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Case Number

Income-tax Appeal No. 147 of 2002

Attorney(S)

Judges

Dr. S. Radhakrishnan
S.J Kathawala, JJ.

Acts

SECTION 263 INCOME TAX ACT 1961

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Smart Summary

Summary of Opinion — S.J. Kathawala, J.

Factual and Procedural Background

The Revenue appealed against the Income-tax Appellate Tribunal, Mumbai Bench's order dated August 24, 2001 (I.T.A No. 2536.Mum/1999) concerning the assessment year 1995–96. The appeal was admitted by the Court on August 11, 2004 on a substantial question of law regarding whether the Tribunal was justified in upsetting the Commissioner's order under section 263 of the Income-tax Act, 1961.

Relevant facts (as recorded in the opinion):

The assessee carried on export of garments and domestic sales.
For A.Y. 1995–96 the assessee filed a return on November 30, 1995 declaring total income of Rs. 3,51,020. The return was processed under section 143(1)(a) on October 18, 1996 and a notice under section 143(2) was issued on August 7, 1996.
On October 30, 1996 the Assessing Officer requested details to explain an increase in expenses. The assessee replied on November 5, 1996 with details of export sales, local sales, job-work charges, purchases, duty drawback, sale of export entitlements, audit reports (Form Nos. 3CA, 3CD and 10CCAC) and other particulars.
The Assessing Officer's order dated December 13, 1996 (recorded in the opinion) noted receipt of remittances, filing of audit reports and audited books, accepted the book results and computed net profit for export business at Rs. 65,07,090 and net profit for local business at Rs. 3,69,491. The Assessing Officer allowed deduction under section 80HHC of Rs. 65,07,090 (the entire export net profit).
The Commissioner issued a notice under section 263 contending that deduction should be proportionate under section 80HHC(3) and not the entire export profit, and by order dated March 30, 1999 recalculated and allowed deduction of Rs. 41,91,131 instead of Rs. 65,07,090, holding the Assessing Officer's order erroneous and prejudicial to the Revenue.
The assessee appealed to the Income-tax Appellate Tribunal which, by order dated August 24, 2001, quashed the Commissioner's order. The Tribunal held the Assessing Officer's view was a possible view, relied on authorities cited by the assessee, and found that the condition precedent for invoking section 263 did not exist.
The Revenue filed the present appeal challenging the Tribunal's order; the question of law framed related to the correctness of the Tribunal in upsetting the Commissioner's order under section 263.

Legal Issues Presented

Whether on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was justified in upsetting the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961?

Arguments of the Parties

Revenue's Arguments

The Revenue conceded that the Assessing Officer's view was a possible view, but contended that the Assessing Officer did not give any reasons for allowing deduction of the entire export net profit of Rs. 65,07,090 under section 80HHC — i.e., the order lacked reasons and was passed without application of mind.
Before the Court the Revenue's counsel stated he had no other submission beyond the contention that the Assessing Officer's order lacked reasons.

Assessee's Arguments

The assessee submitted that the Assessing Officer had applied his mind: the AO asked for particulars, the assessee supplied them, and after discussion the AO allowed the deduction for the entire export profit.
The assessee relied on this Court's decision in Commissioner of Income-Tax v. Gabriel India Ltd. ([1993] 203 ITR 108) to argue that an order of an Income-tax Officer cannot be labelled "erroneous" simply because the order did not contain elaborate discussion; material and explanation given to the AO suffices to show application of mind.
The assessee also relied on earlier authorities placed before the Commissioner and Tribunal (as recorded by the Tribunal) — including V.D. Swami & Co. Ltd. and Bajaj Tempo Ltd. — to support the view that identifiable export profits can be deducted and that the scope of interference under section 263 is limited.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
V.D. Swami and Co. Ltd. v. Deputy CIT, [1993] 44 ITD 91 (Mad)	As recorded by the Tribunal, held (as relied on by the assessee) that if export profits were clearly identifiable, such profits were available for deduction.	The Tribunal relied on this decision (as placed before it by the assessee) in concluding that the Assessing Officer's view to allow deduction of identifiable export profits was a possible view; the Court noted the Tribunal's reliance when upholding the Tribunal's conclusion.
Bajaj Tempo Ltd. v. CIT, [1992] 196 ITR 188 (SC)	Cited before the Tribunal in the context of the scope of interference under section 263 (i.e., limits on supervisory interference by the Commissioner).	The Tribunal treated this decision (as relied on by the assessee) as supporting the proposition that section 263 should not be invoked to overturn a subordinate order merely because it is unfavourable; the Court accepted the Tribunal's approach.
Commissioner Of Income-Tax v. Gabriel India Ltd., [1993] 203 ITR 108 (This Court)	Held that to exercise powers under section 263 there must be material before the Commissioner to consider that an order was erroneous or passed without making any inquiry; an assessing officer's decision cannot be held "erroneous" simply because the order lacks elaborate discussion if material and explanation existed.	The Court expressly relied on this decision to reject the Revenue's submission that the Assessing Officer had not applied his mind; the Court held Gabriel India supports the proposition that lack of detailed discussion in the AO's order does not automatically make it erroneous for purposes of section 263.

