion for the AO to examine if the Assessee fulfilled the requisite pre-conditions for claiming deduction under Section 80-IA of the Act for AY 1997-98. Even for AYs 1999-00, 2000-01, 2001-02, 2002-03, the Assessee had not claimed deduction under Section 80-IA of the Act in its returns initially. The deductions were claimed only in the revised returns. In none of the abovementioned AYs or statutory Tax Audits Reports furnished by the Assessee along with the Returns of Incomes was it specified or certified that that Assessee was eligible for deduction under Section 80-IA. This was the same even as per the Assessee's own auditor. (ii) The certificate issued to the Assessee on 24th February, 1997 by Project Manager of the District Industries Centre, Hoshiarpur under which the Assessee was registered as an SSI for 'Assembling of Tractors' provided that an Undertaking would stop enjoying the status of an SSI as and when the total machinery exceeded the prescribed limit. In each year, the claim was always being made by attaching only an Income Calculation Sheet signed by a representative of the Assessee and being submitted along with the revised re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems Ltd. v. Deputy CIT (2014) 367 ITR 266 (Kar) and CIT v. Sunder Forging (decision of the Punjab and Haryana High Court in ITA Nos. 242 243/2012 92/2014). (v) It is further submitted that the Circulars issued by the Ministry under the IDR Act are not relevant and binding and, in any event, not applicable to the Assessee. What had to be seen is whether as per the Circulars issued by the CBDT, there were five conditions required to be fulfilled cumulatively if an Assessee was to claim deduction u/s 80-IA(l) of the Act. The first two conditions related to the year of formation of the industrial undertaking. These, therefore, pertained to the initial AY. However, for the other three conditions, they would have to be complied with and fulfilled year after year i.e., in every previous year. All these three conditions had to be fulfilled cumulatively. It was impermissible that out of the three conditions, one or two conditions were fulfilled in a year while the others remained unfulfilled. 24. In addition to the oral submissions, there were three written submissions filed by Mr. Manchanda. The first written submission was dated 10th April, 2017 running into 13 pages. In this wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or each AY. He submitted that once the eligibility condition was satisfied in the initial assessment year , then the benefit of deductions would continue for ten successive years. He submitted that the decisions in Praveen Soni v. CIT (supra) and CIT v. Natraj Stationery Products Pvt. Ltd. (supra) in fact supported the Assessee s case. 28. As regards Form 10-CCB, Mr Vohra pointed out that this came about with the bifurcation of Section 80-IA and 80-IB with effect from 1st April, 2000. Correspondingly, Form 10-CCB did not come into force till AY 2003-04. He further submitted that the said form was a composite form for different businesses. Mr. Vohra pointed out that the eligibility limit for being recognized as an SSI in terms of investments made in P M could vary from year to year. It stood raised from ₹ 60 lacs to ₹ 3 crores for AY 1997-98 and reverted to ₹ 1 crore by notification dated 24th December, 1999. If the interpretation sought to be advanced by the Revenue were to be adopted, then the entire Section would become non-workable. The idea was to ensure that there are incentives for SSIs and to assure them of continuous deductions for at least ten years a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance was placed on the decision of the Supreme Court in DIT v. A.P. Moller Moersk (2017) 392 ITR 186 (SC). 32. On the issue of exercise of jurisdictional powers under Section 263 of the Act, reliance was placed on the decision in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) and the decision of Punjab and Haryana High Court in CIT v. Max India Limited (2004) 268 ITR 128 (P H) which was upheld by the Supreme Court in CIT v. Max India Limited (2007) 295 ITR 282 (SC). Interpretation of Section 80 IA 33.The Court first takes up for consideration the question of interpretation of Section 80-IA of the Act. The said section, provided for Deductions in respect of profits and gains from industrial undertakings, etc. in certain cases. Sub-section (1) stated that where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking on or after the 1st day of April, 1997 (eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to the percentage s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of an industrial undertaking located in such industrially backward district as the Central Government may specify as an industrially backward district of Category A or an industrially backward district of Category B, and it begins to manufacture or produce articles or things or to operate its cold storage plant or plants at any time between 1st April, 1995 and 31st May, 2000; Clause (d) of Sub-Clause (iv) of Sub-Section (2) of Section 80-IA states that in the case of an industrial undertaking being an SSI where it begins to manufacture or produce articles or things at any time during the period beginning on the 1st April, 1995 and ending on 31st March, 2000. 37. A further condition to be satisfied is that the undertaking manufactures or produces articles or things, employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers if it is carried on without the aid of power. 