Punjab & Haryana H.C : the invoking of s. 263 of the Act was not justified ignoring the fact that the order of the AO passed under s. 143 (3) on 30th March, 2006, was erroneous insofar as it was prejudicial to the interest of the Revenue

High Court Of Punjab & Haryana

CIT vs. Saluja Exim Ltd.

Section 80HHC(1B), 115JB(2), 263

Asst. Year 2002-03, 2003-04

M.M. Kumar & Jitendra Chauhan, JJ.

IT Appeal Nos. 581, 582 & 583 of 2009

16th March, 2010

Counsel Appeared :

Vivek Sethi, for the Appellant : Ms. Radhika Suri, for the Respondent

JUDGMENT

M.M. Kumar, J. :

This order shall dispose of IT Appeal Nos. 581 to 583 of 2009 which have been decided by the Tribunal, Chandigarh Bench “A”, Chandigarh (for brevity “the Tribunal”) by a common order dt. 30th Sept., 2008 in respect of the asst. yrs. 2002-03 and 2003-04. The Revenue has approached this Court challenging the aforesaid order claiming that the following substantial questions of law would arise for determination of this Court :

“(i) Whether on the facts and in law, the Hon’ble Tribunal was justified in holding that the invoking of s. 263 of the Act was not justified ignoring the fact that the order of the AO passed under s. 143 (3) on 30th March, 2006, was erroneous insofar as it was prejudicial to the interest of the Revenue ?

(ii) Whether on the facts and in law, the Hon’ble Tribunal was justified in considering the issue relating to the quantum of exclusion under cl. (iv) of the Explanation below s. 115JB(2) of the IT Act, for computation of ‘book profits’ in the light of the decisions in the case of Dy. CIT vs. Syncome Formulations (I) Ltd. (2007) 108 TTJ (Mumbai)(SB) 105 : (2007) 106 ITD 193 (Mumbai) (SB) : (2007) 292 ITR 144 (Mumbai)(SB)(AT) and Asstt. CIT vs. Ajanta Pharma Ltd. (2008) 118 TTJ (Mumbai) 611 : (2008) 2 DTR (Trib)(Mumbai) 241 : (2008) 21 SOT 101 (Mumbai) whereas the said decision has been reversed by the Hon’ble Bombay High Court in IT Appeal No. 1005 of 2008 dt. 7th May, 2009 in the case of CIT vs. Ajanta Pharma Ltd. (2009) 223 CTR (Bom) 441 : (2009) 23 DTR (Bom) 1 : (2009) 318 ITR 252 (Bom).

It is appropriate to mention that assessment was finalized under s. 143(3) of the IT Act, 1961 (for brevity “the Act”). However, the CIT exercising power under s. 263, has taken the view that the AO while computing book profits chargeable to tax under s. 115JB of the Act, has reduced the profits of export business without any justification. According to the CIT, “eligible profits of business” as computed in accordance with the provision of s. 80HHC(1B) was alone to be reduced to the extent of 50 per cent only. After issuing show-cause notice, the CIT cancelled the assessment framed under s. 143(3) by the AO on the limited issue of recomputing the “book profit” after excluding only eligible profits of business computed in accordance with the provisions of s. 80HHC(1B) of the Act.

Aggrieved by the order of the CIT, the assessee approached the Tribunal challenging the invocation of power under s. 263 by the CIT in addition to the direction issued by him to the AO for recomputing the “book profits” in accordance with the provisions of s. 80HHC(1B) of the Act, making them eligible to the extent of 50 per cent.

The Tribunal placed reliance on the judgment delivered by Special Bench in the case of Dy. CIT vs. Syncome Formulations (I) Ltd. (supra) and Asstt. CIT vs. Ajanta Pharma Ltd. (supra). It is appropriate to mention that in those decisions, the Tribunal has considered the issue relating to computation of “book profit” for the purposes of s. 115JB and in relation to cl. (iv) of the Explanation to s. 115JB of the Act. It has been observed that the amount referred to therein is the amount of profit eligible for deduction under s. 80HHC irrespective of the percentage of the profits that are eligible for deduction ultimately. The Mumbai Bench of the Tribunal in the case of Asstt. CIT vs. Ajanta Pharma Ltd. (supra) has held that amount to be reduced in terms of cl. (iv) of the Explanation to s. 115JB(2) is not governed by sub-s. (IB) of s. 80HHC in the absence of any reference to it in cl. (iv) of the Explanation to s. 115JB(2) of the Act. The Tribunal after making reference to the aforesaid judgment observed in para 11 as under :

“In this case, the plea of the assessee is that on the dispute relating to the quantum of exclusion under cl. (iv) of the Explanation below s. 115JB(2), the interpretation placed by the assessee as well as by the AO in the order passed under s. 143(3) is supported by the decisions of the Tribunal in the case of Ajanta Pharma Ltd. (supra) and Syncome Formulations (I) Ltd. (supra). We have perused the said decisions, copies of which are on record and find that the stand of the assessee is justified. The assessment framed by the AO by excluding the book profits eligible for deduction under s. 80HHC in terms of cl. (iv) of the Explanation to s. 115JB(2) is in tune with the aforesaid two decisions of the Tribunal. On this basis, factually speaking, it can be deduced that the view taken by the AO while framing the assessment under s. 143(3) on 30th March, 2006, is a possible view. No decision to the contrary has been brought to our notice and in any case, it cannot be said that the view of the AO was unsustainable in law. We also find that the CIT has neither in the show-cause notice dt. 14th March, 2008, and nor in the impugned order dt. 31st March, 2008, made reference to any judicial order to support his interpretation, which is contrary to that of the AO. In any case, having regard to the fact that the view adopted by the AO was a possible view in the light of the cited Tribunal decisions, though renderedsubsequently, the same in our considered opinion, does not enable the CIT to invoke s. 263 in the face of the law laid down by the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC).”

On the other issue, as to whether the CIT was within his power to invoke s. 263, the Tribunal answered the issue against the Revenue, it has been held that the question concerning powers of the CIT to invoke s. 263 is no longer res integra. The Tribunal has placed reliance on the judgment of the Hon’ble Supreme Court rendered in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC), and has held for valid invocation of s. 263, the twin conditions are required to be satisfied simultaneously (a) that the order in question should be erroneous; and (b) it should be prejudicial to the interest of the Revenue. Both the conditions are required to be satisfied simultaneously and absence of any one of them would not be sufficient for exercising power under s. 263. The Tribunal, thus, concluded that where the AO has adopted one of the two courses permissible in law then revisional power under s. 263 of the Act cannot be invoked by the CIT merely because the CIT prefers the other view than the one taken by the AO.

It is pertinent to mention that in the case of CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266 : (2007) 295 ITR 282 (SC), the Hon’ble Supreme Court has clarified that the position of law as it stood on the date when the AO had passed the order has to be taken into consideration. No subsequent change in law could constitute basis for exercise of power under s. 263 of the Act. The views of the Hon’ble Supreme Court are discernible from para 10 of Malabar Company’s case (supra) which discusses s. 80HHC and read thus (p. 283) :

“In our view at the relevant time two views were possible on the word ‘profits’ in the proviso to s. 80HHC(3). It is true that vide the 2005 amendment the law has been clarified with retrospective effect by insertion of the word ‘loss’ in the new proviso. We express no opinion on the scope of the said amendment of 2005. Suffice it to state that in this particular case when the order of the CIT was passed under s. 263 of the IT Act, 1961, two views on the said word ‘profits’ existed. In our view, the matter is squarely covered by the judgment of this Court in the case of Malabar Industrial Co. Ltd. vs. CIT (supra) as also by the judgment of the Calcutta High Court in the case of Russell Properties (P) Ltd. vs. A. Chowdhury, Addl. CIT (1977) 109 ITR 229 (Cal) at 243. At this stage, we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. vs. CIT (supra) this Court has taken the view that the phrase ‘prejudicial to the interests of the Revenue’ under s. 263 has to be read in conjunction with the expression ‘erroneous’ order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the ITO is unsustainable in law. According to the learned Addl. Solicitor General, on an interpretation of the provision of s. 80HHC(3) as it then stood the view taken by the AO was unsustainable in law and therefore the CIT was right in invoking s. 263 of the IT Act. In this connection, he has further submitted that in fact the 2005 amendment which is clarificatory and retrospective in nature itself indicates that the view taken by the AO at the relevant time was unsustainable in law. We find no merit in the said contentions. Firstly, it is not in dispute that when the order of the CIT was passed there were two views on the word ‘profits’ in that section. The problem with s. 80HHC is that it has been amended eleven times. Different views existed on the day when the CIT passed the above order. Moreover, the mechanics of the section have become so complicated over the years that two views were inherently possible. Therefore, subsequent amendment in 2005 even though retrospective will not attract the provision of s. 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the CIT passed the order dt. 5th March, 1997, in purported exercise of his powers under s. 263 of the IT Act.” (emphasis Here printed in italics added).

Once the aforesaid legal position is clear and the law which was applicable on the date when the AO passed the order has to determine the erroneous nature of the order passed by the AO then it is obvious that the judgment of the Bombay High Court in Asstt. CIT vs. Ajanta Pharma Ltd. (supra), would not be attracted to the facts of the present case. On that basis the order passed by the CIT on 31st March, 2008, cannot be justified by any subsequent pronouncement of law and consequently the order of the AO cannot be held to be erroneous as law applicable on the date of passing the order by the AO has to be applied. Admittedly, on that date, two views were possible and according to the Hon’ble Supreme Court, the mechanics of the section have become so complicated over the years that two views were inherently possible. Accordingly, we find that the order of the Tribunal does not suffer from any legal infirmity warranting interference of this Court. The appeals are wholly and without merit and are, thus liable to be dismissed.

As a sequel to the above discussions, the appeals are dismissed.

[Citation : 329 ITR 603]