NOTICE U/S 148 BEYOND FOUR YEARS QUASHED BY GUJARAT HIGH COURT IN 80IA(IV) CASE

[pawansingla]

SCA/5846/2010 7/7 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION No. 5846 of 2010
and
SPECIAL CIVIL APPLICATION No.5847 of 2010
=========================================
SADBHAV ENGINEERING LTD - Petitioner(s)
Versus
DEPUTY COMMISSIONER OF INCOME-TAX (OSD), CIRCLE-8 & 1 - Respondent(s)
=========================================
Appearance :
MR RK PATEL with MR BD KARIA with MS PAURAMI SHETH for Petitioner
MR MR BHATT, SR. ADVOCATE with MRS MAUNA M BHATT for Respondents
=========================================
Date : 20/07/2010
ORAL ORDER
(Per : HONOURABLE MS.JUSTICE H.N.DEVANI)
1. These two petitions have been filed with the following prayers :
[A] Issue a writ of certiorari and/or a writ of mandamus and/or any other
writ, direction or order to quash and set aside the impugned notice dated
29.03.2010 under section 148 of the Income-tax Act, 1961 annexed hereto
at Annexure D along with preliminary order dated 4.5.2010 annexed
hereto at Annexure H for proceeding and completing reassessment
proceedings.
Pending admission, hearing and disposal of this petition, ad-interim
relief be granted and the respondent be ordered to restrain from enforcing
CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA
and
HONOURABLE MS.JUSTICE H.N.DEVANI
compliance of the impugned notice dated 29.03.2010 at Annexure D
and/or taking any other steps in this regard including ex-parte order or
implementation of preliminary order dated 4.5.2010 at Annexure H.
[C] Pending admission, hearing and disposal of this petition, stay the
implementation/operation of the notice and orders to restrain the
respondent from taking any further proceedings pursuant to the impugned
notice dated 29.03.2010 at Annexure D including stay of operation of
preliminary order dated 4.5.2010 at Annexure H.
[D] Award the cost of this petition.
[E] Grant such other and further reliefs as this Hon'ble Court deems fit.
2. Since common questions of fact and law are involved in both these
petitions, the same were taken up for hearing together and are disposed of
by this common judgment.
3. For the sake of convenience, reference is made to the facts as appearing
in Special Civil Application No.5846 of 2010.The petitioner Company had
filed return of income for assessment year 2004-05. Scrutiny assessment
was framed under section 143(3) of the Income Tax Act, 1961 (the Act),
wherein there was partial disallowance under section 80IA (4) of the Act.
The petitioner carried the matter in appeal before Commissioner (Appeals),
who dismissed the appeal insofar as ground relating to section 80IA (4) of
the Act is concerned. Against the said order the petitioner has preferred
second appeal before the Income Tax Appellate Tribunal, which is still
pending.
4. In the meanwhile, vide the impugned notice dated 29.3.2010, issued under
section 148 of the Act, respondent No.1 has sought to reopen the
assessment for assessment year 2003-04. In response to the said notice,
the petitioner submitted its reply dated 01.04.2010 requesting that the
return of income filed originally be treated as a return filed in response to
the notice under section 148. The petitioner also requested for a copy of
the reasons recorded for reopening the assessment under section 148.
Upon being furnished with a copy of the reasons recorded for reopening
the assessment, the petitioner submitted objections to the reassessment
proceedings under section 147 of the Act. The respondent No.1 vide order
dated 4.5.2010, rejected the objections raised by the assessee to
reassessment proceedings for assessment year 2003-04. The facts of
Special Civil Application No.5847 of 2010 are also similar, wherein notice
under section 148 for reopening assessment under section 147 has been
issued in relation to assessment year 2004-05. Being aggrieved, the
petitioner has moved the present petitions, seeking the reliefs noted
hereinabove.
5. Mr. R. K. Patel, learned advocate for the petitioner has vehemently
assailed the impugned notices on various grounds. However, considering
the view that the court is inclined to take in the matter, it is not necessary
to refer to all the contentions raised by the learned advocate for the
petitioner. In the present petitions, the main ground for assailing the
impugned notice is that in absence of any allegation that the petitioner has
failed to furnish fully and truly all material facts necessary for its
assessment for the relevant assessment years, the impugned notices
which are issued beyond a period of four years from the end of the
relevant assessment years are invalid in the light of the first proviso to
section 147 of the Act and as such the very initiation of proceedings under
section 147 of the Act is bad.
6. On the other hand, Mr. M. R. Bhatt, learned Senior Advocate appearing for
the respondents has opposed the petition and reiterated what is stated in
the affidavit in reply filed on behalf of the respondents. Dealing with the
contention that there was no failure on the part of the petitioner in
disclosing fully and truly all material facts relevant for its assessment,
attention was invited to the reasons recorded for reopening the
assessments under section 147, to submit that in the light of the
amendment of section 80IA vide Finance (No.2) Act, 2009 with
retrospective effect from 01.04.2000, it is deemed that the assessee had
submitted untrue facts at the relevant point of time and as such the
