TaxTMI 
TaxTMI 
2017 (7) TMI 822
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....tions of law ITA No. 1189/2009 1998-99 20th June, 2008 ITA No. 4571/Del/2005 1. Whether the ITAT was correct in law in holding that there was no failure on the part of the Assessee to disclose truly and fully all material facts and in thereby concluding that the re-opening of the assessment was not justified in view of the proviso to Section 147 of the Act? 2. Whether the ITAT was correct in law in holding that for the purpose of deduction under Section 80-IA of the Act, the Assessee should be a small scale undertaking on the last date of the previous year relating to the initial/first assessment year and that the said requirement need not be satisfied in subsequent years? ITA No. 225/2009 2000-01 20th June, 2008 ITA No. 4572/Del/2005 Whether the ITAT was correct in holding that for the purpose of deduction under Section 80-IA of the Act the Assessee should be a small scale undertaking on the last day of the previous year relevant to the initial or first Assessment Year and that the said requirement need not be satisfied in the subsequent Assessment Years? ITA No. 690/2008 2001-02 17th August, 2007 ITA No. 2668/Del/2005 Whether the IT....
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....urposes of claiming the benefit of Section 80-IA of the Act. In terms of Notification No. SO 232(E) dated 2nd April, 1991, an industrial undertaking could be treated as a small scale undertaking under Section 11B of the Industries (Development and Regulation) Act, 1951 ('IDR Act') if its total investment in fixed assets i.e., Plant & Machinery ('P&M') did not exceed Rs. 60 lakhs. The notification was operative up to 9th December, 1997. 4. During the AY 1997-98, the total investment in fixed assets worked out to Rs. 1.07 crores. The stand of the Revenue was, therefore, that in the initial year the Assessee was not a small scale industrial undertaking and was not entitled to the deduction under Section 80-IA of the Act. While the Assessee claimed this deduction in the original return filed for AY 1997-98, it did not make any such claim in its revised return. Further, no such deduction was allowed by the AO for the AY 1997-98. 5. A fresh notification dated 9th December, 1997 was issued by the Central Government under Section 11B of the IDR Act. The limit of investment by a Small Scale Industry ('SSI') in fixed assets in the form of P&M was raised from Rs. 60 lakhs to Rs. 3 crores. T....
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....he legislature did not intend to give the benefit of deduction under Section 80-IA to these units continuously for 10 years as that would adversely affect the interests of SSIs in the competitive market." The CIT, accordingly, directed the AO to withdraw the deduction allowed under Section 80-IA of the Act and enhance the taxable income of the Assessee for AY 1999-00 by Rs. 3.61 crores. 9. Within three days thereafter, on 14th July, 2003, the AO issued a notice to the Assessee under Section 148 of the Act seeking to re-open the assessment for the AY 1998-99. This has given rise to the first question framed in the appeal relevant to this AY. 10. The facts relevant to the AY 2000-01 (ITA No. 225/2009) are that the return was filed by the Assessee for this AY on 30th November, 2000. Initially, no deduction under Section 80-IA of the Act was claimed. A revised return was filed on 12th October, 2001 claiming deduction of Rs. 6.40 crores under Section 80-IA of the Act. The case was taken up for scrutiny and the assessment was completed by the AO on 29th January, 2001 by restricting the deduction under Section 80-IA of the Act at Rs. 95,59,064. The Assessee challenged the assessment ord....
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....ed under Section 147 of the Act was held to be void ab initio. 14. Meanwhile, as already noticed, for AY 1999-00, the ITAT allowed the Assessee's appeal by order dated 1st March, 2004. Incidentally, that order is also under challenge by the Revenue in this Court by way of ITA No. 497/2004. Since that appeal involved an additional point regarding the impugned order not having been signed by both the members of the ITAT before one of them retired, it has been kept for hearing on a separate date. 15. As far as AY 2000-01 is concerned, an assessment order was passed on 28th February, 2005 under Section 143(3)/263 of the Act disallowing the deduction under Section 80-IA on the ground that the investment made in P&M up to 31st March, 2000 was more than the prescribed limit. By the order dated 1st September 2005, the CIT(A) allowed the Assessee's appeal thereby allowing the deduction. 16. Against the orders of the CIT(A) dated 9th September, 2005 for AY 1998-99 and 1st September, 2005 for AY 2000-01, the Revenue filed ITA Nos. 4571/De1./2005 and ITA No. 4572/De1/2005 respectively. By a common order dated 20th June, 2008, the ITAT dismissed both the appeals of the Revenue and held that ....
