DCIT, Bellary V. M/s Trident Minerals (100 % EOU), Bellary

ITA 1050/BANG/2012

• Counselvise Citation: 105021114 RSA 2012
• Duration Of Justice: 1 year(s) 5 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-02-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 02-12-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 17-08-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Opportunity of being heard; Condonation of delay; Bonafide mistake; Revenue expenditure
• Section: 40A(3); 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NO. 1050 /BANG/201 2 (ASSESSMENT YEAR : 2009-10) DY. COMMISSIONER OF INCOME TAX , CIRCLE 1, BELLARY. VS. M/S. TRIDENT MINERALS (100% EOU) , NO.811/2, NH-63, HOSPET ROAD, BELLARY. PAN AAFFT0920R APPELLANT RESPONDENT. C.O. NO.85/BANG/2013 (ASSESSMENT YEAR : 2009-10) (BY ASSESSEE) REVENUE BY : SHRI SADANANDA SONBARSA. ASSESSEE / C.O. BY : SHRI M.V.SHESHACHALA. DATE OF HEARING : 02.12.2013. DATE OF PRONOUNCEMENT : 07.02.2014. O R D E R PER SHRI JASON P. BOAZ, A.M. : THIS APPEAL BY REVENUE AND THE C.O. BY THE ASSESSE E ARE PREFERRED IN RESPECT OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S), HUBLI DT.30.5.2012 FOR ASSESSMENT YEAR 2009-10. 2. ORDER ON PETITION FOR CONDONATION OF DELAY IN FILING THE CROSS OBJECTIONS 2.1 THE PETITIONERS CROSS OBJECTIONS (C.O. IN SH ORT) WERE ADMITTEDLY FILED IN THE IMPUGNED CASE ON 28.8.2013 THEREBY LEADING TO A DEL AY OF 148 DAYS. ALONG WITH THE C.O., THE PETITIONER HAS FILED A PETITION AND AFFIDAVIT P RAYING FOR CONDONATION OF THE AFORESAID 2 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 DELAY OF 148 DAYS IN FILING THE C.O. BEFORE THIS TR IBUNAL. IN THE AFORESAID PETITION, THE PETITIONER SUBMITS THAT THE PERSON AUTHORIZED TO FI LE THE C.O. ON ITS BEHALF HAD MISTAKENLY FILED THE C.O. IN THE OFFICE OF THE CIT DR (ITAT) AND NOT IN THE OFFICE OF THE ASST. REGISTRAR, ITAT, BANGLAORE DUE TO SOME CONFUSION AS BOTH THESE OFFICES WERE SITUATED IN THE SAME BUILDING. IT IS SUBMITTED THAT WHEN THIS M ISTAKE WAS REALIZED, THE C.O. WAS FRESHLY FILED IN THIS TRIBUNAL. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS INADVERTENT MISTAKE COMMITTED BY THE PERS ON FILING THE C.O. WAS A BONA FIDE AND UNINTENTIONAL MISTAKE. IT IS SUBMITTED BY THE LEAR NED AUTHORISED REPRESENTATIVE THAT IF THE DELAY IS NOT CONDONED, THE PETITIONER WOULD BE PUT TO GREAT HARDSHIP AND IRREPARABLE INJURY, AS THE TAX DEMAND AT STAKE INVOLVED IN REV ENUES APPEAL WAS RS.5.80 CRORES APPROXIMATELY. ON THE OTHER HAND, REVENUE WOULD NO T BE PUT TO ANY HARDSHIP IF THE DELAY IS CONDONED AND THE C.O. IS ADJUDICATED ON MERITS. IN SUPPORT OF THE ASSESSEE'S PLEA FOR CONDONATION OF THE DELAY OF 148 DAYS IN FILING THE C.O., THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE FOLLOWING DEC ISIONS OF VARIOUS COURTS AND TRIBUNALS :- I) COLLECTOR, LAND ACQUISITION V MST KATIJI (167 I TR 471) (SC) II) CIT V WEST BENGAL INFRASTRUCTURE DEVELOPMENT FI NANCE CORPORATION LTD (334 ITR 269) (SC) III) CIT V SANMAC MOTOR FINANCES LTD. (322 ITR 309 ) (MADRAS) IV) CIT V ISRO SATELLITE CENTRE (ITA NO.532/2008 DT .28.12.2011) OF THE KARNATAKA HIGH COURT. V) RAGHAVENDRA CONSTRUCTIONS V ITO (ITA NO.425/BANG /2012 DT.14.12.2012 OF ITAT, BANGALORE). THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, AS FACTUALLY LAID OUT ABOVE, THE DELAY OF 148 DAYS IN FILING THE C.O. BE CONDONED AND THE C.O. BE DISPOSED OFF ON MERITS. 3 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 2.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTA TIVE OPPOSED THE ASSESSEE'S PLEA FOR CONDONATION OF DELAY OF 148 DAYS IN FILING THE C.O. FOR ASSESSMENT YEAR 2009-10. 