M K Exim India Ltd., Jaipur vs Department Of Income Tax

vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR

Jh vkj-ih-rksykuh] U;kf;d lnL; ,oa Jh Vh-vkj-ehuk] ys[kk lnL; ds le{k BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM

vk;dj vihy la-@ITA No. 410/JP/2010 fu/kZkj.k o"kZ@Assessment Year : 2002-03. The Assistant Commissioner cuke M/s. M.K. Exim (India) Ltd., E- of Income Tax, Vs. 3, RIICO Industrial Area, Circle-7, Sitapura, Jaipur. Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No. AABCM 4995 N vihykFkhZ@Appellant izR;FkhZ@Respondent

jktLo dh vksj ls@ Revenue by : Smt. Neena Jeph (JCIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri Rajeev Sogani, (C.A.)

lquokbZ dh rkjh[k@ Date of Hearing : 07.05.2015. ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 17.7.2015. vkns'k@ ORDER

PER SHRI T.R. MEENA, A.M.

This is an appeal filed by the Revenue emanating from the order of ld. CIT

(A)-I, Jaipur dated 18.01.2010 for the A.Y. 2002-03. The sole ground of appeal is

against quashing the assessment order passed by the AO u/s 148 of the I.T. Act.

2. The brief facts of the case are that the assessee is an exporter of textile goods,

filed its return declaring income of Rs. 4,96,128/- on 31.10.2002. The assessment was

completed in this case under section 143(3) read with section 148 of the IT Act after

recording the reasons as under :-

2

ITA NO. 410/JP/2010 A.Y. 2002-03 ACIT vs. M/s. M.K. Exim (India) Ltd., Jaipur.

" REASONS FOR ISSUING NOTICE U/S 148

M/s. M.K. Exim (India) Ltd.

1, Anand Chambers, B.H.C. Marg, Jaipur PAN No. AABCM 4995 N

The return of income for A.Y. 2002-03 declaring total income of Rs. 4,96,128/- was filed on 31.10.2002 at S. No. 35038. In the return filed the assessee has claimed exemption u/s 10B(4) of Income-tax Act, 1961.

For the purpose of exemption the profit derived from export of articles or things shall be the amount which bears to the profits of the business of the undertaking in the same proportion as the export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking.

A scrutiny of the assessment records of above company has revealed that an exemption of Rs. 3,24,81,050/- u/s 10B was claimed by the assessee and also allowed by the AO. The allowable amount of exemption works out to Rs. 29714664/- as per details given below.

Export turnover of EOU unit Rs. 15,39,35,866/- Total turnover Rs. 16,82,67,037/- (153935866+14331171 other income)

Business Income Rs. 3,24,81,050/-

Export turnover Total turnover x Export business profit i.e. 153935866/168267037 x 32481050 = Rs. 2,97,14,664/-

This has resulted in excess allowances of exemption Rs. 27,66,386/- (32481050 - 29714664) u/s 10B.

In view of the above facts, I have reason to believe that substantial income has escaped to assessment in the return filed for A.Y. 2002-

03 and provisions of section 147 are invoked. Notice u/s 148 has been issued."

3

ITA NO. 410/JP/2010 A.Y. 2002-03 ACIT vs. M/s. M.K. Exim (India) Ltd., Jaipur.

Accordingly, notice under section 143(2) was issued. It is noticed by the AO from the

details in respect of other income of Rs. 1,43,31,171/- that assessee also included

Interest income amounting to Rs. 12,14,227/-, Dividend income amounting to Rs.

32,550/- and Brokerage and Commission amounting to Rs. 12,736/- totalling Rs.

