High Court Of Bombay
Hindustan Unilever Ltd. vs. DCIT & Anr.
Section 147, IT Rule 8
Asst. Year 2004-05
Dr. D.Y. Chandrachud & J.P. Devadhar, JJ.
Writ Petn. No. 85 of 2009
1st April, 2010
Counsel Appeared :
Percy J. Pardiwala with Nishant Thakkar & Rajesh Poojari, for the Petitioner : Ms. Suchitra Kamble i/b Suresh Kumar, for the Respondents
JUDGMENT
Dr. D.Y. Chandrachud, J. :
Rule, with the consent of counsel returnable forthwith. By consent of both the parties, the petition is taken up for final hearing at the stage of admission.
The petitioner filed its return of income on 29th Oct., 2004 for asst. yr. 2004-05. Under the head of business income, an amount of Rs. 1,815.59 crores was reflected as the net profit before tax. This was arrived at after taking into consideration losses of Rs. 10.84 crores suffered by the plantation division and of Rs. 98.28 lakhs suffered by the Crab Stick Unit at Chorwad. The case of the petitioner for asst. yr. 2004-05 was selected for a scrutiny assessment. The assessment was concluded upon the passing of an order on 27th Dec., 2006. By a notice dt. 7th April, 2008, the assessment was sought to be reopened, in exercise of the powers conferred by ss. 147 and 148 of the IT Act, 1961.
Four reasons have been furnished for reopening the assessment in the disclosure made by the Asstt. CIT on 17th Sept., 2008. For convenience of reference, it would be appropriate to extract from the reasons which have been furnished to the assessee, which are as follows :
“On perusal of the records, it is noticed that in the computation of income enclosed with the return of income filed by the assessee along with the return of income, the assessee has claimed deduction of Rs. 10,84,07,449 as loss of plantation division deductible under r. 8 and the same was allowed in the assessment order passed under s. 143(3) of the Act. As per r. 8 of IT Rules, 1962, income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business and forty per cent of such income shall be deemed to be income liable to tax. The provision under r. 8 for taxing of 40 per cent of income from sale of tea grown and manufactured in India is deeming provision and it is applicable only in the case of income. Therefore, the assessee’s claim of set off of 40 per cent of such losses against the normal business profits is not allowable. Thus, the assessee’s income to the extent of Rs. 10,84,07,449 has escaped the assessment.
On perusal of the records, it is also noticed that in the computation of income enclosed with the return of income filed by the assessee, the business income included in the total income determined by the assessee is at Rs. 18,15,59,78,868. In the same computation of income, while determining the business income, the assessee has deducted an amount of Rs. 10,84,07,449 as loss of plantation division. However, in the computation of business income in the assessment order passed under s. 143(3) of the Act, the assessee was again allowed a deduction of Rs. 10,84,07,449 as loss of plantation division. Therefore, the assessee was wrongly allowed the deduction of Rs. 10,84,07,449 as loss of plantation division in the assessment order passed under s. 143(3) of the Act. Thus, the assessee’s income to the extent of Rs. 10,84,07,449 has escaped the assessment.
On perusal of the records, it is also noticed that in the computation of long-term capital gain on sale of Bhandup land enclosed with the return of income filed by the assessee, the assessee has claimed exemption under s. 54EC of the Act of Rs. 3,07,50,000 being invested in 5.10 per cent National Housing Bank Capital Gains Bonds and the same claim of exemption was allowed in the assessment order passed under s.143(3) of the Act. The date of sale i.e. transfer of asset is 29th Sept., 2003. As per s. 54EC(1) of the Act, where the capital gain arises from the transfer of a long-term capital asset and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say—(a) if the cost of the longterm specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under s. 45 of the Act, (b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under s. 45 of the Act. On perusal of the NHB Capital Bonds Certificates dt. 9th June, 2004, it is seen that the date of allotment of the said bond is 31st March, 2004. The date of allotment of the bond is the record date for all other purposes (date of redemption is 31st March, 2009). Thus, the assessee has not invested the gain in specified asset within a period of six months after the date of transfer of the capital asset (date of sale 29th Sept., 2003). Hence, the assessee is not eligible for the exemption under s. 54EC of the Act of Rs. 3,07,50,000 on sale of Bhandup land. Thus, the assessee’s income from long-term capital gain to the extent of Rs. 3,07,50,000 has escaped the assessment.
