Brief– High Court of Bombay at Goa held in the case of CIT vs. V. S. Dempo & Company Ltd. Held that view taken by the Assessing Officer or by the Commissioner has to be on the basis of the law prevailing on the day the view was taken. The view taken by the Assessing Officer on the basis of the law as it then stood was a possible view. Thus, the exercise of jurisdiction under Section 263 of the Act by the Commissioner of Income Tax was not justified.
Brief about case
The appellant filed its return of income for the A.Y. 1996-97 declaring its total income Rs.7.71 crores. The A.O. determined the total income of Rs.8.44 crore u/s 143(3), after extending the benefit of deduction of Rs.23.22 crore u/s 80HHC. The Commissioner while exercising his power u/s 263 of the Act, sought to revise the order passed by the A.O. u/s 143(3) on the ground of being erroneous for the reason that while computing deduction under Section 80 HHC of the Act income comprising of hire charges for vessels and refund of duty on export proceeds cannot be classified as Business Income but has to categorized as Income from other sources as in his opinion the same was not connected with the assessee’s export business. Consequently the order of A.O. was set aside and the issue of deduction u/s 80HHC was restored to the A.O. for passing a fresh assessment order. Being aggrieved, the assessee filed appeal to the ITAT contending that the exercise of jurisdiction under Section 263 of the Act by the Commissioner was improper.
Issue Before the Court
In the present case, following substantial question of law raised by the Revenue before the Hon’ble High Court.
“Whether on the facts and in the circumstances of the case the ITAT was justified in law in setting aside the order passed by the CIT without giving any finding, whether the lease hire charges and refund of duty on export proceeds on other services, received by the assessee was operational income attributable to the business of the Assessee or not ?”
Contention of the Assessee
It was submitted that merely because the Assessing Officer has taken one of the two possible views it cannot be held that the order of the Assessing Officer is erroneous. In support he relied upon the Apex Court’s decision in Commissioner of Income Tax vs. Max India Ltd. reported in  295 ITR 282 (SC), which while dealing with the powers of revision of the Commissioner of Income Tax in the context of Section 80 HHC of the Act held where two views are possible and the Assessing Officer has taken one view, the same cannot be treated as erroneous and prejudicial in the interest of revenue unless the view taken by the Assessing Officer is not sustainable in law. Further, the Apex Court held that the view taken by the Assessing Officer or by the Commissioner has to be on the basis of the law prevailing on the day the view was taken. It is submitted that at the time when the Assessing. Officer took a view that the same has to be considered as a part of business income, it could not have been said to be a view which is erroneous in law. Besides, the appellant also contended that in case of a composite business such as that carried on by the respondent – assessee the income earned on account of lease / hire charges of vessels / barges etc. is a part of the profit of its business as computed under the head of profits and gains of business or profession. Thus, the same cannot be classified under the head Income from other sources.
Held By Tribunal
The Tribunal allowed the assessee’s appeal and held that in case of composite business, there is no reason to treat income earned on account of lease / hire of vessels / barges etc. as Income from other sources for the purpose of Section 80 HHC of the Act. This is particularly so as the parliament has given a formula to arrive at profits of exports in case of composite business in Sub-section 3 of the Section 80 HHC of the Act. Further I.T.A.T. relied upon the decision of the Apex Court in Malabar Industrial Co. Ltd. V. Commissioner of Income Tax reported in (2000) 243 ITR 83 (SC). in support of the view that where two views are possible and an Assessing Officer has taken one view it cannot be treated as an erroneous or prejudicial to the interest of the revenue merely because the Commissioner has a different view on the subject.
Contention of Revenue
The Revenue relied upon the order of CIT passed u/s 263 of the Act and submitted that the I.T.A.T. failed to deal with the merits of the matter and for that reason the impugned order of the tribunal is not sustainable.
Held by the Court
It was held that the power under Section 263 of the Act is exercised by the Commissioner of Income Tax when the orders of the Assessing Officer satisfy the twin test of being erroneous in law and prejudicial to the interest of the revenue. Both these tests have to be cumulatively satisfied. The Assessing Officer while passing the assessment order under Section 143 (3) of the Act had considered the income on account of hire/lease of vessels / barges etc. as part of the respondent-assessee business income as it formed a part of its composite business. The order in revision of the Commissioner of Income Tax, seeks to reclassify income from profit and gain of business as income from other sources merely on the ground that such income was not connected with export business and do not qualify for export business. This view of the Commissioner of Income Tax was not correct in law and the view taken by the Assessing Officer cannot be said to be erroneous. This was for the reason that undisputedly to take care of such contingencies the parliament has prescribed a formula in Section 80 HHC (3) of the Act to arrive at the profits derived from the export business. The formula which enables arriving at the profits attributable to export business after taking into account the profit of the business as a whole subject to clause (baa) of the explanation to Section 80 HCC of the Act. The view taken by the Assessing Officer on the basis of the law as it then stood was a possible view. Thus, the exercise of jurisdiction under Section 263 of the Act by the Commissioner of Income Tax was not justified. Accordingly, the substantial question of law was answered in the affirmative i.e. in favour of the respondent–assessee and against the revenue.