12,59,513/- apart from Excise Duty refund, Closing Stock of finished goods and Work-

in-progress. The AO observed that deduction under section 10B as claimed by the

assessee company in respect of interest income, dividend income and income from

brokerage and commission does not qualify for the deduction under section 10B of IT

Act, 1961 as these incomes are not business income in nature and they are in the

nature of income from Other sources and also do not form part of turnover. The AO

relied upon the following cases :-

Murli Investments vs. CIT 167 ITR 368 (Rajasthan High Court)

CIT vs. Raj. Land Development Corporation 211 ITR 597 (Raj. High Court)

CIT vs. Sterling Food, 237 ITR 579 (SC)

Pandian Chemicals Ltd. Vs. CIT 262 ITR 278 (SC)

In response to show cause notice the assessee submitted before the AO that assessee

also incurred interest expenditure amounting to Rs. 44,65,350/-. Thus the interest

income earned should be reduced from interest expenditure. Dividend income of Rs.

32,550/- is received from shares of SBBJ who are the bankers of the company.

Brokerage and commission of Rs. 12,736/- is received from M/s. Maersk India Ltd. 4

ITA NO. 410/JP/2010 A.Y. 2002-03 ACIT vs. M/s. M.K. Exim (India) Ltd., Jaipur.

which is a shipping company. Since the assessee company has direct dealings/booking

with them, they allow commission which is normally given by them to booking agents.

In view of this the said receipt is only recoupment of freight expenditure and should go

to reduce the freight expenditure rather than being treated as turnover. After

considering the assessee's reply, the AO held that interest income, dividend income and

income from brokerage and commission form part of the turnover. Thus assessee is

entitled to deduction under section 10B at Rs. 3,12,21,537/- only as against deduction

under section 10B claimed in the return of income at Rs. 3,24,81,050/-. Thus, the

difference of Rs. 12,59,513/- is liable to be assessed as income from other sources and

not income from business and profession.

3. Being aggrieved by the order of AO, assessee challenged reopening under

section 148 and also on merit before ld. CIT (A). The ld. CIT (A) vide order dated

18.01.2010 had quashed the assessment order by considering the assessee's reply. The

ld. A/R submitted before ld. CIT (A) that AO started the reassessment proceedings

based on audit objections of AG Department. There was no independent satisfaction of

the AO before reopening the assessment. The ld. A/R further submitted that on

inspection of appellant's file on 29.12.2009 it was found that the audit has raised the

issue of definition of total turnover which reason was recorded for issuing notice under

section 148. On that basis alone notice under section 148 was issued. Although the AO

was satisfied about the wrong issue being taken as the basis for reopening, he dropped

the issue of total turnover but proceeded to hold certain incomes to be not eligible for

10B exemption. It was submitted that AO hade not passed a speaking order while 5 ITA NO. 410/JP/2010 A.Y. 2002-03 ACIT vs. M/s. M.K. Exim (India) Ltd., Jaipur.

disposing off the objection against reassessment proceedings. It was further submitted

that reassessment was done on issue other than the issue on which the reopening was

done. In this regard the AO placed reliance on several judicial decisions including the

decision of Hon'ble Rajasthan High Court in the case of Shri Rajasthan Syntax Ltd. 212

Taxation 275 and the decision of Hon'ble Gujarat High Court in the case of Adani

Exports vs. DCIT, 240 ITR 224. The ld. CIT (A) has considered the submissions of the

assessee and also decisions of both the Hon'ble High Courts and held that reopening is

not permissible on borrowed satisfaction. The ld. CIT (A) observed that reopening of

the assessment was done by the AO only on the basis of audit objection. There is no

independent material available with the AO to justify the reopening. Accordingly he

quashed the reassessment and has not decided the case on merit.

4. This issue was challenged by the revenue before the Tribunal. This Bench has

decided Revenue's appeal in ITA No. 410/JP/2010 for A.Y. 2002-03 vide order dated

10.03.2011 and Revenue's appeal was dismissed.

5. The Revenue filed Miscellaneous Application against this order which has been

decided by this Bench in M.A. No. 46/JP/2012 (Arising out of ITA No. 410/JP/2010)) on

31.10.2014 wherein Revenue has claimed that Hon'ble Rajasthan High Court decision in

case of Ram Singh, 306 ITR 343, no longer holds after explanation 3 of section 147 has

been introduced in the IT Act with retrospective effect from 1989. This Bench has

considered the Miscellaneous Application and recalled the order passed by coordinate

Bench dated 10.03.2011. Accordingly case was refixed and reheard. 6

ITA NO. 410/JP/2010 A.Y. 2002-03 ACIT vs. M/s. M.K. Exim (India) Ltd., Jaipur.

6. The ld. D/R argued that the AO recorded the reasons under section 147 on the

ground that assessee's total turnover has been considered for claiming deduction under

section 10B and had not included other income in total turnover. During the course of

assessment proceedings, the AO further came to know that assessee has not excluded

other income i.e. interest income, dividend income and brokerage income which is not

related to export business. Therefore, he rightly reduced the other income from the

business income. Therefore, the ld. D/R requested that AO's order may please be

confirmed.

7. At the outset, the ld. A/R of the assessee argued that the AO reopened the

assessment proceedings on the basis of audit objection. He has drawn our attention on

the copy of audit objection submitted by him at page 7 & 8 of the Paper book and

argued that the ld. AO borrowed the satisfaction from the CAG audit objection. Further

even if it is treated that the reasons recorded by the AO as on the basis of reasons to

believe then the basis of reasons to believe had not been made part of addition in the

final order. It means the AO has recorded the reasons on which no addition has been

made by him. As evident from the deduction claimed by the assessee, it has not been

disturbed i.e. Rs. 3,24,81,050/-. The ld. AO had simply reduced the other income which

has not been treated by him as derived income from the 100 export oriented unit as per

section 10B of the IT Act for which he has relied upon the case of Hon'ble Delhi High

Court in the case of M/s. Ranbaxy Laboratories Ltd. Vs. CIT, (2011) 336 ITR 136 and

Hon'ble Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd. (2011) 331 ITR

236. The Hon'ble Delhi High Court in the case of Ranbaxy Laboratories Ltd. Vs. CIT 7 ITA NO. 410/JP/2010 A.Y. 2002-03 ACIT vs. M/s. M.K. Exim (India) Ltd., Jaipur.

(supra) held that the AO has not allowed under Explanation 3 of section 147 to include

the different items of income which was not connected or related with the reasons to

believe, on the basis of which he assumed jurisdiction. For inclusion of such items the

AO would be required to issue a fresh notice under section 148.

7.1. In case of Jet Airways (I) Ltd. (supra), the Hon'ble Bombay High Court had

expressed similar view and held that the AO accepted the objection of the assessee and

does not assess or reassess the income which was the basis of the notice, it would not

be open to him to assessee income under some other issue independently. It means

the Assessing Officer had to make addition on the basis of forming of reasons to believe

in assessment order, if not, the independent income cannot be covered under

Explanation 3. Therefore, he requested to delete the addition made by the AO.

8. We have heard rival contentions and perused the material on record and gone

through the reasons recorded by the AO under section 147 of the IT Act. It is

undisputed fact that AO had not borrowed the satisfaction from the audit party as

nowhere in the satisfaction he has mentioned the audit objection. The basis of

reopening of the assessment order was lesser figure of total turnover. As per his

working in reasons recorded excess deduction had been calculated at Rs. 27,66,386/-

on the basis of total turnover of Rs. 16,82,67,037/- whereas the assessee has taken

total turnover in computation made by the CA in prescribed form at Rs. 15,39,35,866/-

but this issue has not been considered by the AO at the time of completing the

assessment. He simply reduced the other income from total income Rs. 1,43,31,171/-

which includes interest at Rs. 12,14,227/-, dividend income of Rs. 32,550/- and 8 ITA NO. 410/JP/2010 A.Y. 2002-03 ACIT vs. M/s. M.K. Exim (India) Ltd., Jaipur.

