The Cadila Healthcare Ltd., Ahmedabad V. The CIT-I, Ahmedabad

ITA 1096/AHD/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80410 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-09-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 18-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: M M PATEL WITH JIGAR M PA TEL
• Keywords: Business income; Maximum Marginal Rate
• Section: 143(3); 142(1); 115JB; 56; 263; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD (BEFORE SHRI ANIL CHATURVEDI, A.M. & SHRI KUL BHARA T, J.M) I.T. A. NOS. 1096/AHD/2013 & 910/AHD/2014 (ASSESSMENT YEAR: 2006-0 7 & 2008-09) CADILA HEALTHCARE LTD., ZYDUS TOWER, OPP. ISKON TEMPL, SATELLITE CROSS ROADS, AHMEDABAD- 380015 V/S CIT AHMEDABAD-1 (APPELLANT) (RESPONDENT) PAN: AAACC 6253G APPELLANT BY :SHRI M.M. PATEL WITH JIGAR M. PA TEL, A.R RESPONDENT BY :SHRI SUBHASH BAINS CIT, D.R. ( )/ ORDER DATE OF HEARING : 10-09-2014 DATE OF PRONOUNCEMENT : 17-10-2014 PER SHRI ANIL CHATURVEDI,A.M. 1. THESE 2 APPEALS FILED BY THE ASSESSEE ARE AGAINS T THE ORDER PASSED U/S 263 OF THE ACT PASSED BY CIT, AHMEDABAD DATED 13.03.2014 A ND 29.03.2014 FOR A.YS. 2006-07 AND 2008-09 RESPECTIVELY. 2. SINCE BOTH THE APPEALS ARE AGAINST THE ORDER PAS SED U/S 263, BOTH THE APPEALS ARE CONSIDERED TOGETHER FOR DISPOSAL. 3. THE FACTS AS CULLED OUT FROM THE MATERIAL ON REC ORD ARE AS UNDER. ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 2 4. ASSESSEE IS A COMPANY STATED TO BE ENGAGED AS MA NUFACTURER AND TRADER OF PHARMACEUTICAL GOODS, DIAGNOSTICS AND INSTRUMENTS. 5. FOR AY 2006-07, ASSESSEE ORIGINALLY FILED ITS RE TURN OF INCOME FOR A.Y. 06-07 ON 28.12.2006 DECLARING TOTAL LOSS OF RS. 42,70,55,684 /- AND INCOME U/S 115JB OF RS. 148,01,16,388/-. LATER ON, THE RETURN OF INCOME WAS FINALLY REVISED WHEREBY THE TOTAL LOSS WAS DECLARED AT RS 41,60,48,185/- AN D INCOME U/S 115JB WAS DECLARED AT RS 149,11,23,887/-. THE CASE WAS SELECT ED FOR SCRUTINY AND THEREAFTER THE ASSESSMENT WAS FRAMED UNDER SECTION 143(3) R.W.S. 144C VIDE ORDER DATED 28.10.2010 AND THE TOTAL INCOME WAS DET ERMINED AT RS. 51,43,37,718/-. SUBSEQUENTLY, ON EXAMINATION OF REC ORDS OF ASSESSMENT, LD. CIT NOTICED THAT ASSESSEE HAD AVAILED AND GIVEN FOREIGN CURRENCY LOANS AND HAD CLAIMED EXPENSES OF RS. 5,65,95,469/- AS EXCHANGE RATE FLUCTUATION LOSS. LD. CIT WAS OF THE VIEW THAT THE LOSS ON ACCOUNT OF FOR EIGN EXCHANGE FLUCTUATION WAS CAPITAL IN NATURE AND THEREFORE CANNOT BE ALLOWED U NDER THE PROVISIONS OF THE ACT. HE ACCORDINGLY ISSUED NOTICE AND CALLED UPON THE AS SESSEE TO SHOW CAUSE AS TO WHY THE ORDER U/S 263 OF THE ACT NOT BE PASSED IN R ESPONSE TO WHICH ASSESSEE INTERALIA OBJECTED TO THE INITIATION OF PROCEEDINGS U/S 263 AND ON MERITS SUBMITTED THAT THE EXCHANGE RATE FLUCTUATION LOSS WAS ALLOWAB LE AS DEDUCTION ON REVENUE ACCOUNT IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWORD GOVERNOR INDIA PVT. LTD. (2009) 312 ITR 25 4 (SC). THE SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE LD CIT . HE WAS OF THE VIEW THAT THE AO HAS NOT EXAMINED THE ISSUE WITH RESPECT TO A LLOWABILITY OF LOSS OF EXCHANGE RATE FLUCTUATION AND HAD NOT ALSO EXAMINED THE ASPECT AS TO WHETHER THE EXCHANGE RATE FLUCTUATION LOSS WAS INCURRED ON LOANS TAKEN ON CAPITAL ACCOUNT. HE WAS THEREFORE OF THE VIEW THAT THE ORDE R PASSED BY THE A.O WAS UNSUSTAINABLE IN THE EYES OF LAW. HE ACCORDINGLY CA NCELLED THE ASSESSMENT ORDER DATED 28.10.2010 FRAMED U/S 143(3) OF THE ACT AND D IRECTED THE A.O TO MAKE THE FRESH ASSESSMENT OF THE TOTAL INCOME OF THE ASSESSE E. ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 3 6. AS FAR AS AY 2008-09 IS CONCERNED, ASSESSEE FILE D ITS RETURN OF INCOME ON 29.9.2008 DECLARING TOTAL INCOME AT RS. NIL. THE CA SE WAS SELECTED FOR SCRUTINY AND THEREAFTER THE ASSESSMENT WAS FRAMED UNDER SECT ION 143(3) R.W.S. 144C VIDE ORDER DATED 23.02.2012 AND THE TOTAL INCOME WAS DET ERMINED AT RS. 1,77,09,75,283/-. SUBSEQUENTLY, ON EXAMINATION OF R ECORDS OF ASSESSMENT, LD. CIT NOTICED THAT ASSESSEE HAD RECEIVED REMUNERATION OF RS 4.73 CRORE FROM ZYDUS HEALTHCARE SIKKIM IN TERMS OF THE AGREEMENT A ND IT WAS CLAIMED AS EXEMPT U/S 28(V) RWS 40(B) OF THE ACT. LD. CIT WAS OF THE VIEW THAT SINCE THE AMOUNT RECEIVED BY THE ASSESSEE WAS