2.3 WE HAVE HEARD BOTH PARTIES AT LENGTH ON THE ISS UE OF CONDONATION OF DELAY OF 148 DAYS IN FILING THE C.O. AND CAREFULLY PERUSED AND C ONSIDERED THE MATERIAL ON RECORD IN THIS REGARD. THE HON'BLE APEX COURT IN THE CASE OF COLL ECTOR, LAND ACQUISITION V MST KATIJI & OTHERS (SUPRA) HAS LAID DOWN THE PRINCIPLES BE TAKE N INTO ACCOUNT WHICH CONSIDERING THE APPLICATION FOR CONDONATION OF DELAY. THE HON'BLE APEX COURT HAS STATED THAT SUBSTANTIAL JUSTICE SHOULD PREVAIL OVER TECHNICAL CONSIDERATION S. THE HON'BLE APEX COURT HAS ALSO EXPLAINED THAT EVERY DAYS DELAY MUST BE EXPLAINED DOES NOT MEAN THAT A PEDANTIC APPROACH SHOULD BE TAKEN; THE DOCTRINE MUST BE APPLIED IN A NATURAL, COMMON SENSE AND PRAGMATIC MANNER. IN THE CASE ON HAND, THE AFFIDAVIT AND THE ACCOMPANYING INDICATE THAT THERE WAS NEGLIGENCE ON THE PART OF THE PERSON AUTHORIZED TO FILE THE C.O. OF FILING IT IN THE CORRECT OFFICE. WE ARE INCLINED TO AGREE WITH THE SUBMISSIO N OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE DELAY IN FILING THE C.O. FO R THE SAID 148 DAYS WAS NOT DELIBERATE AS THE PETITIONER CERTAINLY WOULD NOT WANTONLY JEOPARD IZE ITS OWN CASE. CONSIDERING THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE ON HAND IN THE LIGHT OF THE PRINCIPLES LAID DOWN BY THE HON'BLE APEX COURT IN THE CASE OF M.S.T. KATIJI & O THERS (SUPRA), WE ARE OF THE CONSIDERED OPINION THAT THERE HAS BEEN REASON AND SUFFICIENT C AUSE ON THE PART OF THE PETITIONER IN FILING THE C.O. FOR ASSESSMENT YEAR 2009-10 BELATED LY. FURTHER, WE ARE OF THE OPINION THAT IF THE DELAY OF 148 DAYS IN FILING THE SAID C. O. IS CONDONED AND THE C.O. IS ADMITTED FOR ADJUDICATION ON MERITS OF THE CASE, THERE SHALL BE NO LOSS TO REVENUE AS LEGITIMATE 4 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 TAXES PAYABLE IN ACCORDANCE WITH LAW ALONE WILL BE COLLECTED. IN THIS VIEW OF THE MATTER, WE ARE OF THE CONSIDERED OPINION THAT IN THE INTEREST OF EQUITY AND JUSTICE THIS IS A FIT CASE FOR CONDONATION OF THE DELAY OF 148 DAYS IN FILING THE C.O. FOR ASSESSMENT YEAR 2009-10. THE APPEAL IN ITA NO.1050/BANG/2012 IS ACCORDINGLY ADMITTED FOR HEARING AND DISPOSAL. IT IS ORDERED ACCORDINGLY. APPELLATE ORDER 3. THE FACTS OF THE CASE, IN BRIEF, ARE AS UNDER : 3.1 THE ASSESSEE FIRM WAS FORMED BY PARTNERSHIP DEE D DT.5.10.2007 TO CARRY ON THE PRODUCTION AND TRADING / EXPORT OF IRON ORE. FOR AS SESSMENT YEAR 2009-10, THE ASSESSEE E-FILED ITS RETURN OF INCOME ON 22.9.2009 DECLARING INCOME OF RS.1,31,23,510. THE RETURN OF INCOME WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS 'THE ACT') AND THE CASE WAS TAKEN UP FOR SCRUTINY. IN THE PERIOD / YEAR UNDER CONSIDERATION, THERE WAS A MERGER OF ANOTHER PARTNERSHIP FIRM, NAMELY M/S. KMMI EXPORTS, A 100% EOU WITH THE ASSESSEE FIRM, WHICH W AS ALSO A 100% EOU. THE ERSTWHILE FIRM M/S. KMMI EXPORTS ALSO HAD THE SAME PARTNERS A ND WAS IN THE SAME LINE OF BUSINESS AS THE ASSESSEE FIRM. THE CASE WAS SELECTED FOR SC RUTINY AND THE ASSESSMENT WAS COMPLETED BY AN ORDER UNDER SECTION 143(3) OF THE A CT DT.26.12.2011 WHEREIN THE INCOME OF THE ASSESSEE WAS DETERMINED AT RS.13,92,24,127 A S AGAINST RETURNED INCOME OF RS.1,31,23,510 DUE TO THE FOLLOWING ADDITIONS / DIS ALLOWANCES MADE BY THE ASSESSING OFFICER : I) DISALLOWANCE OF CLAIM FOR DEDUCTION UNDER SECTIO N 10A OF THE ACT 5 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 II) EXCESS PROFITS DUE TO THE PURCHASE TRANSACTIONS WITH SISTER CONCERNS OF THE ASSESSEE RS.4,76,52,385 III) DISALLOWANCE OF EXCESS HANDLING LOSS RS.56,48,409 IV) DISALLOWANCE OF PRIOR PERIOD EXPENSES. RS.6,13,949 V) DISALLOWANCE UNDER SECTION 40A(3) OF THE ACT RS.17,46,726 3.2 AGGRIEVED BY THE ORDER OF ASSESSMENT DT.26.12.2 011 FOR ASSESSMENT YEAR 2009-10, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (AP PEALS), HUBLI. THE LEARNED CIT (APPEALS) DISPOSED OFF THE ASSESSEE'S APPEAL BY ORD ER DT.30.5.2012 ALLOWING THE ASSESSEE PARTIAL RELIEF. THE AFORESAID ISSUES AT S. NOS. (I ) TO (V) (SUPRA) WERE DECIDED AS UNDER : (I) THE LEARNED