Commissioner of Income Tax, Panaji vs Damodar Mangalji Mining Company

B.P. Dharmadhikari, J.—This appeal u/s 260A of the income tax Act, 1961 has been admitted by formulating the following 3 questions on 2-8-2004: (1) Whether on facts and in the circumstances of the case, the ITAT was justified in setting aside the order passed by the Commissioner u/s 263 of the income tax Act, relying on the decision of Bombay High Court in the case of " Alfa Laval India Ltd. Vs. Deputy Commissioner of Income Tax, , which is not applicable to the facts of the case?

(2) Whether on the facts and in the circumstances of the case, the ITAT was legally correct in placing reliance on the decision of Bombay High Court in the case of " Alfa Laval India Ltd. Vs. Deputy Commissioner of Income Tax, , which has held that "having accepted interest income as part of the business profits, the same could not be excluded from business profits, while calculating deduction u/s 80HHC of the income tax Act", which is not the question involved in the present case?

(3) Whether the ITAT ought to have held that the order passed by the Assessing Officer allowing deductions u/s 80HHC(1) and (1A) of the income tax Act, by not excluding certain receipts from the business profits under Explanation (baa) to section 80HHC, is prejudicial to the interest of revenue and therefore the Commissioner was justified in revising the same u/s 263 of the income tax Act?

The facts, in brief, are that the assessee, a partnership firm, engaged in business of manufacture and sale of processed ore, filed return for the assessment year 1993-94 and claimed deduction u/s 80HHC of Rs. 2,13,98,095. The Assessing Officer finalised the assessment u/s 143(3) of the Act on 30-11-1995. In this order, he has considered the truck lease income of Rs. 18,58,810, machinery lease income of Rs. 3,95,500 and service charges of Rs. 30,000 as eligible for deduction. The matter was taken up by Commissioner of income tax (CIT), Panaji, Goa u/s 263(1) of the Act and after hearing the assessee, vide order dated 26-2-1998 income under these three heads was treated as non-business receipts and, therefore, liable to be excluded while computing eligible business profits. This order was challenged in appeal before the income tax Appellate Tribunal ("ITAT" for short) by the assessee and the ITAT, Panaji Bench vide its order dated 20-1-2004 allowed that appeal by placing reliance upon the Division Bench Judgment of Bombay High Court in Alfa Laval India Ltd. Vs. Deputy Commissioner of Income Tax, . Thereafter, the revenue approached the Court and as mentioned above, the appeal came to be admitted.

We have heard Advocate Rivonkar for the Department and Advocate Srinivasan with advocate Parag Wagle for the assessee.

After inviting attention to the relevant provisions of the Act, Advocate Rivonkar has argued that mechanical reliance by the ITAT upon judgment of Division Bench of Bombay High Court in Alfa Laval India Ltd.''s case (supra) is totally misconceived because in that case, the Assessing Officer himself treated the income in dispute as "business profits" and while computing eligible profits u/s 80HHC, excluded them. Advocate Rivonkar by inviting attention to the said judgment attempted to demonstrate that the Division Bench was required to consider only this question of change in treatment to said income by the Assessing Officer himself and no other question fell for consideration. He points out that in the present matter, the CIT has specifically recorded a finding that income under above-mentioned 3 heads was non-business receipts, i.e., non-operational income and, therefore, needed to be excluded while computing eligible profits. In this background, he states that the questions, as framed, need to be answered in favour of present assessee and the present appeal needs to be allowed and orders passed by CIT need to be restored.