PURSUANT TO AN AGREEMENT ENTERED BY THE ASSESSEE WITH ZYDUS HEALTHCARE, THE AMOUNT WAS REQU IRED TO BE TREATED AS INCOME OF THE ASSESSEE U/S 56 OF THE ACT FOR THE YE AR UNDER CONSIDERATION. HE ACCORDINGLY ISSUED NOTICE AND CALLED UPON THE ASSES SEE TO SHOW CAUSE AS TO WHY THE ORDER U/S 263 OF THE ACT NOT BE PASSED IN RESPO NSE TO WHICH ASSESSEE INTERALIA OBJECTED TO THE INITIATION OF PROCEEDINGS U/S 263 AND ON MERITS SUBMITTED THAT PAYMENT OF RS 4.73 CRORE WAS IN RESPECT OF PAR TNERS REMUNERATION AND IT REPRESENTS BUSINESS INCOME IN VIEW OF PROVISIONS OF U/S 28(V) AS THE FIRM WHO HAD PAID REMUNERATION TO THE ASSESSEE HAD ALREADY DISAL LOWED THE EXPENSES U/S 40(B) OF THE ACT AND THUS THERE WAS NO JUSTIFICATIO N FOR TREATING IT AS INCOME FROM OTHER SOURCES U/S 56 OF THE ACT. THE SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE LD CIT. HE WAS OF THE VIEW THAT T HE AO HAS WITHOUT CONDUCTING THE NECESSARY INQUIRY SIMPLY ACCEPTED THE CLAIM OF THE ASSESSEE. ON THE MERITS ALSO FOR THE REASONS SPELT IN THE ORDER, CIT WAS OF THE VIEW THAT THE INCOME WAS REQUIRED TO BE TREATED AS INCOME FROM OTHER SOURCE S. HE THUS RELYING ON THE VARIOUS DECISIONS CONCLUDED THAT AO HAS NEITHER EXA MINED THE ISSUE NOR CONDUCTED NECESSARY INQUIRIES AND WAS THEREFORE OF THE VIEW THAT THE ORDER PASSED BY THE A.O WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE AND THEREFORE CANCELLED THE ASSESSMENT ORDER DATED 23.2.2012 FRAMED U/S 143(3) OF THE ACT AND DIRECTED THE A.O TO MAKE THE FRESH ASSESSMENT OF THE TOTAL INCOME OF THE ASSESSEE. 7. AGGRIEVED BY THE ORDER OF CIT, ASSESSEE IS NOW I N APPEAL BEFORE US. ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 4 8. BEFORE US, THE LD. A.R. SUBMITTED THAT IN THE PR ESENT CASE FOR BOTH THE YEARS, THE PRE-REQUISITE CONDITIONS SPECIFIED U/S 263 WERE NOT SATISFIED AND THEREFORE THE PROCEEDINGS U/S 263 LACKS JURISDICTION AND ARE BAD IN LAW. HE SUBMITTED THAT U/S 263, THE CIT CAN REVISE AN ORDER PASSED BY THE AO O NLY ON THE SATISFACTION OF TWIN CONDITIONS NAMELY (I) THE ORDER IS ERRONEOUS A ND (II) IT IS PREJUDICIAL TO THE INTEREST OF REVENUE. IF ONE OF THEM IS ABSENT I.E. IF EITHER THE ORDER OF THE REVENUE IS ERRONEOUS BUT IS NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE OR IF IT IS NOT ERRONEOUS BUT IS PREJUDICIAL TO THE INTEREST OF REVENUE RECOURSE CANNOT BE HAD TO S. 263(1). HE FURTHER SUBMITTED THAT THE ERROR ENVISAGED BY S. 263 IS NOT ONE WHICH DEPENDS ON POSSIBILITY OR GUESSWORK BUT I T SHOULD BE AN ACTUAL ERROR EITHER OF FACTS OR OF LAW. HE FURTHER SUBMITTED THA T WHEN TWO VIEWS ARE POSSIBLE AND THE AO HAS TAKEN ONE VIEW WITH WHICH THE CIT DO ES NOT AGREE, THE ORDER OF THE AO CANNOT BE TREATED AS AN ERRONEOUS ORDER PREJ UDICIAL TO THE INTERESTS OF THE REVENUE UNLESS THE VIEW TAKEN BY THE AO IS UNSUSTAI NABLE IN LAW AND FOR THE AFORESAID PROPOSITION HE RELIED ON THE DECISION IN THE CASE OF MALABAR IND. CO VS CIT (2000) 243 ITR 83 (SC). 9. WITH RESPECT TO THE ISSUE OF LOSS ON ACCOUNT OF EXCHANGE FLUCTUATION IN AY 2006- 07, THE LD AR SUBMITTED THAT DURING THE COURSE OF A SSESSMENT PROCEEDINGS, A.O HAD RAISED A QUERY WITH RESPECT TO THE LOSS ON ACCO UNT OF EXCHANGE FLUCTUATION AND THE SAME WAS REPLIED BY THE ASSESSEE VIDE ITS R EPLY DATED 14 TH OCTOBER, 2009. HE POINTED TO PAGE 7 OF THE PAPER BOOK WHEREI N HE POINTED OUT THAT THE DETAILS OF DEFICIT ON ACCOUNT OF FLUCTUATION IN FOR EIGN EXCHANGE RATE ON LOANS THAT WAS SUBMITTED BEFORE THE A.O. HE ALSO POINTED TO TH E DETAILS OF FOREIGN RATE FLUCTUATION LOSS STATEMENT PLACED AT PAGE 9 OF THE PAPER BOOK WHICH WAS ALSO SUBMITTED BEFORE THE A.O. THE LD. A.R. FURTHER SUB MITTED THAT IN RESPONSE TO THE FURTHER QUERY OF THE A.O, ASSESSEE VIDE ITS LETTER DATED NOVEMBER 12, 2009 HAD SUBMITTED THE REASONS FOR CLAIMING THE LOSS AS REVE NUE LOSS AND THE RELEVANT REPLY WAS PLACED AT PAGE 15 OF THE PAPER BOOK. THE LD. A.R. THEREFORE SUBMITTED THAT AFTER CONSIDERING THE SUBMISSIONS OF THE ASSES SEE AND ON BEING SATISFIED BY ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 5 THE REPLIES GIVEN BY ASSESSEE, NO ADDITION WAS MADE BY A.O. ON THE ISSUE OF NON MENTIONING OF THE QUERY RAISED DURING THE ASSES SMENT PROCEEDINGS IN THE ASSESSMENT ORDER, HE POINTED TO THE OBSERVATIONS MA DE BY