Some suugestions for Department officers to increase their tax collection

[pawansingla]

 (1) In case of ACIT vs. Saurashtra Kutch Stock Exchange of India 305 ITR 227 (SC) conclude the issue? It was observed there:
The core issue, therefore, is whether non-consideration of a decision of Jurisdictional Court (in this case a decision of the High Court of Gujarat) or of the Supreme Court can be said to be a "mistake apparent from the record"? In our opinion, both - the Tribunal and the High Court - were right in holding that such a mistake can be said to be a "mistake apparent from the record" which could be rectified under Section 254(2). The SC has held that a judgment of the jurisdictional High Court and that of the SC, even if rendered subsequently, will constitute a mistake apparent from the record.
The full text is available here:
http://www.caclubindia.com/judiciary/acit-vs-saurashtra-kutch-stock-e...
(2) A similar question came up for consideration before the High Court of Gujarat in Suhrid Geigy Limited v. Commissioner of Surtax, Gujarat, (1999) 237 ITR 834 (Guj).
It was held by the Division Bench of the High Court that if the point is covered by a decision of the Jurisdictional Court rendered prior or even subsequent to the order of rectification, it could be said to be "mistake apparent from the record" under Section 254 (2) of the Act and could be corrected by the Tribunal.



(3) The MUMBAI TRIBUNAL in case of KAILASHNATH MALHOTRA v/s JT.CIT(TM) 34 SOT 541 has held that
A judgment of the jurisdictional High Court and that of the SC, even if rendered subsequently, will constitute a mistake apparent from the record under Section 254 (2) of the Act and could be corrected by the Tribunal.

Recently the Apex Court in case of M/s LIBERTY INDIA v/s CIT (2009) 183 TAXMANN 349 has held that
There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In other words, by using the expression "derived from" Parliament intend to cover sources not beyond the first degree. The deduction is available on operational income and not on incentives which flow from the schemes framed by central government or state governments".
Now before this decision there were difference of opinion between various ITAT's and High Courts. While Gujarat High Court in case of CIT v/s INDIA GELATINE & CHEMICALS LTD ,145 TAXMAN 303(2005). & Delhi High Court in case of ELTEK SGS (P) LTD v/s CIT, 169 TAXMAN 283(2008)  HELD duty drawback is profit or gain derived from business of an industrial undertaking and, therefore, assessee is entitled to deduction under section 80-IB on custom duty drawback - Held, yes,


Rajasthan High court in case of SARAF SEASONING UDYOG v/s ITO 174 TAXMAN 594(2008) had held that income derived by assessee from sale of DEPB licence is profit and gain from industrial undertaking and, thus, is eligible for deduction under section 80-IB - Held, yes .
Relying on these decisions many addition made by Assessing Officers in assessment orders were deleted by CIT (A) or ITAT's or Hon,ble High Courts.
Though in most of cases department may have filed appeal against the order of CIT (A) or ITAT to the  ITAT's or to  the High Court u/s 260A .But now in view of recent Supreme Court judgment, following action can be taken
(i) The Assessing Officer may be directed to file MA u/s 254(2) in ITAT if ITAT has deleted the addition and 154 to CIT (A) if he has deleted the addition. Department will be able to recover thousands of crores of tax amount which is pending in litigation at various levels.
(ii) The Assessing Officer may be directed to review all cases in which deduction under section 80IA/80IB or 10A/10B has been claimed from A.Y. 2004-05 onwards and to take necessary remedial action under section 147/263 of the act as applicable





(4) The MUMBAI TRIBUNAL in case of KAILASHNATH MALHOTRA v/s JT.CIT(TM) 34 SOT 541 has held that
Section 254 of the Income Tax Act
" It will be an error apparent from records , if the order is not in conformity with the retrospective amendment carried out to the statutory provision covering the period and point in dispute , subject to the fulfillment of other conditions prescribed in the Act such as limitation period etc "

115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, [2007]], is less than [ten per cent]] of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of [ten per cent]]].
      
1.   Finance Act, 2008, w.r.e.f 01/04/2001 has inserted clause (h) below explanation-1 that book profit shall be increased by :
(h) "the amount of deferred tax and the provision therefore"
                  If debited to Profit & Loss Account.