CIT (APPEALS) UPHELD THE CLAIM OF THE ASSESSEE THAT IT IS ENTITLED FOR DEDUCTION UNDER SECTION 10B OF THE ACT AND THEREBY REVERSED THE DECISION OF THE ASSESSING OFFICER DISALLOWING THE SAID DEDUCTION CL AIMED BY THE ASSESSEE; (II) AS REGARDS THE DISALLOWANCE OF RS.4,76,52,3 85, THE LEARNED CIT (APPEALS) OBSERVED THAT THE ASSESSEE HAD WITHDRAWN THE APPEAL IN RESPE CT OF THE DEDUCTION UNDER SECTION10B OF THE ACT RELATABLE TO THE PROFITS ATTRIBUTABLE TO PURCHASES FROM SISTER CONCERNS, AND THEREFORE THERE WAS NO SEPARATE ADJUDICATION THEREO N; (III) THE LEARNED CIT (APPEALS)S ORDER IS SILE NT ON THE ISSUE OF DISALLOWANCE TOWARDS HANDLING LOSS OF RS.56,48,409 EVEN THOUGH THE IMPUG NED ORDER OF THE LEARNED CIT (APPEALS) SHOWS THAT THE ASSESSEE HAD RAISED THIS G ROUND IN THE APPEAL BEFORE HIM AS REPRODUCED IN HIS ORDER; 6 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 (IV) AS REGARDS THE DISALLOWANCE OF PRIOR PERIOD EXPENSES OF RS.6,13,949, THE LEARNED CIT (APPEALS) HAS DIRECTED THE ASSESSING OFFICER TO ALLOW 1/5 TH OF THIS EXPENDITURE AS DEFERRED REVENUE EXPENDITURE UNDER SECTION 35D OF T HE ACT; (V) AS REGARDS THE DISALLOWANCE OF RS.17,66,726 UN DER SECTION 40A(3) OF THE ACT, THE LEARNED CIT (APPEALS) SUSTAINED THE DISALLOWANCE TH ERE UNDER TO THE EXTENT OF RS.15,92,726 ALLOWING THE ASSESSEE RELIEF OF RS.1,5 4,000. 4. AGGRIEVED BY THE ORDER OF THE CIT (APPEALS), HUB LI, DT.30.5.2012, REVENUE IS IN APPEAL AND THE ASSESSEE HAS FILED CROSS OBJECTIONS BEFORE THIS TRIBUNAL. 4.1 THE GROUNDS RAISED BY REVENUE IN ITS APPEAL ARE AS UNDER : 1. THE ORDER OF THE CIT (APPEALS) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE CIT (APPEALS) ERRED IN DELETING THE ADDITI ONS OF RS.6,11,18,796 BEING DISALLOWANCE OF ASSESSEE'S CLAIM UNDER SECTION 10B OF INCOME TAX ACT. 3. THE CIT (APPEALS) OUGHT TO HAVE APPRECIATED T HE FACTS NARRATED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS NOT FULFILLED CONDITIONS SPECIFIED IN SECTION 10B OF IT ACT FOR C LAIMING EXEMPTION UNDER THE SAID SECTION. THE CIT (APPEALS) OUGHT TO HAVE APPR ECIATED THE FACTS THAT THE ASSESSEE HAS FAILED TO FULFILL THE CONDITIONS AS LA ID DOWN IN SECTION 10A / 10B OF IT ACT, WHICH ULTRA VIRES OF THE INCOME TAX ACT. 4. THE CIT (APPEALS) ERRED IN DELETING THE ADDIT IONS OF RS.6,13,949 BEING DISALLOWANCE OF ASSESSEE'S CLAIM UNDER PRIOR PERIOD EXPENDITURE. 5. THE CIT (APPEALS) OUGHT TO HAVE APPRECIATE D THE FACTS NARRATED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS NOT CARRIED OUT COMMERCIAL ACTIVITIES IN THE PREVIOUS YEAR RELE VANT TO A.Y. 2009-10. IN THE ABSENCE OF COMMERCIAL ACTIVITIES SUCH EXPENDITURE CANNOT BE ALLOWED AS PRIOR PERIOD EXPENDITURE, AND ASSESSEE HAS NOT CLAIMED TH E SAID EXPENDITURE IN EARLIER YEAR. THE CIT (APPEALS) OUGHT TO HAVE APPR ECIATED FACT THAT THE AND THE ASSESSEE HAS NOT MADE CLAIM IN AUDIT REPORT UND ER SECTION 44A IN RESPECT OF CLAIM OF DEDUCTION UNDER SECTION 35D. 6. THE CIT (APPEALS) ERRED IN DELETING THE ADDITION S OF RS.1,54,000 BEING DISALLOWANCE OF EXPENDITURE UNDER SECTION 40A(3). THE CIT (APPEALS) OUGHT TO HAVE APPRECIATED FACT THAT THE SAID EXPENDITURE HAS BEEN INCURRED OTHERWISE 7 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 THAN BY A ACCOUNT PAYEE CHEQUE OR BANK DRAFT, WHICH IS IN CONTRAVENTION OF THE PROVISIONS OF SECTION 40A(3) OF INCOME TAX ACT. 7. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING IT IS PRAYED THAT THE ORDER OF THE COMMISSIONER OF INCOME TAX MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 8. THE APPELLATE CRAVES, LEAVES TO ADD, TO ALTER, T O AMEND OR DELETE ANY OF THE GROUND ON OR BEFORE HEARING OF APPEAL. 