Reassessment to disallow deduction u/s. 80HHC based on audit objections & reappraisal of details furnished not valid

ITAT HYDERABAD BENCH ‘B’

Deputy Commissioner of Income-tax

Versus

Lee Pharma (P.) Ltd.

IT Appeal No. 1236 (Hyd.) of 2010
[ASSESSMENT YEAR 2004-05]

JUNE  8, 2012

ORDER

Smt. Asha Vijayaraghavan, Judicial Member – This appeal filed by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals)-V, Hyderabad, dated July 6, 2010, for the assessment year 2004-05.

2. The assessee-company engaged in manufacturing of bulk drugs and intermediates, filed its return of income for the assessment year 2004-05 on October 28, 2004 declaring total taxable income of Rs. 82,29,600 after claiming deduction under section 80HHC at Rs. 18,40,275. The return was processed under section 143(1) of the Act on February 5, 2005.

3. The case was selected for scrutiny and by an order under section 143(3) dated December 22, 2006 had been passed and the income was assessed at Rs. 83,59,320 after allowing deduction under section 80HHC at Rs. 18,40,275. However, it was observed subsequently that the assessee had adopted incorrect adjusted export turnover and adjusted total turnover and also the eligible profits for working out deduction under section 80HHC. The assessee adopted eligible profits without reducing 90 per cent. of other income admitted as “conversion charges” and “technical consultancy charges” amounting to Rs. 21,87,459 as required under Explanation (baa) to section 80HHC. This resulted in excess claim of deduction under section 80HHC.

4. The Assessing Officer noted that the assessee had not reduced 90 per cent. of the “commission” on exports received of Rs. 67,98,563 from the profits of the business while working out the deduction. It was decided in the case of CIT v. P.R. Prabhakar [2005] 276 ITR 176 that brokerage and commission being income for procuring export contract cannot be treated as part of eligible profits of the business.

5. In view of the above, the Assessing Officer worked out the admissible deduction under section 80HHC at Rs. 3,44,690, as under :

6. On the basis of the above the Assessing Officer redetermined the deduction under section 80HHC at Rs. 3,44,690 as against Rs. 18,40,275 claimed by the assessee.

7. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals).

8. Before the Commissioner of Income-tax (Appeals), the assessee contended that the action of the Assessing Officer amounted to only a change of opinion on account of an audit objection. He, therefore, submitted that the reassessment was not valid as per law, on the following reasons :

“It received two separate letters from the then Assessing Officer both bearing No. DCIT 16(1)/L-65/2004-05, dated February 12, 2008, in the month of February, 2008, i.e., about 14 months after completion of original assessment, wherein certain clarifications/objections were sought, based on an objection raised by the Revenue audit party, in respect of the claims of deferred revenue expenditure and deduction under section 80HHC. Consequently, the appellant submitted two separate letters dated March 12, 2008 and March 13, 2008, reiterating its explanations/clarifications, furnished during the original assessment proceedings. Subsequently, no action was taken by the then Assessing Officer obviously for the reason that he was satisfied with the explanations filed on the issues involved, based on which a reply might have been sent to audit.

Suddenly, after a lapse of one full year from the date of filing the above explanations by the appellant, the present Assessing Officer decided to issue a notice under section 148 on March 26, 2009, on the same issues, clearly at the insistence of the revenue audit.

The above facts amply demonstrate that reassessment was prompted by mere change of opinion, that too under the influence of the opinion of the audit party. It is a settled law that such change of opinion cannot form the basis for initiation of proceedings under section 147 and any attempt to make a reassessment based on a change of opinion amounts to review of earlier order which is not permissible in law. Hence, the appellant prays the Commissioner of Income-tax (Appeals) to declare the reassessment order passed, consequent on such invalid proceedings, as null and void.”

9. The Commissioner of Income-tax (Appeals) relied on the decision of the Delhi High Court (Full Bench) in the case CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 wherein it has been held as under (headnote) :

“The scope and effect of section 147 as substituted with effect from April 1, 1989, by the Direct Tax Laws (Amendment) Act, 1987, and subsequently amended by the Director Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989 as also of sections 148 to 152 have been elaborated in Circular No. 549 ([1990] 182 ITR (St.) 1), dated October 31, 1989. A perusal of clause 7.2 of the said circular makes it clear that the amendments had been carried out only with a view to allay fears that the omission of the expression ‘reason to believe’ from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on a mere change of opinion. It is, therefore, evident that even according to the Central Board of Direct Taxes a mere change of opinion cannot form the basis for reopening a completed assessment.

An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without any further, the same would amount to giving a premium to an authority exercising quasi judicial function to take benefit of its own wrong. Hence, it is clear that section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceedings upon a mere change of opinion”.

The said decision was confirmed by the apex court in CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561.

10. The Commissioner of Income-tax (Appeals) held that the reopening was invalid observing as under :

“4.7 Given the above ratios, the facts in the present case are examined. Firstly, the original assessment was completed under section 143 of the Act on December 22, 2006 and deduction under section 80HHC was allowed at Rs. 18,40,275 after examining all the relevant facts. It is noteworthy that specific details regarding deduction under section 80HHC, details of turnover, details of conversion charges as well as nature of deferred revenue expenditure was called for vide various letters of the Assessing Officer during assessment proceedings. These details were duly provided. In this regard, the following extract from the written submissions of the appellant is noteworthy :

The appellant submits that the action of the Assessing Officer lacks both legal and factual strength. Both the above deduction/expenses were allowed by the Assessing Officer in the original assessment only after thoroughly examining the allowability or otherwise of such deduction/expenses. All the relevant information was specifically required to be furnished during original assessment proceedings by the then Assessing Officer. The relevant details called for by the Assessing Officer during the original assessment proceedings are as under :

(A) The Assistant Commissioner of Income-tax 16(1)lr. L-056 dated September 15, 2005.