38. Section 80-IA specifies what the extent of deduction available would be. In the context that an undertaking is an SSI, then 25% of the profits and gains derived from such industrial undertaking would be allowed as a deduction. The extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 1998-99. In the order of the matters decided by the ITAT, the earliest was the order passed on 1st March, 2004 in ITA No. 497/Del/2004. The next in chronological order is the order dated 28th March, 2005 passed by the ITAT in ITA No. 469/Del/2004 where it followed the previous order dated 1st March, 2004. 42. As already noted hereinbefore, the appeal filed in this Court by the Revenue against the order dated 1st March, 2004 for AY 1999-00 (ITA No. 497/2004) has been kept for hearing on a different date because one question involved in that appeal is that the Vice-President of the ITAT who presided over the Bench which passed that order ceased to be as such by the time the second member signed the order dated 1st March, 2004. Whether such an order could be held to be valid is a question that has been considered in that appeal by this Court. Nevertheless, the said order has been followed in the subsequent orders dated 28th March, 2005 of the ITAT for AY 2001-02, and order dated 17th August, 2007 passed by the ITAT in ITA No. 2668/Del./2005 for same AY i.e., AY 2001-02. These were followed by the orders of the ITAT dated 20th June, 2008 for AYs 1998-99 and 2000-01 in ITA Nos. 457 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghting equipment etc. 46. Clearly, therefore, the CIT was in error in proceeding on the basis that the investment in P M as on 31st March, 1997 was about ₹ 60 lacs. In any event, this determination of the CIT by the order dated 5th December, 2003 has already been set aside by the ITAT in its order dated 28th March, 2005 in ITA No. 469/Del/2004. There is, therefore, no justification for the Court to proceed on that basis even for the initial year i.e., AY 1997-98. 47. At this stage, it requires to be noted that the purpose of introducing provisions like Section 80-IA, which incidentally is not restricted to providing relief to SSI units but to all kinds of industrial undertakings, was to encourage industrial expansion. The idea was to incentivise investment in industries. Further, the legislative intent was to give, even in the beginning, the benefit for a period of ten years irrespective of whether after the initial year there was an expansion of industrial undertaking by increased investment in P M that may have taken it outside the ambit and scope of that provision. In other words, it is not expected that the investment for P M in the initial AYs would remain static f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om this point of view, the interpretation advanced by the Revenue in this case cannot be accepted. Discussion of case law 50. Now turning to the case law, in Bajaj Tempo Ltd. v. CIT (supra), the question that arose was whether the Assessee was entitled to claim partial exemption from payment of tax under Section 15C of the Indian Income Tax Act, 1922 on the profits and gains derived from an industrial undertaking established in a building taken on lease used previously for another business . The Income Tax Officer rejected the claim since the new business was formed by splitting of business already in existence and it was also formed by transfer to the new building and machinery previously used in another business. While interpreting Section 15C of the 1922 Act, the purpose of which was more or less similar to Section 80-IA of the Act i.e., granting incentives for promoting growth and development , the Supreme Court observed that the provision required to be liberally construed. It was pointed out that adopting a liberal construction in such cases would result in defeating the very purpose of Section 15C. It was observed as under: A provision in a taxing statute g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04-05, it was pointed out that it could claim the benefit up to AY 2007-08. While claiming the benefit, the Assessee filed the requisite documents including Form 10CCB. While the AO agreed with the Assessee that the condition stood fulfilled, he denied it only on the ground that it was not claimed in the initial AY. It was also found that the unit had not been registered as an SSI under the IDR Act. 53.3 Accordingly, two substantial questions of law were framed in the matter by this Court One was whether the rejection of the claim for deduction under Section 80-IB was valid, and second, whether the Assessee was disentitled to claim deduction on the ground that it had not claimed deduction in the initial AY. The Court answered both the questions in favour of the Assessee by holding that there was no dispute that the Assessee fulfilled the eligibility conditions prescribed under Section 80-IB and was to be regarded as an SSI. The AO was directed to given the benefit of deduction for the AY in question i.e., AY 2004-05. 54. Mr. Manchanda was asked by the Court as to how the above decision was helpful to the case of the Revenue since it, in fact, rather helps the case of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been denied this benefit for the next ten AYs. In the considered view of the Court, therefore, the decision in Praveen Soni v. CIT (supra) in fact is in favour of the Assessee. 