Intellectual Dishonesty – of CA or CIT? Cost to be imposed on CA or CIT?

The assessee had categorically stated that the assessee had claimed deduction under the provisions of section 10B for the first time in the assessment year 1995-96. This fact has been admitted by the Revenue in the assessment year 1999-2000. The assessee has placed on record the order of the CIT(A) dated 21.10.2005 relevant to the assessment year 1999-2000 at page 10 to 16 of the paper book.

The CIT(A) has given a categoric finding that the assessee has exercised its option to avail tax holiday for a period of five years commencing from assessment year 1995- 96 . Since, the tax holiday has been extending from 5 years to 10 years by the amendment to the Income Tax Act in 1998 and the assessee is eligible to avail tax holiday under section 10B of the Act up to the assessment year 2004-05. The factual findings of CIT(A) have been reproduced in para 7 herein above. The findings of the CIT(A) were not challenged by the Revenue in appeal before the Tribunal. The factual position was admitted by the Revenue way back in the year 2005. The assessee has also placed on record the Chartered Accountant’s Report under section 10A/10B of the Income Tax Act which is at page 3 to 7 of the paper book. In the Annexure ‘A’ of the said Report it has been specifically mentioned that assessment year 2004-05 is the 10th year for claiming deduction by the assessee. All these documents were placed before the CIT(A) by the assessee at the time of hearing of the appeal. But the CIT(A) has not taken into consideration the same. On the contrary, the CIT(A) after relying on the judgement of the Hon’ble Karnataka High Court in the case of CIT Vs. DIL Software Ltd. reported as 2011- TIOL-787-HC-KAR-IT. The CIT(A) has dismissed the appeal of the assessee. By reading only particular paragraph (para 8) of the said judgement, the CIT(A) came to the conclusion that the assessee is not entitled to the benefit under section 10B of the Act and held as under:- 3.2.2: In view of the above, it is held that since the appellant company admittedly began manufacturing or production in the assessment year 1994-95, the appellant was entitled to deduction up to assessment year 2003-04 only. The present assessment year 2004-05 being the 11th assessment year, the appellant is not entitled to claim deduction under section 10B for this year. With due respect to the decision of the then CIT(A)in the appeal order in appeal and only for assessment year 1999-2000, I beg to differ with him on the issue of entitlement of the appellant to claim deduction under section 10B as I have already given my independent decision on this issue after considering the relevant provision of law and the decision of Hon’ble High Court of Karnataka in the case of M/s. DSL Software Ltd. (supra). Therefore, the action of the AO in denying deduction under section 10B of the Act to the appellant for the present assessment year 2004- 05, being the 11th year, is upheld as the same is in conformity with the provisions of law is also the decision of Hon’ble High Court of Karnataka as discussed above. The grounds of appeal relating to this issue, therefore, are dismissed.”

We are of the considered opinion that the order has been passed by the CIT(A) in a non-judicious and arbitrary manner. The order of the CIT(A) is not only against the law laid down by the Hon’ble High Court but smacks malafide on the part of the CIT(A). It is evident that the CIT(A) has committed “intellectual dishonesty” extending it to the limit of perversity. The impugned order has burdened the assessee with the avoidable cost of litigation before the Tribunal and harassment. We feel that the instant case is one of the rare and fit case where the Revenue should compensate the assessee for causing unnecessary mental and financial harassment. The valuable time of the Tribunal has also been lost in adjudicating the issue which is squarely covered by the judgement of the Hon’ble High Court. Therefore, the appeal of the assessee is allowed with costs of Rs. 25,000/-. The cost shall be paid to the assessee in accordance with Rule 32A(2) of the Appellate Tribunal Rules, 1963.

INCOME TAX APPELLATE TRIBUNAL, ‘C’ BENCH, CHENNAI

ITA No. 586/Mds/2012 – (Assessment Year: 2004- 05)

M/s. Qmax Test Equipments Pvt.Ltd.

Vs.

Assistant Commissioner of Income

Date of Pronouncement : 27th September, 2012

ORDER

Per Vikas Awasthy, JM:

The appeal has been filed by the assessee impugning the order of the CIT(A)-V, Chennai dated 27th January, 2012.