         The above said amendment was brought to nullify the judgments which have held that deferred tax if debited to P & L A/c cannot be added back to Book Profit as per sec. 115JB.
1.   Maharaja Shree Umaid Mills Ltd  v/s ACIT.(2007) 17 SOT 72 (JAIPUR)
2.   ACIT .C.C XIX Kolkata v/s Balrampur Chini Mills Ltd(2007) 14 SOT 372(KOL)
Section 115JB of the Income-tax Act, 1961 - Minimum alternate tax - Assessment year 2004-05 - Assessing Officer made an addition of amount of deferred tax under Explanation (c) to section 115JB(2) for purposes of computing book profit - Whether since deferred tax charge is not covered by any of clauses of Explanation to section 115JB(2), such deferred tax charge is not required to be added back in computation of book profit for purpose of section 115JB and, therefore, addition made by Assessing Officer was to be deleted - Held, yes

2.   Finance Act, 2008 w.r.e.f 01/04/2001 has inserted explanation-2 to widen the scope of the term Income Tax.
      Explanation 2.— For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include—
   (i)   any tax on distributed profits under section 115-O or on distributed income under section 115R;
   (ii)   any interest charged under this Act;
   (iii)   surcharge, if any, as levied by the Central Acts from time to time;
   (iv)   Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and
(v)   Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time.]
Suggestion;
3.   Finance Act, 2009 w.r.e.f. 01/04/2001 has inserted clause (g) below explanation-1 that book profit shall be increased by :
(i)   the amount or amounts set aside as provision for diminution in the value of any asset,
Thus now
(a)   provision for bad & doubtful debts
(b)   provision for diminution in value of investment
(c)   provision for obsolete inventory
(d)   provision for impairment of assets
has to be added back to book profit u/s 115JB  in view of this amendment which has been given retrospective effect.

(i) The Assessing Officer may be directed to file MA u/s 254(2) in ITAT if ITAT has deleted the addition or 154 to CIT (A) if he has deleted the addition. Department will be able to recover thousands of crores of tax amount which is pending in litigation at various levels.
(ii) The Assessing Officer may be directed to review all cases in which assessee has not added back deferred tax/interest on income tax/provision for diminution in the value of assets for the purpose of sec. 115JB from A.Y. 2004-05 onwards and to take necessary remedial action under section 147/263 of the act as applicable
(4)    Sec. 80A(4) inserted by Finance Act , 2009 w.e.f 01/04/2003
Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C—Deductions in respect of certain incomes", where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be.

This section is overlapping with the section 80IA (9) which read as under:
80IA(9) Where any amount of profits and gains of an 76[undertaking] or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading "C.—Deductions in respect of certain incomes", and shall in no case exceed the profits and gains of such eligible business of 76[undertaking] or enterprise, as the case may be.



There was dispute regarding interpretation of the section between assessee and the revenue. While revenue was of the view that deduction granted u/s 80IA/80IB has to be reduced from profits of business before allowing deduction u/s 80HHC. However assessee was of the view that the both the deductions has to be allowed on gross total income subject to the condition that deduction will not exceed gross total income. During earlier stage the issue was decided in favour of the Assessee by the Hon,ble ITAT'S in following cases
(i)   Toshica creation v/s ITO (2006) 150 TAXMAN 48(MAG)(JP)
(ii)   Mittal clothing co v/s DCIT.(2005) 4 SOT 626 (DELHI)
(iii)   DCIT v/s Eltek Sgs (p) ltd (2006) 10 SOT 178 (DELHI)
and addition made by Assessing Officer was deleted either at the level of CIT(A) or the level of ITAT following these judgments.
But then a reference was made by revenue for constitution of special Bench and Chennai Special Bench in case of
ACIT v/s ROGINI GARMENTS (2007) 108 ITD 49 (CHENNAI)(SB)

  Decided the issue in favour of the department and it was held that deduction granted u/s 80IA/80IB has to be reduced from profits of business for calculating quantum of deduction u/s 80HHC.
But again one more controversy arose. One of the assessee who was an intervener before special bench filed appeal against the order of ITAT. The Hon,ble Madras HIGH court in case of
SCM creations v/s ACIT.(2008) 304 ITR 379

While not noticing that section 80IA(9) was inserted by Finance Act , w.e.f 01/04/99 i.e A.Y. 1999-2000 allowed the appeal of the assessee company based on judgments which were delivered on the basis of old section which was applicable till A.Y. 1998-99.
After this decision, there were different views regarding the ratio of this judgment. While some ITAT held it being a decision of superior authority it has to be followed in precedence over Special Bench judgment. While other group of ITAT was  of the view that it is per incurian because it did not consider correct position of law.
To resolve this conflict, a five member special bench was constituted to decide the issue. The five member special Bench in case of
ACIT v/s HINDUSTAN MINT & AGRO PRODUCTS (P) LTD 119 ITD 107 (DELHI)(SB)