THE TRIBUNAL IN THE CASE OF SIDDH INTERNATIONAL VS. CIT (2009) 32 SOT 1 4 (AHD) (URO) WHEREIN THE HBLE TRIBUNAL HAS OBSERVED THAT THERE IS NO PROVIS ION UNDER THE INCOME TAX ACT WHICH REQUIRES THAT THE ASSESSING OFFICER SHOULD PA SS ORDER IN SPECIFIED MANNER SO THAT ALL THE QUERIES RAISED BY HIM AS WELL AS TH E SUBMISSIONS MADE BY THE ASSESSEE ALONG WITH THE DECISION OF THE A.O SHOULD BE INCORPORATED IN THE ORDER. THE LD. A.R. FURTHER SUBMITTED THAT AN IDENTICAL IS SUE ABOUT THE FOREIGN EXCHANGE LOSS WAS BEFORE THE HONBLE AHMADABAD TRIBUNAL IN T HE CASE OF ZAVERI AND CO. VS. CIT (ITA NO. 1395/AHD/2013 ORDER DATED 07.05.20 14) AND THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWORD GOVERNOR (SUPRA) AND OTHER DECISIONS. 10. WITH RESPECT TO THE ISSUE OF TREATMENT OF REMUN ERATION RECEIVED FROM ZYDUS HEALTHCARE SIKKIM IN AY 2008-09, THE LD AR SUBMITTE D THAT RS 4.73 CRORE WAS RECEIVED BY THE ASSESSEE AS REMUNERATION FROM ZYDUS HEALTHCARE, THE FIRM, WHERE THE ASSESSEE WAS A PARTNER. WHILE COMPUTING T HE TOTAL INCOME OF THE FIRM, THE REMUNERATION OF RS 4.73 CRORE WAS DISALLOWED U/ S 40(B) BECAUSE AS PER EXPLANATION 4 TO S. 40(B) WORKING PARTNER MEANS O NLY AN INDIVIDUAL WHO IS ACTIVELY ENGAGED IN CONDUCTING THE AFFAIRS OF THE B USINESS OR PROFESSION OF THE FIRM. WHILE COMPUTING THE TOTAL INCOME IN THE HANDS OF THE ASSESSEE, THE REMUNERATION OF RS 4.73 CRORE RECEIVED FROM THE FIR M WAS EXCLUDED IN VIEW OF THE PROVISIONS OF S. 28(V) OF THE ACT BECAUSE AS PER PR OVISO TO THE SECTION, THE AMOUNT OF INTEREST, SALARY, BONUS, COMMISSION OR RE MUNERATION, BY WHATEVER NAME CALLED AND WHICH HAS NOT BEEN ALLOWED TO BE DE DUCTED U/S 40(B) NEEDS TO BE ADJUSTED TO THE EXTENT OF THE AMOUNT NOT ALLOWAB LE. SINCE THE AMOUNT OF RS 4.73 CRORE WAS DISALLOWED IN THE CASE OF FIRM U/S 4 0(B), THE AMOUNT WAS RIGHTLY EXCLUDED BY THE ASSESSEE U/S 28(V). LD A.R SUBMITTE D THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO VIDE NOTICE U/S 142(1) DA TED 19.9.2011 VIDE POINT NO 3 RAISED A SPECIFIC QUERY WHEREBY THE ASSESSEE W AS ASKED TO GIVE THE DETAILS, ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 6 EVIDENCE AND A NOTE AS TO HOW THE RECEIPT WAS EXEMP T IN THE HANDS OF ASSESSEE. THE LD AR POINTED TO THE COPY OF THE NOTICE PLACED AT PAGE 1 OF THE PAPER BOOK. IN RESPONSE TO THE QUERY OF THE AO, ASSESSEE VIDE L ETTER DATED 13.10.2011 FURNISHED THE COPIES OF THE ADDENDUM TO THE PARTNER SHIP DEED, MOU AND SUBMITTED THAT THE AMOUNT WAS NOT TAXABLE. HE POINT ED TO THE COPY OF THE LETTER AND THE RELEVANT REPLY PLACED AT PAGE 9 OF THE PAPE R BOOK. THEREAFTER THE AO AGAIN VIDE LETTER DATED 24.10.2011 SOUGHT EXPLANATI ON AND STATED THAT HE PROPOSED TO DISALLOW THE ASSESSEES CLAIM AND ASKED THE ASSESSEE TO FILE ITS OBJECTION IF ANY. THE ASSESSEE OBJECTED TO THE PROP OSED DISALLOWANCE AND SUBMITTED A DETAILED WRITTEN REPLY. HE POINTED TO T HE COPY OF THE LETTER OF THE AO AND RESPONSE OF THE ASSESSEE WHICH WAS PLACED AT PA GE 17 TO PAGE 24 OF THE PAPER BOOK. THE LD. A.R. THEREFORE SUBMITTED THAT A FTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND ON BEING SATISFIED BY THE REPLIES GIVEN BY ASSESSEE, NO ADDITION WAS MADE BY A.O. THE LD AR RE LYING ON THE DECISION OF APEX COURT IN THE CASE OF MALABAR INDUSTRIAL CO. LT D. VS. CIT (2000) 243 ITR 83 (SC) THAT THE PHRASE PREJUDICIAL TO THE INTERESTS OF THE REVENUE HAS TO BE READ IN CONJUNCTION WITH AN ERRONEOUS ORDER PASSED BY THE A O. EVERY LOSS OF REVENUE AS A CONSEQUENCE OF AN ORDER OF AO CANNOT BE TREATED A S PREJUDICIAL TO THE INTERESTS OF THE REVENUE, FOR EXAMPLE, WHEN AN ITO ADOPTED ON E OF THE COURSES PERMISSIBLE IN LAW AND IT HAS RESULTED IN LOSS OF R EVENUE; OR WHERE TWO VIEWS ARE POSSIBLE AND THE ITO HAS TAKEN ONE VIEW WITH WHICH THE CIT DOES NOT AGREE, IT CANNOT BE TREATED AS AN ERRONEOUS ORDER PREJUDICIAL TO THE INTERESTS OF THE REVENUE UNLESS THE VIEW TAKEN BY THE ITO IS UNSUSTA INABLE IN LAW. THE LD AR FURTHER PLACING RELIANCE ON THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT VS GABRIEL INDIA LTD (1993) 203 ITR 108 (BOM) SUBMI TTED THAT HBLE BOMBAY HIGH COURT HAS HELD THAT AN ORDER CANNOT BE TERMED AS ERRONEOUS UNLESS IT IS NOT IN ACCORDANCE WITH LAW. IF AN ITO ACTING IN ACCORDANCE WITH LAW MAKES CERTAIN ASSESSMENT, THE SAME CANNOT BE BRANDED AS ERRONEOUS BY THE COMMISSIONER SIMPLY BECAUSE ACCORDING TO HIM THE ORDER SHOULD HA VE BEEN WRITTEN MORE ELABORATELY. THIS SECTION DOES NOT VISUALISE A CASE OF SUBSTITUTION OF JUDGMENT OF THE COMMISSIONER FOR THAT OF THE ITO, WHO PASSED TH E ORDER, UNLESS THE DECISION ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 7 IS HELD TO BE ERRONEOUS. CASES MAY BE VISUALISED WH ERE ITO WHILE MAKING AN ASSESSMENT EXAMINES THE ACCOUNTS, MAKES ENQUIRIES, APPLIES HIS MIND TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND DETERMINES THE INCOME EITHER BY ACCEPTING THE ACCOUNTS OR BY MAKING SOME ESTIMATES HIMSELF. THE COMMISSIONER, ON PERUSAL OF THE RECORDS, MAY BE OF THE OPINION THAT THE ESTIMATE MADE BY THE OFFICER CONCERNED WAS ON THE LOWER SIDE AND, LEFT TO THE COMMISSIONER, HE WOULD HAVE ESTIMATED THE INCOME AT A HIGHER FIGURE THAN THE ONE DETERMINED BY THE ITO. THAT WOULD NOT VEST THE COMMISSIONER WITH POWER TO RE-EXAMINE THE ACCOUNTS AND DETERMINE THE INCOME HI MSELF AT A HIGHER FIGURE. IT IS BECAUSE THE ITO HAS EXERCISED THE QUASI-JUDICIAL POWER VESTED IN HIM IN ACCORDANCE WITH LAW AND ARRIVED AT A CONCLUSION AND SUCH A CONCLUSION CANNOT BE TERMED TO BE ERRONEOUS SIMPLY BECAUSE THE COMMIS SIONER DOES NOT FEEL SATISFIED WITH THE CONCLUSION. IT MAY BE SAID IN SU CH A CASE THAT IN THE OPINION OF THE COMMISSIONER THE ORDER IN QUESTION IS PREJUDICI AL TO THE INTEREST OF THE REVENUE. BUT THAT BY ITSELF WILL NOT BE ENOUGH TO V EST THE COMMISSIONER WITH THE POWER OF SUO MOTU REVISION BECAUSE THE FIRST REQUIR EMENT, NAMELY, THE ORDER IS ERRONEOUS, IS ABSENT. SIMILARLY IF AN ORDER IS ERRO NEOUS BUT NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE, THEN ALSO THE POWER OF SUO MOTU REVISION CANNOT BE EXERCISED. ANY AND EVERY ERRONEOUS ORDER CANNOT BE SUBJECT-MATTER OF REVISION BECAUSE THE SECOND REQUIREMENT ALSO MUST BE FULFILL ED. ON THE ISSUE OF NON MENTIONING OF THE QUERY RAISED DURING THE ASSESSMEN T PROCEEDINGS IN THE ASSESSMENT ORDER, HE POINTED TO THE OBSERVATIONS MA DE BY THE TRIBUNAL IN THE CASE OF SIDDH INTERNATIONAL VS. CIT (2009) 32 SOT 1 4 (AHD) (URO) WHEREIN THE HBLE TRIBUNAL HAS OBSERVED THAT THERE IS NO PROVIS ION UNDER THE INCOME TAX ACT WHICH REQUIRES THAT THE ASSESSING OFFICER SHOULD PA SS ORDER IN SPECIFIED MANNER SO THAT ALL THE QUERIES RAISED BY HIM AS WELL AS TH E SUBMISSIONS MADE BY THE ASSESSEE ALONG WITH THE DECISION OF THE A.O SHOULD BE INCORPORATED IN THE ORDER. THE LD AR THUS SUBMITTED THAT THE ORDER OF THE LD C IT FOR AY 2006-07 AND AY 2008-09 PASSED U/S 263 OF THE ACT NEEDS TO BE SET A SIDE, BOTH ON THE GROUND OF JURISDICTION AND ON FACTS. ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 8 11. THE LD. D.R. ON THE OTHER HAND SUPPORTED THE OR DER OF CIT. HE FURTHER SUBMITTED THAT WHEN A.O HAS ALLOWED THE CLAIM WITHOUT ANY DIS CUSSION, THE ORDER WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE AND FOR WHICH HE PLACED RELIANCE ON THE DECISION IN THE CASE OF CIT VS. INF OSYS TECHNOLOGIES LTD. 17 TAXMAN.COM 203 (KARNATAKA). HE ALSO PLACED RELIANCE ON THE DECISION IN THE CASE OF CIT VS. USHA INTERNATIONAL LTD. 348 ITR 485 (DEL.). WITH RESPECT TO THE ALLOWABILITY OF FLUCTUATION LOSS, HE SUBMITTED THAT THE FACTS IN THE CASE OF ZAVERI AND CO. (SUPRA) RELIED BY THE ASSESSEE ARE DISTINGU ISHABLE IN VIEW OF THE FACT THAT IN THAT CASE, THE OFFICE NOTE HAD THE RECORDING ABO VE THE EXAMINATION OF THE ISSUE WHICH WAS NOT SO IN THE PRESENT CASE. HE FURTHER SU BMITTED THAT WHILE DECIDING THE CASE IN THE CASE OF ZAVERI AND CO, THE DECISION OF KARNATAKA HIGH COURT IN THE CASE OF CIT VS. INFOSYS TECHNOLOGIES (SUPRA) WA S NOT CONSIDERED. THE LD DR FURTHER RELIED ON THE DECISION IN THE CASE OF CIT V S M.M.KHAMBATWALA (1992) 198 ITR 144 (GUJ) FOR THE PROPOSITION THAT REVISIONAL P OWER CAN BE EXERCISED EVEN IN A CASE WHERE THE ISSUE IS DEBATABLE. HE FURTHER SUBMI TTED THAT BY SETTING ASIDE THE ORDER OF A.O NO PREJUDICE WOULD BE CAUSED TO ASSESS EE AS THE ASSESSEE WILL BE GETTING AN OPPORTUNITY TO REPRESENT ITS CASE ONCE A GAIN. HE THUS SUPPORTED THE ORDER OF CIT. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS ABOVE THE INVOKING OF PROVISIONS OF SECTION 263 BY CIT. 13. S. 263(1) OF THE ACT, THE POWERS UNDER WHICH CI T HAS ASSUMED POWER FOR REVISION READS AS UNDER: THE COMMISSIONER MAY CALL FOR AND EXAMINE THE RECO RD OF ANY PROCEEDING UNDER THIS ACT, AND IF HE CONSIDERS THAT ANY ORDER PASSED THEREIN BY THE ITO IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INT ERESTS OF THE REVENUE, HE MAY, AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING H EARD AND AFTER MAKING OR CAUSING TO BE MADE SUCH INQUIRY AS HE DEEMS NECESSA RY, PASS SUCH ORDER THEREON AS THE CIRCUMSTANCES OF THE CASE JUSTIFY, INCLUDING AN ORDER ENHANCING OR ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 9 MODIFYING THE ASSESSMENT, OR CANCELLING THE ASSESSM ENT AND DIRECTING A FRESH ASSESSMENT. 14. THE READING OF THE ABOVE PROVISIONS MAKES IT VE RY CLEAR THAT THE POWER OF SUO MOTU REVISION U/S 263(1) IS IN THE NATURE OF SUPERV ISORY JURISDICTION AND THE SAME CAN BE EXERCISED ONLY IF THE CIRCUMSTANCES SPECIFIE D THEREIN EXIST. TWO CIRCUMSTANCES MUST EXIST TO ENABLE THE COMMISSIONER TO EXERCISE POWER OF REVISION U/S 263, NAMELY (I) THE ORDER IS ERRONEOUS (II) BY VIRTUE OF BEING ERRONEOUS PREJUDICE HAS BEEN CAUSED TO THE INTEREST S OF THE REVENUE. 15. HBLE APEX COURT IN THE CASE OF MALABAR INDUSTR IAL CO LTD VS CIT (2000) 243 ITR 83 (SC) HAS HELD THAT CIT HAS TO BE SATISFIED OF TW IN CONDITIONS, NAMELY, (I) THE ORDER OF THE AO SOUGHT TO BE REVISED IS ERRONEOUS; AND (II) IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE. IF ONE OF THEM IS ABSENT IF THE ORDER OF THE ITO IS ERRONEOUS BUT IS NOT PREJUDICIAL TO THE REVENUE OR IF IT IS NOT ERRONEOUS BUT IS PREJUDICIAL TO THE REVENUERECOURSE CANNOT BE HAD T O S. 263(1). IT WAS FURTHER HELD THAT THE PROVISION CANNOT BE INVOKED TO CORREC T EACH AND EVERY TYPE OF MISTAKE OR ERROR COMMITTED BY THE AO; WHEN AN ITO A DOPTED ONE OF THE COURSES PERMISSIBLE IN LAW AND IT HAS RESULTED IN LOSS OF R EVENUE; OR WHERE TWO VIEWS ARE POSSIBLE AND THE ITO HAS TAKEN ONE VIEW WITH WHICH THE CIT DOES NOT AGREE, IT CANNOT BE TREATED AS AN ERRONEOUS ORDER PREJUDICIAL TO THE INTERESTS OF THE REVENUE UNLESS THE VIEW TAKEN BY THE ITO IS UNSUSTA INABLE IN LAW. 16. IN THE CASE OF CIT VS GABRIEL INDIA LTD (1993) 203 ITR 108 (BOM), THE HBLE BOMBAY HIGH COURT HAS HELD AS UNDER: AN ORDER CANNOT BE TERMED AS ERRONEOUS UNLESS IT I S NOT IN ACCORDANCE WITH LAW. IF AN ITO ACTING IN ACCORDANCE WITH LAW MAKES CERTA IN ASSESSMENT, THE SAME CANNOT BE BRANDED AS ERRONEOUS BY THE COMMISSIONER SIMPLY BECAUSE ACCORDING TO HIM THE ORDER SHOULD HAVE BEEN WRITTEN MORE ELAB ORATELY. THIS SECTION DOES NOT VISUALISE A CASE OF SUBSTITUTION OF JUDGMENT OF THE COMMISSIONER FOR THAT OF THE ITO, WHO PASSED THE ORDER, UNLESS THE DECISION IS HELD TO BE ERRONEOUS. ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 10 CASES MAY BE VISUALISED WHERE ITO WHILE MAKING AN A SSESSMENT EXAMINES THE ACCOUNTS, MAKES ENQUIRIES, APPLIES HIS MIND TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND DETERMINES THE INCOME EITHER BY ACCEPT ING THE ACCOUNTS OR BY MAKING SOME ESTIMATES HIMSELF. THE COMMISSIONER, ON PERUSAL OF THE RECORDS, MAY BE OF THE OPINION THAT THE ESTIMATE MADE BY THE OFFICER CONCERNED WAS ON THE LOWER SIDE AND, LEFT TO THE COMMISSIONER, HE WO ULD HAVE ESTIMATED THE INCOME AT A HIGHER FIGURE THAN THE ONE DETERMINED B Y THE ITO. THAT WOULD NOT VEST THE COMMISSIONER WITH POWER TO RE-EXAMINE THE ACCOUNTS AND DETERMINE THE INCOME HIMSELF AT A HIGHER FIGURE. IT IS BECAUSE TH E ITO HAS EXERCISED THE QUASI- JUDICIAL POWER VESTED IN HIM IN ACCORDANCE WITH LAW AND ARRIVED AT A CONCLUSION AND SUCH A CONCLUSION CANNOT BE TERMED TO BE ERRONE OUS SIMPLY BECAUSE THE COMMISSIONER DOES NOT FEEL SATISFIED WITH THE CONCL USION. IT MAY BE SAID IN SUCH A CASE THAT IN THE OPINION OF THE COMMISSIONER THE ORDER IN QUESTION IS PREJUDICIAL TO THE INTEREST OF THE REVENUE. BUT THAT BY ITSELF WILL NOT BE ENOUGH TO VEST THE COMMISSIONER WITH THE POWER OF SUO MOTU REVISION BE CAUSE THE FIRST REQUIREMENT, NAMELY, THE ORDER IS ERRONEOUS, IS ABSENT. SIMILARL Y IF AN ORDER IS ERRONEOUS BUT NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE, THE N ALSO THE POWER OF SUO MOTU REVISION CANNOT BE EXERCISED. ANY AND EVERY ERRONEO US ORDER CANNOT BE SUBJECT- MATTER OF REVISION BECAUSE THE SECOND REQUIREMENT A LSO MUST BE FULFILLED. 17. IN THE PRESENT CASE FOR AY 2006-07, IT IS SEEN THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO HAD RAISED QUERY WITH RES PECT TO THE EXCHANGE FLUCTUATION LOSS AND IN RESPONSE TO WHICH THE ASSES SEE HAS SUBMITTED ITS REPLY. FOR READY REFERENCE, THE REPLY SUBMITTED BY THE ASS ESSEE VIDE ITS LETTER DATED 14 TH OCTOBER 2009 (WHICH IS PLACED AT PAGE 7 OF THE PAP ER BOOK) READS AS UNDER: 15. WE ARE ENCLOSING HEREWITH, DETAILS OF DEFICIT O N ACCOUNT OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES ON LOANS. OF RS. 565.95 LACS, MARKED AS ANNEXURE NO . 9. SINCE THE SAID DEFICIT/ LOSS IS PERTAINED TO T HE LOAN/BORROWINGS OF THE COMPANY IT HAS BEEN CHARGED TO THE PROFIT AND LOSS ACCOUNT AS PER THE ACCOUNTIN G STANDARD 11 PRESCRIBED BY THE INSTITUTE OF CHARTERE D ACCOUNTANTS OF INDIA, CONSISTENTLY FOLLOWED BY TH E ASSESSEE COMPANY FROM YEAR TO YEAR. COPY OF THE ANNEXURE 9 REFERRED TO IN THE ABOVE REP LY AND WHICH 9 OF THE PAPER BOOK IS AS UNDER: DETAILS OF EXCHANGE RATE FLUCTUATION GAIN/LOSS ON LOANS: ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 11 NAME OF THE PARTY ERF LOSS RS. ERF GAIN RS. LOAN TAKEN: BNP PARIBAS ECB LOAN EXIM BANK FOREIGN LOAN BOB-ECB & FCNR LOAN SBI-FCNR LOAN ICICI-ECB LOAN GIVEN: ZYDUS INTERNATIONAL PVT. LTD., IRELAND ZYDUS FRANCE SAS, FRANCE NET DEFICIT 3,284,061 1,189,071 26,701,748 17,170,000 13,100,000 27,110,000 27,022,840 2,187,520 2,749,061 56,595,459 TOTAL 88,554,880 88,554, 880 ASSESSEE VIDE ITS LETTER DATED 12 TH NOV 2009 GAVE FURTHER CLARIFICATION ON THE FOREIGN EXCHANGE GAIN /LOSS (COPY PLACED AT PAGE 15 OF THE PAPER BOOK) THE RELEVANT PORTION OF WHICH IS AS UNDER: 5. AS REGARDS YOUR QUERY AS TO WHY FOREIGN EXCHANG E GAIN/LOSS ON LOANS GIVEN TO ZYDUS INTERNATIONAL PVT. LTD., IRELAND AND ZYDUS FRANCE SAS, FRANCE, HA VE BEEN CLAIMED ALLOWABLE REVENUE INCOME/LOSS, WE WISH TO SUBMIT AS UNDER: (A) IT RELATES TO THE LOANS GIVEN BY THE ASSESSEE C OMPANY WHICH HAVE FETCHED INTEREST INCOME TO THE ASSESSEE COMPANY. (B) IT IS NOT COVERED U/S 43A AS THESE LOANS DO NOT REPRESENT ANY AMOUNT BORROWED TO ACQUIRE / IMPORT ANY FIXED ASSETS. (C) IT IS ACCOUNTED IN THE BOOKS OF ACCOUNTS FOR TH E YEAR UNDER ASSESSMENT FOLLOWING THE ACCOUNTING STANDARD-11 PRESCRIBED BY THE INSTITUTE OF CHARTERE D ACCOUNTANTS OF INDIA, IN THIS REGARD, CONSISTENTL Y FOLLOWED BY THE ASSESSEE COMPANY FOR YEAR TO YEAR. (D) THE ASSESSEE COMPANY IS RELYING ON THE FOLLOWIN G DECISIONS OF THE HONBLE SUPREME COURT DECIDED IN FAVOUR OF THE ASSESSEE:- (I) CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. (2009) 312 ITR 254 (SC) (II) CIT VS. ENRON OIL AND GAS INDIA LTD. (2008) 30 5 ITR 75 (SC) 18. THUS ON PERUSING THE QUERY OF THE A.O AND THE R EPLY BY THE ASSESSEE TO THE QUERY RAISED BY A.O, IT IS SEEN THAT SPECIFIC QUERY WAS RAISED BY THE A.O ABOUT THE LOSS ON ACCOUNT OF EXCHANGE FLUCTUATION AND THE QUERY WAS ALSO REPLIED TO BY THE ASSESSEE AND THE DECISIONS OF THE APEX COURT ON WHICH THE ASSESSEE HAD RELIED UPON WAS ALSO POINTED OUT BY THE ASSESSEE. A FTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, IT APPEARS THAT THE REP LY OF ASSESSEE WAS FOUND TO BE ACCEPTABLE BY THE AO BECAUSE NO ADDITION ON ACCO UNT OF EXCHANGE RATE FLUCTUATION WAS MADE BY THE AO IN THE ASSESSMENT OR DER. ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 12 19. WITH RESPECT TO THE ISSUE OF ALLOWING OF REMUNE RATION OF RS 4.73 CRORE IN AY 2008-09, IT IS SEEN THAT DURING THE COURSE OF ASSES SMENT PROCEEDINGS AO VIDE NOTICE ISSUED U/S 142(1) DATED 19.9.2011 AND 24.10. 2011 HAD RAISED THE QUERY AND SOUGHT THE EXPLANATION FROM THE ASSESSEE TO WHI CH THE ASSESSEE VIDE REPLY DATED 13.10.2011 AND 19.12.2011 HAS FURNISHED THE R EPLIES. FOR READY REFERENCE, THE QUERY OF THE AO VIDE NOTICE DATED 19.9.2011 (WH ICH IS PLACED AT PAGE 1 OF THE PAPER BOOK)READS AS UNDER: 3. RS 4,73,19,405 HAVE BEEN CLAIMED AS EXEMPT IN T HE STATEMENT OF TOTAL INCOME UNDER THE HEAD REMUNERATION FROM PARTNERSHIP FIRM SINCE DISALLOWE D U/S 40(B) IN FIRMS INCOME. PLEASE GIVE DETAILS AND EVIDENCE OF THE SAME WITH WORKING AND A NOTE AS TO HOW THE SAME IS EXEMPT IN THE HANDS OF THE COMPANY IN RESPONSE TO WHICH ASSESSEE VIDE REPLY DATED 13.1 0.2011 SUBMITTED (WHICH IS