LEELA SCOTTISH LACE P.LTD MUMBAI vs ADDL CIT 8(2) MUMBAI

आयकर आयकर आयकर आयकर अपीलीय अपीलीय अपीलीय अपीलीय अिधकरण अिधकरण अिधकरण अिधकरण, “ए” खंडपीठ खंडपीठ खंडपीठ खंडपीठ मुंबई मुंबई मुंबई मुंबई INCOME TAX APPELLATE TRIBUNAL,MUMBAI - ‘A’ BENCH. सवौी सवौी सवौी सवौी बी बी बी बी.आर आर आर आर.िम िम िम िमल, याियक सदःय याियक सदःय/ एवं एवं एवं एवं ौी ौी ौी ौी राजे ि राजे ि राजे ि राजे ि,लेखा लेखा लेखा लेखा सदःय सदःय सदःय सदःय Before S/Sh.B.R.Mittal,Judicial Member & Rajendra,Accountant Member आयकर आयकर आयकर आयकर अपील अपील अपील अपील संसंसंसं/.ITA No.4084/Mum/2011,िनधारण िनधारण िनधारण िनधारण वष वष वष वष/Assessment Year-2006-07 Leela Scottish Lace Pvt.

Ltd.

Leela Baug, Sir M.V.Road, Andhwei(E) Mumbai-400059 V/s Addl.

CIT 8(2) R.No.

214, Aayakar Bhavan, M.K.Road, Mumbai.

PAN: AAACD9926D (अपीलाथ' / Appellant) (ू)यथ' / Respondent) िनधा*रती िनधा*रती ओर ओर ओर ओर सेसेसेसे / Appellant by : Shri Nitesh Joshi राजःव क- ओर से/Revenue by : Shri S.J.

Singh सुनवाई सुनवाई सुनवाई सुनवाई क- क- क- क- तार.ख तार.ख तार.ख तार.ख / Date of Hearing : 31-10-2013 घोषणा क- तार.ख / Date of Pronouncement : 13-11-2013 आयकर आयकर आयकर आयकर अिधिनयम अिधिनयम अिधिनयम अिधिनयम, 1961 क- क- क- क- धारा धारा धारा धारा 254 ) 1 ( केकेकेके अ तगत अ तगत अ तगत अ तगत आदेश आदेश आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) PER RAJENDRA, AM: Challenging the order dated.21.03.2011 of the CIT-8, Mumbai,passed u/s.263 of the Act assessee company has raised following grounds of appeal: 1.On the facts and circumstances of the case the Hon’ble CIT-8 Mumbai erred in passing the order U/s 263 on the ground that “The A.O. while computing the assessment has allowed deduction U/s 10B in respect of profit derived by two EOU is without first setting off the loss incurred in third EOU amounting to Rs.

2,85,72,437/- which is not as per law.” 2. r law.” 2.

On the facts and circumstances of the case Hon’ble CIT-8 failed to appreciate the fact that “the provision of section 10B does not stipulate that the loss incurred by one EOU unit should be set off against the profit derived from other EOU for allowing deduction under said section.

Hence the order passed U/s 263 of Income Tax Act is bad in law.

The Appellant beg to add, amend, alter or delete any grounds of appeal at any time before the date of hearing.

In the effective ground of appeal,assessee has challenged the order passed u/s.263 of the Act by the CIT.

In this AO has passed order u/s.143(3)of the Act on determining the total income of the assessee at Rs.

Nil.While finalising the assessment AO had allowed the assessee deduction,claimed by it,u/s.10B of the Act and allowed setting off of losses.CIT was of the view that the order passed by the AO was erroneous and prejudicial to the interest of Revenue and as a result she issued a notice to the assessee asking it as why the order passed by the AO should not be set aside/cancelled/ enhanced.

Notice issued by the CIT, read as under: (i) As per the provisions of section 10B(6)(ii), no loss pertaining to newly established undertakings in free trade zones or to newly established 100% Export Oriented Undertakings shall be carried 2 ITA No.

4084/Mum/2011 Leela Scottish Lace Pvt.

Ltd. forward or set off where such loss relates to any of the relevant assessment years ending before 1st April, 2001.

In other words, losses, if pertaining to assessment years commencing on or after 1st April, 2001, of the undertaking covered u/s.

10B, shall be set off or carried forward for setoff.

However, such losses may be carried forward or set off against those profits of the undertaking which are covered u/s 10B only and not against those which are not covered u/s.