56. The other decision relied upon by the Revenue is CIT v. Natraj Stationery Products Pvt. Ltd. (supra). The initial AY, as far this decision was concerned was AY 1994-95. The Court was interpreting Section 80-IA. The question was whether the Assessee was entitled to deduction in respect of the profits derived from an industrial undertaking set up in AY 1994-95. Therefore, the question involved was not that which arises in the present case, viz., whether the Assessee is required to fulfil the eligibility condition in each of the AYs for which benefit under Section 80-IA is claimed. Here, again, the ITAT gave a direction to the AO to ascertain whether the Assessee had fulfilled the condition set out in Section 80-IA(2)(iii) of the Act as applicable for the initial year i.e. AY 1994-95. 57. Mr. Manchanda referred to an observation in paragraph 9 of CIT v. Natraj Stationery Products Pvt. Ltd. (supra) where it was noted that the ITAT directed the AO to verify the Assessee s eligibility for deduction i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition in the initial AY. This was notwithstanding any change that may have happened even in the provision itself as it in fact did, as already noticed, with effect from 1st April, 2000 when Section 80-IA as it then stood was bifurcated into 80-IA and 80-IB. Therefore, even this decision of this Court is of no help to the Revenue as claimed by it. 60.1 In CIT v. Delhi Press Patra Prakashan Ltd. (supra), this Court had to interpret the deduction available under Section 80-I (2) (i) of the Act. The question was whether the fact that more than 10 workers were permanently involved in carrying out the activities in the second and third unit of the Assessee would disentitle it from deduction under Section 80-I (2) (iv). 60.2 Here, the Assessee was engaged in printing and publishing newspapers and periodicals. It was set up in 1973 with the head office in New Delhi. It had established a unit in Sahibabad, namely, Unit No. 2 for carrying on the work of high speed printing during the period ending 30th September, 1985 relevant to AY 1986-87. Since in the first year there was a loss, no deduction under Section 80-IA was allowed to the Assessee in respect of Unit No. 2. 60.3 In the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up or reconstruction of business already in existence, it is entitled to the deduction under section 80-IA for subsequent years. Since the assessee had been granted claim of deduction right from the assessment year 2004-05 under section 80-IA, consequently it cannot be denied deduction for the subsequent years inasmuch as restraint of section 80-IA(3) cannot be considered for every year of claim of deduction, but can be considered only in the year of formation of the business. 62. In Ace Multi Axes Systems Ltd. v. Deputy CIT (supra), the Karnataka High Court was considering whether the condition under Section 80-IB had to be fulfilled by the Assessee in all the ten years. This was answered in the negative and it was held as under: 5. In the entire provision, there is no indication that these conditions had to be fulfilled by the assessee all the 10 years. When once the benefit of 10 years, commencing from the initial year, is granted, if the undertaking satisfies all these conditions initially, the undertaking is entitled to the benefit of 10 consecutive years. The argument that, in the course of 10 years, if the growth of the industry is fast and it acquires machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e such eligibility condition for every one of the ten consecutive AYs inclusive of the initial AY in order to be eligible for the deduction. Section 263 64. The Court now turns to the question of the invocation of Section 263 of the Act by the CIT(A) to revise the orders of the AO. This question has been raised for AY 2001-02. It has not been framed as a question in other AYs. Nevertheless, the Court has examined the question even for the other AYs. 65. The two requisite conditions that are required to be met to justify the invocation of Section 263 of the Act are: (i) That the order of the AO must be erroneous; and (ii) It must be prejudicial to the interest of the Revenue. 66. In Malabar Industrial Co. Ltd. v. CIT (supra), the Supreme Court explained it as under: There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losing stock of the year will also get altered and this would result in the modification of the assessment in the previous year. Therefore, the change in the method of valuation of closing of stocks was not a justification for the exercise of power under Section 263. Consequently, as far as AY 2001-02 is concerned, this could not have been a ground for invoking Section 263 of the Act. Again, the mere change in the method of accounting would ipso facto not make a difference to the Revenue and cannot be said to be prejudicial to the interest of the Revenue. Reopening of assessment under Section 147 72. The re-opening of assessment under Section 147 of the Act was only on account of the orders passed by the CIT under Section 263 of the Act and for no other reason. This Court having held that there is no justification for the CIT to have invoked Section 263 of the Act, the re-opening of the assessments under Section 147 of the Act in AY 1998- 99, which is the only year for which the question was framed, was not justified. Answers to the questions 73. The Court answers the questions that arise in each of the appeals as under: Assessment Year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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