(iv) details of turnover . . . etc. . . .

(viii) Details of expenditure exceeding Rs. 1 lakh under each head along with vouchers.

(B) The Assistant Commissioner of Income-tax 16(1)/L-56/2004-05, dated September 8, 2006.

(5) Extracts of bank accounts wherein foreign exchange remittances were received for total export turnover of Rs. 14,69,41,270.

(7) nature of conversion charges received.

(C) The Deputy Commissioner of Income-tax 16(1)/L-56/2004-05, dated October 4, 2006.

(2) Please file nature of deferred revenue expenditure and its allowability.

(6) Please file working sheet for claiming deduction under section 80HHC.

4.8 Based on all the above information, the Assessing Officer applied his mind and completed the assessment under section 143(3) of the Act by allowing deduction under section 80HHC, etc. In other words, all the details were investigated into and there was a clear application of mind.

4.9 However, on exactly the same facts and same information, notice under section 148 of the Act was issued based on an audit objection. As per reasons recorded, the Assessing Officer wanted to recompute the deduction under section 80HHC and also treat the sum of Rs. 21,45,679 originally allowed as current repairs, now as capital expenditure. This is evident from the following reasons recorded :

‘2. It is observed that the assessee adopted incorrect adjusted export turnover and adjusted total turnover and also the eligible profits. The assessee adopted eligible profits without reducing 90 per cent. of other income admitted as ‘conversion charges’ and ‘technical consultancy charges’ amounting to Rs. 21,87,459 as required under Explanation (baa) to section 80HHC. This resulted in excess claim of deduction under section 80HHC.

3. Similarly, the assessee had not reduced 90 per cent. of the ‘commission’ on exports received of Rs. 67,98,563 from the profits of the business while working out the deduction. It was decided in the case of CIT v. P. R. Prabhakar [2005] 276 ITR 176 (Mad) that brokerage and commission being income for procuring export contract cannot be treated as part of eligible profits of the business.

6. The assessee has incurred a sum of Rs. 21,45,679 towards renovation of the newly taken leased premises for the purposes of starting production of some pharmaceutical products. The assessee claimed it as current repairs whereas the expenditure is capital in nature and cannot be allowed deduction.

7. In view of the above facts I have reason to believe that income has escaped for the assessment year 2004-05.’

4.10 From the above facts and circumstances, it is clear that no new information had come before the Assessing Officer and he merely wanted to review his earlier order based on an audit objection and his change of opinion. Therefore, the aforementioned ratios are clearly applicable in the present case. Accordingly, it is held that the act of issuing notice under section 148 and assuming jurisdiction of section 147 of the Act was not valid as per law. These grounds of appeal are thus decided in favour of the appellant and the assessment is treated as null and void. Accordingly the other grounds of appeal need not be adjudicated upon.”

11. Aggrieved the Revenue is in appeal before us.

12. We have heard the arguments of both parties and perused the record as well as the orders of the authorities below. No doubt that the reopening is within four years from the end of the assessment year and hence the assessee cannot enjoy the benefit of proviso to section 147(1), which requires the Assessing Officer to show in what new material has come to his notice and in what manner the assessee has omitted to provide full particulars, before he can reopen the assessment. But still the courts have held that the Assessing Officer has power to reassess escaped income and has no power to review his own order.

13. In this case as found by the Commissioner of Income-tax (Appeals) the Assessing Officer in the course of assessment proceedings had called for the particulars regarding various items of income going into the computation of deduction under section 80HHC, for which the assessee had given the requisite details and particulars. Now the Assessing Officer has reopened the assessment to hold that the very same items of receipt has to be excluded in computing relief under section 80HHC. In other words, the Assessing Officer, on a reappraisal of the very same details, which was called for by him and furnished by the assessee, would like to come to a different conclusion. This clearly tantamounts to reopening is merely on a change of opinion.

14. The Full Bench of the Delhi High Court in the case of Kelvinator of India Ltd. (supra) has held at page 19 as under :

“In the event it is held that by reason of section 147 if the Income-tax Officer exercises his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional. We are therefore of the opinion that section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceedings upon his mere change of opinion.

We, however, may hasten to add that if ‘reason to believe’ of the Assessing Officer is founded on an information which might have been received by the Assessing Officer after the completion of assessment, it may be a sound foundation for exercising the power under section 147 read with section 148 of the Act.

We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the Assessing Officer had received information from an audit report which was not before the Income-tax Officer, but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself.

We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147 of the Act. The said sub-section is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. It if be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.”

15. The apex court confirmed the order of the Delhi High Court decision in this case in Kelvinator of India Ltd. (supra).

16. Thus in our opinion the reopening is merely change of opinion of the Assessing Officer and he should have tangible material for forming an opinion that there has been an escapement of income. “Reason to believe” will not include mere change of opinion. Respectfully following the ratio laid down by the hon’ble Delhi High Court in the case of Kelvinator of India Ltd. (supra), we uphold the order of the Commissioner of Income-tax (Appeals) in treating the reassessment made by the Assessing Officer under section 148 is null and void.

17. Further, an audit opinion in regard to the application or interpretation of law cannot be treated as information for reopening the assessment under section 147(b) of the Act, as held by the hon’ble Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996. In the case of CIT v. Lucas T.V.S. Ltd. [2001] 249 ITR 306, the hon’ble Supreme Court held that information with the meaning of section 147(b) includes information as to true and correct state of law as well which should come from a competent Legislature or judicial order or judicial authority. Hence, we dismiss the grounds raised by the Revenue in this regard.

18. In the result, the appeal of the Revenue is dismissed.