Gujarat H.C : Where Assessing Officer in original assessment had examined claim of assessee pertaining to deduction under section 80HHC at considerable length, reopening of assessment to recompute deduction under section 80HHC would not be valid

High Court Of Gujarat

ILAG Industries (P.) Ltd. VS. ACIT

Assessment Year : 2004-05

Section : 80HHC

Akil Kureshi And Ms. Harsha Devani, Jj.

Special Civil Application No. 18821 Of 2011

November 5, 2012

JUDGMENT

Akil Kureshi, J. -This petition is filed challenging a notice dated 24-3-2011 issued under section 147 of the Income Tax Act, 1961 (‘the Act’, for short) by which the Assessing Officer desired to reopen the assessment in case of the petitioner assessee for the assessment year 2004-05. It can, thus, be seen that the notice for reopening had been issued beyond a period of four years from the end of relevant assessment year. For issuing such notice, the Assessing Officer had recorded his reasons which were supplied to the petitioner under communication dated 26-4-2011. We will refer to such reasons in detail at a later stage. Suffice it to notice that the petitioner raised several objections to such process of reopening under communication dated 4-7-2011. The Assessing Officer, however, rejected such objections vide his order dated 27-12-2011. Assessee has, therefore, preferred this petition challenging the very notice for reopening of the assessment.

2. Having heard learned counsel for the parties, we may peruse the reasons recorded by the Assessing Officer for reopening the assessment. Relevant portion of such reasons read as under:-

“Thereafter, a scrutiny of the assessment order against the background of the material available on record, including the submissions of the Assessee, revealed the following: The Assessee claimed deduction u/s. 80HHC of the I.T. Act at Rs.23,38,76,292/-. The AO restricted the deduction to Rs.21,83,49,539/-. This difference arose because the AO reduced 90 percent of the interest income, provisions written back, proceeds from sale of scrap and exchange gain. Such deduction amounted to Rs.2,37,90,110/-. The AO also reduced the gain on cancellation of forward currency contract of Rs.6,49,83,003/- and 90 percent of the export incentives of Rs.13,23,41,400/-. The amount reduced was Rs.11,91,07,260/-. These deductions were made in accordance with the provisions of section 80HHC (3) r.w. clause (baa) to the Explanation below the said section, and the clauses (iiia) (iiib)(iiic) (iiid) and (iiie) of the section 28 of the Act.

However, after working on the profits of business in terms of sub section 80HHC at Rs.64,15,41,324/-, the AO added the sum of Rs.8,62,90,472/- under the first proviso to the said section, so that the eligible profits of business was worked out at Rs.72,78,31,796/-. Thus, a mistake has been committed by the AO. This is because, as per the First Proviso the profits of business computed under sub section (3) to section 80HHC is to be further increased by the amount which bears to 90 percent of the export incentives as referred to in clauses (iiia) (iiib) and (iiic) of the section 28 in the ratio of the export turnover to the total turnover of the business. As per, the details furnished by the Assessee, vide written submissions dtd.2/11/2006, export incentives included the following :

DEPB Income Rs. 16,19,01,763
Loss of sale of DEPB Rs. (68,43,896)
Loss on valuation of Licenses at hand Rs. 2,27,16,467
(at the year end) Rs. 1,33,41,400

From the above, it will be seen that the export incentives/benefits comprised entirely of DEPB, which is covered under clause (iiid) of section 28. This means that under the first proviso, the DEPB was not to be included while adding back 90 percent of the export incentives in the ratio of the export turnover to the total turnover, to the profits of the business. In other words, the profits of the business ought to have been computed at Rs.64,15,41,324/- in place of Rs.72,78,31,796/-, which was the figure computed by the AO after adding the proportionate export incentives of Rs.8,62,90,472/-, inclusive of the DEPB. 30 percent of the profits of business of Rs.64,15,41,324/- works out to Rs.19,24,62,397/-.

Therefore, the deduction u/s. 80HHC was allowed in excess by the sum of Rs.21,83,49,539 – Rs.19,24,62,397 = Rs.2,58,87,142.

