Himachal Pradesh H.C : Activities of call centre didn’t require Excise registration to became eligible for claiming sec. 80-IC relief

High Court Of Himachal Pradesh

Altruist Technologies (P.) Ltd. vs. DCIT.

Section 80-IC, 147

Assessment year 2010-11

Sanjay Karol, ACTG. CC. And Sandeep Sharma, J.

CWP Nos. 1576,1577 & 1831 Of 2015

July  13, 2017

JUDGMENT

Sanjay Karol, Acting Chief Justice – Since the issue involved in these petitions is purely legal, they are being heard and disposed of by a common judgment.

2. Factual matrix is not in dispute, which we shall refer to herein later. The issue involved is only with respect to interpretation of Part-C of the Fourteenth Schedule, so prescribed under Section 80-IC of the Income Tax Act, 1961 (hereinafter referred to as the Act).

3. That the petitioner (in all the writ petitions)(hereinafter referred to as the Assessee) is assessed to income tax is not in dispute. It is neither disputed nor can it be disputed that Assessee is engaged in the business of information technology services and Call Centre. The business came to be established sometime in the year 2005 and with the passage of time three separate units came to be established, one at Baddi and two at Shimla.

4. For the Assessment Year 2006-2007, the Assessee filed return, under Section 139 of the Act, which came to be scrutinized on 29.12.2008 and order passed under Sub Section (3) of Section 143 of the Act. Noticeably, accounts of the Assessee were audited and audit reports filed, disclosing that Assessee is an undertaking/enterprise located in an area notified by the Board, for the purposes of Section 80-IC of the Act and since the Assessee is engaged in the business of information technology, by virtue of the activity of the business specified in the Fourteenth Schedule, is entitled for statutory deductions, so prescribed under the provisions of Section 80-IC of the Act. The declaration to that effect came to be made on 28.2.2008, the date prior to the passing of the order of assessment. The Assessing Officer, accepting the contention of the Assessee, assessed the income, holding the Assessee eligible for statutory deductions, referred to supra.

5. It is a matter of record that for three successive Assessment Years, i.e. 2007-2008, 2008-2009 and 2009-2010, the Returns so filed by the Assessee, seeking statutory deductions, as also pursuant to declarations so filed with respect to each year, came to be adjudicated under Section 143(3) of the Act, holding the Assessee entitled for statutory deductions.

6. However, with respect to the Assessment Year 2010-2011, the Assessing Officer, who, by that time, was a new incumbent, took a contrary view, and by interpreting clauses of the Schedule (Part-C, Fourteenth Schedule), and holding the Assessee not to have obtained Central Excise 4/6 Digit classification or National Industrial Classification (NIC) Code on 1998, stipulated at Point No. 13, held the Assessee not eligible for statutory deductions.

7. It is also not in dispute that with respect to the subsequent Financial Years, the very same Officer took similar view, holding the Assessee ineligible for the statutory deductions. Appeals arising out of the orders dated 22.3.2013 (Annexure P-6) and 12.3.2014 (Annexure P-7) are pending adjudication before the competent authority.

8. So far so good. It is only subsequent to the passing of the said orders, that the Assessing Officer issued notices under Section 148 of the Act, disclosing that he had reasons to believe that with respect to previous Assessment Years 2007-2008, 2008-2009 & 2009-2010, income had escaped assessment, within the meaning of provisions of Section 147 of the Act, which stand assailed by the Assessee in the present petitions.

9. At this juncture, we deem it appropriate to reproduce the reasons so assigned by the Assessing Officer, of forming his opinion of the income having escaped assessment, in the following terms:

‘It is observed that the business activities as claimed by assessee do not fall under either under the 4/6 digit excise classification at tariff 84.71 or NIC classification on 1998 at Sub-class 30006/7.

