TaxTMI 
TaxTMI 
2010 (3) TMI 1104
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....ls) has erred both on facts and in law in upholding the action of the Assessing Officer for taxation of interest income of Rs. 16,49,441 under the head "Income from other sources", instead of holding that the same was eligible for set off against the expenditure incurred on interest of Rs. 19,60,038 while computing the profits of business of 100 per cent Export Oriented Unit (';EOU'; for short) of the assessee-company. The assessee also moved an additional ground vide letter dated 15-11-2007 to the effect that the order of assessment framed by the Assessing Officer is without jurisdiction as no notice under section 143(2) of the Act was issued and served after the assessee had filed the return of income in pursuance of notice under section 148. 1.1 In regard to the additional ground, it was submitted by the ld. counsel for the assessee that all the facts are available on file and it is purely a question of law. It was stressed that no new fact is required to be brought on record. Therefore, it was argued that the ground should be admitted in view of the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (';NTPC';) v. CIT (1998) 229....
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....r may be cancelled. 2.1 The facts in this regard are that the return of income was filed on 28-11-1998 declaring nil income. The same was processed under section 143(1)(a) on 26-4-1999 at nil income as declared. An order under section 154 was passed on 28-5-1999, in which the income was assessed at Rs. 16,49,441, being interest on the fixed deposits. This order was rectified under section 154 on 21-10-1999 assessing the income at nil by holding that there was no evidence on record to deny exemption under section 10B on the interest income. This rectification order was made on the basis of two letters dated 4-10-1999 and 7-10-1999 filed by the assessee to the effect that the assessee is an EOU. Thereafter, the Assessing Officer recorded reasons for making assessment under section 147 on 17-3-2003, which read as under : - "M.K.R. Frozen Food Exports Ltd. Assessment year 1998-99, 17-3-2003. The assessee is engaged in the business of Export of Frozen Foods and meals. The profit from business is claimed exempt under section 10B. During the year under consideration, the assessee received interest of Rs. 16,49,441, which is adjusted against interest paid by assessee. The method shown b....
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....uch an approval could not have been obtained without forwarding the reasons to the Additional Commissioner although, as mentioned earlier, such an approval was not required in law. Notwithstanding the aforesaid observation, we also mention that all acts done in discharge of official duty are assumed to be done in regular course unless proved otherwise, and the onus of such proof is on the party which disputes the fact. Apart from making only a verbal submission, no evidence was brought on record by way of opinion of hand-writing expert, report of hand-writing expert, record from the Additional CIT, etc. Therefore, we have no reason whatsoever to agree with the ld. counsel that this note was not initialed by the Assessing Officer. Further, only initialing the note is sufficient for the purpose of the Act so as to assume jurisdiction. Therefore, this argument is dismissed. 2.5 Coming to validity of issuance of notice under section 148, it was submitted that the Assessing Officer had processed the return of income at nil income. Thereafter, the income was revised under section 154 to Rs. 16,49,441 on 28-5-1999. The income was finally reduced to nil on 21-10-1999. Nothing hap-pened be....
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....turn is processed under section 143(1)(a) and, thus, there is no question of change of opinion when reasons are recorded for making assessment under section 147. It was further submitted that there were other reasons for reopening the assessment, as mentioned by the ld. CIT (Appeals) in his order. In the order for assessment year 2001-02, the Assessing Officer took a stand that interest received by the assessee from the fixed deposits was taxable under the residuary head and, thus, deduction under section 10B was not applicable to such income. This view was confirmed by the CIT (Appeals) in order dated 3-3-2003 in Appeal No. 112/2002-03. This order of the ld. CIT(A) constituted information for the Assessing Officer on the basis of which he recorded reasons for this year on 17-3-2003. In the light of these facts, it was argued that the reopening was justified in the light of the decisions of Hon'ble Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT (1979) 119 ITR 997 and Kalyanji Mavji & Co. v. CIT (1976) 102 ITR 287. 2.7 In the rejoinder, the ld. counsel submitted that the factum of receipt of the appellate order for assessment year 2001-02 has not been me....
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....and in his way if the condition of "reason to believe" is satisfied. With these preliminary remarks, we may examine other submissions of rival parties by taking into account the case law under existing and the pre-existing provisions in the matter. 2.9 The relevant law applicable in the case of Indian & Eastern Newspaper Society (supra) has been extracted by the Hon'ble Court on page 1000, which reads as under : - "147. If - (a)the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or (b)notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recomputed the loss....