On perusal of the records, it is also noticed that in the computation of income enclosed with the return of income filed by the assessee, the assessee has claimed deduction of Rs. 14,53,98,193 under s.10B in respect of four 100 per cent export oriented undertakings. The deduction under s. 10B was restricted to Rs. 11,11,76,919 in the assessment order passed under s. 143(3) of the Act. On perusal of the records, it is noticed that in the assessment order the exemption under s.10B in respect of Crab Stick, Chorwad Unit was taken as nil in view of loss from that unit of Rs. 1,33,49,654. As the income of the said unit is exempt from taxation, the loss of the said unit, which is already set off against normal business income in the accounts, is not allowable. However, the same was allowed in the assessment order. Thus, the assessee’s income to the extent of Rs. 1,33,49,654 has escaped the assessment.”
The petitioner communicated its objections to the reopening of the assessment on 6th Oct., 2008. An order was passed thereon by the AO on 14th Nov., 2008, overruling the objections. The challenge in these proceedings is to the notice reopening the assessment for asst. yr. 2004-05. The reopening of the assessment, it may be noted has taken place within a period of four years from the end of the relevant assessment year.
The reasons on the basis of which the assessment is sought to be reopened have been extracted earlier. Before dealing with the challenge in these proceedings, it would be appropriate to summarize the basis for reopening the assessment. The first reason, according to the Revenue, is that the loss of Rs. 10.84 crores in respect of which the assessee had claimed a deduction, as emanating from the plantation division, is wrongly set off and income to the extent of Rs. 10.84 crores has escaped assessment. Secondly, according to the Revenue, there is a computational error in the assessment order. Thirdly, the investment which has been made under s. 54EC was beyond a period of six months from the date of the transfer of the asset by the assessee and the exemption is alleged to have been wrongly allowed. Fourthly, in respect of a loss which was incurred on an eligible unit under s. 10B, the case of the Revenue is that the set off was wrongly granted in the order of assessment.
6. Each of the reasons set out in the notice for reopening the assessment would have to be taken separately in order to consider the challenges addressed before the Court. (i) The loss sustained by the plantation division In the return of income that was filed by the assessee and as a part of the statement showing computation of the total income, the total business income was reflected as Rs. 1,826.43 crores. The assessee reported a loss on the Plantation division, described as the Doom Dooma division and the tea estates, in the amount of Rs. 10.84 crores. After deducting the loss of Rs. 10.84 crores from the business income, the profits attributable to the business carried on by the assessee were computed at Rs. 1,815.59 crores.
The assessee, as a part of its plantation business carries on a composite activity of growing tea leaves which are then utilized for the manufacture and sale of tea. Rule 8 of the IT Rules, 1962 provides that income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business and 40 per cent of such income is deemed to be the income liable to tax. Rule 8, in other words, enacts a legal fiction for segregation of agricultural income from business income, where an assessee grows tea, which constitutes an agricultural activity and also manufactures and sells tea, which is a non-agricultural and business activity. By virtue of s. 10, agricultural income is not included in the computation of the total income of the assessee. Consequent upon r. 8, a formula has been provided for the segregation of income, which is attributable to agricultural activity from income which is attributable to the business activity of the assessee. Income derived from the sale of tea grown and manufactured by the assessee has to be computed as if it were income derived from the business; 40 per cent of such income is deemed to be income liable to tax. Rule 8, therefore, which is subordinate legislation, stipulates a method of segregating the agricultural income from the business income, by applying the proportion of 60 : 40.