Court's Reasoning and Analysis

The Court proceeded step-by-step, closely following the facts and the record before the Assessing Officer, the Commissioner and the Tribunal:

The Court noted the procedural history: the AO asked for particulars (letter dated October 30, 1996) and the assessee furnished detailed replies and documentary material (letter dated November 5, 1996), including audited books and statutory audit reports (Forms 3CA, 3CD and 10CCAC).
The AO's order (dated December 13, 1996) recorded the receipt of remittances, availability of audit reports and that export profits were identifiable; after discussion the AO computed profits and allowed deduction of Rs. 65,07,090 under section 80HHC.
The Commissioner issued a section 263 notice and subsequently set aside the AO's order because, in the Commissioner's view, deduction should have been proportionate under section 80HHC(3)(a); the Commissioner recalculated the deduction at Rs. 41,91,131 and treated the AO's order as erroneous and prejudicial to the Revenue.
The Tribunal quashed the Commissioner's order, finding the AO's view to be a possible view and observing that the scope of section 263 is limited — it should not be used to overturn every unfavourable or differing view. The Tribunal recorded reliance on decisions placed by the assessee.
Before this Court the Revenue conceded that the AO's view was a possible view, but argued the AO had not given reasons and thus had not applied his mind. The assessee countered that the AO had sought particulars, examined the material and reached a view, and relied on this Court's decision in Gabriel India to show that lack of detailed discussion alone does not demonstrate absence of application of mind.
The Court accepted the assessee's submissions and Gabriel India. It found that the AO did request and consider detailed particulars and that the AO's allowance of deduction followed consideration of those materials. The Court rejected the Revenue's contention that the AO's order was passed without application of mind merely because the AO's order did not contain elaborate discussion.
The Court further observed that the Commissioner had set aside the AO's order because he disagreed with the AO's view; mere disagreement, without material showing the AO's order was erroneous or prejudicial to Revenue, is not sufficient to invoke section 263. Given that the AO's view was a possible view, the "condition precedent" for exercise of section 263 jurisdiction did not exist.
On that basis the Court concluded that the Tribunal was justified in quashing the Commissioner's order under section 263.

Holding and Implications

Holding: The Court held that the Income-tax Appellate Tribunal was justified in upsetting the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961. The substantial question of law was answered in favour of the assessee and against the Revenue, and the Revenue's appeal was dismissed. There is no order as to costs.

Implications:

Direct effect: The Commissioner's order under section 263 (which reduced the deduction allowed under section 80HHC) was quashed and the Tribunal's order restoring the Assessing Officer's allowance of the entire export profit deduction is sustained.
The Court's decision reiterates that section 263 should not be invoked merely because the Commissioner disagrees with a possible view taken by an Assessing Officer, and that lack of elaborate discussion in an AO's order does not automatically establish lack of application of mind where the AO has sought and considered material.
No broader new precedent was proclaimed by the Court beyond applying existing principles (including those in Gabriel India) to the facts of this case; the decision resolves the appeal between the parties without stating any novel general rule beyond the authorities relied upon.

This summary is restricted to and based exclusively upon the contents of the provided opinion. No information not contained in the opinion has been added.

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Commissioner Of Income-Tax v. Design And Automation Engineers (Bombay) P. Ltd.

S.J Kathawala, J.:— The above appeal is filed by the Revenue impugning the order dated August 24, 2001, passed by the Income-tax Appellate Tribunal, Mumbai Bench in I.T.A No. 2536.Mum/1999 filed by the assessee for the assessment year 1995–96.

2. The above appeal was admitted by this court on August 11, 2004 on the following substantial question of law:

“Whether on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was justified in upsetting the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961?”