However the assessee’s claim of deduction u/s. 80-IC, under the head “Information and Communication Technology Industry, Computer hardware, Call Centres”, is not tenable as the sub-classifications of schedule 14 are qualifying in nature. Only if the business activity of an enterprise passes the test of classification then only the benefits of the same are available. The assessee company’s claim of deduction u/s. 80-IC falls flat on this issue as it undoubtedly does not fall in any of the prescribed classifications/sub-classifications. These facts are noticed during the assessments proceedings for the A.Y. 2010-11.’ (Emphasis Supplied)

10. Objections, so filed by the Assessee, pursuant to the notices so issued under Section 148 of the Act, also stand dismissed by the Assessing Officer, holding as under:

“Thus it can be concluded that the activities undertaken by the Assessee ‘Altruist Technologies Private Limited’ do not come under the purview of manufacturing as required by ‘NIC code classification of 1998′ in 30006 or 30007′ for which he is taking the deduction u/s. 80IC of the Income Tax Act’ 1961. Further the deduction claimed by him for the activities being carried out by it are not covered as per Item No. 13 under Part C of 14th Schedule referred under Section 80IC(2) of Income Tax Act, hence not eligible for deduction u/s. 80IC(2). The Issuance of Notice under Section 148 of the Income Tax Act is based upon the material on record and I had ‘Reasons to believe’ that Income has escaped assessment due to wrong statement of facts and claiming the wrong deduction by the assessee.” (Emphasis Supplied)

11. Evidently, the opinion formed by the Assessing Officer is that information, incomplete or incorrect, came to be furnished by the Assessee; there was non-disclosure of material and relevant facts by the Assessee; and that the opinion formed by the predecessor Assessing Officers, who had passed the orders of assessment, pertaining to the years 2006-2007, 2007-2008, 2008-2009 & 2009-2010, were erroneous, illegal and not sustainable in law.

12. Since interpretation of the statute (the Act) is involved, we deem it appropriate to reproduce the relevant clauses thereof:

“80-IC. (1)** ** **
2. This section applies to any undertaking or enterprise,—

(a) which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning—

(i)** ** **

(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal Pradesh or the State of Uttaranchal;”

“(b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in the Schedule and undertakes substantial expansion during the period beginning—

(i)** ** **
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal;”

13. Relevant portion of the Schedule is extracted as under:

“[THE FOURTEENTH SCHEDULE

[See section 80-IC(2)]

LIST OF ARTICLES OR THINGS OR OPERATIONS”

“PART C

FOR THE STATE OF HIMACHAL PRADESH AND THE STATE OF UTTARANCHAL

S.No. Activity or article or thing or operation 4/6 digit excise classification Sub-class under NIC classification on 1998 ITC(HS) classification 4/’6 digit.”

 

“13. Information and Communication Technology Industry, Computer hardware, Call Centres. 84.71 30006/7”

14. That the activity carried out by the Assessee falls in the categories specified in the category so mentioned at Sr. No. 13 of the Schedule, is not in dispute. The only objection being that since the Assessee does not possess NIC code and Excise Classification, it is not entitled to the statutory deduction. It is here, we find the Assessing Officer to have committed grave illegality in correctly and completely construing the provisions of the Schedule. In fact, from the observations of the Assessing Officer, reproduced supra, it stands admitted that the code/classification, reproduced supra, is required only for such of those activities, which fall under the category of ‘manufacture’. Assessee is running a Call Centre. It does not deal with computer hardware or is in the business of manufacturing information and communication technology. It is not into the business of manufacture or production of any articles referred to in item at Sr. No. 13. It carries out operation of such items, which do not require registration or necessitate obtaining permission under the provisions of the Central Excise Act or National Industrial (Activity) Classification, 1998, vis-à-vis Code 30006/7. Sub-class under NIC classification on 1998 at 30006/7 reads as under:

“3006: Manufacture of complete digital systems comprising a central processing unit, an input unit and an output unit; digital systems which include peripheral units such as additional input/output units, additional storage units etc.

30007: Manufacture of computer peripherals like magnetic disc/floppy/Winchester disk drives, magnetic tape/cassette/cartridge drives; punchy tape readers, curve followers, graph plotters: serial/daisy wheel/line printers. Data entry equipment with or without visual display; magnetic or optical readers; machines for transcribing data onto data media in coded form; and so forth.”

15. Now, if the Assessee is otherwise not subjected to any of the provisions of the Statute, Rules, Notifications, circulars, under the said provisions, and when it does not relate to the activity of operations, so carried out by him, that of running a Call Centre, for which, in any event, the aforesaid provisions are not applicable, then obviously it would be incorrect and illegal to read the provisions relating to the code into the expression “Call Centre”, which is an activity, totally distinct and separate from “manufacture” or “production of information and communication technology”. It is in this backdrop, we find the Assessing Officer to have erred in forming its opinion/reason to believe that the Assessee, was not entitled to statutory deductions. The interpretation is perverse, resulting into travesty of justice.

16. There is yet another reason for us to interfere with the orders passed by the Assessing Officer. Proviso to Section 147 of the Act prescribes that where an assessment under sub-section (3) of Section 143 of the Act has been carried out, no action after expiry of four years from the end of the relevant Assessment Year shall be initiated under Section 147 of the Act, save and except where income chargeable to tax has escaped assessment for such Assessment Year, by reason of failure on the part of the Assessee, inter alia, to make the return under Section 139 of the Act or disclose fully and truly all material facts necessary for carrying out assessment for that Assessment Year.

17. Notices came to be issued only on 20.3.2014 and all these with respect to the Assessment Years 2007-2008, 2008-2009 and 2009-2010. For all these Assessment Years, Assessing Officer had passed orders under Section 143(3) of the Act.

18. Now, there is nothing on record to establish, much less, even prima facie showing any opinion, formed by the Assessing Officer, to the effect that with respect to these Assessment Years, the Assessee had not filed his Returns, under Section 139 of the Act or that it did not disclose material facts, either fully or truly, necessary for carrying out the Assessment. In fact, Assessee had made full disclosures. Opinion of the Assessing Officer in reopening the assessments for these years is also not on this ground, but on the ground that even though the activity carried out by the Assessee was not manufacturing of the items specified in the Schedule and was otherwise not required to obtain the code, but since it otherwise did not have the same, was not entitled to statutory deductions.

19. It is in this backdrop, we find the action initiated by the revenue in trying to reopen the assessments, beyond a period of four years, i.e. with respect to the years 2007-2008, 2008-2009, to be barred by limitation. Significantly, no such action is contemplated with respect to the assessment carried out in the first year i.e. Assessment Year 2006-2007.

20. At this point in time, we feel obliged to refer to the following observations made by the Apex Court in CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312:

‘On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words “reason to believe”, Parliament re-introduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549 dated 31st October, 1989, which reads as follows:

“7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in Section 147.–A number of representations were received against the omission of the words ‘reason to believe’ from Section 147 and their substitution by the ‘opinion’ of the Assessing Officer. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression ‘has reason to believe’ in place of the words ‘for reasons to be recorded by him in writing, is of the opinion’. Other provisions of the new section 147, however, remain the same.’

For the afore-stated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs.’

21. To this effect, a Coordinate Bench of this Court, in ITA No. 22 of 2007, titled as CIT v. Ruchira Papers Ltd. [2012] 25 taxmann.com 166/210 Taxman 86 (HP)(Mag.), has observed as under:

“5. Another admitted fact is that the assessment proceedings in this case were conducted in accordance with the provisions of Section 143 of the Act i.e. scrutiny proceedings, which definitely entail a greater amount of scrutiny by the Assessing Officer as the term scrutiny itself postulates.”

“8. Finality has to be given to assessment proceedings. These cannot be reopened at the whims and fancy of the Revenue even when mistakes may have taken place. The law provides a procedure and also prescribes the limitation for taking such action. To take benefit of a power, which essentially is very wide power of virtually reopening the assessment, the Revenue must act within the time prescribed by the Act.”

“11. It is clear that: (a) when there is full, complete and true disclosure of all material facts, the limitation is only four years from the end of the assessment year concerned; (b) when there is non disclosure of facts the limitation is four years in case the income escaping assessment is less than Rs. 1,00,000/-; and (c) in case there is non-disclosure of facts and the income escaping g assessment is more than Rs. 1,00,000/- the limitation is six years. This is the only interpretation which can be given to Sections 147 to 149.”

22. With vehemence, Revenue has raised the jurisdictional issue of interfering with the orders passed by the Assessing Officer, more so in view of availability of alternate statutory remedy. Well, we are not inclined to agree with the submission so made by Mr. Vinay Kuthiala, learned Senior Advocate.

23. While examining the scope of jurisdiction of this Court to interfere with the orders of similar nature, passed by the authority, this Court in CWP No. 3072 of 2016, titled as Virbhadra Singh v. Dy. CIT [CWP. No. 3072 of 2016, dated 26-12-2016], and connected matters, decided on 26.12.2016, has observed as under:

’22. A three-Judge Bench of the apex Court in The Commissioner of Income-tax, Gujarat v. M/s. A. Raman and Co., AIR 1968 SC 49, held that:

“6. The High Court exercising jurisdiction under Article 226 of the Constitution has power to set aside a notice issued under Section 147 of the Income-tax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. The Court may, in exercise of its powers, ascertain whether the Income-tax Officer had in his possession any information: the Court may also determine whether from that information the Income-tax Officer may have reason to believe that income chargeable to tax had escaped assessment. But the jurisdiction of the Court extends no further. Whether on the information in his possession he should commence a proceeding for assessment or reassessment, must be decided by the Income-tax Officer and not by the High Court. The Income-tax Officer alone is entrusted with the power to administer the Act; if he has information from which it may be said prima facie, that he had reason to believe that income chargeable to tax had escaped assessment, it is not open to the High Court, exercising powers under Article 226 of the Constitution, to set aside or vacate the notice for reassessment on a re-appraisal of the evidence.” (Emphasis Supplied)

“26. In Chhabil Dass Aggarwal (supra), in somewhat similar circumstances, where notice issued under Section 148 of the Act and the ex-parte assessment proceedings came to be quashed by a writ Court, the Apex Court, by referring to its several judicial pronouncements, including that of the Constitution Bench (Five Judges) in K.S. Rashid and Son v. Income Tax Investigation Commission, AIR 1954 SC 207, observed that restriction of not entertaining a writ petition, when an efficacious and alternate remedy is available, is self imposed. It is essentially a rule of policy, convenience and discretion, rather than the rule of law. Only where an exceptional case, warranting interference; existence of sufficient grounds; for invoking extra ordinary jurisdiction, is made out, power, which is discretionary in nature, must be exercised. Where hierarchy of appeal is provided by a statute, party must exhaust the statutory remedies before invoking the writ jurisdiction. The right or liability created by a statute giving a special remedy for enforcing it must be availed of. The Court reiterated the principle laid down in Union of India v. Guwahati Carbon Ltd., (2012) 11 SCC 651 and in Munshi Ram v. Municipal Committee, Chheharta, (1979) 3 SCC 83, that when a statute provides for a person aggrieved, a particular remedy to be sought in a particular Forum and in a particular way, it must be sought in that manner, to the exclusion of all other modes and Forums. But it did recognize certain exceptions to this rule and that, inter alia being, where the action of the statutory authority is not in accordance with the statutory provisions; in defiance of fundamental principles of judicial procedure; and in total violation of principle of natural justice.

27. Justifying the action of the petitioner in bypassing the statutory remedy and directly assailing the notice for reassessment, Mr. Vishal Mohan, learned counsel, seeks reliance on the decision rendered by the Bombay High Court, in Ajanta Pharma Ltd. (supra). The decision came to be rendered in the given facts and circumstances, where reason for reassessment being non-discloser of invoice/details of the purchase of the trading goods exported and failure to co-relate the trading exports with the trading goods exported was found to have been non-existent, in fact contradicted from the record rendering the reasons of the Assessing Officer to be totally “flimsy” and not “sufficient to draw conclusion about the escapement of income” and there being “no material” before the Assessing Officer, entitling him to reopen the case of assessment, the Court found the notice so issued to be ex-facie, bad in law. Hence it exercised its discretionary power in quashing such action. Significantly, the Court observed that a writ would lie only if the impugned action is ex-facie without jurisdiction or again in excess of the jurisdiction vested in the authority or the action being totally arbitrary. It cautioned that extra ordinary jurisdiction cannot be allowed to be availed as a matter of course and while deciding the issue of jurisdiction, finding of the authority on the factual aspect may be necessary, in which case, necessarily the assessee would be required to approach the Assessing Officer.”

“29. Thus it cannot be said that jurisdiction of this Court, in entertaining a petition even when an equally efficacious remedy is available to a party, is totally ousted. Notwithstanding the statutory remedies available to the aggrieved party, restriction imposed by a writ Court is more in the nature of restraint. With the ever increasing and growing scope of judicial review, exercise of extraordinary writ jurisdiction cannot be circumscribed.”

31. While contending that this Court has no jurisdiction to quash the order of rejection of objections by the Assessing Officer, Mr. Vinay Kuthiala, learned Senior Advocate, seeks reliance on the decision rendered by the High Court of Madras in Kalanithi Maran (supra). We are unable to persuade ourselves to agree with such submission. The procedure for filing the objections and obligation to decide the same, came to be evolved with the following observations made by the apex Court in GKN Driveshafts (supra), wherein it is held as under:

“5. We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under section 148 of the Income Tax Act is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the assessing officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the above said five assessment years.”

32. Since then, the practice has been in vogue. The mechanism evolved is only a safeguard, a protection from harassment of the assessee, for avoiding unwarranted harassment, from undesirable adjudicatory process, so initiated, perhaps on jurisdictional error or such material which ex-facie may be false or reason(s) which prima facie appears to be baseless or without any cause or justification. The object being, affording an opportunity to an assessee of putting across its case, by placing authentic and undisputed material, satisfying no escapement of income from assessment, enabling the authority to consider, and if so required, drop the proceedings. There can be a fact situation where out of malice or for extraneous reasons, an Assessing Officer may decide the objections, in a palpably illegal manner. What if it is against the mandate of the said decision itself? In any event, orders passed by a Statutory authority are always amenable for challenge in a writ Court which power, perhaps the Court may exercise, when warranted, in the attending facts and circumstances.’

24. Significantly, the Assessing Officer himself admits that (a) petitioner is not a manufacturer, and (b) the code is not required for the activity/operations so carried out by it.

25. In the instant case, it cannot be said that the action taken is in good faith. Whether the Assessee is required to obtain sanction/permission/code, so prescribed or not, is not in dispute. It is true that notice is only subjective satisfaction and not final opinion, but then the Assessing Officer has decided the objections, already expressing an opinion on the assessee’s entitlement for statutory deduction. The question is not whether the action taken is in good faith or not. What is important is that the Assessing Officer has exceeded its jurisdiction erroneously. Which, in our considered view, he has so done, rendering the action to be absolutely illegal and unsustainable in law. The impugned action cannot be said to be only in the nature of show cause notice.

26. Learned counsel have referred to several other decisions, which we need not deal with, in view of our aforesaid discussion, as we have already considered the decisions, relevant to the controversy in issue, so rendered by the Apex Court.

27. Hence, for all the aforesaid reasons, all the writ petitions are allowed, holding the action taken by the Revenue to be illegal and, as such, we quash and set aside the impugned show cause notices dated 25.3.2014 (A.Y. 2007-2008), 25.3.2014 (A.Y. 2008-2009) and 20.3.2014 (A.Y. 2009-2010) as also Communication disposing of the objections (Annexure P-10, in all the petitions).

All the petitions stand disposed of, so also pending application(s), if any.

[Citation : 399 ITR 492]