2. Brief facts of the case are that the assessee is a manufacturer of test equipments. The assessee had commenced production in May, 1983. Accordingly, the assessee was eligible for deduction under section 10B from the assessment year 1994-95 on wards. As per the provisions of unamended section 10B, the assessee was eligible to  claim deduction for five consecutive assessment years falling within a period of eight years beginning with assessment year relevant to previous year in which the undertaking had commenced production. The assessee opted to claim deduction under section 10B from the assessment year 1995- 96 to 1999-2000. The amendment to the Income Tax Act in the year 1998 extended the tax holiday period under section 10B from 5 years to 10 years. Consequently, the assessee was eligible to claim deduction from assessment year 1995- 96 to 2004-05.

3. The assessee filed its return of income relevant to the assessment year 2004-05 on 31.10.2004 admitting total income of `33,06,031/- before claiming deduction under section 10B of `33,06,031/-.The Assessing Officer made scrutiny assessment under section 143(3) on 29.9.2006. In the scrutiny assessment, deduction under section 10B was recomputed by excluding income from other sources and the total income was determined at `36,42,560/-. Thereafter, on 23.3.2007 a revision order was made and gratuity amounting to `40,203/- was excluded to recompute deduction under section 10B. As per the revised assessment order, the total income of the assessee was determined at `33,91,640/- . Later on, the Revenue alleged that the assessee had claimed deduction under section 10B in the 11th year. According to the provisions of section 10B the deduction is available only up to 10th year of production. Notice under section 148 was issued to the assessee on 29.8.2010. The Assessing Officer passed assessment order under section 143(3) read with section 147 of the Income Tax Act, 1961 to disallow the entire amount of deduction claimed by the assessee under section 10B. The Assessing Officer raised demand of ` 35,75,270/- from the assessee including interest under section 234B and 234C of the Act. Penalty proceedings under section 271(1)(c) were also separately initiated against the assessee.

4. Aggrieved against the assessment order dated 30.11.2010, the assessee preferred an appeal before the CIT(A). The assessee assailed the assessment order primarily on the following three counts:-

i) Reopening of assessment under section 148 beyond four years;

ii) Disallowing deduction of ` 61,85,982/- under section 10B of the Act; &

iii) Charging of interest under section 234B and 234C to the tune of ` 12,58,667/-

The CIT(A) dismissed the appeal of the assessee vide impugned order and confirmed the order of the Assessing Officer by holding that “action of the Assessing Officer in denying deduction under section 10B of the Act to the appellant for the present assessment year 2004-05 for being 11th year is upheld as the same is in conformity with the provisions of law as also the decision of Hon’ble Karnataka High Court in the case of CIT Vs. DSL Software Ltd. as discussed above.”

The CIT(A) also upheld the reopening of assessment under section 147 of the Act and accordingly interest charged under section 234B and 234C was also held to be valid being mandatory and consequential to the findings.

5. Shri G.Narayanasamy appearing on behalf of the assessee submitted that the Assessing Officer has reopened the assessment under section 147 on 29.3.2010 beyond the period of four years from the end of the assessment year. The reason given by the Assessing Officer for reopening of assessment is that the assessee had claimed exemption under section 10B amounting to ` 61,85,982/- for the assessment year 2004-05 which is the 11th year. The assessee has been availing benefit from the assessment year 1994-95. The reason given by the Assessing Officer for reopening the assessment is factually incorrect. The assessee had started claiming deduction under section 10B from the assessment year 1995-96 and not from the assessment year 1994-95. Therefore, 10th and the last year for claiming deduction under the provisions of section 10B of the Act is assessment year 2004-05 and not assessment year 2003-04 as has been wrongly held by the Assessing Officer as well as the first appellate authority.