3. The relevant facts giving rise to the present appeal are set out hereunder.

(i) The assessee is engaged in the business of exporting garments as well as sales in the domestic market.

(ii) For the assessment year 1995–96 the assessee filed return of income on November 30, 1995 declaring the total income at Rs. 3,51,020. The return of income was processed under section 143(1)(a) on October 18, 1996. Notice under section 143(2) was issued to the assessee on August 7, 1996.

(iii) Vide the Department's letter dated October 30, 1996 the assessee was asked to file the details and to explain the reasons for increase in the expenses. The assessee by its letter dated November 5, 1996 filed details of the export sales, local sales, job work charges received, purchases, duty drawback, sale of export entitlements, job work charges paid and other expenses and also reasons for increase in the expenses. It was also explained that during the year gross profit ratio had increased as compared to earlier year. The Assessing Officer by his order dated December 13, 1996 recorded the aforesaid facts and further recorded that all the remittances out of the exports have been received by the assessee before the end of the year and there was no outstanding as on March 31, 1995. The Assessing Officer has further recorded that the copies of the audit report in Form No. 3CD, audit report in Form No. 10CCAC and working of deduction under section 80HHC have been filed along with the return of income. As the sales and purchases were supported, books of account audited, statutory audit reports in Form Nos. 3CA, 3CD and 10CCAC had been filed, the book results were accepted. After discussion the Assessing Officer computed the total income whereunder the net profit pertaining to the export business of the assessee was computed at Rs. 65,07,090 and the net profit pertaining to local business of the assessee was computed at Rs. 3,69,491 and the assessee was allowed deduction under section 80HHC of Rs. 65,07,090, i.e, the entire net profit of the assessee pertaining to its export business.

(iv) Thereafter a notice under section 263 of the Income-tax Act, 1961 was issued by the Commissioner of Income-tax to the assessee on the ground that the assessment order under section 143(3) dated December 31, 1996 was erroneous as the assessee was entitled to only proportionate deduction in the light of section 80HHC(3) of the Act, and proposing suitable action. The assessee was given an opportunity to be heard in the matter. The Commissioner of Income-tax by his order dated March 30, 1999 accepted the fact that the assessee is involved in both export and domestic sales and is maintaining separate books of account and that the export profits are clearly identifiable. However, in his opinion the deduction can be granted only as per the provisions of section 80hhc(3)(a). The Commissioner of Income-tax has, therefore, held that in order to arrive at the amount deductible under section 80HHC in the case of an assessee doing export business as well as some other domestic business the fraction of “export turnover” to “total turnover” would be applied to the profit computed by the assessee under the head “Profits and gains of business or profession”. The Commissioner of Income-tax has in his order recorded that though the assessee has quoted the decision of the Income-tax Appellate Tribunal wherein it has been held that if the export profits were clearly identifiable, then, such profits were available for deduction, he would differ with the same due to the above statutory provision. The Commissioner of Income-tax has, therefore, held that since the Assessing Officer has not followed the above provision of law in the order under section 143(3) dated March 31, 1996 while allowing the deduction under section 80HHC and as deduction allowed is higher than what is allowable, the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue. The Commissioner of Income-tax, therefore, recalculated the deductions under section 80HHC and held that the assessee is eligible for deduction under section 80HHC to the extent of Rs. 41,91,131 as against Rs. 65,07,090 allowed by the Assessing Officer.

(v) The assessee being aggrieved by the order of the Commissioner of Income-tax, dated March 30, 1999 appealed before the Appellate Tribunal. The Appellate Tribunal by its order dated August 24, 2001 came to the finding that the view taken by the Assessing Officer was a possible view and, therefore, it cannot be concluded that the order of the Assessing Officer was erroneous and was prejudicial to the interest of the Revenue. The Tribunal recorded that reliance was placed by the assessee before the Commissioner of Income-tax on the decision reported in the case of V.D Swami and Co. Ltd. v. Deputy CIT reported in [1993] 44 ITD 91 (Mad) and in the case of Bajaj Tempo Ltd. v. CIT reported in [1992] 196 ITR 188 (SC). The Tribunal recorded that the scope of interference under section 263 is not to set aside merely unfavourable orders and bring to tax some money to the treasury nor is the section meant to get sheer escapement of revenue. It is taken care of by other provisions of the Act. It was recorded that section 263 is to be invoked not as a jurisdictional corrective or as a review of subordinate order in exercise of supervisory powers but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the Revenue. The Appellate Tribunal after taking into consideration the entire conspectus of the case, came to a finding that since the view taken by the Assessing Officer was a possible view and considering the decisions relied upon by the assessee the condition precedent for invoking jurisdiction under section 263 did not exist and the order of the Commissioner of Income-tax was quashed.