10B. (ii) From the assessment records, it is seen that the assessee had derived income from non – EOU-I, EOU-II & EOU-III, SEZ-I and claimed deduction u/s. ction u/s.

10B of the Act as tabulated below:- Particulars Non-EOU EOU-I EOU-II EOU-II SEZ-I Total (Rs) Total income (as computed by the assessee 8,02,43,782 5,34,30,787 6,79,45,079 (2,76,63,648) 72,29,007 18,11,27,072 (-)PF/ESIC 1,13,66,943 5,84,148 45,11,406 9,08,789 --- 1,73,71,286 Total income 6,88,76,839 5,28,46,639 6,34,33,673 (2,85,72,437) 72,29,007 16,37,55,786 (-)Ded.10B/10A Nil 5,28,46,639 6,33,75,738 --- 72,29,007 12,24,51,384 Business income 6,88,76,839 Nil 57,935 (2,85,72,437) Nil 4,03,62,337 (iii) The A.O. while completing the assessment has allowed deduction u/s.

10B in respect of profit derived by two EOUs.

Without first setting off the losses incurred in the third EOU amounting to Rs.

2,85,72,437/- which is not as per law as mentioned in para (i) above.

Accordingly, a show cause notice dated 28.02.2011 was issued to the assessee to show why the assessment made by the A.O. which is erroneous and prejudicial to the interest of revenue, should not be set aside / cancelled / enhanced.

Vide its letter dated 26.03.2011 assessee submitted that provisions of section 10B(6)(ii) were not applicable to the assessee,that said section related to the post tax holiday period,that in the case of the assessee the year under consideration was relevant assessment year,that provisions of Sec.

10 B did not stipulate that loss incurred by one (export oriented unot)EOU not should be set off against the profit derived from other EOU should be set off against the profit derived from the other units for allowing the deduction under the said section,that even if loss of EOU was to be set off against the profits of other EOU the assessee was covered under the provisions of section 115JB of the Act,that taxable income was than the Book profits.

2.After considering the submissions of the assessee,CIT held that loss from the EOU had been set off by the AO against the profit of the Non EOU,that calculation made by the AO of the loss of EOU and non EOU was erroneous,that by setting by setting off the loss of the EOU unit against the Non EOU unit the assessee had had claimed the entire profit of the EOUs as exempt,that it had reduced the taxable income of the Non EOU,that it had claimed double benefit,that the intent and the object of the provisions of section 10B of the Act not that while profits were allowed to be exempt from tax u/s.10B,the losses of such units were allowed to be set off against other taxable income at the options of the assessee,that by doing so income otherwise taxable under other provisions of the Act in a way would become exempt by claiming off of losses of the 10B unit, that loss of Rs.2.

85 Crores of the EOU allowed by the AO to be set off against the profit of non EOU was erroneous and prejudicial to the interest of revenue.Accordingly ,CIT directed the AO to modify the assessment order by withdrawing the set off of above referred loss of Rs.2.85 Crores.

3.Before us,Authorised Representative (AR) submitted that the assessee had three EOU undertak - ings, an SEZ undertaking and one non EOU undertaking,that the assessee suffered a loss of Rs.

2.85 Crores in the EOU III undertaking, that other undertakings had earned positive profits,that loss suffered in the EOU III was set off against the profit of the non-EOU undertaking,that the 3 ITA No.

CIT in her notice dated 28.02.2011,issued u/s.263 of the Act,had referred to section 10B(6)(ii) and had mentioned that loss suffered by an EOU undertaking has to be set off only against profits of an EOU undertaking,that the CIT further mentioned that deduction u/s.10B of the Act in respect of EOU I and EOU II ought to have been allowed on profits arrived at after setting off the loss incurred in the EOU III undertaking,that vide her order dated 21.03. ted 21.03.2011 CIT had denied the claim made by the assessee for set off of loss relating to the EOU III undertaking on the ground that section 10B was in nature of an exemption provision,that the income of an eligible undertaking was not included in the total income the loss could not also be allowed to be set off, that the grounds for initiation of revision proceedings as mentioned in the show cause notice dated 28.02.2011 and reasons given by the CIT in her order dated 21.03.2011 were different.It was further argued that when the decision taken by the CIT in the order passed u/s.263 goes beyond the reasons mentioned in the show cause notice same has to be quashed.AR relied upon the order delivered by the Hon’ble Bombay High Court in the case of Amitabh Bachchan (Income Tax Appeal No.293 of 2008 )in this regard.He submitted that on merits also issue was covered in favour of the assessee by the decisions of jurisdictional High Court delivered in the cases of Hindustan Unilever Ltd.(325ITR102),Galaxy Surfactants Ltd.(343ITR108)and Black and Veatch Consulting Pvt.Ltd.(348 ITR 72)Departmental Representative (DR) submitted that CIT had by her show cause notice had brought to the notice of the assessee that as per the provisions of section 10(B)(6)(ii)losses of eligible units are to be carried forward and not to be set off against the other taxable income,that CIT had held that the assessee was not entitled to claim set of losses of eligible units against taxable income.DR referred to the decision of Black and Beach Consulting Pvt.Ltd.(supra)delivered by the Hon’ble Bombay High Court holding that provisions of section 10(B)were akin to exemption provisions,that losses or profits of eligible units were not to be taken in to account to compute taxable income.He also relied upon the order of Karle International (P.)Ltd.(29taxmann.com.9-Bang).