PLACED AT PAGE 9 OF THE PAPER BOOK) READS AS UNDER: 3. REPLY TO POINT NO 3 OF YOUR LETTER DATED 19.9.20 11: THE ASSESSEE COMPANY HAS CLAIMED THE AMOUNT OF REMU NERATION FROM PARTNERSHIP FIRM AS NOT CHARGABLE TO TAX SINCE THE SAME HAS BEEN ADDED TO THE TOTAL INCO ME AS DISALLOWANCE U/S 40(B) IN THE FIRMS CASE AS ENVISAGED UNDER THE PROVISO TO S. 28(V) OF THE ACT. IN THIS REGARD, WE ARE ENCLOSING HEREWITH COPIES O F THE ADDENDUM TO THE PARTNERSHIP DEED AND THE MEMORANDUM OF UNDERSTANDING BETWEEN THE PARTNERS FIRXING THE REMUNERATION MARKED AS ANNEXURE NO 8 AND 9 RESPECTI VELY. THEREAFTER VIDE NOTICE DATED 24.10.2011 (COPY PLACE D AT PAGE 17 OF THE PAPERBOOK) FURTHER QUERY WAS RAISED BY THE AO WHICH READS AS UNDER: 2. WITH REGARD TO RS. 4,73,19,405 CLAIMED AS EXEMP T IN STATEMENT OF TOTAL INCOME UNDER THE HEAD 'REMUNERATION FROM PARTNERSHIP FIRM SINCE DISALLOWED U/S. 40(B) IN FIRM'S INCOME', VERIFICATION OF STATEMENT OF TOT AL INCOME OF ZYDUS HEALTHCARE, SIKKIM SHOWS THAT THE AMOUNT WAS ADDED IN COMPUTATI ON THERE AND THE SAME AMOUNT IS CLAIMED AS EXEMPT HERE IN THE COMPANY. TH E DISALLOWED AMOUNT IN THE HANDS OF THE FIRM HAS GONE TO INCREASE THE ELIG IBLE BENEFIT U/S 10C AND THE SAME AMOUNT HAS IS CLAIMED NOT TAXABLE AS PER PROVI SO PLACED UNDER SECTION 28(V). THE PROVISO READS THAT... PROVIDED THAT WHERE ANY INTEREST, SALARY, BONUS, C OMMISSION OR REMUNERATION, BY WHATEVER NAME CALLED, OR ANY PART THEREOF HAS NOT BEEN ALLOWED TO BE DEDUCTED UNDER CLAUSE (B) OF SECTION 40 , THE INCOME UNDER THIS CLAUSE SHALL BE ADJUSTED TO THE EXTENT OF AMOUNT NOT SO ALLOWED TO BE DEDUCTED' ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 13 IN OTHER WORDS THE SECTION 40(B) IS PROTECTION FOR THE REVENUE FROM EXCESS CLAIM OF REMUNERATION IN THE HANDS OF THE FIRM AND THE PROVISO PLACED UNDER SECTION 28(V) IS A SAFETY FOR THE ASSESSEE AGAINST DOUBLE TAXATION OF THE AMOUNT WHICH THE ASSESSING OFFICER DISALLOWS AS PER SECTION 40(B ). HOWEVER THE INTENTION OF THE PROVISO IS NOT TO FACILITATE THE ASSESSEE TO SUO-MOTO DISALLOW FULL AMOUNT TO GET UNDUE BENEFIT OF 'EXCESS DEDUCTION' AND DEPRIVE THE REVENUE THE DUE TAX. THAT IS THE REASON FOR THE USAGE OF THE PHRASE 'HAS NOT BEEN ALLOWED TO BE_DEDUCTED_UNDER CLAUSE (B) OF SECTION 40' AS AGAINST THE WORDING 'DISALLOWED UNDER CLAUSE (B) OF SECTION 40'. IN OTH ER WORDS THE SECTION 40(B) PROVIDES FOR DISALLOWANCE OF CERTAIN AMOUNTS IN EXC ESS OF CERTAIN LIMITS, WHICH THE AO WILL DISALLOW AND THE INTENTION IS NOT TO ALLOW THE ASSESSEE TO DISALLOW THE ENTIRE AMOUNT TO MISUSE THE PROVISO FOR DERIVING UNDUE AND UNINT ENDED BENEFIT. THEREFORE THE AMOUNT, MORE SO THE FULL AMOUNT DISAL LOWED BY YOU IN ZYDUS HEALTHCARE, SIKKIM TO CLAIM EXEMPTION HERE IN THE C OMPANY BEING RS.4,73,19,405 IS PROPOSED TO BE DISALLOWED AND ADD ED BACK TO INCOME. PLEASE FILE YOUR OBJECTIONS IF ANY. IN RESPONSE TO THE QUERY, ASSESSEE VIDE ITS SUBMISS ION DATED 19.12.2011 (COPY PLACED AT PAGE 19 TO 24 OF THE PAPER BOOK) SUBMITTE D AS UNDER: 1. IN THE STATEMENT OF TOTAL INCOME FOR A.Y. 2008- 09, THE ASSESSEE COMPANY HAS EXCLUDED THE AMOUNT OF RS.4,73,19,405/- REPRESENTING REMUNERATION RECEIVED BY THE COMPANY F ROM THE PARTNERSHIP FIRM OF M/S. ZYDUS HEALTHCARE SIKKIM, I N VIEW OF THE PROVISIONS OF SEC. 28(V) OF THE INCOME-TAX ACT. 2. IT IS A MATTER OF RECORD THAT THE SAID REMUNERAT ION OF RS.4.73 CRORES WAS DISALLOWED U/S. 40(B) WHILE COMPUTING THE TOTAL INCOME OF THE AFORESAID PARTNERSHIP FIRM. AS PER SEC. 40(B), 'THE FOLLOWING AMOUNT SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSI NESS AND PROFESSION: - IN THE CASE OF ANY FIRM ASSESSABLE AS SUCH, ANY P AYMENT OF SALARY, BONUS, COMMISSION OR REMUNERATION, BY WHATE VER NAME CALLED TO ANY PARTNER WHO IS NOT A WORKING PARTNER. ' 3. SINCE AS PER EXPLANATION 4 TO SEC. 40(B), 'WORKI NG PARTNER' MEANS ONLY AN INDIVIDUAL WHO IS ACTIVELY ENGAGED IN CONDU CTING THE AFFAIRS OF THE BUSINESS OR PROFESSION OF THE FIRM, REMUNERATION PAID TO THE ASSESSEE COMPANY IS NOT ALLOWED TO BE DEDUCTED UNDER THE PROVISIONS OF SEC.40(B). IN VIEW OF THE ABOVE, WHILE COMPUTING THE ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 14 TOTAL INCOME OF THE PARTNERSHIP FIRM, REMUNERATION OF RS.4.73 CRORES PAID BY THE FIRM TO THE COMPANY WAS DULY DISALLOWED UNDER SEC. 40(B). 