6. The A.R. submitted that the Assessing Officer has wrongly assumed jurisdiction in reopening of assessment under the provisions of section 147 of the Act beyond the period of four years. In order to support his contentions, he relied on the judgement of the Hon’ble Supreme Court of India in the case of CIT Vs. Kelvinator of India Ltd., reported as 320 ITR 661(SC) and the judgement of the Hon’ble Madras High Court in the case of Sri Sakthi Textiles Ltd. Vs. JCIT., reported as 340 ITR 144. The A.R. submitted that the assessee had submitted all the necessary documents as required by the Assessing Officer during the course of initial assessment. At the time of making assessment under section 143(3), the Assessing Officer had an occasion to go through all the documentary evidences tendered by the assessee. Reopening proceedings have been initiated only on account of change of opinion on the part of the Assessing Officer. It is not the case of the Revenue that the assessee had not submitted any documents as asked by the Assessing Officer which had resulted in escapement of chargeable income from tax. It is also not the case of the Revenue that reassessment proceedings under section 147 were initiated only on failure on the part of the assessee to disclose fully and truly all material particulars necessary for the assessment.

7. The A.R. further submitted that the CIT(A) has erred in dismissing the appeal of the assessee on the ground that it is the 11th year of claim of deduction under section 10B. Since the assessee had started production in the assessment year 1994-95. The A.R. drew our attention to the order of the CIT(A) dated 21.10.2005 relevant to the assessment year 1999-2000 which is at page 10 to 16 of the paper book filed by the assessee. The A.R. submitted that in para 8.5(iii) & (iv) which is at page 15 of the paper book, the CIT(A) had observed as under:-

“Thus the Assessing Officer has clearly erred in applying the amended provisions to the appellant company which has already exercised its option to avail tax holiday under section 10B of the Act, for a period of five years commencing from the assessment year 1995-96.

(iv) As the period of tax holiday was extended from five to ten years by amendment to Income Tax in 1998, the assessee is still eligible to avail tax holiday under section 10B of the Act up to the assessment year 2004-05.”

The A.R. contended that factual findings given by the CIT(A) in his order relevant to the assessment year 1999-2000 with regard to period of availing benefit under section 10B, where never challenged by the Revenue, thus the findings of the CIT(A) had attained finality. The A.R. submitted that now it does not lie in the hands of the Revenue to take the plea that the findings of the CIT(A) in the appeal relevant to the assessment year 1999-2000 were incorrect.

8. On the other hand, Mr. S.Dasgupta appearing on behalf of the Revenue supported on the order of the CIT(A).

9. We have heard the submissions made by both the parties. We have also perused the orders passed by the authorities below and the judgements relied by the A.R. The first ground of appeal relates to the reopening of assessment under section 148 of the Act beyond the period of four years. The assessee had filed its return of income on 31.10.2004. The assessment was completed under section 143(3) on 29.09.2006. Subsequently, it was revised vide order dated 23.03.2007 to recompute the deduction under section 10B after excluding gratuity. Thereafter, notice under section 148 was issued to the assessee on 29.3.2010. To determine the validity of the reassessment proceedings, it is relevant to first examine the provisions of section 147. The relevant extract of section 147 is reproduced herein below:- Section 147: Income escaping assessment:

“If the [Assessing] Officer [has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.”

10. In the present case, it is not the case of the Revenue that the assessee had not furnished the relevant documents or the information at the time of the assessment. The original assessment order was passed on 29.9.2006. Thereafter, the order was revised by the Assessing Officer on 23.3.2007. Subsequently, after the elapse of four years notice under section 148 was issued to the assessee. The reason for reopening given by the Assessing Officer does not fall within the ambit of the provisions leading to escapement of assessment. In our view it is merely a change of opinion on the part of the Assessing Officer. The Assessing Officer had applied his mind while passing the assessment order and thereafter at the time of passing of revision order. The Revenue has not alleged that the assessee had withheld any material information or document at the time of assessment proceedings which has resulted in the escapement of assessment. The case of the assessee is squarely covered by the judgement of the Hon’ble Supreme Court of India in the case of CIT Vs. Kelvinator of India Ltd. (supra) as well as the judgement of the jurisdictional High Court in the case of Sri Sakthi Textiles Ltd.(supra). The Hon’ble Madras High Court in the aforesaid case has held that where there is no mention in the recorded reasons that the escapement of chargeable income from tax was due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, the notices issued under section 148 read with section 147 of the Act are without jurisdiction and therefore are liable to be quashed. For the foregoing reasons this issue is decided in favor of the assessee.