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....lary to foreign personnel under a Technical Collaboration Agreement. 21. The Assessee's appeal was allowed by the CIT(A) by an order dated 25th October, 2005. Relying upon the orders passed by the ITAT for AYs 1999-00 and 2001-02, the deduction under Section 80-IA of the Act was allowed. Further, as regards Section 40(a)(i) of the Act, the CIT(A) observed that the payment was only a re-imbursement of the expenditure and not payment of royalty and, therefore, the said provision was not applicable. Hence, the said addition was deleted. 22. The Revenue's appeal (ITA No. 89/Del/2006) was dismissed by the ITAT by order dated 5th September, 2008 following its orders dated 20th June, 2008 for AYs 1998-99 and 2000-01. Submissions of counsel for the Revenue 23. Mr Ashok Manchanda, learned Senior Standing counsel appearing for the Revenue, submitted as under: (i) The Assessee was not a small scale industry in the 'initial assessment year' i.e., AY 1997-98 as the investment in P&M was above Rs. 60 lacs, which was beyond the permissible limit. Even for the AY 1999-00, the investment in P&M was Rs. 6.42 crores which was more than double the specified limit of Rs. 3 crores. In the first/i....
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....status of an industrial unit had to be necessarily determined on the last date of each previous year and not just the one relevant to the initial investment year. An industry started in the latter part of a year could be so managed and arranged to qualify the criteria for an SSI unit even if it was a mega industry. If the interpretation adopted by the CIT(A) and the ITAT were to be accepted, then even big industrial houses would become eligible for deductions and that would defeat the very objective of providing the deduction. (iv) As far as Section 263 of the Act is concerned, although this was not a question framed for AYs 1999-00, 2002-03 or even 1998-99 and 2000-01, the Court should, in the interests of justice, permit the Revenue to urge that question as it had been inadvertently omitted to be framed for the said years. It is submitted that the wrong claim made by the Assessee justified the re-opening ordered by the CIT under Section 263 of the Act. Revenue was placed reliance on the decisions in CIT v. Delhi Press Patra Prakashan Ltd. (2013) 355 ITR 14 (Del); Saurashtra Cement & Chemical Industries Limited v. CIT (1994) 122 CTR 329 (Guj); CIT v. Paul Brothers (1995) 216 ITR....
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....(2000) 243 ITR 83 (SC); CIT v. Electro House (1971) 82 ITR 824 (SC); CIT v. Infosys Technologies Limited (2012) 214 ITR 293 (Kar.); CIT v. Abhishek Industries Limited (2006) 286 ITR 1 (P&H). 26. Mr. Manchanda gave a second set of written submissions on 1st May, 2017, this time running into 9 pages. Apart from repeating many of the arguments already made earlier, he also referred to a host of decisions of ITAT directly on the point favouring the Revenue. The Court declines to name all of them since in any event such decisions of the ITAT are not binding on it. Mr. Manchanda added one more decision of the Karnataka High Court to this list i.e., Sami Labs Ltd. v. ACIT (2011) 239 CTR 510 (Kar.). A third set of written submissions by way of rejoinder was filed by Mr. Manchanda on 11th May, 2017 where all of the above submissions were reiterated. Submissions on behalf of the Assessee 27. Mr. Ajay Vohra, learned Senior Counsel appearing for the Respondent/Assessee, took the Court through the Scheme of Section 80-IA and, in particular, Section 80-IA(7) which categorically stated that the benefit of deduction would be available for every subsequent AY after the 'initial assessment year'....
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....may not have complied with those conditions of eligibility in the subsequent AYs, the deductions nevertheless should be allowed. 30. Pressing for a liberal construction of a beneficial provision, reliance was placed by Mr Vohra on the decision of P.R. Prabhakar v. CIT (2006) 284 ITR 548 (SC). He also relied on the principle of consistency and referred to the decision in Shasun Chemicals & Drugs Ltd. v. CIT (2016) 388 ITR 1 (SC) and the decision of this Court dated 11th January, 2011 in ITA No. 889/2009 (CIT v. Rajasthan Breweries Limited) which was upheld by the Supreme Court by dismissal of the Revenue's Special Leave Petition [CC No. 1379/ 2014 (SC)] on 7th February, 2014. 31. On the question of change in the method of valuation of inventory, reliance was placed on the decision of Madras High Court in CIT v. Carborundum Universal Ltd. (1984) 149 ITR 759 (Mad.) which was upheld by the Supreme Court by the dismissal of the Revenue's SLP in CIT v. Carborundum Universal Ltd. (2004) 187 ITR 38 (SC). Reliance was also placed on the decision of this Court in CIT v. Indo Rama Synthetics Ltd. (2009) 180 Taxman 35 (Del) and in CIT v. Modi Rubbers Ltd. (No. 2) (1998) 230 ITR 820 (Del). On....
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....p, or the reconstruction, of a business already in existence; (ii) does not form by the transfer to a new business of machinery or plant previously used for any purpose; (iii) manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India. 36. Clause (a) of Sub-Clause (iv) of Sub-Section (2) of Section 80-IA states that in the case of an industrial undertaking not specified in sub-section (b) or sub-section (c), it begins to manufacture or produce articles or things or operate such plant or plants at any time between 1st April, 1991 and 31st March, 1995; Clause (b) of Sub-Clause (iv) of Sub-Section (2) of Section 80-IA states that in the case of an industrial undertaking located in an industrially backward State specified in the Eighth Schedule or set up in any part of India for the generation, or generation and distribution, of power, it begins to manufacture or produce articles or things or operate its cold storage plant or plants to generate power at any time between 1st April, 1993 and 31st March, 2000; Clause (c) of Sub-Clause (iv) of S....
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....ure or produce articles or things..." Under Sub-Clause 12(f) of Section 80-IA, an SSI is defined to mean an industrial undertaking which is "as on the last day of the previous year, regarded as a small-scale industrial undertaking under Section 11B of the IDR Act. 40. While Section 80-IA(12)(f) defines an SSI to mean an industrial undertaking that has the status of an SSI on the last day of the previous year (which expression 'previous year' is referable to the previous year relevant to the 'initial assessment year'), it is not meant to refer to a previous year relevant to each of the ten AYs for which benefit under Section 80-IA is availed. The very use of the word 'initial' preceding in the word 'assessment year' and a separate definition for that expression given under Section 80-IA(12)(c) is not without significance. It is only in relation to the 'initial' assessment year in which an undertaking begins to manufacture or produce articles or things that the following nine years are determined. The ITAT orders 41. There is little dispute on the essential fact that in the present cases. The year in which the undertaking began manufacturing or producing articles and things was d....
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....vestment in P&M on the last date of previous year was above Rs. 60 lacs. He referred to an order dated 11th July, 2003 passed by the CIT under Section 263 of the Act for AY 1999-00. However, relevant to AY 1998-99, the factual determination by the CIT(A) and the ITAT is that the Assessee did fulfil the eligibility condition. The total investment in P&M was worked out to be Rs. 41.19 lacs. This fact has not been controverted by the Revenue. 45. The Auditor's report ended on 31st March, 1997 and was in fact enclosed with the order dated 5th December, 2003 passed by the CIT under Section 263 of the Act for AY 2001-02. This showed the total value of P&M as per Section 11B of IDR Act as Rs. 41,19,373/-. It was explained how certain items had to be excluded as per the notification dated 1st January, 1993 issued under the Act, which included cost of equipments, cost of installation of P&M, cost of research and development, cost of procurement and installation of wires, electrical control panels etc., cost of gas producer plant, transportation charges for indigenous machinery from the place of manufacturing to the factory site, charges paid for technical know-how for erection of P&M, cost....
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....us year relevant to the 'initial assessment year' as defined in Section 80-IA(12)(c) and not for any other purpose. This explains why this expression 'previous year' is not used anywhere else in Section 80-IA of the Act. In fact, when the entire section is read as a whole, it becomes very clear that the benefit is to be for ten continuous AYs after the initial AY. 49. It is also in consonance with the changing criteria for recognition of an SSI under the IDR Act. If the eligibility for deduction under Section 80-IA were to be linked to such changing criteria beyond the initial AY, then the section itself would become non-workable. It would simply not be possible under Section 80-IA for the benefit to be extended to 'ten consecutive assessment years' under Section 80-IA(6)(ii) specific to an SSI if these ten years would include the initial assessment year. Even if these need to be 'consecutive', the benefit must be extended irrespective of whether in the AYs following the initial assessment year an SSI unit seizes to be as such either because of increased investment in P&M or because of the change in eligibility limit in terms of the notification in the IDR Act. Therefore, even fro....
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.... was granted for the initial year could be withdrawn for the subsequent years for breach of service conditions. The Court answered the question in the negative following the decision of the Gujarat High Court in Saurashtra Cement & Chemical Industries v. CIT (supra). 53.1 As far as this Court is concerned, the question that arose in Praveen Soni v. CIT (supra) was whether an Assessee which failed to claim the deduction under Section 80-IB of the Act in the initial AY i.e., 1998-99 was disentitled to claim such deductions in the subsequent AY 2004-05 despite the fact that the undertaking fulfilled the conditions for claiming deductions under Section 80-IB of the Act. The facts were that in the first year of manufacture, the Assessee did not claim the deduction i.e., in AY 1998-99. Therefore, in that AY it could not be examined whether the Assessee fulfilled the conditions prescribed in Section 80-IB of the Act. It also did not claim this benefit in the succeeding years. 53.2 Like Section 80-IA of the Act, even Section 80-IB of the Act provides that the benefit is available for ten successive AYs. Though for the first time, the Assessee claimed benefit for AY 2004-05, it was pointe....