4.We have heard the rival submissions and perused the material before us. before us.Un-disputed facts of the case are that the AO had finalised the total income of the assessee u/s.143(3),that while determining the total income of the assessee AO had allowed setting off of losses from the EOU against the profit of the Non EOU undertaking,that CIT had issued a show cause notice u/s.263 of the Act on the ground that such setting off was not permissible as per the provisions of the Act,that while passing the order u/s.263 of the Act CIT held that assessee was not entitled to claim set off as the provisions of section 10B were in the nature of exemption and when exemption- provisions are applicable such set off cannot be allowed.As per the AR show cause notice and final order of the CIT did not deal with the same issue and therefore it has violated the mandate of the section.DR was of the opinion that issue finally decided by the CIT was part of the show cause notice.

4.1.We find that the issue of difference between the show cause notice and the final order passed u/s.263 of the Act has been dealt with by courts in detail.In the matter of G.K.Kabra (211ITR 336) Hon’ble High Court of AP has held as under : “A perusal of the provisions of section 263 of the Act shows that the Commissioner may, if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, pass such orders thereon after giving the assessee an opportunity of being heard.

The necessary implication in the expression "after giving opportunity of being heard" relates to the point at which the Commissioner considers the order to be erroneous and prejudicial to the interests of the Revenue.

In other words, it is necessary for the Commissioner to point out the exact error in the order which he proposes to revise so that the assessee would have an adequate opportunity of meeting that error before the final order is made. r is made.

Affording any further opportunity after setting aside the order of the Income-tax Officer would not amount to an opportunity of meeting the alleged error in the assessment proposed to be revised.

4.1.a.In the case of Ashish Rajpal (320ITR674)Hon’ble Delhi High Court has held that it is the requirement of section 263 that the assessee must have an opportunity of being heard in respect of those errors which the Commissioner proposes to revise.Court further held as under: 4 ITA No.

Ltd. “The provisions of section 263 mandate that an order for enhancing, or modifying the assessment, or cancelling the assessment and directing a fresh assessment can only be passed after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as is deemed necessary.

The threshold condition for reopening the assessment is that before passing an order an opportunity has to be granted to the assessee and, such an opportunity granted to the assessee is a necessary concomitant of the enquiry the Commissioner is required to conduct to come to a conclusion that an order for either an enhancement or modification of the assessment or, an order for cancellation of the assessment is called for, with a direction to the AO to make a fresh assessment.

This defect cannot be cured by first reopening the assessment and then granting an opportunity to the assessee to respond to the issue raised before the AO during the course of fresh assessment proceedings.” In that matter CIT had issued a notice to the assessee on the ground that he was of the view that the assessment made in the case of the assessee was both erroneous and prejudicial to the interest of the Revenue.The notice referred to four issues.CIT revised the assessment order and crystallis - ed nine issues which,according to him,required enquiry and investigation. stigation.When the matter reached to the Hon’ble High Court it was held that there was nothing on record which would show that the assessee was given an opportunity to respond to the discrepancies which formed part of the order in revision but were not part of notice.Even though the notice issued by the Commissioner before commencing the proceedings under section 263 referred to four issues,the final order passed referred to nine issues, some of which obviously did not find mention in the earlier notice and hence resulted in the proceedings being vitiated as a result of the breach of the principles of natural justice.In short it was held that where a Commissioner had issued a notice under section 263 in respect of four issues,but his revisional order referred to nine issues,there was clear violation of principles of natural justice for lack of opportunity in respect of the other five issues.

4.1.b.Following the above referred principles ITAT Mumbai in the case of Colorcraft (303ITR- AT, 7) has held as under : “There must be nexus between the reasons given in the show-cause notice and the order of the Commissioner under section 263.