9. The genesis of r. 8 has been explained in the judgment of the Supreme Court in CIT vs. Willamson Financial Services & Ors. (2007) 213 CTR (SC) 612 : (2008) 297 ITR 17 (SC). In the case before the Supreme Court, the assessee grew and manufactured tea, which was then exported. The assessee claimed that the deduction under s. 80HHC was liable to be granted against the entire tea income before applying r. 8(1). The AO rejected the claim and held that the deduction would be allowed only after apportionment between agricultural income and non- agricultural income. The Tribunal restored the order of the AO, which had been interfered with by the CIT(A), while the High Court in turn reversed the decision of the Tribunal. The Supreme Court observed that r. 8 refers to cases of integrated income. Where the income of the assessee arises partly from agriculture and partly from manufacture, the profits which arise from the sale of tea have to be apportioned since that part of the income which constitutes income from agricultural activity, has to be exempted, being agricultural income. The Supreme Court held that rr. 7 and 8 simplify the procedure for apportionment. Where the income comprises both of agricultural and non-agricultural elements, the Supreme Court held that the income has to be ‘disintegrated’ and that portion which represents agricultural income should be exempted from tax. At the same time, computation of income from tea had to be in accordance with the relevant provisions of the IT Act, 1961 and deductions towards expenses incurred for earning the income shall be liable to be made in accordance with the law. The Supreme Court held that since agricultural income is neither chargeable nor includible in the total income, r. 8(1) segregates the agricultural income from business income in the ratio of 60 : 40. Consequently, chargeability and computability under the Act would be confined to the extent of 40 per cent of the income. If this distinction is kept in mind, the assessee would not be entitled to claim a deduction under s. 80HHC against the entire or composite tea income but only against a proportionate part thereof, which is attributable to business income in the ratio which is set out in r. 8. In the present case, the ground on which the assessment is sought to be reopened is that the assessee had claimed a deduction of Rs. 10.84 crores as the loss sustained by the plantation division under r. 8, which came to be allowed. According to the notice issued to the assessee, the deeming provisions of r. 8 are applicable only in the case of agricultural income and the claim of the assessee to set off 40 per cent of the losses against normal business profits was not allowable.
The submission which has been urged on behalf of the assessee is that the ground on which the assessment is sought to be reopened could not possibly have led any reasonable person, instructed in law, to form a reason to believe that income had escaped assessment within the meaning of s. 147. Learned counsel submitted that under r. 8 a segregation is required to be made of income derived from the sale of tea grown and manufactured by the seller, such that 40 per cent of the income is deemed to be income liable to tax. Counsel submitted that income for the purposes of the Act and, for the purposes of r. 8 must of necessity take into account the expenditure incurred by the assessee for the purposes of business and r. 8 requires the computation of such income as if it were income derived from the business. Ex facie, the legal fiction which is created by r. 8(1) requires the computation of the income derived from the sale of tea “as if it were income derived from business” and that can only be after taking into account the expenditure which is incurred by the assessee for the purposes of earning the income.
Consequently, the loss, if any, that is sustained by the assessee on account of its business operations involving the manufacture and sale of tea would be allowable and all that the assessee has done was to segregate the overall loss that was sustained by attributing only 40 per cent of the loss to the business activity of the manufacture and sale of tea. Counsel submitted that the notice for reopening the assessment proceeds on the basis that the loss of Rs. 10.84 crores is entirely to be disallowed. This, it was urged is an inference which has been drawn by the AO without even a plausible basis in law. The claim of the assessee was that 60 per cent of the loss which was sustained as a result of its composite operations should be attributable to the agricultural activity and it was only in respect of the balance representing 40 per cent that the assessee sought to set off the loss which has arisen as a result of its business activities. Hence, it was submitted that the basis on which the Revenue has sought to reopen the assessment could not possibly be sustained as giving rise to an inference that income chargeable to tax had escaped assessment.
In evaluating the submissions which have been urged on behalf of the assessee, this Court has been mindful of the circumstance that the jurisdiction of the Court has been invoked against a notice issued under s. 148 seeking to reopen an assessment on the ground that income chargeable to tax has escaped assessment. The condition precedent for a valid exercise of power under s. 147 is the formation of a reason to believe on the part of the AO that income chargeable to tax had escaped assessment. Now, it cannot be disputed, as it has not been during the course of the submissions, that the assessee had sought to adjust 40 per cent of the overall loss which was sustained as the loss that was attributable to the business activity of the manufacture and sale of tea at its two plantation units. This is evident from the computation of the profits and gains of business made by the assessee in respect of its tea estates and Doom Dooma unit. In other words, the material on record clearly demonstrates that the adjustment that was sought was not in respect of the entire loss that was sustained by the assessee in the composite activity of the growing of tea leaves and the manufacture and sale of tea but only to the extent of 40 per cent which represented the segregation of the income attributable to the sale of tea under r. 8. Now, what r. 8 postulates is the process of segregating the income derived from the sale of tea upon its computation as if it were income derived from business. Rule 8 creates a legal fiction, as a result of which the income which is derived from the sale of tea which is grown and manufactured by the assessee is to be computed as if it were income derived from business. It needs no line of elaborate reasoning to state the well settled position in law that once a legal fiction is created by the legislature or, as in this case, in subordinate legislation, the legal fiction has to be given force and effect so as to operate within the area in which it was intended to operate. In applying a legal fiction, it is trite law that one cannot allow the imagination to boggle. A legal fiction has to be carried to its logical conclusion. In computing the income from the sale of tea as if it was income derived from business, for the purposes of r. 8, it is impossible to comprehend as to how the expenditure incurred by an assessee, wholly and exclusively, for the purposes of business should be disregarded. Obviously, the expenditure cannot be disregarded. The principle which must govern is well-settled and only a brief reference to authority on the subject would be necessary.
14. In CIT vs. Harprasad & Co. (P) Ltd. 1975 CTR (SC) 65 : (1975) 99 ITR 118 (SC), the question which came up before the Supreme Court was whether a capital loss could be determined and carried forward, in accordance with the provisions of s. 24 of the Act of 1922, when the provisions of s. 12B were not applicable during the course of asst. yr. 1955-56. The Supreme Court held that from the charging provisions of the Act it is discernible that the words ‘income’ or ‘profits and gains’ should be understood as including losses also, so that, in one sense ‘profits and gains’ represent ‘plus income’ whereas losses represent ‘minus income’. The Supreme Court observed as follows : “From the charging provisions of the Act, it is discernible that the words ‘income’ or ‘profits and gains’ should be understood as including losses also, so that, in one sense ‘profits and gains’ represent ‘plus income’ whereas losses represent ‘minus income’. In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Although s. 6 classifies income under six heads, the main charging provision is s. 3 which levies income-tax, on the ‘total income’ of the assessee as defined in s. 2(15). An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the ‘total amount of income, profits and gains referred to in s. 4(1)’. Secondly, it must be ‘computed in the manner laid down in the Act’. If either of these conditions fails, the income will not be a part of the total income that can be brought to charge.” The Supreme Court held that if the capital gain was not chargeable to tax during the period between 1st April, 1948 to 1st April, 1957, the assessee did not possess an independent right to carry forward his capital loss even if it could not be set off, owing to the non-taxability of the capital gains, against profits in subsequent years. The decision of the Supreme Court emphasizes that under the charging provisions of the Act, income must be comprehensively understood as including a loss. The principle that income would include a loss has also been reaffirmed in a subsequent judgment of the Supreme Court in CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) at p. 338.
15. In the present case, the AO, while issuing a notice for reopening the assessment observed that the provisions of r. 8 are applicable “only in the case of income” and the claim of the assessee to set off 40 per cent of losses against normal business profits could not be allowed. On this basis, the AO has formed the opinion that the loss of Rs. 10.84 crores attributable to the business activity of the assessee involving the manufacture and sale of tea was liable to be disallowed. It must be noted here that it is not the contention of the AO that the loss which has been computed by the assessee by applying the proportion of 40 per cent is not a fair estimate of the actual loss sustained by the assessee in its business operations. On the contrary, it is on the basis of r. 8 that the AO seeks to postulate that the loss attributable to the business activity of the assessee would have to be disregarded on the ground that it is not allowable expenditure. This inference which is sought to be drawn by the AO is contrary to the plain meaning of the charging provisions of the Act, and to r. 8, besides being contrary to the position in law laid down by the Supreme Court. The assessee was lawfully entitled to adjust the loss which arose as a result of the business activity under r. 8. (ii) Computational error in the assessment order
16. The second ground on which the assessment is sought to be reopened is a computational error in the assessment order. In order to appreciate the ground for reopening, it would be appropriate to refer to the statement showing the computation of total income, as appended to the return for asst. yr. 2004-05. The assessee returned a business income of Rs. 1,826.43 crores. The loss of Rs. 10.84 crores arising out of the plantation division and attributable to the business activity was deducted from the business income so as to result in a profit of Rs. 1,815.59 crores from business operations. Consequently, in its computation of income, the assessee disclosed the adjustment of the loss arising from the plantation division as being made in order to determine the business profit.
The AO while passing his order of assessment dt. 27th Dec., 2006 adopted the business income of Rs. 1,815.59 crores which was in terms of the computation made by the assessee. While making deductions from the business income, the AO deducted an amount of Rs. 10.84 crores as a loss arising from the Plantation division. This was a plain computational error on the part of the AO because the figure of Rs. 1,815.59 crores disclosed as business income by the assessee in the computation of income was after the adjustment of the loss from the Plantation division of Rs. 10.84 crores. The AO, therefore, plainly made a computational error in once again deducting an amount of Rs. 10.84 crores which had already been accounted for in the computation of business income at Rs. 1,815.59 crores.
Counsel appearing on behalf of the assessee submitted that the error which took place in the computation of income by the AO can and ought to be rectified under s. 154. The submission which was urged before the Court is that if the AO would proceed to rectify the error, which is obvious, the assessee would have no objection. Further it was urged that upon a mistake in the order of the AO, three remedies may possibly be available under the Act, namely (i) A rectification under s. 154; (ii) A revision under s. 263; and (iii) A reassessment under s. 147. Each of these remedies is exercisable by different authorities within different periods of limitation. The submission which has been urged before the Court is that the Revenue must choose the most appropriate remedy, that leaves the assessee with the least detriment. In the event that the AO was to exercise the power of rectification under s. 154, the order would have to be corrected to the extent of the computational error. Exercising the power of reopening the assessment on that ground of a simple computational error is a matter of serious prejudice to the assessee since, in such an event, the entire assessment would be liable to be reopened including all other issues which come to the notice of the AO in the course of proceedings under s. 147.
We find that there is merit in the submission which has been urged on behalf of the assessee. Sec. 154 empowers the IT authorities, including an AO, to amend any order passed by them with a view to rectify any mistake apparent from the record. The limitation for the exercise of the power is under sub-s. (7) of s. 154, four years from the end of the financial year in which the order sought to be amended was passed. There can be no dispute about the position that the computational error that has been made by the AO in the present case is capable of being rectified under s. 154 (1). The AO is within the period of limitation prescribed by sub-s. (7) of s. 154. Moreover the computational error cannot be attributed to any act or omission on the part of the assessee, as the assessee in the course of its statement of computation of total income had clearly disclosed that the business profits were arrived at after adjusting the losses sustained by the Plantation division (attributable to the business activity) from the business income. Explanation 2 to s. 147 provides a deeming fiction, for the purposes of the section, of cases where income chargeable to tax would be regarded as having escaped assessment. Clause (c) of Expln. 2 incorporates a situation where an assessment has been made, but income chargeable to tax has been underassessed, or assessed at too low a rate; or where such income has been made the subject of excessive relief under the Act. Where the power to rectify an order of assessment under s. 154(1) is adequate to meet a mistake or error in the order of assessment, the AO must take recourse to that power as opposed to the wider power to reopen the assessment. The assessee cannot be penalized for a fault of the AO. We must emphasize that we are not dealing with a case where the error in the order of assessment is attributable to a lapse or omission on the part of the assessee. The provisions of the statute lay down overlapping remedies which are available to the Revenue but the exercise of these remedies must be commensurate with the purpose that is sought to be achieved by the legislature. The reopening of an assessment under s. 147 has serious ramifications. Explanation 3 to s. 147 provides that for the purposes of assessment or reassessment, the AO may assess or reassess the income in respect of any issue which has escaped assessment and where such issue comes to his notice subsequently in the course of the proceedings under the section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-s. (2) of s. 148. In other words, once an assessment is validly reopened in exercise of powers conferred by s. 147, the AO is empowered to reassess the income in respect of any other issue which comes to his notice in the course of the proceedings, though such reasons have not been set out in the notice under s. 148. There is, therefore, merit in the submission that is urged on behalf of the assessee that before recourse can be taken to the wider power to reopen the assessment on the ground that there is a computation error, as in the present case, the AO ought to have rectified the mistake by adopting the remedy available under s. 154 of the Act. All statutory powers have to be exercised reasonably. Where a statute confers an area of discretion, the exercise of that discretion is structured by the requirement that discretionary powers must be exercised reasonably. Indian Law is governed by the prescriptions of a written Constitution. Fairness and fair treatment are norms which emanate from the guarantee of equality and non-discrimination under Art. 14. Constitutional norms, including non discriminatory application of law, must guide the interpretation of statutes. Statutory enactments must be read to be in conformity with constitutional norms. The exercise of powers vested by a statute must equally be consistent with constitutional norms. The remedies which the law provides are tailored to be proportional to the situation which the remedy resolves. Where the statute provides for several remedies, the choice of the remedy must be appropriate to the underlying basis and object of the conferment of the remedy. A simple computational error can be resolved by rectifying an order of assessment under s. 154(1). It would be entirely arbitrary for the AO to reopen the entire assessment under s. 147 to rectify an error or mistake which can be rectified under s. 154. An arbitrary exercise of power is certainly not a consequence which Parliament contemplates.
20. The view which we are inclined to take would find support from a judgment of Chief Justice M.C. Chagla, speaking for a Division Bench of the Court in J.C. Thakkar vs. CIT (1955) 27 ITR 658 (Bom). The principle which was laid down by the Division Bench is that when one or more modes of assessment or remedies are available to the taxing authority, the authority must adopt that remedy which is a matter of the least prejudice to the assessee. The principle has been put in the felicitous words of the learned Chief Justice, which are as follows : “……. It would still be open to the assessee to contend that by adopting one mode of assessment rather than another a prejudice has been caused to him or that he has been deprived of some right to which he would have been entitled if the unregistered firm had been assessed first or that the burden of taxation has been increased because he has been assessed without the unregistered firm being assessed. It is needless to say that if one or more modes of assessment are open to the taxing authorities, the taxing authorities must adopt that mode which is more beneficial to the assessee. The Indian IT Act is a taxing statute and therefore the Courts must be zealous to see that no right which an assessee has under the Act has been taken away by any action on the part of the Department. Even though it may not be obligatory upon the Department to follow a particular procedure the Court will insist upon the Department following the procedure if that procedure leads to a beneficial result as far as the assessee is concerned and the procedure followed by the Department is prejudicial to the assessee. ……..”
We are in respectful agreement with the principle laid down by the Division Bench, in the facts of the present case. We, therefore, hold that in this case the Revenue has an efficacious remedy open to it in the form of a rectification under s. 154 for correcting the computational error and that consequently recourse to the provisions of s. 147 was not warranted. (iii) The investment under s. 54EC
The third ground for reopening the assessment relates to the exemption claimed by the assessee under s. 54EC in respect of an amount of Rs. 3.07 crores invested in the National Housing Bank Capital Gains Account. The assessee transferred an immovable asset namely certain land at Bhandup on 29th Sept., 2003. Sec. 54EC(1) provides that where capital gains arise from a transfer of a long-term capital asset and the assessee has at any time within a period of six months after the date of such transfer, invested the whole or any part of the capital gains in a long-term specified asset, the capital gains shall be dealt with in accordance with the provisions made in the section. In order to avail of the benefit of s. 54EC, the capital gains have to be invested in a long-term specified asset within a period of six months of the date of the transfer.
In the present case, the period of six months was due to expire on 28th March, 2004. The assessee invested an amount of Rs. 3.07 crores on 19th March, 2004. A receipt was issued on that date by the National Housing Bank. A debit was reflected in the bank account of the assessee to the extent of the sum invested on 19th March, 2004. The certificate of bond was issued by the National Housing Bank on 9th June, 2004, which refers to the date of allotment as 31st March, 2004. For the purposes of the provisions of s. 54EC, the date of the investment by the assessee must be regarded as the date on which payment was made and received by the National Housing Bank. This was within a period of six months from the date of the transfer of the asset. Consequently, the provisions of s. 54EC were complied with by the assessee. There is absolutely no basis in the ground for reopening the assessment. (iv) The loss incurred by the eligible unit under s. 10B.
The fourth and final ground which has weighed with the AO in reopening the assessment is that the assessee claimed a deduction of Rs. 14.53 crores under s. 10B. The deduction was restricted to Rs. 11.11 crores in the order. While reopening the assessment, the AO has proceeded on the basis that s. 10B provides an exemption and that in respect of the Crab Stick Unit the assessee had suffered a loss of Rs. 1.33 crores. The AO has observed that since the income of the unit was exempt from taxation, the loss of the unit could not have been set off against the normal business income. However, this was allowed by the assessment order and it is opined that the assessee’s income to the extent of Rs. 1.33 crores has escaped assessment. There is merit in the submission which has been urged on behalf of the assessee that the AO has while reopening the assessment ex facie proceeded on the erroneous premise that s. 10B is a provision in the nature of an exemption. Plainly, s. 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Sec. 10B was substituted by the Finance Act of 2000 w.e.f. 1st April, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent export oriented undertaking, to which the section applies “shall not be included in the total income of the assessee”. The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of s. 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and gains as are derived by a 100 per cent export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment is sought to be reopened is belied by a plain reading of the provision. The AO was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under s. 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick Unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of s. 10B.
For all the aforesaid reasons, we are of the view that the AO could not possibly have formed a belief that income chargeable to tax had escaped assessment within the meaning of s. 147. The petition would have to be allowed and is accordingly allowed by setting aside the impugned notice dt. 31st March, 2008 issued under s. 148 of the IT Act,1961.
Rule is made absolute in the aforesaid terms. There shall be no order as to costs.
[Citation : 325 ITR 102]