Advocate Srinivasan, on the other hand, has relied upon judgments of the Apex Court in R.J. Singh Ahuluwalia Vs. The State of Delhi, and in G.M. Contractor and Others Vs. Gujarat Electricity Board and Others, and Division Bench judgment of this Court in Inventors Industrial Corporation Ltd. Vs. Commissioner of Income Tax, to state that the issue which goes to the root of jurisdiction can be raised at any point of time. He points out that in R.J. Singh Ahuluwalia''s case (supra) before the Apex Court, a point not raised earlier before any of the lower Courts, was allowed to be raised and as sanction was found to be invalid, the conviction and sentence was set aside. He further states that the said judgment has been followed by the Division Bench of the Court in Inventors Industrial Corporation Ltd.''s case (supra). Therein the ground going to the very root of the matter and challenging jurisdiction of ITO to make reassessment was allowed to be raised for the first time in second round of appeal against order of ITO based on version. In this background, he invites our attention to the judgment of the Court in CIT v. Design & Automation Engineers (Bombay) (P.) Ltd. [2009] 177 Taxman 9 (Bom.) (para 6) to urge that when two views of the matter are possible while discharging jurisdiction u/s 263, the CIT cannot take the other possible view. In CIT v. Max India Ltd. [2008] 166 Taxman 188 (SC) is relied upon for very same purpose. The above referred judgment in case of Alfa Laval India Ltd. (supra) is also a judgment of Division Bench of this Court. Commissioner of Income Tax Vs. Bangalore Clothing Co., is relied upon to contend that the Assessing Officer has to ascertain whether receipt of such income by the assessee was a part of operational income or not and in the present matter, the CIT in revisional jurisdiction has not disturbed that finding. He further states that recently, on 18-7-2007, ITAT has passed an order in bunch of appeals (IT Appeal Nos. 123 to 127/PNJ/2004) for the assessment years 1991-92, 1992-93, 1993-94, 1994-95, and 1997-98 and held that truck leasing income, machinery lease income and service charges in case of the assessee constituted operational income. In this view of the matter, he contends that the view taken by the Assessing Officer in assessment order dated 30-11-1995 has not been disturbed and was a possible view. Therefore, the revisional authority could not have interfered in the matter and taken other possible view. He also supported the impugned order by pointing out facts and law relied upon in it.

With the assistance of both learned Counsel, we have perused the order passed in revision, as well as order passed by the appellate authority and the judgments relied upon by them. Advocate Rivonkar during his reply has invited attention to the provisions of section 260A to state that the question of jurisdiction u/s 263 has not been framed in the present matter as substantial question of law and, therefore, in view of provisions of sub-section (4) thereof, the assessee cannot be heard on the said question. He further stated that if the Court finds that such a question is involved, the question needs to be formulated and opportunity needs to be given to the assessee to assist the Court by arguing the said question on next date. Advocate Srinivasan has contended that as the respondent has raised that issue, the provisions of section 260A(3)(4) are not applicable and the assessee can argue the said substantial question of law. Perusal of order passed by the revisional authority clearly shows that the said authority has found that income under the above 3 heads could not have been retained as business receipts and, therefore, was not operational income. It is apparent that if income under the 3 heads is not operational income, the same needs to be treated in the manner as stipulated in section 80HHC, Explanation (baa)(1). CIT, therefore, is justified in recording that the treatment accorded to the said income by the Assessing Officer is erroneous and has prejudiced the revenue.

Ingredients of section 263 are, therefore, satisfied in the matter and it cannot be said that recourse to section 263 was misconceived. No substantial question of law, therefore, arises. As we are not framing any substantial question u/s 263, the other arguments advanced by respective counsel need not be considered at this stage.