4.2 THE CROSS OBJECTIONS (C.O.) BY THE ASSESSEE ARE AS UNDER : 1. THE APPELLATE COMMISSIONER HAS CORRECTLY APP RECIATED THE LEGISLATIVE INTENT BEHIND OMISSION OF SECTION 10B(9) OF THE ACT , WHEN THIS SUB-SECTION WAS INTRODUCED ORIGINALLY AND THEREAFTER DELETED, WHIC H CLEARLY SHOWS THAT THE OWNERSHIP OR BENEFICIAL INTEREST IN AN UNDERTAKING IS TRANSFERRED, THE SAME WILL BE ENTITLED TO CLAIM DEDUCTION AS THE PROHIBITION I S DELETED. 2. THE DEDUCTION UNDER SECTION 10B OF THE ACT , WAS GRANTED TO M/S. TRIDENT MINERALS 100% EOU, THE ASSESSEE FOR THE ASSESSMENT YEAR 2008-09. THEREFORE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN FAILING TO CONTINUE THE RELIEF UNDER SECTION 10B OF THE ACT FOR THE ASSESSM ENT YEAR 2009-10, WHEN THERE WAS ONLY SUCCESSION AND THE PROVISIONS OF SEC TION 10B(2)(III) HAD NOT BEEN VIOLATED. 3. THE FINDING OF THE ASSESSING OFFICER THAT THERE WAS NO MERGER OF TWO PARTNERSHIP FIRMS WHICH IS WHOLLY ERRONEOUS AS SUCH A FINDING IS CONTRARY TO THE PROVISIONS OF SECTIONS 170 & 188 OF THE ACT, REGARD ING ASSESSMENT OF PREDECESSOR FIRM AND SUCCESSOR FIRM HAS NOT BEEN CO RRECTLY APPRECIATED. 4. THE CONCLUSION DRAWN BY THE ASSESSING OFFICER TH AT THERE WAS A TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PR EVIOUSLY USED BY M/S. KMMI EXPORTS AND THEREFORE CONTRARY TO SECTION 10B(2)(II I) OF THE ACT IS TOTALLY ERRONEOUS AS THERE WAS SUCCESSION AND THE FIRMS HAV E MERGED AND THE UNITS CONTINUE TO OPERATE SEPARATELY WITHOUT APPLYING THE PROPER TEST PRESCRIBED BY THE HON'BLE SUPREME COURT. 5. THE APPELLATE COMMISSIONER COMMITTED AN ERROR IN HOLDING THAT THE GROUND REGARDING A SUM OFRS.4,76,52,385 STANDS WITH DRAWN WHEN ACTUAL THE WITHDRAWAL PERTAINED TO ONE OTHER ISSUE AND NOT IN RESPECT OF THESE GROUNDS OF APPEAL. THE RESPONDENT / CROSS OBJECTOR MAY BE PER MITTED TO URGE THE VALIDITY OF THE CONCLUSION DRAWN BY THE ASSESSING OFFICER TH AT THE PURCHASES FROM SISTER CONCERNS ARE NOT MADE AT MARKET PRICES AS ER RONEOUS IN THE INTEREST OF JUSTICE AND EQUITY. 6. THE RESPONDENT / CROSS OBJECTOR SEEKS LEAVE OF T HIS HON'BLE TRIBUNAL TO RAISE ALL OTHER GROUNDS IN SUPPORT OF THEIR CONT ENTION AT THE TIME OF ARGUMENTS. 8 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 4.3 IN BRIEF, THE ISSUES ON WHICH REVENUE HAS PREFE RRED THE APPEAL ARE IN RESPECT OF DELETION OF :- I) DISALLOWANCE OF DEDUCTION UNDER SECTION 10A OF T HE ACT. II) DISALLOWANCE OF PRIOR PERIOD EXPENSES OF RS.6, 13,949. III) DISALLOWANCE UNDER SECTION 40A(3) OF THE ACT OF RS.1,54,000. 4.3 THE ASSESSEE IN ITS C.O., WHILE SUPPORTING THE DECISION OF THE LEARNED CIT (APPEALS) ON ALLOWING ITS CLAIM FOR DEDUCTION UNDER SECTION10 B OF THE ACT, HAS PLEADED THAT THE LEARNED CIT (APPEALS) HAS ERRED IN HOLDING THAT THE GROUNDS RAISED IN RESPECT OF DISALLOWANCE OF RS.4,76,52,385 HAS BEEN WITHDRAWN. 5. THE GROUNDS OF APPEAL RAISED AT S.NOS.1, 7 AND 8 BY REVENUE AND THE C.O. NO.6 ARE GENERAL IN NATURE AND THEREFORE, NO ADJUDICATION IS CALLED FOR THEREON. 6. DEDUCTION UNDER SECTION 10B OF THE ACT . 6.1 IN THE GROUNDS RAISED AT S.NOS.2 AND 3 OF ITS APPEAL, REVENUE CONTENDS THAT THE ORDER OF THE LEARNED CIT (APPEALS) IN DELETING THE DISALLOWANCE OF THE ASSESSEE'S CLAIM FOR DEDUCTION UNDER SECTION10B OF THE ACT, AMOUNTING TO RS.6,11,18,796, WAS ERRONEOUS SINCE THE ASSESSEE HAD NOT FULFILLED THE CONDITIONS SPECI FIED THERE UNDER, FOR CLAIMING AND BEING ALLOWED THE SAID DEDUCTION UNDER SECTION 10B OF THE ACT. 6.2 IN SUPPORT OF THE GROUNDS RAISED, THE LEARNED D EPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSING OFFICER IN THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT, IN THE PERIOD UNDER CONSIDERATION, THE ASSESSEE FIR M, WHICH IS IN THE BUSINESS OF PRODUCTION 9 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 AND EXPORT OF IRON ORE, MERGED WITH ANOTHER FIRM M/ S. KMMI EXPORTS. BOTH THE ASSESSEE AND THE AFORESAID FIRM, VIZ. M/S. KMMI EXPORTS HAD COMMON PARTNERS AND ARE BOTH 100% EOUS DULY APPROVED BY THE SEZ AUTHORITIES. THE L EARNED AUTHORISED REPRESENTATIVE