(vi) Being aggrieved by the order of the Appellate Tribunal dated August 24, 2001 the above appeal was filed by the Revenue which was admitted on August 11, 2004 on the substantial question of law set out in paragraph 2 above.

4. The advocate appearing for the Revenue conceded before us that the view taken by the Assessing Officer was a possible view.

5. However, he contended that the Assessing Officer has not given any reasons for allowing deduction to the assessee under section 80HHC in respect of the entire net profit of Rs. 65,07,090 pertaining the export business of the assessee. The order is, therefore, passed without application of mind. The advocate for the Revenue stated before us that except for this submission he has no other submission to make.

6. The advocate for the assessee on the other hand contended that there is no substance in the contention of the advocate for the Revenue that the Assessing Officer has not applied his mind at the time of allowing the deduction of Rs. 65,07,090 under section 80HHC of the Act. He has pointed out that the Assessing Officer has sought particulars from the assessee and after the assessee provided all the particulars required by the Assessing Officer and after discussion the Assessing Officer took a view that the assessee is eligible to reduction of the entire export profit amounting to Rs. 65,07,090 under section 80HHC of the Act. The advocate for the assessee has also relied upon a decision of this court in the case of Commissioner Of Income-Tax v. Gabriel India Ltd. reported in [1993] 203 ITR 108. In that case the Commissioner of Income-tax had disagreed with the conclusion arrived at by the Income-tax Officer namely that the expenditure was revenue in nature. The Commissioner of Income-tax had reopened the matter under section 263 and after hearing the assessee had directed the Income-tax Officer to rehear the matter. This court has in that decision held that in order to exercise the powers under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interest of the Revenue. It must be an order which is not in accordance with law or which has been passed by the Income-tax Officer without making any inquiry in undue haste. This court has in the said decision also set out that the Income-tax Officer in that case had made the inquiries in regard to the nature of the expenses incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. Evidently the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. It was held by this court that such a decision of the Income-tax Officer cannot be held to be “erroneous” simply because in his order he did not make elaborate discussion in that regard.

7. We have considered the arguments advanced by the advocates appearing for the Revenue as well as the assessee. In the instant case as recorded earlier, the Income-tax Officer had by his order dated October 30, 1996, sought details/explanation from the assessee which the assessee had given by his letter dated November 5, 1996. It is evident from the order of the Assessing Officer that he has considered all detailed particulars filed before him and after discussion allowed the deduction of the entire profit earned by the assessee pertaining to its export business. We are in complete agreement with the decision of this court in the case of Commissioner Of Income-Tax v. Gabriel India Ltd., [1993] 203 ITR 108 and we reject the submission of the Revenue that the order of the Assessing Officer is erroneous or is passed without application of mind because in his order he has not made elaborate discussion in that regard. In any event the Revenue has admittedly not argued before the Commissioner of Income-tax or before the Tribunal that the order passed by the Assessing Officer was without application of mind. The Commissioner of Income-tax has set aside the order of the Assessing Officer only on the ground that the Commissioner of Income-tax did not agree with the view taken by the Assessing Officer and took a view different than that taken by the Assessing Officer. In our view it cannot be said that the Assessing Officer has not applied his mind while granting deduction to the assessee under section 80HHC as regards net profit earned by the assessee pertaining to its export business. In our view, the Tribunal is correct in its view that the view taken by the Assessing Officer was a possible view and that the condition precedent for invoking jurisdiction under section 263 by the Commissioner of Income-tax did not exist.

8. In view of the above, we hold that the Income-tax Appellate Tribunal was justified in upsetting the order passed by Commissioner of Income-tax under section 263 of the Income-tax Act, 1961. We, therefore, answer the question of law raised in this appeal in favour of the assessee and against the Revenue. The above appeal, therefore, stands dismissed. However, there will be no order as to costs.

Commissioner Of Income-Tax v. Design And Automation Engineers (Bombay) P. Ltd.

Summary of Opinion — S.J. Kathawala, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's Arguments

Assessee's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Design And Automation Engineers (Bombay) P. Ltd.

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