Case Law Details
Zydus Hospira Oncology Private Limited Vs PCIT ( ITAT Ahmedabad)
ITAT Ahmedabad held that order passed by PCIT under section 263 of the Income Tax Act without discussing or rebutting any of the arguments taken by the assessee is in gross violations to the principles of natural justice and hence the same is liable to be set aside.
Facts- During the examination of the assessment records, PCIT observed that the assessee had claimed an exemption of Rs. 59,98,80,918 u/s. 10AA of the Income Tax Act. PCIT was of the view that the assessee had included Revenue from operations and “other income” while calculating the claim u/s. 10AA of the Act. The “other income” included export incentives, which were part of government schemes like Duty Drawback and the sale of Duty Entitlement Pass Book (DEPB) licenses. PCIT was of the view that the export incentives and other income claimed by the assessee were not eligible for the exemption u/s. 10AA. PCIT was of the view that the assessee had claimed excess exemption under Section 10AA by a sum of Rs. 7,08,83,828. This excess exemption was due to the inclusion of non-eligible income, like export incentives which were part of government schemes like Duty Drawback and the sale of Duty Entitlement Pass Book (DEPB) licenses, in the calculation of 10AA claim. Consequently, PCIT was of the view that order passed by AO was erroneous and prejudicial to the interests of the Revenue and hence was directed to be set aside.
Conclusion- Held that from the contents of the order passed under section 263 of the Act, it is seen that Principal CIT has not discussed or rebutted any of the aforesaid arguments taken by the assessee during the course of 263 proceedings. The entire 263 order has been passed on the basis of initial notice issued under section 263 of the Act and has been passed in total disregard to any of the legal/factual submissions placed on record by the assessee challenging the 263 proceedings. It is seen from the contents of the 263 order that Principal CIT has not even discussed/analysed/rebutted any of the arguments taken by the assessee during the course of 263 proceedings, thereby making such proceedings a mere formality, initiated only with a view to take a unilateral call to set aside the assessment order as being erroneous insofar as prejudicial to the interests of the Revenue, without even bothering to discuss the arguments taken by the assessee during the course of 263 proceedings. Accordingly, since the order passed under section 263 of the Act, is in gross violations to the principles of natural justice, in our considered view the same is liable to be set aside.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal has been filed by the Assessee against the order passed by the Ld. Principal Commissioner of Income Tax (in short “Ld. PCIT”), Ahmedabad-3 vide order dated 19.03.2024 passed for the Assessment Year 2016-17.
2. The assessee has raised the following grounds of appeal:-
“1. That the Order passed by the learned PCIT invoking jurisdiction u/s 263 of the IT Act is prima-facie bad in law, in as much as the IT Assessment framed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) r.w.s. 1448 of the I.T. Act for A.Y. 2016-17 could not be said to be either ‘erroneous or prejudicial to the interests of the revenue. The learned PCIT further erred in sel-aside the said Assessment Order and directing the Assessing Officer to make a fresh assessment.
2. That the learned PCIT not only failed to appreciate the merits of the contention of the appellant that the original assessment u/s.143(3), also involving the issue of deduction u/s.10AA, having been settled under Vivad se Vishwas Act, no Revision Proceedings u/s.263 can be initiated, but also failed to deal with the same and give any reason as to why the same was not being accepted. In this regard, the appellant had in its reply to the notice u/s.263, relied upon the direct ratio laid down under the decision of the Hon’ble Gujarat High Court in the case of PCIT v. Mrs. Swatiben Biharilal Parekh (156 com 267 (Gujarat), wherein the Hon’ble Court was pleased to hold that “Opting VSV Scheme and finalizing thereof is nothing but closure of disputes in respect of tax arrears which cannot be subsequently reopened by issuing notice under section 263 for revising assessment order.”
3. That the learned PCIT, moreover, not only failed to appreciate the submission of the appellant that the Assessment Order passed in accordance with directions issued by DRP cannot be revised by the CIT u/s.263 but also failed to deal with the same and give any reason as to why the same was not being accepted. In this regard, the appellant had relied on the direct decision of the Hon’ble Mumbai ITAT in case of Barclays Bank PLC vs. CIT 139 com 503 (Mumbai), wherein the Hon’ble ITAT has clearly held that an assessment order passed in accordance with the directions issued by DRP, cannot be revised by the Commissioner u/s.263.
4. That the learned PCIT grievously erred in not considering the merits of the elaborate submissions filed by the appellant in response to the Notice u/s 263 highlighting the fact that the learned A.O. had, while finalizing the original assessment u/s. 143(3), after due consideration taken a conscious decision not to make any addition or disallowance on the account as sought to be suggested by the learned PCIT in her notice u/s.263.
5. Without prejudice to the legal challenge as referred to hereinabove, even on the merits of the case, the learned PCIT was not justified in holding that the Assessing Officer had erred in allowing claim of the appellant u/s. 10AA in respect of income from Export incentives of Rs.5,74,38,113/- and other income of Rs.8,85,67,574 (comprised of income from sale of scrap of Rs. 10,64,295 and Misc. Income of Rs.8,75,03,279).
The learned PCIT further failed to appreciate that the decision of the Hon’ble Supreme Court in case of Liberty India is not applicable both on the facts of the appellant as well in law. Moreover, she also failed to appreciate the decision of the Bombay High Court in case of CIT vs Arts & Craft Exports, 22 taxmann.com 53 (Bom), which duly settles the controversy that the decision of the Apex Court in the case of Liberty India cannot be invoked in case of an exemption governed by the provisions of Sec. 10AA, which is identical to the provisions of Sec. 10BA, which came up before the consideration of the Hon’ble Court. After the dismissal of the question raised before the Hon’ble Court in the light of the fair concession made by the learned standing counsel, the aforesaid judgment of the Hon’ble Bombay High Court is now of a binding nature.”
3. The brief facts of the case are that the assessee Company is engaged in the business of manufacturing drugs and pharmaceuticals. The company filed its return of income the Assessment Year 2016-17 declaring a total income of Rs. 65,84,62,870. Subsequently, the case was selected for scrutiny, and the assessment was finalized under Section 143(3) read with Section 144C(13) and Section 144B of the Income Tax Act on April 22, 2021, with the total income assessed at Rs. 1,22,84,03,397. During the examination of the assessment records, Principal CIT observed that the assessee had claimed an exemption of Rs. 59,98,80,918 under Section 10AA of the Income Tax Act. However, upon reviewing the computation of this claim and the relevant Schedules in the Profit & Loss account (Schedules 3.18 and 3.19), Principal CIT was of the view that the assessee had included Revenue from operations and “other income” while calculating the claim under Section 10AA of the Act. The “other income” included export incentives, which were part of government schemes like Duty Drawback and the sale of Duty Entitlement Pass Book (DEPB) licenses. These export incentives, while part of Government Schemes, did not have a direct nexus with the profits derived from the eligible unit of the assessee, established in Special Economic Zones (SEZs). Section 10AA(1)(a) of the Income Tax Act allows for a deduction of 100% of the profits and gains derived from the export of goods or services for five consecutive assessment years, beginning with the assessment year in which the unit begins production or provision of services. For the next five assessment years, the deduction is reduced to 50%. Principal CIT was of the view that the Supreme Court, in its ruling in the case of Liberty India vs. CIT (317 ITR 218) held that the words “derived from” are narrower than “attributable to” and intended to cover only the first degree of connection with the eligible profits. In this case, the Supreme Court stated that Duty Drawback and the sale of DEPB licenses were incentives from government schemes and did not constitute profits “derived from” the industrial undertaking. Based on this ruling, Principal CIT was of the view that the export incentives and other income claimed by the assessee were not eligible for the exemption under Section 10AA. On perusal of the calculation, Principal CIT was of the view that the assessee had claimed excess exemption under Section 10AA by a sum of Rs. 7,08,83,828. This excess exemption was due to the inclusion of non-eligible income, like export incentives which were part of government schemes like Duty Drawback and the sale of Duty Entitlement Pass Book (DEPB) licenses, in the calculation of 10AA claim. The profit before tax, as per the Profit & Loss Account, was Rs. 1,27,45,07,137, and after adjustments for other income (interest and profit from the sale of investments), the net business income eligible for Section 10AA was Rs. 1,08,96,22,094. The claim of exemption under Section 10AA (based on the ratio of business income to export turnover and total turnover) was of Rs. 59,98,80,918, while the actual allowable exemption, as per Principal CIT was Rs. 52,89,97,090. Therefore, the excess claim of Rs. 7,08,83,828 resulted in an underassessment of income. The assessing officer, while passing the assessment order, had failed to properly inquire into the claim for exemption under Section 10AA and allowed the excess claim to the assessee. Consequently, Principal CIT was of the view that order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue and hence was directed to be set aside.
4. The assessee is in appeal before us against the aforesaid order passed by Principal CIT. Before us, the counsel for the assessee firstly submitted that the order passed by Principal CIT was against the principles of natural justice and did not at all deal with any of the arguments, which were taken by the assessee, by way of three written submissions filed during the course of 263 proceedings. The counsel for the assessee submitted that the assessee had taken various legal and factual contentions before Principal CIT, during the course of 263 proceedings, which were totally ignored at the time of passing of 263 order by Principal CIT.
5. The first argument taken by the assessee before the Principal CIT was that the decision in Liberty India (317 ITR 218) is not applicable to the facts of the assessee’s case or under the law. The assessee submitted that method of computation given in section 10AA(7) of the Act differs from the approach considered by the Supreme Court in Liberty India in the context of Section 80-IA of the Act, which dealt with deductions under that section and not Section 10AA. In Liberty India, the Supreme Court held that export incentives such as Duty Drawback and the sale of DEPB licenses are not part of the net profits of the industrial undertaking for the purposes of claiming deductions under Section 80-IA of the Act. However, this ruling is not applicable to the current case, as thing Ruling pertains to a different provision of the Income Tax Act—specifically Section 80-IA—rather than Section 10AA, which deals with a different calculation and framework for deductions. The assessee relied on the ruling in the case of ITO vs. Maker Marts (50 Taxmann.com 106), where the Income Tax Appellate Tribunal distinguished the Liberty India case in the context of Section 10AA. In that case, the Tribunal allowed the exemption claim for export incentives like Duty Drawback, explaining that the reasoning in Liberty India did not apply to Section 10AA. The Tribunal clarified that the section under consideration in Liberty India (Section 80-IA) did not prescribe a formula for computing profits, whereas Section 10AA provides a specific formula for determining profits derived from export business. This distinction was important in determining that export incentives should be included in the exemption calculation under Section 10AA. The assessee also drew the attention of Principal CIT to the decision of the Hon’ble Bombay High Court in the case of CIT vs. Arts & Craft Exports (22 Taxmann.com 53), where the Revenue had raised a similar issue based on Liberty India, but the learned Standing Counsel for the Department conceded in Court that the Liberty India decision did not apply to the facts of the case. In this case, the Tribunal held that the DEPB benefits were profits derived from export business and should be included for the purpose of computing deductions under Section 10BA of the Act. The Bombay High Court dismissed the Revenue’s argument, agreeing with the concession made by the learned Standing Counsel, thereby affirming that the Liberty India decision was not relevant to the case at hand. This judgment shows that Liberty India does not apply to Section 10AA of the Act, which is worded similarly as section 10BA of the Act—both of which have specific provisions for calculating profits derived from export activities. Therefore, the assessee contended before Principal CIT that the exemption claimed under Section 10AA for “export incentives” and “other income” is in line with the provisions of the Act, and the decision of Liberty India is not applicable to the assessee. The case laws cited by the assessee, including the Bombay High Court decision, supports the view that export incentives are correctly included in the calculation of profits for the purposes of Section 10AA, and the Assessing Officer did not err in facts and in law in allowing the claim of exemption u/s 10AA of the Act.
6. The second argument taken by the assessee for Principal CIT was that the assessing officer had duly applied his mind on this issue during the course of assessment proceedings and therefore, the assessment order was not erroneous and prejudicial to the interests of the Revenue. During the course of assessment, vide notice dated the 20-09-2019, the assessing officer had sought for elaborate information with regards to claim of exemption under section 10 AA of the Act. The assessee had filed reply dated 20-11-2019 giving a detailed computation of claim of exemption under section 10AA claimed by the assessee. Thereafter, the assessing Officer issued another notice dated 18-122019 in response to which, the assessee filed in the reply dated 23-12-2012 and it was after due consideration of the merits of the replies filed by the assessee that the assessing officer chose not to disturb the claim made by the assessee under section 10AA of the Act. The assessee relied on various decisions in support of the proposition that once the assessing officer had made adequate enquiries during the course of assessment, in response to which the assessee had filed its replies and the assessing officer took a well informed decision taking into consideration the assessee’s particular set of facts, then the assessment order cannot be held to be erroneous insofar as prejudicial to the interests of the Revenue.
7. The third argument taken by the assessee during the course of 263 proceedings was that the assessee had settled this matter by opting for resolution under the Vivad Se Vishwas (VSV) Act. As a result of this resolution, the assessee submitted that no revision proceedings under Section 263 can be initiated. The assessee had applied under VSV Scheme and had received a certificate in Form-3 dated March 12, 2021, under the VSV Act, issued by the Hon’ble Principal Commissioner of Income-tax, Ahmedabad-3, certifying the settlement of the dispute for the relevant A.Y. 2016-17. Additionally, the assessee was granted an Order for Full and Final Settlement of Tax Arrears under Section 5(2) and Section 6 of the VSV Act, which calculated that the ‘Amount of Tax Arrear’ for A.Y. 2016-17 was zero. The assessee placed reliance on the ruling of the Hon’ble Gujarat High Court in the case of PCIT v. Mrs. Swatiben Biharilal Parolth (156 com 267), wherein the Court held that opting for and finalizing the VSV Scheme effectively closes the disputes regarding tax arrears, and such disputes cannot be reopened by issuing a notice under Section 263 for revising the assessment order.
8. The fourth argument taken by the assessee during the course of 263 proceedings was that the final Assessment Order dated April 22, 2021, passed under Section 143(3) read with Section 144C(13) and Section 144B, which specifically mentioned the sequence of events leading to the finalization of the assessment. The order stated that a draft order was issued on December 27, 2019, and the assessee filed objections before the DRP on January 27, 2020. The assessee later submitted a request on March 18, 2021, to withdraw the objections, as they intended to avail the benefits under the Vivad Se Vishwas Scheme. The DRP subsequently dismissed the objections for statistical purposes vide order dated March 20, 2021. The assessee relied on the decision of the Hon’ble Mumbai ITAT in the case of Barclays Bank PLC v. CIT (139 taxmann.com 503), where the Tribunal held that when the Assessing Officer passes an order in accordance with the directions of the DRP, such an order cannot be revised by the Commissioner under Section 263.
9. However, it was submitted before us by the counsel for the assessee that Principal CIT did not take into consideration any of the various legal/factual arguments taken by the assessee during the course of 263 proceedings and proceeded to set aside the original assessment order only on the grounds which formed part of the original 263 notice. Therefore, in light of the above facts, the order passed under section 263 of the Act is liable to be set aside.
10. In response, DR placed reliance on the observations made by Principal CIT in the 263 order.
11. We have heard the rival contentions and perused the material on record. On going through the contents of the 263 order passed by Principal CIT , we observe that the said order has been passed in gross violation of the principles of natural justice. The assessee had taken several factual and legal arguments during the course of 263 proceedings, which have been reproduced in the earlier part of our order. The assessee had submitted during 263 proceedings that the assessment order had been passed after due application of mind by the assessing officer on the claim of deduction under section 10AA of the Act and hence was not erroneous and prejudicial to the interest of the Revenue, secondly the assessee had opted for VSV scheme and hence in the light of various judicial precedents which have held that once the assessment year under consideration has been settled in the VSV scheme then that assessment order cannot be subject matter of revision under section 263 of the Act, thirdly the assessee had given detailed written submissions in which it was submitted that the Liberty decision on which reliance was sought to be placed by Principal CIT was rendered on a different set of facts and involving different sections under the Act which are differently worded and hence have no applicability of to assessee’s set of facts and finally the assessee had also submitted in the 263 proceedings that an assessment order passed pursuant to directions of DRP (consisting of panel three Commissioners) cannot be subject matter revision under section 263 of the Act. However, from the contents of the order passed under section 263 of the Act, it is seen that Principal CIT has not discussed or rebutted any of the aforesaid arguments taken by the assessee during the course of 263 proceedings. The entire 263 order has been passed on the basis of initial notice issued under section 263 of the Act and has been passed in total disregard to any of the legal/factual submissions placed on record by the assessee challenging the 263 proceedings. It is seen from the contents of the 263 order that Principal CIT has not even discussed/analysed/rebutted any of the arguments taken by the assessee during the course of 263 proceedings, thereby making such proceedings a mere formality, initiated only with a view to take a unilateral call to set aside the assessment order as being erroneous insofar as prejudicial to the interests of the Revenue, without even bothering to discuss the arguments taken by the assessee during the course of 263 proceedings. Accordingly, since the order passed under section 263 of the Act, is in gross violations to the principles of natural justice, in our considered view the same is liable to be set aside.
12. Secondly, even otherwise, on merits we observe that the assessee has placed on record several judicial precedents in support of the contention that the case of Liberty (supra) is not applicable for computation of claim of exemption under section 10AA of the Act. Further, even on the basis of facts placed on record is seen that the assessing officer had specifically enquired into the aspect of computation of claim of exemption under section 10AA of the Act and after taking into consideration the written submissions/legal arguments placed by the assessee on record, took a legally plausible view and decided not to disturb the claim of deduction under section 10AA of the Act. Further, we also observe that several judicial precedents have held that once the assessee has opted for VSV scheme, and paid due taxes thereon, then the tax proceedings for this year would come to a close and thereafter, the same issues cannot be re-agitated by taking recourse to 263 proceedings. In the point to be noted is that this is the 9th year of claim of deduction by the assessee and therefore, even from point of view of principle of consistency, unless any new facts are brought on record, the claim of exemption cannot be disturbed by taking recourse to 263 proceedings.
13. Accordingly, in light of the above observations, we direct that the 263 order passed by Principal CIT is liable to be set aside.
14. Since common facts and issues for consideration are also involved in assessee’s appeal for assessment year 2017-18, the order passed by Principal CIT is also directed to be set aside for this year as well.
15. In the combined result, both the appeals filed by the assessee are allowed.
This Order pronounced in Open Court on 04/12/2024
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