SUBMITS THAT ON EXAMINATION OF THE ASSESSEE'S CLAIM FOR DEDUCTION UNDER SECTION 10B OF THE ACT, THE ASSESSING OFFICER DISALLOWED THE SAME FOR THE FOLLOWING REASONS : I) THE ASSESSEE'S UNIT HAS BEEN FORMED BY TRANSFER OF PLANT AND MACHINERY USED BY M/S. KMMI EXPORTS; II) THOUGH THE PARTNERS OF BOTH THE ASSESSEE FIRM A ND KMMI EXPORTS ARE COMMON, EACH OF THESE FIRMS ARE INDEPENDENT ENTITIES ; III) MERELY BECAUSE THE SEZ AUTHORITIES HAVE ALLO WED MERGING THE OPERATIONS OF THE TWO FIRMS, THE CONDITIONS SPECIFIED / PRESCRIBED FOR AL LOWING THE DEDUCTION UNDER SECTION 10B OF THE ACT CANNOT BE IGNORED. IV) THE PROVISIONS OF SECTION 10B OF THE ACT RECO GNIZES THE MERGING OF TWO COMPANIES AND NOT TWO FIRMS. IN VIEW OF THE ABOVE, THE LEARNED D.R. SUBMITTED T HAT THE ASSESSING OFFICER HELD THAT THE ASSESSEE'S UNIT HAS BEEN FORMED BY TRANSFE R OF PLANT AND MACHINERY PREVIOUSLY USED BY KMMI EXPORTS AND THEREFORE THE CLAIM OF DED UCTION UNDER SECTION 10B IS NOT TENABLE. THE LEARNED D.R. SUPPORTED THESE FINDINGS OF THE ASSESSING OFFICER IN THE ORDER OF ASSESSMENT AND PRAYED THAT THE ORDER OF THE LEAR NED CIT (APPEALS) ALLOWING THE 10 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 ASSESSEE THE DEDUCTION CLAIMED UNDER SECTION 10B O F THE ACT BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 6.3 PER CONTRA, THE LEARNED AUTHORISED REPRESENTAT IVE OF THE ASSESSEE STRONGLY SUPPORTED THE ORDER OF THE LEARNED CIT (APPEALS) AL LOWING DEDUCTION UNDER SECTION 10B OF THE ACT. IT WAS SUBMITTED BY THE LEARNED AUTHORISE D REPRESENTATIVE THAT THE ASSESSING OFFICER WRONGLY CONCLUDED THAT THERE IS NO MERGER O F THE ASSESSEE FIRM AND M/S. KMMI EXPORTS AND THAT THERE IS A TRANSFER OF ASSETS ALRE ADY USED FROM KMMI EXPORTS TO THE ASSESSEE'S UNIT. IT WAS ALSO SUBMITTED THAT THE AS SESSING OFFICER IS WRONG IN CONCLUDING THAT SECTION 10B OF THE ACT DOES NOT RECOGNISE THE MERGER OF FIRMS. THE LEARNED AUTHORISED REPRESENTATIVE REITERATED THE SUBMISSION S MADE BY THE ASSESSEE BEFORE THE LEARNED CIT (APPEALS); THE JUDICIAL DECISIONS AND C BDT CIRCULAR NO.1 OF 2013 DT.17.1.2013 CITED AND RELIED ON THEREIN. THE LEARNED AUTHORISE D REPRESENTATIVE CONTENDS THAT THERE IS NO ERROR IN THE ORDER OF THE LEARNED CIT (APPEALS) IN ALLOWING THE ASSESSEE DEDUCTION UNDER SECTION 10B OF THE ACT WARRANTING INTERFERENC E THEREIN AND PRAYS THAT THE ORDER OF THE LEARNED CIT (APPEALS) BE UPHELD AND REVENUES A PPEAL ON THIS ISSUE BE DISMISSED. 6.4.1 WE HAVE HEARD BOTH PARTIES AT LENGTH AND PERU SED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDING THE ORDERS OF THE AUTH ORITIES BELOW, SUBMISSIONS MADE, JUDICIAL DECISIONS CITED ETC. FROM AN APPRECIATION OF THE FACTS ON RECORD, IT IS NOT IN DISPUTE THAT THE UNIT OF THE ASSESSEE FIRM IS A 100 % EOU UNIT ENTITLED FOR DEDUCTION UNDER SECTION 10B OF THE ACT. IT IS ALSO SEEN THAT THE ASSESSING OFFICER HAS NOT DISPUTED 11 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 THE EOU STATUS OF THE UNIT OF M/S. KMMI EXPORTS ALS O. THE ISSUE FOR CONSIDERATION IS AFTER THE MERGER OF THE FIRM M/S. KMMI EXPORTS WITH THE ASSESSEE FIRM, WHETHER THE ASSESSEE FIRM IS ENTITLED FOR DEDUCTION UNDER SECTI ON 10B OF THE ACT OR NOT. 6.4.2 ON CAREFUL CONSIDERATION, WE DO NOT CONCUR WITH THE VIEW OF THE ASSESSING OFFICER THAT THE LAW RECOGNISES MERGER OF ONLY COMPANIES AN D NOT THE MERGER OF FIRMS. EARLIER, THERE WAS SUB-SECTION 9 TO SECTION 10B OF THE ACT W HICH SPECIFICALLY PROVIDED AND THAT THE DEDUCTION SHALL NOT BE ALLOWED IF THERE WAS A TRANS FER OF OWNERSHIP OR BENEFICIAL INTEREST IN THE UNDERTAKING. THIS SUB-SECTION 9 OF SECTION 10B OF THE ACT WAS OMITTED FROM THE STATUTE W.E.F. 1.4.2004. ANOTHER SUB-SECTION 9A OF SECTION 10B OF THE ACT WAS INTRODUCED W.E.F. 1.11.2003, WHICH PROVIDED THAT THE DEDUCTION CAN BE ALLOWED IF A FIRM IS SUCCEEDED BY A COMPANY. THIS SUB-SECTION WAS ALSO OMITTED W. E.F. 1.4.2004. IN THIS VIEW OF THE MATTER, THE INEVITABLE AND APPROPRIATE CONCLUSION IS THAT THE LIMITATIONS SPECIFIED IN SUB- SECTIONS 9 AND 9A OF SECTION 10B OF THE ACT DO NOT EXIST FROM 1.4.2004 AND THEREFORE THE CONCLUSION OF THE ASSESSING OFFICER THAT DEDUCTION UNDER SECTION 10B OF THE ACT CANNOT BE GRANTED ON THE MERGER OF FIRMS IS NOT CORRECT. 