provisions of section 147 are clearly attracted.
7. As can be seen from the averments made in the petition, more particularly
paragraphs 4, 6, 7, and 10 thereof it has been specifically contended
therein that the notices under section 147 of the Act are invalid in view of
the fact that the same have been issued beyond the period of four years
from the end of the relevant assessment years. However, though affidavit
in reply has been filed on behalf of the respondents, the said contention
has not been dealt with and remains uncontroverted.
8. In the facts of the present case, relevant assessment years are 2003-04
and 2004-05. The notice under section 148 of the Act relating to
assessment year 2003-04 has been issued on 29.03.2010, whereas the
notice under section 148 of the Act relating to assessment year 2004-05
has been issued on 29.4.2010. Computing the period between the end of
the relevant assessment years and the date of issuance of the notices
under section 148, it is evident that both the notices have been issued
beyond a period of four years from the end of the relevant assessment
years. The first proviso to section 147 of the Act, lays down that where an
assessment under sub-section (3) of section 143 or the said section has
been made for the relevant assessment year, no action shall be taken
under the section after expiry of four years from the end of the relevant
assessment year, unless any income chargeable to tax has escaped
assessment 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 subsection
(1) of section 142 or section 148 or to disclose fully and truly all
material facts necessary for his assessment. Thus, for the purpose of
invoking section 147 after the expiry of four years from the end of the
relevant assessment year, the income chargeable to tax should have
escaped assessment by reason of failure on the part of the assessee
either (i) 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 (ii) to
disclose fully and truly all material facts necessary for his assessment. In
the facts of the present case, it is an undisputed position that there is no
failure on the part of the assessee insofar as the first condition is
concerned. Insofar as the second condition, viz. failure on the part of the
assessee to disclose fully and truly all material facts necessary for his
assessment is concerned, on a plain reading of the reasons recorded, it is
apparent that the same are totally silent as regards any failure on the part
of the petitioner to disclose fully and truly all material facts necessary for its
assessment for the relevant assessment years. From the reasons
recorded it is apparent the assessments are sought to be reopened on the
ground that as per the explanation given below sub-section (13) of section
80IA of the Act, which has been substituted by the Finance Act No.2 of
2009 with retrospective effect from 1.4.2000, deduction under section 80IA
would not be admissible to an assessee who carries on business which is
in the nature of works contract. That the petitioner assessee being a civil
contractor working for the Government is not eligible for deduction under
section 80IA as claimed by the assessee, hence there was reason to
believe that income chargeable to tax has escaped assessment for the
assessment years under consideration. The record of the case does not in
any manner indicate that proceedings under section 147 are sought to be
reopened by reason of failure on the part of the petitioner to disclose fully
and truly all material facts necessary for its assessment for assessment
years under consideration. The respondent in its affidavit in reply also has
not disputed the fact that there is no failure on the part of the petitioner to
disclose fully and truly all material facts. Only by way of submission
advanced before the Court it is contended that in the light of the
amendment of section 80IB, it is deemed that the petitioner has failed to
disclose the correct facts. As to whether or not there is any failure on the
part of the assessee in disclosing fully and truly all material facts
necessary for his assessment, is a matter of fact and there can be no
deemed failure as is sought to be contended on behalf of the respondents.
In the circumstances, in absence of any failure on the part of the petitioner
to disclose fully and truly all material facts necessary for its assessment for
the assessment years under consideration, the notices under section 148
of the Act having been issued after the expiry of a period of four years from
the end of the relevant assessment years, the very initiation of
proceedings under section 147 of the Act stand vitiated and as such
cannot be sustained.
9. For the foregoing reasons, the petitions succeed and are, accordingly,
allowed. The impugned notices dated 29.3.2010 and 29.4.2010
respectively, issued under section 148 of the Income Tax Act, 1961, are
hereby quashed and set aside. Rule is made absolute accordingly in each
of the petitions.
10. Registry is directed to keep a copy of this order in each of the petitions.
[D.A.MEHTA, J.]
[HARSHA DEVANI, J.]
parmar*
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[rajul5234]

for the same assessee, writs for 3 assessment years where reopening is within 4 years from the end of relevant years is  admitted by the court . RULE is issued with approproiate  INTERIM RELIEF by way of restraining respondent from serving  reassessment orders to the assessee till disposal of petitions.