11. The next ground on which the assessee has assailed the order of the CIT(A) is disallowance of deduction under section 10B. The assessee had categorically stated that the assessee had claimed deduction under the provisions of section 10B for the first time in the assessment year 1995-96. This fact has been admitted by the Revenue in the assessment year 1999-2000. The assessee has placed on record the order of the CIT(A) dated 21.10.2005 relevant to the assessment year 1999-2000 at page 10 to 16 of the paper book. The CIT(A) has given a categoric finding that the assessee has exercised its option to avail tax holiday for a period of five years commencing from assessment year 1995- 96 . Since, the tax holiday has been extending from 5 years to 10 years by the amendment to the Income Tax Act in 1998 and the assessee is eligible to avail tax holiday under section 10B of the Act up to the assessment year 2004-05. The factual findings of CIT(A) have been reproduced in para 7 herein above. The findings of the CIT(A) were not challenged by the Revenue in appeal before the Tribunal. The factual position was admitted by the Revenue way back in the year 2005. The assessee has also placed on record the Chartered Accountant’s Report under section 10A/10B of the Income Tax Act which is at page 3 to 7 of the paper book. In the Annexure ‘A’ of the said Report it has been specifically mentioned that assessment year 2004-05 is the 10th year for claiming deduction by the assessee. All these documents were placed before the CIT(A) by the assessee at the time of hearing of the appeal. But the CIT(A) has not taken into consideration the same. On the contrary, the CIT(A) after relying on the judgement of the Hon’ble Karnataka High Court in the case of CIT Vs. DIL Software Ltd. reported as 2011- TIOL-787-HC-KAR-IT. The CIT(A) has dismissed the appeal of the assessee. By reading only particular paragraph (para 8) of the said judgement, the CIT(A) came to the conclusion that the assessee is not entitled to the benefit under section 10B of the Act and held as under:- 3.2.2: In view of the above, it is held that since the appellant company admittedly began manufacturing or production in the assessment year 1994-95, the appellant was entitled to deduction up to assessment year 2003-04 only. The present assessment year 2004-05 being the 11th assessment year, the appellant is not entitled to claim deduction under section 10B for this year. With due respect to the decision of the then CIT(A)in the appeal order in appeal and only for assessment year 1999-2000, I beg to differ with him on the issue of entitlement of the appellant to claim deduction under section 10B as I have already given my independent decision on this issue after considering the relevant provision of law and the decision of Hon’ble High Court of Karnataka in the case of M/s. DSL Software Ltd. (supra). Therefore, the action of the AO in denying deduction under section 10B of the Act to the appellant for the present assessment year 2004- 05, being the 11th year, is upheld as the same is in conformity with the provisions of law is also the decision of Hon’ble High Court of Karnataka as discussed above. The grounds of appeal relating to this issue, therefore, are dismissed.”

12. We would like to point out here that the CIT(A) instead of going through the entire judgement of Hon’ble Karnataka High Court has read only a part of the judgement and has interpreted the same out of context in favor of the Revenue. In fact, the Hon’ble Karnataka High Court in the said judgement has adjudicated a similar issue in favor of the assessee therein. The penultimate para 9 of the judgement is reproduced herein below:-

“9. In the instant case, the assessee has commenced production in the year 1993-94. He enjoyed the benefit of 5 years from 1993-94 to 1997-98. The amended provision came into force on 1.4.1999. He is entitled to the tax holiday under the amended provision i.e. from 1993-94 to 2002-03. He claimed benefit from 1999-2000, 2000-01 and 2001-02. It is for the period 2001-02, the benefit is denied. The said denial of the benefit runs counter to the spirit of section 10B and it would negate the object with which the amended provision was brought in. The assessee is entitled to the benefit of extension from 5 years to 10 years tax holiday as provided under the amended provision for 10 consecutive years from the date of commencement of production. In that view of the matter, the order passed by the Tribunal as well as the First Appellate Authority is strictly in accordance with law and do not suffer from any legal infirmity, which calls for interference. No substantial question of law arises for consideration in this appeal.”