The reason given in the show-cause notice to the assessee was that duty drawback received by the assessee could not be considered as profit derived from export in view of the Supreme Court judgment and, therefore, the said amount did not qualify for deduction under section 80HHC.

However, the order under section 263 held the assessment order as erroneous on different grounds…...This clearly showed that there was no nexus between the reasons given in the show-cause notice and the reasons given in the order for holding the order of the AO erroneous qua deduction under section 80HHC.

The order of revision was not valid with reference to section 80HHC.” From the above it is clear that for invoking provisions of section 263 of the Act,contents of the show cause notice and the final order should not be different or rather they should be same. d be same.

Reasons behind the said principle are not difficult to understand.Assessee comes to know about the proposed revision,for the first time,when he receives a notice from the CIT.Accordingly,he files his explanation.If the CIT,while passing final orders u/s.263 of the Act,directs the AO to revise or modify the order on some other ground the assessee would not get any chance to defend himself.Such an order passed by the CIT would fall in the category of ex-parte orders.AO is bound to implement the order of the CIT.As a result and in pursuance of his order,tax payable by the assessee would be determined by the AO.Clearly,in such a case the assessee would be saddled with tax liability without being heard.Provisions of the Act expect that authorities administering the levy and collection of taxes should adhere to the principles of natural justice and basic mandate of these principles is that that no adverse view should be taken against anybody without hearing him.So,if the CIT without confronting an assessee,by way of show cause notice,decides some issue against him while passing the final order,same cannot be endorsed,though he is vested with revisionary powers.It is said that power and duty go together or cannot be separated.

5 ITA No.

Therefore,in our opinion,it is the duty of the CIT that;while using his powers as envisage by the provisions of Sec.263 of the Act;he should not to travel beyond the reasons recorded in the show cause notice.

4.2.Now we would like to apply the principles enumerated above to the facts of the case under consideration.We find that while issuing the show cause notice CIT had informed the assessee that deduction u/s.10B of the Act ought to have been allowed in respect of profits of the EOU I and EOU II undertakings after setting off of the losses incurred by the EOU III undertaking. dertaking.But, while passing the final order CIT has held that section 10B dealt with exemption,that setting off of losses was not allowable if a claim pertained to an exemption-section.If the CIT was of the opinion that provisions of section 10B,being exemption section,did not allow setting off of losses she should have mentioned the same it in the show cause notice issued by her.It would have given the assessee an opportunity to deal with question raised by the CIT.

Whether the section 10B dealt with deductions or exemptions was not the issue which was supposed to be answered by the assessee when it filed reply to the show cause notice.We find that while passing the final order u/s.263 CIT had added something more to the show cause notice and assessee was not conf - ronted with it.In our opinion CIT had travelled beyond the reasons mentioned in the show cause notice.Therefore, reversing the order of the CIT,we decide the effective ground of appeal in favour of the assessee.

As a result,appeal filed by the assessee stands allowed. प*रणामतः िनधा*रती 4ारा दा5खल क- गई अपील मंजूर क- जाती है.

Order pronounced in the open court on 13th November,2013. आदेश क- घोषणा खुले यायालय म9 :दनांक 13 नवंबर नवंबर नवंबर नवंबर,2013 को क- गई । Sd/- Sd/- (बी बी बी बी.आर् आर् आर् आर्.िमल िमल िमल िमल.B.R.Mittal) (राजे ि राजे ि राजे ि राजे ि/Rajendra) याियक याियक याियक याियक सदःय सदःय सदःय सदःय /JUDICIAL MEMBER लेखा लेखा लेखा लेखा सदःय सदःय सदःय सदःय /ACCOUNTANT MEMBER मुंबई/Mumbai,:दनांक/Date: 13.11.2013 SK आदेश आदेश आदेश आदेश क- क- क- क- ूितिल=प ूितिल=प ूितिल=प ूितिल=प अमे=षत अमे=षत अमे=षत अमे=षत/Copy of the Order forwarded to : 1.

Assessee /अपीलाथ' 2.

Respondent /ू)यथ' 3.

The concerned CIT (A) /संब? अपीलीय आयकर आयु@, 4.

The concerned CIT /संब? आयकर आयु@ 5.

DR “A” Bench, ITAT, Mumbai /=वभागीय ूितिनिध ए खंडपीठ,आ.अ. याया.मुंबई 6.

Guard File/गाड फाईल स)या=पत स)या=पत स)या=पत स)या=पत ूित ूित ूित ूित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst.

Dy./Asst.

Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai