TaxTMI 
TaxTMI 
2012 (4) TMI 267
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.... behalf of the Assessee are agreed that the first question is broad enough to determine the fate of this appeal. We accordingly admit the appeal on question (a). With the consent of Counsel, the appeal is taken up for hearing and final disposal. 3. The appeal relates to Assessment Year 199899. The assessee filed a return of income of Rs.661.15 crores and claimed a deduction in the amount of Rs.11.41 crores under Section 80I, Rs. 218.62 crores under Section 80IA and Rs.20.20 crores under Section 80HH. The Assessing Officer assessed the income under Section 143(3) at Rs.814.66 crores and restricted the deduction claimed under Sections 80I, 80IA and 80HH to Rs.11.06 crores, Rs.201.08 crores and Rs.18.57 crores respectively. The Commissioner of Income Tax issued a notice under Section 263 on 21 March 2003 stating that on verification of the records, it was revealed that the following expenditure, though having a bearing on the profits of the units, had not been considered for allocation: "i) R & D Revenue expenditure Rs. 33,95,42,336/ ii) R & D Capital expenditure Rs. 12,39,73,377/ iii) Interest paid Rs. 32,16,45,000 /iv) Agency commission Rs. 35,59,51,682/ ( i....
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....h the provisions of the Act, is required to be apportioned between the income on the manufacture of tea and income from agriculture in the ratio of 40 : 60. According to the assessee, cess on green leaves was a part of the expenditure incurred in the business of growing and manufacture of tea. The Commissioner in his order under Section 263 relied upon the judgment of the Gauhati High Court while coming to the conclusion that cess on green leaves was liable to be claimed entirely against agricultural income. 5. Against the decision of the Commissioner under Section 263, the assessee filed an appeal before the ITAT which was allowed on 5 July 2007. On the issue of the cess on green leaves, the Tribunal noted that a similar issue had come up for consideration before its Kolkatta Bench in Bishanuth Tea Company Ltd. vs. Joint Commissioner of Income Tax,(2002) 77 TTJ 45 (Cal) wherein the amount paid on cess was held to be expenditure incurred in carrying on business of growing, manufacturing and sale of tea. The Tribunal held that the decision of the Gauhati High Court having been considered by the Kolkatta Bench, there existed a possible view in favour of the assessee, according to ....
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....ssessing Officer should have considered, while computing profits derived from the industrial undertakings to which the deductions under Sections 80I, 80IA and 80HH pertained as to whether the expenditure incurred on research and development had a direct nexus with the business of the undertaking. The Commissioner opined that a failure to do so has resulted in the order being erroneous in so far as it is prejudicial to the interests of the Revenue; (ii) The assessee has allocated the agency commission as between all the eligible units. There was no reason not to allocate the expenditure incurred on account of research and development between the eligible units though full deduction has been claimed against the profits of the business as a whole; (iii) The Commissioner has acted within his jurisdiction under Section 263 as expounded in the judgment of the Supreme Court in Malabar Industrial Company Pvt. Ltd. vs. Commissioner of Income Tax. (2003) 243 ITR 83 (SC) There was an incorrect assumption of the facts by the Assessing Officer. The Assessing Officer had proceeded to accept the assessment without application of mind. The assessee having failed to make a full and proper disclosur....
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....which a deduction was sought under Sections 80I, 80IA and 80HH without specifically establishing the existence of such a nexus. The order passed by the Commissioner was, therefore, held to be outside jurisdiction under Section 263 and it was urged that the decision of the Tribunal is consistent with the legal provisions. On this ground, it was urged that the appeal which arises before the Court under Section 260A out of an appellate order of the Tribunal on a decision under Section 263 would not warrant interference of the Court. Counsel submitted that the Commissioner had not interfered under Section 263 on the ground that the Assessing Officer had failed to carry out an enquiry, but on the ground that on merits, the Assessing Officer was not justified in granting deductions claimed under Sections 80I, 80IA and 80HH. The Tribunal, in the circumstances, could not have substituted the reasons which weighed with the Commissioner, nor could it have sustained the order passed by the Commissioner on other grounds. This, it is submitted, must be applied to the exercise of the appellate jurisdiction of this Court under Section 260A. 8. The rival submissions now fall for consideration. ....
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....Government has not been realised or cannot be realised. The judgment of the Division Bench has been followed by the Delhi High Court in Commissioner of Income Tax vs. Vikas Polymers.(2010) 236 CTR (Del) 476. 11. Now, it must be noted that subsequent to the judgment of the Division Bench of this Court in Gabriel India, the provisions of Section 263 were interpreted by the Supreme Court in the decision in Malabar Industrial Company (supra). In the case before the Supreme Court, the assessee had entered into an agreement for sale of a plantation. The purchaser not having adhered to the Schedule prescribed for payment by instalments, parties agreed to the extension of time on condition of payment of compensation/damages. In the return filed by the assessee, the amount was noted as compensation and damages for loss of agricultural income. The Assessing Officer accepted this and endorsed a nil assessment for the assessment year. The Commissioner in the exercise of his jurisdiction under Section 263 concluded that the amount was unconnected with any agricultural operation and was liable to be taxed under the head "income from other sources". Both, the Tribunal in appeal and the High Co....