13. A perusal of the above findings clearly shows that the case of the assessee is squarely covered by the judgement of the Hon’ble High Court. The Hon’ble Karnataka High Court has not only granted relief to the assessee, rather it came heavily on the Revenue for filing such frivolous petitions before the High Court by misinterpreting the law. The observations of the Hon’ble High Court in para 10 of judgement are reproduced herein below:-

“10. This case brings to the force the way in which the Income Tax Department, without a proper application of mind, are filing appeals against the orders of the Tribunal and thus, wasting the precious time of this Court and wasting the tax payer’s money. Even if the Assessing Authority for want of experience or has over zealously tried to protect the interests of the revenue, which runs counter to the express provision and when the two Appellate Authorities interpret the said provision, point out the law declared by various forums and grant relief to the assessee, we fail to understand how the department has taken a decision to prefer an appeal in this case, where there is absolutely no error in the order passed by the Appellate Authorities. It only shows the lack of application of mind and it is our experience that it is not an isolated case. It seems that the department is filing these appeals mechanically either for the purpose of statistics or to save their skins without application of mind. In the process, a person who is eligible to a tax holiday has not only been denied the benefit, but made him to contest the proceedings in three forums. If the object of extending these benefits is to give added thrust to exports, the assessee is made to unnecessarily waste his time in fighting the dispute in different forums. The only way to bring reason to the department, is by imposing costs, so that appropriate action may be taken against the person who has taken a decision to prefer an appeal and recover the same after inquiry. Having regard to the facts of the case, the Parliamentary intention and the object sought to be achieved and the way the two Appellate Authorities have pointed out the express provision, the view of the department is contrary to law, unsustainable and cannot be countenanced. Hence, we are of the view that the appellants are liable to pay costs of ` One lakh for making the assessee to contest the cases in three forums and wasting the tax payer’s money. It is open to the authorities to recover the money from the person who has taken a decision to prefer the frivolous appeal. Ordered accordingly.”

14. The Hon’ble High Court has observed that the object of granting benefit under the provisions of section 10B is to promote exports. The Revenue is unnecessarily harassing the assessees as well as wasting the time of the courts. The Hon’ble High Court has even imposed heavy cost of Rs. 1.00 lakh on the officer who has taken a decision to file appeal. In the case in hand, the CIT(A) has misread the findings of the Hon’ble Karnataka High Court. It seems that the CIT(A) has deliberately ignored the findings of the Hon’ble High Court given in para 9 and the strictures passed against the Revenue in para 10. The CIT(A) by referring to para 8 of the judgement only in his order has misconstrued the same by reading it out of context. It is highly improbable that the CIT(A) read only para 8 and did not notice para 9 and 10 of the judgement.

15. We are of the considered opinion that the order has been passed by the CIT(A) in a non-judicious and arbitrary manner. The order of the CIT(A) is not only against the law laid down by the Hon’ble High Court but smacks malafide on the part of the CIT(A). It is evident that the CIT(A) has committed “intellectual dishonesty” extending it to the limit of perversity. The impugned order has burdened the assessee with the avoidable cost of litigation before the Tribunal and harassment. We feel that the instant case is one of the rare and fit case where the Revenue should compensate the assessee for causing unnecessary mental and financial harassment. The valuable time of the Tribunal has also been lost in adjudicating the issue which is squarely covered by the judgement of the Hon’ble High Court. Therefore, the appeal of the assessee is allowed with costs of Rs. 25,000/-. The cost shall be paid to the assessee in accordance with Rule 32A(2) of the Appellate Tribunal Rules, 1963.

16. The last ground of appeal is with regard to interest under section 234B & 234C of the Act. Consequent to our aforesaid findings, the assessee is not liable to pay any interest. Therefore, this ground of appeal is allowed.

17. In the result, the appeal of the assessee is allowed with costs as mentioned above.

Order pronounced in the open court at the time of hearing on Thursday, the 27th day of September, 2012 at Chennai.