Mere perusal of the impugned order of the ITAT is sufficient to show that ITAT, after mentioning the facts, has found that the Assessing Officer was justified in allowing the deduction only by relying upon the Division Bench judgment of the Court placed before it. The nature of expenditure in dispute and their co-relation with the export business, if any, or otherwise has not been gone into. The specific finding of revisional authority that the same constituted non-business receipt is, therefore, not even looked into. Perusal of the judgment in the case of Alfa Laval India Ltd. (supra) shows that there were 3 questions involved and question No. 3 is relevant for the present matter. The said question as originally formulated was whether the interest from customers, sales tax set-off and other refunds formed a part of business profit or not? This question has been re-formulated while actually dealing with it and actual question considered is, whether the Tribunal was justified in holding that interest from customers sale-tax set off do not form a part of business profit for calculating deduction u/s 80HHC? The discussion undertaken thereafter shows that for the assessment year 1989-90, the Assessing Officer treated the export incentives under caption "Other income" amounting to Rs. 2,42,66,453 as part of business profits and excluded balance amount of Rs. 1,90,89,554 from the profits of business as if the same was not a part of business profits. The profits computed under the head "Profits and gains of business or profession" at Rs. 7,06,26,746 included "other income" of Rs. 4,33,56,007. This reduction by Rs. 1,90,89,554 (Rs. 4,33,56,007.00 - 2,42,66,453.00) from business income for computing deduction u/s 80HHC, was found to be unjustified as the Assessing Officer himself treated it as part of profits and gains of business. In this background, it has been held that it was not open to the Assessing Officer to treat these incomes as if assessed under the head "Income from other sources". Thus, this contradictory treatment by the Assessing Officer was found sufficient to allow the appeal of the assessee by setting aside the order of ITAT. The propriety or otherwise of the finding of ITAT that said incomes had no nexus with the business activity of the assessee and, therefore, were not to be included in the business profits for the purpose of computation of relief u/s 80HHC of the Act, was, therefore, not required to be gone into. In the present matter, the treatment given to expenditure (sic) included under three heads, namely truck lease income, machinery lease income and service charges has been corrected by CIT in revision with specific finding that said income did not constitute a business receipt. Hence, unless and until ITAT in appeal found that profits from these three activities also constituted business receipt or operational income, it could not have allowed the appeal filed by the assessee before it. This aspect is not gone into at all by the ITAT and mechanically the judgment in case of Alfa Laval India Ltd. (supra) has been followed, though it is not applicable.

In these circumstances, the present tax appeal filed by the Department needs to be allowed. But, instead of remanding the matter back to ITAT, we find it proper to place the matter before CIT to appropriately evaluate and consider the contention of the assessee that said receipts were operational receipts and to record a finding after considering nexus of the receipts with business of the assessee. The Division Bench of the Court in CIT v. Bangalore Clothing Co. (supra) has, in para 8, held that in such matters, the Assessing Officers have to ascertain whether receipts of interest, commission, labour charges, etc., were a part of operational income and no standard test for deciding it can be laid down.

It is to be noted that after the revisional authority passed the order against the assessee, the Assessing Officer has passed fresh assessment order on 9-12-1999 and finalised the assessment by treating truck lease income, machinery lease income and service charges as not eligible for such deduction. In copy of subsequent order passed by ITAT on 18-7-2007 in 5 IT Appeals, supra there is reference to assessment year 1993-94 also and all the appeals have been filed by the revenue itself. It has been pointed out to us by Advocate Rivonkar that said order of ITAT dated 18-7-2007 has been challenged by the revenue by filing appeals u/s 260A before the Court and those appeals are already admitted. In other words, the challenge by the revenue to the treatment extended by the Assessing Officer to said income as operational income is pending before the Court. It is obvious that there is some error somewhere, because in the present matter, on 9-12-1999, the Assessing Officer has finalised the assessment by treating said income as non-operational income. If any fresh orders are passed again in respect of this year thereafter because of impugned order of ITAT, challenge to it could not have been repeated before ITAT as this appeal is/was already pending. In view of the discussion above, we quash and set aside the impugned order passed by ITAT and also the order passed u/s 263 by CIT on 26-2-1998 and restore the proceedings u/s 263 being LRP.263/10/97-98/CIT-PNJ and remand back the same to CIT for taking fresh decision in accordance with law. The present tax appeal is, accordingly, partly allowed. However, in the circumstances of the case, there shall be no order as to costs.