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.... to the Supreme Court, would fall orders "passed without applying the principles of natural justice or without application of mind". Consequently, in view of the affirmative principle of law laid down by the Supreme Court, the exercise of the jurisdiction under Section 263 cannot be confined only to those cases where it can be held that the order of the Assessing Officer is not in accordance with law in the restricted sense in which that expression has been used in Gabriel India Ltd. As regards the order being prejudicial to the interests of the Revenue, the judgment in Malabar Industrial Company adverts to the decisions of the Karnataka and Gujarat High Courts and of the view of the Division Bench in Gabriel India, according to which, a loss of tax has been regarded as prejudicial to the interests of the Revenue. The Supreme Court has held that if due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it would certainly be prejudicial to the interests of the Revenue. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue. For instance, where ....
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....ses wherever incurred having nexus with the unit, need to be deducted to determine true profits of the unit. The assessee submitted a working of the deduction after considering administrative expenses and brought forward loss and on this basis, the Assessing Officer restricted the deduction under Section 80HH to Rs. 18.57 crores (as against the claim of Rs. 20.20 crores) and under Sections 80I and 80IA to Rs. 212.15 crores (as against the claim of Rs. 230.03 crores). The order of the Assessing Officer was, however, completely silent in regard to the allocation of expenditure incurred towards research and development. Exfacie, the order does not deal with that aspect at all. Consequently, when a notice to show cause was issued to the assessee under Section 263, the Commissioner stated that on verification of the records, expenditure under four heads though having a bearing on the profits of the units, had not been considered for allocation. The notice set out the case of the department that the expenditure under the four heads stated therein also had a bearing on the profits of the units and should be allocated proportionately. The assessee was, therefore, placed on notice that the ....
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....s order under Section 263 observed that the assessee spends money on research to improve upon its existing products to compete in the market and also to bring in new brands in the existing category of products. The Commissioner took note of the fact that research is an ongoing process and is inextricably linked with the business of assessee, including business in those products which are manufactured in the units for which deductions were claimed under Sections 80I, 80IA and 80HH. The Commissioner noted that there was common expenditure across all the products/brands and this expenditure had been allowed in computing the income under the head "profits and Gains from Business or Profession" for the whole of the business of the assessee. The logical corollary was that in computing the profits derived from an eligible unit, an appropriate part of the aforesaid expenditure would also have to be allocated. The order of the Commissioner contains a finding also to the effect that the expense should have been considered by the Assessing Officer in computing the profits derived from the industrial undertaking to which the deduction pertained. The failure to do so resulted in the order being....
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....d from the industrial undertaking, the expenditure incurred by the assessee inter alia on research and development was proximately and directly connected with the business of the undertaking. The Assessing Officer's order shows that he failed to do so. Consequently, the Commissioner was justified in taking recourse to his power under Section 263. The order passed by the Assessing Officer was without application of mind. The crucial issue namely, as to whether the expenses in question, bore a direct nexus with the undertaking in respect of which the deduction was sought under Sections 80I, 80IA and 80HH so as to warrant an allocation of expenditure between the units was not considered by the Assessing Officer. Even if the Assessing Officer were to be regarded as having proceeded on a certain hypothesis, he has acted on an incorrect assumption of the fact without a due and proper application of mind. That certainly, in our view, would warrant the exercise of the revisional jurisdiction under Section 263. 18. The Tribunal, in the course of its decision, relied upon the judgment in Wockhardt Ltd. vs. A.C.I.T.I.T.A. No.3991/Mum/2005 decided on 24/02/2006. We have perused the judgment....
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.... the fiction brought in by Rule 8, the entire income which is derived from the sale of tea grown and manufactured by the seller is required to be computed, in the first instance, as if it is an income derived from business. 40% of the income which is so derived, is then deemed to be income which is liable to tax. The expenditure which was incurred by the assessee on the payment of cess on green leaves, is expenditure which is liable to be taken into account in computing the income of the assessee from the business. As a matter of fact, this view has been taken by the Calcutta High Court in Income Tax Appeal 193 of 2002 decided in the case of the assessee itself on 4 February 2011. One of the questions which was formulated for the decision of the Calcutta High Court was to the following effect: " Whether in computing the composite income derived from sale of tea grown and manufactured by the assessee cess payable under the Assam Agricultural Income Tax Act on green tea leaves is allowable as a business expenditure in computing the composite income under Rule of the Income Tax Rules, 1962?" The Division Bench of the Calcutta High Court relied upon the decision in Commissioner o....