Further, from the details of export incentives totaling Rs.13,24,41,400/-, as detailed above, it will be seen that the Assessee adjusted a sum of Rs.2,27,16,467/- on account of loss on valuation of licenses at hand. This was not permissible. The Act does not provide for booking loss on valuation of such licenses. Moreover DEPB is not a license but is a credit given to the exporter against the exports made. This credit is recorded in a pass book. Though it is permissible for the exporter to buy or sell such credits yet. There cannot be any scope for valuing such credits, since, there is no market value rate which can be ascribed to such credits which are essentially allowed to the Assessee to compensate the cost of inputs into the manufacture of the product that is exported.

Clause (iiid) to section 28 of the I.T. Act speaks of “any profit on the transfer of the Duty Entitlement Pass Book Scheme”. The Assessee showed ‘DEPB income’ of Rs.16,19,01,763/-, and ‘Loss on sale of DEPB’ of Rs.68,43,896/-, which was adjusted against the DEPB income. Firstly, no details were furnished by the Assessee to show how the income was earned or the loss incurred. Such income and loss could have been booked only if the Assessee had purchased and sold such credits, but, if the Assessee had only sold the credits that it earned against exports then there could not have been any cost to the assessee. This, in turn, means that the entire sales proceeds of such DEPB credits would have to be treated as the profit from the transfer of DEPB. In other words, the DEPB income could have been at a much higher figure than the sum of Rs.16,19,01,763/- disclosed by the assessee. On the other hand, the loss of Rs.68,43,896/- could not be allowed to be adjusted if the assessee had not purchased and sold the credits but had only sold the credits that it had earned. In any case, the loss booked on valuation of DEPB ‘Licenses’ of Rs.2,27,16,467/- should have been allowed to be adjusted against DEPB income. This would mean that even without inquiring into the details of the income earned and the loss suffered from the alleged transfer of DEPB, the export incentives earned on account of DEPB would have to be adopted at Rs.13,23,41,400 + Rs.2,27,16,467 = Rs.15,50,57,867/-. Thus, notwithstanding the excess claim allowed by the AO on the basis of the submissions of the Assessee, and as computed at Rs.2,58,87,142/- above, the admissible deduction u/s. 80HHC could be further recomputed as under:”

3. The crux of the Assessing Officer’s contention in such reasons appears to be that the entire sale consideration on sale of DEPB scrip should be discarded for deduction under section 80HHC of the Act and not merely the profit margin thereof. Quite apart from the fact that such issue has been covered in favour of the assessee by virtue of Supreme Court decision in the case of Topman Exports v. CIT [2012] 342 ITR 49, we find that the reasons recorded simply would not give jurisdiction to the Assessing Officer to reopen the assessment. We say so for the following reasons.

4. We may recall that the assessment previously framed after scrutiny was sought to be reopened beyond a period of four years. In that view of the matter, it was necessary that the income chargeable to tax has escaped assessment for the reason of the assessee failing to disclose fully and truly all material facts for the purpose of the assessment. In the present case, there is not an iota of such allegation either in the reasons recorded or anywhere else. In fact, in the reasons recorded, the Assessing Officer observes that, thus, a mistake has been committed by the Assessing Officer. A mistake on the part of the Assessing Officer surely would not be a ground to reopen an assessment previously framed after scrutiny beyond a period of four years. Besides such observation which is damaging to the revenue also, there are other sufficient indications in the reasons recorded that in the original assessment the entire issue was examined threadbare by the Assessing Officer. To the extent he was convinced that the claim was exaggerated, disallowances were made. If one peruses minutely the portion of the reasons reproduced above, it becomes clear that the Assessing Officer in the original assessment had examined the claim of the assessee pertaining to deduction under section 80HHC of the Act at considerable length. Various aspects were gone into and disallowances to the extent found required were made. Quite apart from there being nothing on the record to suggest that the Assessing Officer formed a belief that the income chargeable to tax has escaped assessment due to the reason of the assessee failing to disclose truly and fully all material facts, the present case would be one of mere change of opinion. On all counts, therefore, the impugned notice must fail. The same is, therefore, quashed. Rule made absolute. No costs.

[Citation : 353 ITR 393]

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