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....nd truly all material facts necessary for the assessment in a case where assessment was made under section 143(3). As mentioned earlier, the earlier law contains additional condition of "information". The provision contained in section 34(1)(b) of 1922 Act was similar in contents to the provision contained in section 147(b) of the 1961 Act. Therefore, if this case can stand the test laid down in Kalyanji Mavji & Co.';s case (supra) and Indian & Eastern Newspaper Society';s case (supra), there will be no reason to come to a conclusion that assumption of jurisdiction in this case was bad in law. In the case of Kalyanji Mavji & Co. (supra), a reference was made to the decision of Hon'ble Bombay High Court in the case of CIT v. H. Holck Larsen (1972) 85 ITR 467, in which following observations were made : - "What is obligatory in order to apply section 34(1)(b) is that he must have "information" in his possession in consequence of which he has reason to believe that the income has escaped assessment or is under-assessed, etc. The distinction really consists in a change of opinion unsupported by subsequent information on the one hand and a change of opinion based on informa....
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....to pronounce the state of law. The audit party is not such a formal source. However, it is clear to us that the CIT (Appeals) is an authority under the Income-tax Act, which is entrusted with the work of determining facts and position of law in dispute before him. Such quasi-judicial authority had pronounced that the income by way of interest was required to be taxed under the head "Income from other sources". The Assessing Officer, after receipt of this order, initiated assessment proceedings under section 147. The case of Indian & Eastern Newspaper Society (supra) supports his action even under the more stringent provision which contained additional requirement of "information". In such a circumstance, there is no reason to hold that the assumption of jurisdiction was bad in law. The assumption of jurisdiction by the Assessing Officer in this case finds direct support from the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra). At pages 511 and 512, the Hon'ble Court mentioned that the scope and effect of section 147 as substituted with effect from 1-4-1989 are substantially different from the provisions as they stood prior to ....
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....The ld. counsel took some objections in this regard. The first one is that the note was recorded on the basis of law which was not applicable to this year. We are of the view that this argument is misplaced. The law, as it existed, allowed the deduction of profits and gains derived from an EOU from export of articles or things or computer software. The Assessing Officer has clearly mentioned that interest on fixed deposits is to be taxed under the residuary head. The intent of the use of expression that interest income cannot be formed as part of export turnover was that earning of interest income cannot be equated with profits and gains derived from export of articles or things or computer software. Therefore, we do not agree with him that the Assessing Officer invoked provisions of the law applicable with effect from assessment year 2001-02. Accordingly, it is further held that the ratio of the decision in the case of Siemens Information Systems Ltd. (supra) is not applicable to the facts of this case. On the contrary, he recorded the note on the basis of law as it existed for assessment year 1998-99. 2.13 It was also the submission of the ld. counsel that in deciding this issue....
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....ion of Hon'ble Delhi High Court that the assessment for assessment year 1987-88 was completed under section 143(3) and thereafter it was reopened with a view to bring to tax certain amounts aggregating to Rs. 43,91,603 comprising of interest claim of Rs. 41.28 lakhs, guest house expenses of Rs. 1.76 lakhs, advertisement expenses of Rs. 83,303 and club expenses of Rs. 4,300. The assessment was reopened under section 147. The assessee objected to the reopening particularly on the ground that the Tribunal had allowed similar expenses for assessment year 1986-87 on appeal. The Hon'ble Court examined the provisions regarding reopening in the 1922 Act and in the 1961 Act. The Hon'ble Court also examined the reasons recorded by the Assessing Officer and the affidavit filed by him. It transpired that the Assessing Officer stated that he wrongly allowed the deductions in the original assessment and, therefore, he was of the opinion that income had escaped assessment. Admittedly, nothing had happened between the completion of original assessment and formation of opinion by the Assessing Officer. There was no change in law and no new material came on the record. No information was....
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....d that the principle of "change of opinion" will have no application where there was no formation of opinion at all and it seems to us that this part of the judgment applies even to an assessment made under section 143(3). We have already held that processing under section 143(1)(a) and an order under section 154 thereon do not lead to inference of application of mind. Therefore, there could be no question of change of opinion. 2.15 Thus, it is held that the ld. CIT(A) was right in holding that the Assessing Officer properly assumed jurisdiction under section 147 and consequently notice issued under section 148 was valid in law. Therefore, ground No. 1 is dismissed. 3. The additional ground is that the Assessing Officer did not have jurisdiction to make assessment under section 143(3), read with section 148 as notice under section 143(2) was neither issued nor served on the assessee after making of the return under section 148. 3.1 The ld. counsel drew our attention to clause (b) of proviso to section 148, being in the nature of a validation provision, which provides that for making the assessment, reassessment or re-computation of income, every notice served before the expiry o....
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....neither issued nor served on the assessee. 3.2 In reply, the ld. DR produced the case record maintained by the ITO and showed to us and the ld. counsel an office copy of notice under section 143(2) dated 21-4-2003 issued to the assessee. This notice is available on page 31 of the case record. She also showed two other notices dated 11-11-2003, issued under section 142(1). Our attention was also drawn to paragraph 1 of the assessment order which makes a mention that the case was selected for scrutiny and notice under section 143(2)(ii) was issued, in response to which Shri Anil Kakkar, C.A., attended and made oral as well as written submissions. However, she was not able to bring on record the outward dak register, which could prove the service of notice, on the ground that the matter is very old and such record is not traceable. 3.3 In the rejoinder, the case of the ld. counsel was that the revenue has to show not only the issuance of the notice but also its service on the assessee, as held in the case of Venkat Naicken Trust (supra). 3.4 We have considered the facts of the case and rival submissions. The additional ground in respect of non-issuance and non-service of notice und....
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....f assessment proceedings and ending with 14-11-2007, the ld. counsel now wants production of all the records to prove the service after lapse of a long period of time. Further, a portion of the additional ground regarding non-issuance of the notice is found to be false on examination of records, which was also shown to the ld. counsel. In the circumstances narrated above, it is clear that the ld. counsel wants revenue to do the impossible of bringing missing record of service of notice without doing anything being done on the part of the assessee. We are of the view that none of the parties can be forced do anything which is impossible. The tenor of the order, which speaks of issuance of notices under sections 148, 143(2) and 142(1) leads to an irresistible conclusion of fact that notice under section 143(2) was served on the assessee in due course just as other notices were admittedly served on him. Therefore, on peculiar facts of this case, we are of the view that the notice has been served on the assessee. Otherwise, he has been given full opportunity of being heard under this section as well as section 142(1). Thus, this ground is also dismissed. 4. Coming to the merits, the s....
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....ee was engaged in the business of export and the whole of the profit was derived from this activity only. Therefore, the whole of the income, including the interest income, was deductible under section 80HHC(3)(a). Further, reliance was placed on the decision of Hon'ble Delhi High Court in the case of CIT v. Shri Ram Honda Power Equip. (2007) 289 ITR 475in which it was held that where surplus funds are parked with the bank and interest is earned thereon, it can be categorized as income from other sources only. Such income is outside the ring of profits and gains of business. There could also be another category of cases where the exporter is required to keep money in fixed deposits mandatorily in order to avail of credit facility. Interest earned on such deposits for the purpose of availing credit facility from the bank does have an immediate nexus with export business. The finding to the contrary will thus apply only if the Assessing Officer had held that the interest income is business income. Reliance was also placed on the decision of Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. v. ITO (2009) 315 ITR 255. It was held that funds by way....
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....P. ) Ltd. (2003) 260 ITR 258, in which it was held that when surplus funds are invested in fixed deposits, interest income earned thereon is assessable as income from other sources. Reliance was also placed on the decision of Hon'ble Kerala High Court in the case of K. Ravindranathan Nair v. Dy. CIT (2003) 262 ITR 669, in which it was held that interest earned on fixed deposits was not the income derived from export business and, therefore, it was not entitled to deduction under section 80HHC. Reliance was also placed on the decision of Hon'ble Kerala High Court in the case of CIT v. G. Satheesh Nair (2003) 264 ITR 377, in which it was held that interest earned on term deposits placed with the bank will not partake the character of business income so as to allow deduction under section 80HH. Such an income can only be categorized as income from other sources. It was also submitted that the assessee has accepted the decision of the lower authorities in assessment year 2002-03 and, therefore, principle of consistency demands that the ground of the assessee may be dismissed. 4.5 We have considered the facts of the case and rival submissions. Section 10B, as it existed for the....
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....orrowings from the bank and placing fixed deposits with the bank. The interest earned from the bank did not have direct or proximate connection with the business of export of the EOU. Therefore, interest so received was taxable under the residuary head. 4.7 In the case of Snam Progetti S.p.a. (supra), the Hon'ble Court mentioned that the question to be seen is whether interest income is also derived from the business activity. If it is so derived, then the mere fact that it is taxed under a different section will make no difference. In these circumstances, it was held that interest on bank deposits is also business income for the purpose of set-off of the carried forward losses. From the decision, it is clear that the assessee had not come to India for earning interest from the banks but to conduct business on a large scale. The Court held interest income to be business income only for the purpose of set off. The facts of case at hand are distinguishable because the question before us is not only whether interest income is business income for the purpose of set-off but whether interest income can be said to be derived from the EOU. 4.8 Coming to the case of Puneet Commercial ....
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....reated as income from other sources. The facts of this case are also distinguishable as we are not dealing with a case where interest income is earned during the course of setting up of the business. It is the case of a going concern and interest has been earned after the business has been set up. In absence of requirement of proving that it was mandatory to keep deposits with the bank to avail of credit, the only conclusion which can be drawn is that profits generated in the course of business were found to be surplus and placed with the bank for earning interest. 4.11 The ld. counsel had also relied on the order of ITAT, Mumbai Bench in the case of Livingstones Jewellery (P.) Ltd. v. Dy. CIT (2009) 31 SOT 323 for assessment year 2003-04, the summary of which was placed before us. In that case, it is seen from the summary that the decision was that all the profits which have nexus with the business of the undertaking will qualify for deduction. The facts stated in the summary are that the assessee had placed fixed deposits with the bank for obtaining credit facilities. Therefore, it was held that such interest had nexus with the business and, therefore, the interest income was in....