R. K. Patel.

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2010-TIOL-621-ITAT-MUM

INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'I'

ITA Nos.3880, 3882, 3883 & 3884(Mum)/2009
Assessment years: 1999-99, 2000-01, 2001-02 & 2002-03

M/s INDIA EXPORTS
458/7, RAMAIYA NIWAS (MATRU ASHISH)
BHADAJ ROAD, KINGS CIRCLE,
MUMBAI-400019
PAN: AAAFI0080J

Vs

ASST COMMISSIONER OF INCOME TAX
RANGE 17(2), MUMBAI

J Sudhakar Reddy, AM and V Durga Rao, JM

Dated: January 29, 2010

Appellant Rep by: Shri I P Rathi
Respondent Rep by: Shri Ajaykumar Srivastava

Income Tax - Sections 80HHC, 147 - Whether reopening can be done on the basis of subsequent amendment after four year of the relevant assessment year.

Assessee filed ITR on 31.1.2005, claiming deduction u/s 80HHC - the same was picked up for scrutiny and assessment under section 143(3), giving birth to the issue of netting of interest - Assessee filed appeal before the CIT (A) but remained unsuccessful - on further appeal, the ITAT vide its order-dated 30.5.2006 sent the matter back to the file of AO. Thereafter on 28.03.2007 AO issued notice u/s 147 on the basis of amendment made by the finance Act 2005, which debars those assessees, whose turnover exceeded Rs 10 Crores. Assessee questioned the action of AO u/s 147 on the ground that action of the AO after four year from the end of relevant assessment year is not sustainable. CIT(A) confirmed the action of the AO. ITAT after referring to the various decisions has held that,

On further appeal, the ITAT held that,

++ if the AO has reason to believe that income chargeable to tax has escaped assessment, the AO can reopen the assessment by resorting to the provisions of section 147 of the Act. In the case in hand, subsequent to passing of the assessment order u/s 143(3) on 27-2-2004 the Income-tax Act was amended by Taxation Laws Amendment Act, 2005. Keeping in view this amendment, the AO has come to the conclusion that income has escaped assessment and after duly recording reasons, reopened the assessment u/s 147 of the Act. The reopening is valid in law as the same is based on certain materials that have come to the possession of the AO subsequent to completion of assessment u/s 143(3) of the Act and this material which is in the form of amendment of Act has led the AO to believe that income has escaped assessment. This is the view which any reasonable person would take and it cannot be said that there is change of opinion or that there is no escapement of income;

++ the decision of the jurisdictional High Court in the case of case Sesa Goa Pvt. Ltd. relied on by the counsel for the assessee refers to the fact where subsequent judgments of the jurisdictional High Court are the basis for reopening of assessment. The facts in hand are different. Hence, the case law has no application to the facts of the present case. The assessee's ground is devoid of merits and requires to be rejected.

Assessee's appeal dismissed.

ORDER

Per: V Durga Rao:

These appeals filed by the assessee are directed against the order of the CIT(Appeals)-XVII, Mumbai, dated 26-3-2009. As common points are involved, all these appeals were heard together and disposed of by this consolidated order.

2. ITA No.3880(Mum)2009 (Assessment year 1999-2000):

The assessee has raised as many as nine grounds of appeal. Ground No.9 is general in nature and does not require adjudication. At the time of hearing, learned counsel for assessee did not press ground Nos.1 and 2 relating to reopening of assessment u/s 147 of the Income-tax Act, 1961 [hereinafter referred to as "the Act"].

2(i) Ground No.4 is with regard to the finding of the AO that the entire amount received on transfer of DEPB was in the nature of profits on transfer of DEPB and stood covered within the meaning of section 28(iiid) was also not pressed. Hence, ground Nos.1, 2 and 4 are dismissed as not pressed.
2(ii) The assessee has raised ground Nos.3, 5, 6 and 7 as under:

"3. On the facts and circumstances of the case and in law, the learned commissioner of Income-tax(Appeals) has erred in confirming the taxability of 'any profit on transfer of DEPT..'as specified u/s 28(iiid) whereas the newly inserted clause (iiid) of section 28 is not covered within the definition of income u/s 2(24).
5. Further without prejudice to the above, learned Commissioner of Income-tax (Appeals) has erred in confirming the entire sale proceeds of DEPB entitlements as income u/s 28(iiid), as against actual profit on transfer of DEPB entitlement after reducing the entitlement value of DEPB from the sale proceeds of such DEPT. And has further erred in giving effect of the same while calculating the profits of the business under explanation 'baa' to section 80HHC.

6. Further without prejudice to the above, the assessing officer has erred in considering even the sales tax collected on sale of DEPB amounting to Rs.1,56,199 as profit on transfer of DEPT u/s 28(iiid).

7. Further, without prejudice to the above, the face value of DEPB entitlements accrued on export performance should have been considered as export incentives u/s 28(iiia) or (iiib) or (iiic) or business income u/s 28(i) or 28(iv), while calculating the deduction u/ s 80HHC. Or the same should have been reduced from the cost of goods exported as the same are in the nature of cost re-coupment."

2(iii) We have heard rival submissions and perused material on record. Both sides are in agreement that the facts and circumstances of this appeal are mutatis mutandis similar to those decided by the Special Bench (Mumbai) of the Tribunal in the case of M/s Topman Exports (ITA No.5769/Mum/2006) and M/s.Kalpataru Colours & Chemicals (ITA 5651/Mum/2006) 2009-TIOL-531-ITAT-MUM-SB. The Special Bench, vide its order dated 11-8-2009 has restored the matter to the file of the AO for considering the face value of DEPB as covered under section 28(iiib) of the Act and profit on transfer of DEPB i.e. excess of sale price over the face value of DEPB as falling under section 28(iiid) of the Act. It has further been held that there is no scope for allowing separate deduction for individual expenses connected with the sale of DEPB due to the scheme of section 80HHC of the Act. We, therefore, set aside the impugned order on this issue and direct the AO to re-compute the deduction under sec.80HHC of the Act in accordance with the view taken by the Special Bench in the afore mentioned case. Needless to say the assessee will be given reasonable opportunity of being heard by the AO in the fresh proceedings.

2(iv) Ground No.8 relates to interest charged u/s 234B of the IT Act. Learned counsel for assessee submitted that the AO may be directed to follow the CBDT Circular No.2 of 2006 dated 17-1-2006. Learned Departmental Representative fairly conceded that he has no objection to follow the CBDT circular. We, therefore, direct the AO to consider ground No.8 in the light of CBDT circular in accordance with law after giving opportunity to assessee.

2(v) In the result, the appeal is treated as partly allowed for statistical purposes.

3. ITA 3882(Mum/2009 (AY: 2000-01): The assessee has raised as many as seven grounds of appeal. Ground No.7 is general in nature and does not require adjudication.

3(i) At the time of hearing, learned counsel for assessee did not press ground Nos.1, 2, 4. Hence, the same are dismissed as not pressed.
3(ii) Ground No.3, 5 and 6 are identical to ground Nos.3, 5 and 7 raised in ITA 3880/Mum/2009. For the reasons given by us in paragraph 2(iii), we set aside the order of the CIT(Appeals) on this issue and direct the AO to re-compute the deduction under sec.80HHC of the Act in accordance with the view taken by the Special Bench in the afore mentioned case. Needless to say the assessee will be given reasonable opportunity of being heard by the AO in the fresh proceedings.

3(iii) In the result, the appeal is treated as partly allowed for statistical purposes.

4. ITA No.3883(Mum)/2009 (A.Y 2001-02): The assessee has raised as many as eight grounds of appeal. Ground No.8 is general in nature and does not require adjudication.

4(i) Ground Nos.1 and 2 relate to reopening of assessment u/s 147 of the Act. The assessee filed return of income on 31-1-2005 declaring income of Rs.60,74,790/- after claiming deduction of Rs.2,43,22,161/- u/s 80HHC of the Act. The assessment was completed u/s 143(3) on 27-2-2004 determining the total income of the assessee at Rs.62,29,681/-. Against the assessment order, assessee preferred appeal before the CIT(Appeals) and submitted the claim for netting of interest. The CIT(Appeals) rejected the claim of the assessee. On further appeal, the Tribunal, vide order dated 30-5-2006 restored the matter to the file of the AO with a direction to decide the same afresh after affording reasonable opportunity to the assessee.
4(ii) The AO issued notice u/s 148 on 28-3-2007 on the ground that the assessee had incorrectly claimed deduction u/s 80HHC on DEPB credits resulting in under-assessment of income, as per the amendment of taxation laws, 2005. The AO served on the assessee notices u/s 143(2) and 142(1) of the Act. The AO held that in view of the Taxation Laws Amendment 2005 and in view of the fact that assessee has export turnover exceeding Rs.10 crores, the assessee is not eligible to claim deduction and accordingly re-worked deduction u/s 80HHC of the Act. Being aggrieved, assessee went in appeal before the CIT(Appeals) challenging the reopening of assessment u/s 147 of the Act. The CIT(Appeals) held that the AO had prima facie reason to believe that income had escaped assessment as DEPB sale receipts were not taxed. The CIT(Appeals) further held that in view of the amendment, income from these sales was taxable and therefore the AO was duty bound to reopen the assessment. Being aggrieved assessee is in appeal before this Tribunal.

4(iii) Learned counsel for assessee submitted that the reopening of assessment u/s 147 is bad in law as it was done after four years from the end of the relevant assessment year. The assessee had declared all the facts before the AO. The assessment was completed u/s 143(3) of the Act on 27-2-2004. Learned counsel for assessee strongly relied on the decision of the jurisdictional High Court in the case of Sesa Goa Pvt. Ltd. vs. JCIT (2007)(294 ITR 101). In addition, the learned counsel for assessee also relied on the following decisions:

1) IPCA Laboratories Ltd. vs. DCIT (251 ITR 416)
2) Parikh Petrol Chemicals Agencies P. Ltd. vs. ACIT (266 ITR 196)

3) Caprihans India Ltd. vs. DCIT (266 ITR 566)

4) Hindustan Lever Ltd. vs. ACIT (268 ITR 339)

5) Desai Brothers Ltd. vs. DCIT D(272 ITR 335)

6) MRPL vs. ACIT (282 ITR 516)

7) Devidayal Rolling Mills vs. ACIT (285 ITR 514) = (2006-TIOL-248-HC-MUM-IT)

8) Cartini India vs. ACIT (291 ITR 355) = (2007-TIOL-115-HC-MUM-IT)

4 (iv) On the other hand, learned Departmental Representative supported the orders of the authorities below and submitted that the AO had reason to believe that there is escapement of income and the assessment was reopened as per the amended provisions of law. As per the change in law, it is the duty of the AO to reopen the assessment where the assessee has claimed excess deduction incorrectly leading to underassessment.

4 (v) We have heard both sides and perused material on record. If the AO has reason to believe that income chargeable to tax has escaped assessment, the AO can reopen the assessment by resorting to the provisions of section 147 of the Act. In the case in hand, subsequent to passing of the assessment order u/s 143(3) on 27-2-2004 the Income-tax Act was amended by Taxation Laws Amendment Act, 2005. Keeping in view this amendment, the AO has come to the conclusion that income has escaped assessment and after duly recording reasons, reopened the assessment u/s 147 of the Act. In our considered opinion, reopening is valid in law as the same is based on certain materials that have come to the possession of the AO subsequent to completion of assessment u/s 143(3) of the Act and this material which is in the form of amendment of Act has led the AO to believe that income has escaped assessment. This is the view which any reasonable person would take and it cannot be said that there is change of opinion or that there is no escapement of income. The decision of the jurisdictional High Court in the case of case Sesa Goa Pvt. Ltd.(supra relied on by learned counsel for assessee refer to the fact where subsequent judgments of the jurisdictional High Court are the basis for reopening of assessment. The facts in hand are different. Hence, the case law viz., Sesa Goa Pvt. Ltd.(supra) relied on by the learned counsel for assessee has no application to the facts of the present case. The other case laws relied on by learned counsel for assessee are distinguishable on facts and have no application to the present case. In view of our above discussion, we are of the considered opinion that this ground is devoid of any merits and requires to be rejected. Accordingly, this ground of appeal is rejected.

5. Ground Nos. 3, 4, and 5 are identical to ground Nos.3, 4 and 5 of ITA No.3880/Mum/2009. For the reasons given by us in paragraph 2(iii) of this order, we set aside the order of the CIT(Appeals) on this issue and direct the AO to re-compute the deduction under sec.80HHC of the Act in accordance with the view taken by the Special Bench in the aforementioned case. Needless to say the assessee will be given reasonable opportunity of being heard by the AO in the fresh proceedings.

6. Ground No.6 relates to treatment of interest income as income from other sources. The AO treated interest income earned on bank FDs as income from other sources. On appeal, the CIT(Appeals) upheld the order of the AO. Being aggrieved, assessee is in appeal before this Tribunal. We have heard rival submissions and perused material on record. It is not clear from the orders of the authorities below the nature of bank deposits kept by the assessee. It is very much necessary to find out the nature of bank deposits to decide the issue involved in this appeal. Therefore, we remit the issue back to the file of the AO to decide the nature of bank deposits. If the bank deposits were kept for the purpose of business, the AO is directed to allow netting of interest in accordance with decision of the Special Bench of the Tribunal in the case of Lalsons Enterprises vs. DCIT (89 ITR 25) = (2004-TIOL-23-ITAT-DEL-SB) . If the AO comes to the conclusion that bank deposits were not kept for the purpose of business, he is directed to disallow the claim by following the decision of the Special Bench of the Tribunal in the case of M/s Topman Exports (ITA No.5769/Mum/2006) and M/s.Kalpataru Colours & Chemicals (ITA 5651/Mum/2006) 2009-TIOL-531- ITAT-MUM-SB. It is ordered accordingly.

7. Ground No.7 is inter-connected with ground No.6. It is contended that if interest income is treated as income from other sources, 10% of the income may be allowed as indirect cost for earning such interest. This ground of appeal is dismissed in view of direction given with regard to ground No.6. If the AO comes to conclusion that the interest income from FDRs is income from other sources, the alternative ground raised by the assessee may be considered as per law.

8. In the result, the appeal is treated as partly allowed.

9. ITA No.3884(Mum)/2009 (A.Y 2002-03): The assessee has raised as many as eight grounds of appeal. Ground No.8 is general in nature and does not require adjudication.

9(i) Ground No.1 relates to reopening of assessment u/s 147 of the Act. At the time of hearing, learned counsel for assessee did not press this ground. Accordingly ground No.1 is dismissed for non prosecution.
9(ii) So far as the ground Nos.2, 3, 4 which are identical to ground Nos.3, 5 and 7 in ITA No.3880/Mum/2009, for the reasons given by us in paragraph 2(iii).1 of this order, we set aside the order of the CIT(Appeals) on this issue and direct the AO to re-compute the deduction under sec.80HHC of the Act in accordance with the view taken by the Special Bench in the aforementioned case. Needless to say the assessee will be given reasonable opportunity of being heard by the AO in the fresh proceedings.

9(iii) Ground No.5 relates to treatment of interest income as income from other sources. The AO treated interest income on FDs as income from other sources. On appeal, the CIT(Appeals) upheld the order of the AO. Being aggrieved, assessee is in appeal before this Tribunal.

We have heard rival submissions and perused material on record. It is not clear from the orders of the authorities below the nature of bank deposits kept by the assessee. It is very much necessary to find out the nature of bank deposits to decide the issue involved in this appeal. Therefore, we remit the issue back to the file of the AO to decide the nature of bank deposits. If the bank deposits were kept for the purpose of business, the AO is directed to allow netting of interest in accordance with decision of the Special Bench of the Tribunal in the case of Lalsons Enterprises vs. DCIT (89 ITR 25) = (2004-TIOL-23-ITAT-DEL-SB). If the AO comes to the conclusion that bank deposits were not kept for the purpose of business, he is directed to disallow the claim by following the decision of the Special Bench of the Tribunal in the case of M/s Topman Exports (ITA No.5769/Mum/2006) and M/s.Kalpataru Colours & Chemicals (ITA 5651/Mum/2006) 2009-TIOL-531- ITAT-MUM-SB. It is ordered accordingly.

9(iv) Ground No.6 is inter-connected with ground No.5 wherein it is contended that even if interest income is being treated as income from other sources, payment of interest should be allowed to be adjusted as admissible expenses u/s.57(iii) of the Act. Ground No.7 is inter-connected with ground No.6 wherein is contended that if interest income is treated as income from other sources, 10% of the income may be allowed as indirect cost for earning such interest. Ground Nos.6 & 7 are dismissed in view of direction given to the AO with regard to ground No.6. If the AO comes to conclusion that the interest income from FDRs is income from other sources, the alternative ground raised by the assessee may be considered as per law after giving reasonable opportunity to the assessee.