brokerage and commission income of Rs. 12,736/- and business profit has been

calculated at Rs. 3,12,21,537/- in place of Rs. 3,24,81,050/- shown by the assessee. It

is clear that ld. AO had not made any addition on the basis of reopening or satisfaction

recorded. The decisions of both the Hon'ble Delhi High Court in the case of Ranbaxy

Laboratories Ltd. (supra) and Hon'ble Bombay High Court in the case of Jew Airways (I)

Ltd. (supra) are squarely applicable on the case of assessee. The Hon'ble Delhi High

Court in the case of Ranbaxy Laboratories Ltd has held as under :-

"Under Explanation 3 if during the course of the proceedings the Assessing Officer comes to the conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. For every new issue coming before the Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under section 148 . The Assessing Officer was satisfied with the justifications given by the assessee regarding the items of club fees, gifts and presents and provision for leave encashment, but during the assessment proceedings, he found the deduction under sections 80HH and 80-I as claimed by the assessee to be not admissible. He consequently proceeded to make deductions under sections 80HH and 80- I and accordingly reduced the claim on these accounts. The very basis of initiation of proceedings for which reasons to believe were recorded was income escaping assessment in respect of items of club fees, gifts and presents, etc., but while these items were not disturbed, the Assessing Officer proceeded to reduce the claim of deduction under sections 80HH and 80-I which was not permissible. The Tribunal was right in holding that the Assessing Officer had the jurisdiction to reassess issues other than the issues in respect of which proceedings were initiated but he was not justified when the reasons for the initiation of those proceedings ceased to survive."

9 ITA NO. 410/JP/2010 A.Y. 2002-03 ACIT vs. M/s. M.K. Exim (India) Ltd., Jaipur.

The Hon'ble Bombay High Court in the case of Jew Airways (I) Ltd. Has held as under :-

"Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147 . An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148 , he accepts the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a notice under section 148 would be necessary in the event of challenge by the assessee. The effect of section 147 as it now stands after the amendment of 2009 can therefore, be summarised as follows : (i) the Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year ; (ii) upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the Assessing Officer has to serve on the assessee a notice under sub-section (1) of section 148 ; (iii) the Assessing Officer may assess or reassess such income, which he has reason to believe, has escaped assessment and also any other income, chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section ; and (iv) though the notice under section 148(2) does not include a particular issue with respect to which income has escaped assessment, he may none the less, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section.

10 ITA NO. 410/JP/2010 A.Y. 2002-03 ACIT vs. M/s. M.K. Exim (India) Ltd., Jaipur.

In the impugned order, the AO has not made any addition on the basis of formation of

believe under section 147 of the IT Act. The AO has power as per Explanation 3 to

include the items of income which came to his notice subsequently in the course of

proceedings under this section for which no separate reopening is required, but in final

out come both the additions have to be made by the AO in assessment order which has

not been the case of AO during the year under consideration as he has not made any

additions on the basis of total turnover. Accordingly we confirm the order of ld. CIT (A)

and dismiss the revenue's appeal.

9. In the result, appeal of the revenue is dismissed.

Order pronounced in the open court on 17.07.2015.

Sd/- Sd/- ¼vkj-ih-rksykuh½ ¼Vh-vkj-ehuk½ (R.P.Tolani) (T.R. Meena) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 17th July, 2015 Das/

vkns'k dh izfrfyfi vxzsf'kr@Copy of the order forwarded to:

1. vihykFkhZ@The Appellant- The ACIT Circle-7, Jaipur.

2. izR;FkhZ@ The Respondent- M/s. M.K. Exim (India) Ltd., Jaipur.

3. vk;dj vk;qDr@ CIT

4. vk;dj vk;qDr¼vihy½@The CIT(A)

5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur

6. xkMZ QkbZy@ Guard File (ITA No. 410/JP/2010) vkns'kkuqlkj@ By order,

lgk;d iathdkj@Asst. Registrar