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....t claim in that year would not mean that he would be deprived from claiming this benefit till the assessment year 2007-08, which is the period for which his entitlement would accrue. The provisions contained in section 80-IB of the Income Tax Act, nowhere stipulates any condition that such a claim has to be made in the first year failing which there would be forfeiture of such claim in the remaining years. It is not the case of the assessee that he should be allowed to avail this claim for 10 years from the assessment year 2004-05. The assessee has realized his mistake in not claiming the benefit from the first assessment year 1998-99. At the same time, the assessee foregoes the claim up to the assessment year 2003-04 and is making the same only for the remaining period. There is no reason not to give the benefit of this claim to the assessee if the conditions stipulated under section 80- IB of the Income-tax Act are fulfilled." 55. The above observations squarely cover the case in favour of the Assessee in the present case. The Assessee in the present case was entitled to the benefit from the initial AY i.e., AY 1997-98. It, therefore, could not have been denied this benefit for....
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....on of which are in pari materia with the provisions of section 80-IA(2)(iv) as obtaining in the initial year. The Tribunal's direction to the Assessing Officer to ascertain as to whether the respondent/assessee had fulfilled the conditions set out in section 80-IA(2)(iii) of the Act as applicable in the initial year, that is, whether the respondent/assessee produced or manufactured any article or thing not being an article or thins specified in the Eleventh Schedule to the Act, in order to be eligible for deduction under section 80-IB for a period of ten years commencing from the assessment year 1994-95, provided the other condition, such as, employment of requisite number of persons is also satisfied by the respondent/assessee cannot be faulted with." 59. This Court in CIT v. Natraj Stationery Products Pvt. Ltd. (supra) upheld the order of the ITAT and dismissed the appeals meaning thereby that the above decision of the ITAT interpreting Section 80-IA was in fact upheld by this Court, the net result being that the Assessee in that case could not be denied the benefit under Section 80-IA(2) as long as it satisfied the eligibility condition in the initial AY. This was notwithst....
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....r relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things (such assessment year being the initial assessment year) "and each of the seven assessment years immediately succeeding the initial assessment year. This necessarily implied once the issue as to eligibility under section 80-1 of the Act was examined and allowed in the initial assessment, the same was allowable in the subsequent years also unless there was any material change in the succeeding years." 61. In CIT v. Tata Communications Internet Services Ltd. (supra), it was clarified by the Court with specific reference to Section 80-IA that "the bar as provided under section 80-IA(3) is to be considered only for the first year of claim for deduction under section 80-IA": "20. ...The bar as provided under section 80-IA(3) is to be considered only for the first year of claim for deduction under section 80-IA. Once the assessee is able to show that it has-used new plants and machinery which has not been 'previously used for any purpose and the new-undertaking is not formed by splitting up or reconstruction of business already in existence, it is entitled to th....
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....re possible, the courts have to lean in favour of extending the benefit of deduction to an assessee who has availed the opportunity given to him under law and has grown in his business. Therefore, we are of the view, if a small-scale industry, in the course of 10 years, stabilizes early, makes further investments in the business and it results in it's going outside the purview of the definition of a small scale industry, that should not come in the way of its claiming benefit under Sec.80IB for 10 consecutive years, from the initial assessment year. Therefore, the approach of the authorities runs counter to the scheme and the intent of the Legislature..." Conclusion on Section 80 IA 63. In view of the authoritative pronouncements of the Courts as discussed hereinbefore, the Court is unable to accept the plea of the Revenue in the present case that: (i) The Assessee here did not fulfil the eligibility condition for the initial AY i.e., 1997-98; and (ii) That notwithstanding that it may have fulfilled the eligibility conditions in the initial AY, it nevertheless had to fulfil the such eligibility condition for every one of the ten consecutive AYs inclusive of the initial A....
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....er Section 263 cannot be exercised to revisit debatable issues is well settled. 69. Illustratively, reference may be made to the decision in Commissioner of Income-Tax v. Max India Ltd. (supra) where the Punjab and Haryana High Court reiterated the well-settled proposition following the aforementioned decisions of the Supreme Court in Malabar Industrial Co. Ltd. v. CIT (supra). 70. Even on merits, the order under Section 263 was not warranted. It is contrary to the principle of consistency. The deductions allowed in the earlier AYs should not be withdrawn unless the circumstances have changed. Reference may be made to the decisions in Shasun Chemicals & Drugs Ltd. v. CIT (supra) and Rajasthan Breweries Limited v. CIT (supra). Valuation of inventory 71. On the question of change in the method of valuation of inventory, it has been explained by the Madras High Court in CIT v. Carborundum Universal Ltd. (supra) that if an Assessee is called upon to apply a new method of valuation to the opening stock of the accounting year, then in consequence the value of closing stock of the year will also get altered and this would result in the modification of the assessment in the previous yea....