10. In the result, the appeal is partly allowed.

(Order pronounced in open court on 29.01.2010.)

[pawansingla]

Income Tax - Investment Allowance - Clarificatory Amendment will have retrospective effect even if not specified so: High Court


By TIOL News Service

CHENNAI, DEC 15, 2010: INVESTMENT allowance for the assessment year 1983-84 was denied to the assessee, a manufacturer of aerated waters under the brand name of 'TORINO', such manufacturing activity having been carried on under a licence , on the ground that the aerated waters manufactured by it contained blended flavouring concentrates. The assessee having appealed to the Commissioner against that view of the assessing officer, the Commissioner accepted the assessee's case that the original entry without the explanation, did not take in it's fold synthetic essences which are admittedly used by the assessee and that the explanation that was added subsequently did not have retrospective effect. That view of the Commissioner has been affirmed by the Tribunal .

It is not in dispute that synthetic essences are used by the assessee for the purpose of flavouring the aerated waters . The essence is in the form of concentrate and is clearly a flavouring concentrate. It is synthetic essence. The very term 'synthetic' denotes a thing which is not natural. In the making of the synthetic essence more than one ingredient is employed. The interaction of two or more ingredients is capable of being broadly viewed as blending. Synthetic essences, therefore, are clearly blended flavouring concentrates.

The counsel for the assessee, however, submitted that a single Judge of this Court has, in a case concerning the same assessee, held that synthetic essence is not a blended flavouring concentrate.

The High Court found from that judgment that the single Judge had not examined the question as to whether synthetic essence is a blended flavouring concentrate. It has been stated in that judgment that there was no dispute that the assessee was not using blended flavouring concentrate. That was a case which arose under the Central Excise Act and any concession made therein by the Excise authorities would not bind the Revenue here. That judgment, according to the High Court does not lay down the law correctly. 'Blended flavouring concentrates' would take within their fold synthetic essences which are concentrates used for providing flavour and which concentrates are blended.

The eleventh schedule to the Income-tax Act contains a list of articles and things for the manufacture or production of which machinery is installed which would not be eligible for grant of investment allowance. Item No.5 in that eleventh schedule reads thus :-

"Aerated waters in the manufacture of which blended flavouring concentrates in any form are used."

An Explanation was added thereunder by the Finance Act 1987 which came into force from 1.4.1988, which explanation reads thus :- -

"Explanation .- - Blended flavouring concentrates shall include and shall be deemed always to have included, synthetic essences in any form."

The amendment that was effected in the year 1988 for the purpose of introducing an explanation under Entry No.5 , was introduced, as set out in the memorandum explaining the provisions of the Finance Bill 1987, thus :-

"It has been found that certain taxpayers manufacturing aerated waters in which synthetic essence is being used, are claiming the above benefits on the ground that the synthetic essence cannot be included in the expression "blended flavouring concentrates in any form".

As this was never the legislative intent, with a view to counteracting the tax avoidance and placing the matter beyond doubt, the proposed amendment seeks to provide that the blended flavouring concentrate appearing in item 5 would include synthetic essence in any form."

The counsel for the assessee emphasised the fact that this amendment took effect from 1st April, 1988, and submitted that for the purpose of understanding the scope of the original entry the explanation cannot be taken into account.

The High Court held:

The amendment, despite a particular date having been fixed as the date from which it will take effect, even when it is not made retrospective, if found to be clarificatory in the sense that even without the aid of that amendment the un-amended provision was capable of comprehending what was sought to be made clear by the amendment, the amendment made subsequently does not have the effect of restricting the meaning of the original entry and the width of the entry remains the same. The facet of its content which had either been misconstrued or had not been recognised is only brought out when the clarificatory amendment is effected.

The fact that this amendment was made effective from 1st April, 1 988, therefore, does not in any way have the effect of denuding the original entry of a part of its content. The synthetic essence being but one form of a blended flavouring concentrate was a blended flavouring concentrate before the amendment as also after the amendment. The order of the Tribunal holding that the assessee, despite being engaged in the manufacture of a product which is covered by Entry 5 of the eleventh schedule, is entitled to investment allowance, therefore, cannot be sustained. The same is set aside and the appeal is allowed.