6.4.3 IT IS A SETTLED PRINCIPLE, UPHELD BY VARIO US JUDICIAL DECISIONS, THAT DEDUCTION UNDER SECTION 10B OF THE ACT IS GRANTED TO AN UNDERTAKING AND NOT AN ASSESSEE. FURTHER, THE CBDT CIRCULAR NO.1/2013 IN F.NO.178/84/2012 DT.17.1 .2013, RELIED ON BY THE ASSESSEE, IS CLEAR THAT THE DEDUCTION IS GRANTED TO THE UNDERTAK ING. THEREFORE, IT FOLLOWS THAT AS LONG AS THE UNDERTAKINGS REMAIN ELIGIBLE FOR DEDUCTION U NDER SECTION 10B OF THE ACT, THE 12 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 DEDUCTION CANNOT BE DENIED MERELY ON THE GROUND THA T THERE HAS BEEN A MERGER OF THE FIRMS WHICH OWN THE UNDERTAKINGS. WE ALSO FIND THA T THE ASSESSING OFFICER HAS NOT RENDERED ANY FINDING THAT EITHER OF THE UNITS, ONE BELONGING TO THE ASSESSEE AND THE OTHER BELONGING TO THE FIRM THAT GOT MERGED I.E. KMMI EXP ORTS, IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT. THE ONLY REASON ADDU CED IS THAT DUE TO THE MERGER OF THE TWO UNITS, THE ASSESSEE IS DEPLOYING ASSETS ALREADY PUT TO USE BY THE MERGED FIRM AND HENCE THE ASSESSEE CANNOT CLAIM DEDUCTION UNDER SEC TION 10B OF THE ACT. AS ELABORATELY DISCUSSED ABOVE, BOTH THE UNITS / UNDERTAKINGS OF T HE ASSESSEE FIRM AND M/S. KMMI EXPORTS ARE OTHERWISE ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT AND THE DEDUCTION IS TOWARDS THE UNDERTAKING. AS LONG AS T HE UNDERTAKINGS ARE ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT, WHICH HAS N OT BEEN DISPUTED BY THE ASSESSING OFFICER, THE MERGER OF THE FIRM, M/S. KMMI EXPORTS WITH THE ASSESSEE DOES NOT ALTER THE STATUS OF THE UNDERTAKINGS. IN THIS VIEW OF TH E MATTER, WE UPHOLD THE ORDER OF THE LEARNED CIT (APPEALS) IN ALLOWING THE ASSESSEE DEDU CTION UNDER SECTION 10B OF THE ACT. ACCORDINGLY, REVENUES GROUNDS AT S.NOS.2 AND 3 ARE DISMISSED. SINCE THE ASSESSEES C.O. AT S.NOS.1 TO 4 SUPPORT THE ORDER OF THE LEARNED CI T (APPEALS) IN ALLOWING IT DEDUCTION UNDER SECTION 10B OF THE ACT AND WHICH HAVE BEEN AD DRESSED BY OUR DISMISSAL OF THE AFORESAID GROUNDS RAISED BY REVENUE ON THIS ISSUE, THERE IS NO REQUIREMENT TO ADJUDICATE C.OS OF THE ASSESSEE AS THEY ARE RENDERED INFRUCTU OUS. 7.0 DISALLOWANCE OF PRIOR PERIOD EXPENSES : RS.6,13,949 . 13 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 7.1 IN THE GROUNDS RAISED AT S.NOS.4 AND 5 , REVENUE CONTENDS THAT THE ORDER OF THE LEARNED CIT (APPEALS) IN DELETING THE DISALLOWANCE OF PRIOR PERIOD EXPENSES OF RS.6,13,949 IS ERRONEOUS FOR THE REASONS THAT SINCE THE ASSESSE E HAS NEITHER CARRIED OUT COMMERCIAL ACTIVITIES IN THE EARLIER YEAR NOR MADE A CLAIM FOR DEDUCTION UNDER SECTION 35D OF THE ACT IN THE AUDIT REPORT, THE CLAIM OF THE ASSESSEE OUGH T NOT TO HAVE BEEN ALLOWED. 7.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMI TTED THAT IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HAD O BSERVED THAT THE ASSESSEE HAD CLAIMED PRIOR PERIOD EXPENDITURE TO THE TUNE OF RS. 6,13,949 AS DEDUCTIBLE EXPENDITURE. THE ASSESSING OFFICER HELD THAT SINCE THERE WAS NO COMMERCIAL ACTIVITY CARRIED OUT BY THE ASSESSEE IN THE EARLIER YEAR, THE EXPENSES RELATED TO THE EARLIER YEAR CANNOT BE ALLOWED AS AN EXPENDITURE. THE ASSESSING OFFICER ALSO DID NOT CONCUR WITH THE ALTERNATE PLEA OF THE ASSESSEE THAT THESE EXPENSES MAY BE TREATED AS DEFE RRED REVENUE EXPENDITURE AND BE ALLOWED DEDUCTION UNDER SECTION 35D OF THE ACT. IT IS SUBMITTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE LEARNED CIT (A PPEALS) HAS FAILED TO ADJUDICATE ON WHETHER SUCH PRIOR PERIOD EXPENSES IS ALLOWED AS A N EXPENDITURE AND HAS ALLOWED DEDUCTION UNDER SECTION 35D OF THE ACT WITHOUT ASSI GNING ANY REASON FOR HIS DECISION. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT IN THESE CIRCUMSTANCES, IT IS AMPLY CLEAR THAT THE ORDER OF THE LEARNED CIT (APPEALS) I S ERRONEOUS AND THEREFORE HIS ORDER OUGHT TO BE REVERSED AND THAT OF THE ASSESSING OFFI CER RESTORED. 14 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 7.3.2 WE HAVE HEARD BOTH THE LEARNED DEPARTMENTA L REPRESENTATIVE FOR THE REVENUE AND THE LEARNED AUTHORISED REPRESENTATIVE FOR THE A SSESSEE. WE FIND FROM A CAREFUL PERUSAL OF THE APPELLATE ORDER THAT THE LEARNED CIT (APPEALS) HAS, IN FACT, NOT ADJUDICATED ON THE ISSUE OF WHETHER SUCH PRIOR PERIOD EXPENDITU RE IS ALLOWABLE AS AN EXPENDITURE. AS RIGHTLY POINTED OUT BY THE LEARNED DEPARTMENTAL REP RESENTATIVE, THE LEARNED CIT (APPEALS) WHILE HOLDING THAT 1/5 TH OF THE AFORESAI D EXPENDITURE OF RS.6,13,949 IS TO BE ALLOWED UNDER SECTION 35D OF THE ACT HAS NOT GIVEN ANY REASONS WHATSOEVER FOR COMING TO SUCH A DECISION. WE ARE OF THE VIEW THAT THE LEARN ED CIT (APPEALS) OUGHT TO HAVE FIRST EXAMINED THE ISSUE OF THE ALLOWABILITY OF THE CLAIM FOR DEDUCTION OF PRIOR PERIOD EXPENSES AND RENDERED A FINDING TO THE EFFECT WHETHER OR NOT THE CLAIM IS NOT ALLOWABLE. ONLY THEN, IF SO WARRANTED, SHOULD HE HAVE EXAMINED THE ASSESS EE'S ALTERNATE PLEA FOR DEDUCTION UNDER SECTION 35D OF THE ACT AND FOR WHICH ALSO HE SHOULD HAVE RENDERED PROPER AND COGENT REASONS FOR ALLOWING THE DEDUCTION OF 1/5 TH OF THE AFORESAID EXPENDITURE. IN VIEW OF HIS FAILURE TO DO SO, WE DEEM IT NECESSARY, IN T HE INTEREST OF JUSTICE AND EQUITY TO REMIT THE ISSUE BACK TO THE FILE OF THE LEARNED CIT (APPE ALS) FOR DECIDING THE ISSUE AFRESH IN THE LIGHT OF OUR OBSERVATIONS (SUPRA). IN VIEW OF THIS , REVENUES GROUNDS RAISED AT S.NOS.4 & 5 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 8. DISALLOWANCE UNDER SECTION 40A(3) OF THE ACT : RS.1 ,54,000 . 8.1 IN THE GROUND OF APPEAL RAISED AT S.NO.6 , REVENUE CHALLENGES THE ORDER OF THE LEARNED CIT (APPEALS) IN DELETING THE DISALLOWANCE OF RS.1,54,000 UNDER SECTION 40A(3) OF 15 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 THE ACT AS ERRONEOUS SINCE THE SAID EXPENDITURE HA S BEEN INCURRED OTHERWISE THAN BY ACCOUNT PAYEE CHEQUE OR BANK DRAFT. THE LEARNED DE PARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSING OFFICER IN THE COURSE OF ASSESSM ENT PROCEEDINGS OBSERVED, INTER ALIA THAT THE ASSESSEE HAD MADE PAYMENTS AMOUNTING TO RS .1,54,000 TO SRI D.B.M. BASAVARAJ BY DEMAND DRAFT PAYABLE ON DEMAND OR ORDER, WHICH HAD BEEN CLAIMED AS AN EXPENDITURE. THE ASSESSING OFFICER HOLDING THIS PAYMENT TO BE IN CON TRAVENTION OF THE PROVISIONS OF SECTION 40A(3) OF THE ACT, DISALLOWED THE SAME. THE LEARNE D DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE LEARNED CIT (APPEALS) ERRONEOUSL Y DELETED THE DISALLOWANCE BY HOLDING THAT THE SAID PAYMENT HAS BEEN MADE BY DEMAND DRAFT AND THAT THE A.O. HAS NOT DOUBTED EITHER THE GENUINENESS OF THE TRANSACTION OR THE ID ENTITY OF THE PARTIES. THE LEARNED D.R. PRAYS THAT, IN VIEW OF THE ABOVE FACTUAL SITUATION, THE ORDER OF THE LEARNED CIT (APPEALS) BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RE STORED. 8.2 PER CONTRA, THE LEARNED AUTHORISED REPRESENTATI VE SUPPORTED THE ORDER OF THE LEARNED CIT (APPEALS). 8.3 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CARE FULLY CONSIDERED THE MATERIAL ON RECORD. IT IS NOT DISPUTED THAT THE PAYMENT OF RS. 1,54,000 MADE BY THE ASSESSEE TO SRI D.B.M. BASAVARAJ MADE BY WAY OF DEMAND DRAFT WAS P AYABLE ON DEMAND OR BY ORDER. THE PROVISIONS OF SECTION 40A(3) OF THE ACT CLEARLY STI PULATE THAT THE PAYMENT IS LIABLE FOR DISALLOWANCE IF IT IS NOT MADE BY WAY OF ACCOUNT PA YEE CHEQUE / DEMAND DRAFT. IN THIS FACTUAL MATRIX, SINCE THE IMPUGNED PAYMENT HAS BEEN MADE OTHERWISE THAN BY WAY OF AN 16 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 ACCOUNT PAYEE CHEQUE / DEMAND DRAFT, THE PAYMENT OF RS.1,54,000 IS LIABLE FOR DISALLOWANCE UNDER SECTION 40A(3) OF THE ACT. THE ASSESSEE HAS ALSO NOT MADE OUT ANY CASE THAT THIS PAYMENT FALLS UNDER THE EXCEPTIONS P ROVIDED UNDER RULE 6DD OF THE I.T. RULES, 1962. IN THIS VIEW OF THE MATTER, WE HOLD THAT THE ASSESSING OFFICER WAS CORRECT IN HOLDING THAT THE AFORESAID PAYMENT OF RS.1,54,00 0 IS TO BE DISALLOWED UNDER SECTION 40A(3) OF THE ACT. WE, THEREFORE, REVERSE THE DECI SION OF THE LEARNED CIT (APPEALS) IN THIS ISSUE AND RESTORE THE DISALLOWANCE OF THE PAYM ENT OF RS.1,54,000 UNDER SECTION 40A(3) OF THE ACT. REVENUES GROUND RAISED AT S.NO .6 IS ACCORDINGLY ALLOWED. 9. DISALLOWANCE OF EXCESS PROFITS DUE TO TRANSACTIONS WITH SISTER CONCERNS : RS.4,76,52,385. 9.1 IN THE C.O. AT S.NO.5 , THE ASSESSEE CONTENDS THAT THE LEARNED CIT (APPEA LS) HAD ERRONEOUSLY HELD THAT THE GROUND RAISED BY THE ASSE SSEE CHALLENGING THE DISALLOWANCE OF EXCESS PROFITS AMOUNTING TO RS.4,76,52,385 DUE TO T RANSACTIONS WITH SISTER CONCERNS FROM COMPUTATION OF THE ELIGIBLE DEDUCTION UNDER SECTION 10B OF THE ACT WAS WITHDRAWN BY THE ASSESSEE, WHEN ACTUALLY IT WAS NOT SO. 9.2.1 WE HAVE HEARD BOTH THE LEARNED AUTHORISED REP RESENTATIVE AND THE LEARNED DEPARTMENTAL REPRESENTATIVE IN THE MATTER. AS PER THE DETAILS ON RECORD, IT IS SEEN THAT THE ASSESSING OFFICER EXAMINED THE PURCHASE TRANSAC TIONS OF THE ASSESSEE AND OBSERVED THAT THE RATES FOR PURCHASE OF MATERIAL FROM THE SI STER CONCERNS WAS LOWER THAN THE RATE OF PURCHASES MADE BY THE ASSESSEE FROM THIRD PARTIE S. ACCORDING TO THE ASSESSING OFFICER, THIS RESULTED IN THE UNDER-STATEMENT O F THE VALUE OF PURCHASES AND OVER 17 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 STATEMENT OF PROFITS. IN THIS VIEW OF THE MATTER, THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 10B(7) R.W. SUB-SECTION 10 OF SECTION 80 IA OF THE ACT TO DISALLOW THE SO CALLED EXCESS PROFITS ARISING TO THE ASSESSEE DU E TO THESE TRANSACTIONS WITH ITS SISTER CONCERNS. WE FIND THAT THE LEARNED CIT (APPEALS) I N HIS ORDER HAS NOTED THAT THE ASSESSEE HAD WITHDRAWN THIS GROUND AND THEREFORE NE ITHER CONSIDERED NOR ADJUDICATED THIS ISSUE IN HIS ORDER. 9.2.2 BEFORE US, IN ITS C.O. AT S.NO.5, THE ASSE SSEE CONTENDS THAT THIS GROUND WAS NEVER WITHDRAWN AND THE LEARNED CIT (APPEALS) HAD ERRONEO USLY HELD THIS GROUND TO BE WITHDRAWN BY THE ASSESSEE. IT MAY BE MENTIONED THA T THIS DISALLOWANCE HAS THE EFFECT OF VARYING THE TOTAL INCOME OF THE ASSESSEE. SINCE WE HAVE ALREADY HELD IN PARAS 6.4.1 TO 6.4.3 OF THIS ORDER (SUPRA) THAT THE ASSESSEE IS EN TITLED FOR DEDUCTION UNDER SECTION 10B OF THE ACT, THIS ISSUE IS ONLY OF ACADEMIC INTEREST . HOWEVER, SINCE A SPECIFIC OBJECTION HAS BEEN RAISED ON THIS ISSUE BEFORE US THAT THE LEARNE D CIT (APPEALS) HAS ERRONEOUSLY CONSIDERED THIS ISSUE AS WITHDRAWN, IT WOULD ONLY B E APPROPRIATE TO REMAND THIS ISSUE BACK 18 ITA NO.1050/BANG/2012 C.O.NO.85/BANG/2013 TO THE FILE OF THE LEARNED CIT (APPEALS) WITH A DIR ECTION THAT THIS ISSUE BE CONSIDERED AND A FINDING BE RENDERED THEREON AFTER AFFORDING THE A SSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD AND TO FILE DETAILS REQUIRED. IT IS ORDERED ACCORDINGLY. 10. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOW ED AND THE ASSESSEE'S CROSS OBJECTIONS ARE PARTLY ALLOWED FOR STATISTICAL PURPO SES. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH FEB., 2014. SD/- SD/- (N.V. VASUDEVAN) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMB ER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - A BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDER SR. PRIVATE SECRETARY, ITAT, BANGALORE .