Decided the issue in favour of the department and held that deduction granted u/s 80IA/80IB has to be reduced from the gross total income income before calculating quantum of deduction u/s 80HHC.
The ratio of this judgment has been inserted in sec. 80A(5) inserted by Finance Act , 2009 w.e.f from 01/04/2003 which reads as under
Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C—Deductions in respect of certain incomes", where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be.
The MUMBAI TRIBUNAL in case of KAILASHNATH MALHOTRA v/s JT.CIT(TM) 34 SOT 541 has held that
Section 254 of the Income Tax Act
" It will be an error apparent from records , if the order is not in conformity with the retrospective amendment carried out to the statutory provision covering the period and point in dispute , subject to the fulfillment of other conditions prescribed in the Act such as limitation period etc.
(i) The Assessing Officer may be directed to file MA u/s 254(2) in ITAT if ITAT has deleted the addition or 154 to CIT (A) if he has deleted the addition To file 154 to CIT(A) if he has deleted the addition or M.A u/s 254(2) to ITAT if it has deleted the addition made by Assessing Officer for A.Y. 2003-05 & 2004-05 .Department will be able to recover thousands of crores of tax amount which is pending in litigation at various levels.
(ii) The Assessing Officer may be directed to review all cases in which assessee has not reduced  deduction claimed u/s 80IA/80IB for calculation of deduction u/s 80HHC or 10A/10B  as per section 80IA(9)/80A(5)  from A.Y. 2004-05 onwards and to take necessary remedial action under section 147/263 of the act as applicable



THIS IS APPLICABLE ONLY FOR MAHARASHTRA

CIT vs. Shah Originals (Bombay High Court)
(255.1 KiB, 161 DLs)   


EEFC A/c foreign exchange fluctuation and interest not eligible u/s 80HHC

The assessee, an exporter, claimed deduction u/s 80HHC on account of foreign exchange fluctuation and interest in the EEFC account on the ground that it was part of business income and arose from exports. The AO & CIT (A) rejected the claim though the Tribunal allowed it. On appeal by the Revenue, HELD reversing the Tribunal:

(i) S. 80HHC allows a deduction in respect of the profits "derived" from exports. The term 'derived' is of a narrower connotation than the term 'attributable to' and postulates the existence of a direct and proximate nexus with the export activity. Pandian Chemicals 262 ITR 278 (SC) and Ravindranathan Nair 295 ITR 228 (SC) followed;

(ii) An exporter is not obliged to maintain the export proceeds in the EEFC Account but, this is a facility made available by the RBI. The transaction of export is complete in all respects upon repatriation of the proceeds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in the entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC Account. The exchange fluctuation arises after the export transaction is complete and payment has been received by the exporter. It does not bear a proximate and direct nexus with the export transaction so as to be "derived" from exports for s. 80HHC. Interest on EEFC deposits is not "business income" but is "income from other sources" and not eligible for deduction u/s 80HHC


CIT vs. Asian Star Co (Bombay High Court)
   


For Expl (baa) to s. 80HHC, netting of income from expenditure is not allowed

The assessee claimed deduction u/s 80HHC on profits which included interest income of Rs. 3.25 crores. Under Explanation (baa) to s. 80HHC, 90% of the said interest income has to be reduced from the profits. The assessee claimed that the interest expenditure incurred by it having a nexus with the said interest income had to be netted off and only the balance, if any, could be subjected to the 90% reduction. The assessee proved that there was a nexus between the income and the expenditure. The claim was rejected by the AO though it was accepted by the CIT (A) and the Tribunal relying on Lalsons Enterprises 89 ITD 25 (Del) (SB). On appeal by the Revenue, HELD reversing the Tribunal:

(i) Explanation (baa) to s. 80HHC requires that ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. The reason why items like brokerage etc have to be excluded is because they do not possess any nexus with export turnover and their inclusion in profits would result in a distortion of the figure of export profits. However, as some expenditure might have been incurred in earning these incomes, an adhoc deduction of ten per cent from such income is allowed;
(ii) Once Parliament has legislated both in regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the Court to order otherwise by rewriting the legislative provision. The task of interpretation is to find out the true intent of a legislative provision and it is clearly not open to the Court to legislate by substituting a formula or provision other than what has been legislated by Parliament. It is not open to say that something more than the 10% statutorily provided should also be allowed. In Shri Ram Honda Power Equip 289 ITR 475 the Delhi High Court has not adequately emphasized the entire rationale for confining the deduction only to the extent of ninety per cent of the excludible receipts and it cannot be followed;
(iii) As regards the judgement of the Special Bench in Lalsons Enterprises "We are affirmatively of the view that ... the Tribunal ... has transgressed the limitations on the exercise of judicial power and  has in effect legislated by providing a deduction on the ground of expenses other than in the terms which have been allowed by Parliament. That is impermissible".

(i) The Assessing Officer may be directed to file MA u/s 254(2) in ITAT if ITAT has deleted the addition or 154 to CIT (A) if he has deleted the addition made by Assessing Officer on above issues.
(ii) The Assessing Officer may be directed to review all cases in which assessee has claimed deduction on u/s 80HHC by applying net interest and claimed deduction on other income which is not eligible as per Judgment of Bomaby High court above u/s 80HHC or 10A/10B from A.Y. 2004-05 onwards and to take necessary remedial action under section 147/263 of the act as applicable