4. SECTION 28(V) PROVIDES THAT 'ANY INTEREST, SALAR Y, BONUS, COMMISSION OR REMUNERATION, BY WHATEVER NAME CALLED, DUE TO, OR R ECEIVED BY, A PARTNER OF A FIRM FROM SUCH FIRM, SHALL BE CHARGEABLE TO IN COME-TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION.' HOWEVER, THE PROVISO TO THE SAID SECTION ALSO PROVIDES THAT, 'WHERE ANY INTEREST, SALARY, BONUS, COMMISSION OR REMUNERATION, BY WHATEVER NAME CALLED , OR ANY PART THEREOF HAS NOT BEEN ALLOWED TO BE DEDUCTED UNDER C LAUSE (B) OF SECTION 40, THE INCOME UNDER THIS CLAUSE SHALL BE ADJUSTED TO THE EXTENT OF THE AMOUNT NOT SO ALLOWED TO BE DEDUCTED.' 5. THE UNDERLYING LOGIC AND RATIONALE OF THE ABOVE CAME TO BE DULY EXPLAINED BY THE CBDT IN ITS CIRCULAR NO.636, DATED 31/08/1992 EXPLAINING THE PROVISIONS OF THE NEW SCHEME OF TAXA TION OF FIRMS AND PARTNERS AS INTRODUCED BY THE FINANCE ACT, 1992 AS UNDER: '48.1 A FIRM WILL NOW ONWARDS BE TAXED AS A SEPARATE ENT ITY (SECTIONS 184 & 185). THERE WILL BE NO DISTINCTION BETWEEN REGISTERED AND UNREGISTERED FIRMS, AND CLAUSES 39 A ND 48 OF SECTION 2 CONTAINING THE DEFINITION OF 'REGISTERED FIRM' AND ''UNREGISTERED FIRM' HAVE BEEN OMITTED. AFTER ALLOW ING REMUNERATION AND INTEREST TO THE PARTNERS, THE BALA NCE INCOME OF THE FIRMS WILL BE SUBJECT TO MAXIMUM MARGINAL RATE OF TAX OF INCOME-TAX, WHICH WILL BE 40% FOR ASSESSMENT YEAR 1 993-94. THE SURCHARGE ON INCOME-TAX WILL BE AT THE RATE OF 12%, OF THE TOTAL TAX, IF THE INCOME EXCEEDS RS. 1,00,000. THE EARLIER DIS TINCTION BETWEEN RATES OF INCOME-TAX FOR PROFESSIONAL AND NO N-PROFESSIONAL FIRMS HAS BEEN REMOVED. PARTNERS ARE NOT LIABLE TO TAX IN RESPECT OF THE SHARE OF INCOME FROM THE FIRM. HOWEV ER, REMUNERATION AND INTEREST ALLOWED TO PARTNERS WILL BE CHARGED TO INCOME-TAX IN THEIR RESPECTIVE HANDS. THE ONLY DISTINCTION BETWEEN PROFESSIONAL AND NON-PROFESSIONAL FIRMS WIL L BE IN RESPECT OF SLABS FOR ALLOWING DEDUCTION TO FIRMS IN RESPECT OF REMUNERATION. 48.2 THE SHARE OF THE PARTNER IN THE INCOME OF THE FIRM WILL NOT BE INCLUDED IN COMPUTING HIS TOTAL INCOME [SECTION 10(2A)]. HOWEVER, INTEREST, SALARY, BONUS, COMMISSI ON OR ANY OTHER REMUNERATION ALLOWED BY THE FIRM TO A PAR TNER WILL BE LIABLE TO BE TAXED AS BUSINESS INCOME IN THE PAR TNER'S HAND, [SECTION 2(24)(VE) AND SECTION 28(V)]. AN EXP LANATION HAS BEEN ADDED TO THE NEWLY INSERTED CLAUSE (2A1 OF SECTION 10 TO MAKE IT CLEAR THAT THE REMUNERATION OR INTEREST WHICH IS DISALLOWED IN THE HANDS OF THE FIRM WILL N OT SUFFER TAXATION IN THE HANDS OF THE PARTNER. IN CASE ANY R EMUNERATION PAID TO A PARTNER IS DISALLOWED IN THE HANDS OF THE FIRM OR THE AMOUNT IS VARIED IN SUBSEQUENT PROCEEDINGS, THE PAR TNER'S ASSESSMENT CAN BE RECTIFIED [SECTION 155(1A)]. ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 15 48.3 THE GROSS TOTAL INCOME OF THE FIRM IS TO BE DE TERMINED IN THE NORMAL WAY UNDER DIFFERENT HEADS AS IN THE CASE OF ANY TAXABLE ENTITY. THE GROSS TOTAL INCOME SO COMPUTED IS REDUCED BY SALARY, BONUS, COMMISSION, OR ANY REMUNE RATION PAYABLE OR PAID TO A PARTNER [SECTION 40(B)]. REMUN ERATION DUE TO OR RECEIVED BY A PARTNER IS NOT TO BE ASSESS ED AS INCOME UNDER THE HEAD 'SALARIES' (EXPLANATION 2 TO SECTION 15). ANY SALARY, INTEREST, BONUS, COMMISSION OR REM UNERATION DUE TO OR RECEIVED BY A PARTNER IN VIEW OF CLAUSE ( V) TO SECTION 28 SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. 48.4 THE PAYMENT OF REMUNERATION ONLY TO A WORKING PARTNER IS ALLOWABLE [DEFINED IN EXPLANATION 4 TO SECTION 4 0(B)]. ONLY INDIVIDUALS ARE CAPABLE OF BEING WORKING PARTNERS. 6. AS LOGICALLY EXPLAINED IN THE AFORESAID CBDT CIR CULAR, THE PURPOSE OF THE PROVISO TO SECTION 28(V) (ERRONEOUSLY REFERR ED TO AS EXPLANATION TO SEC. 10(2A) UNDER THE CIRCULAR), IS 'TO MAKE IT CLEAR THAT THE REMUNERATION OR INTEREST WHICH IS DISALLOW ED IN THE HANDS OF THE FIRM WILT NOT SUFFER TAXATION IN THE H ANDS OF THE PARTNER.' SINCE THE LEGISLATIVE INTENTION FOR THE NEW SCHEME OF TAXATION OF FIRMS AND PARTNERS IS TO ELIMINATE DOUB LE TAXATION OF THE SAME INCOME, IT HAS BEEN PROVIDED THAT THE INCOME, WHICH IS MADE LIABLE TO TAX IN THE HANDS OF THE FIRM, SHALL NOT B E TAXED IN THE HANDS OF THE PARTNERS. THUS, SHARE OF PROFIT TAXED IN THE CASE OF THE FIRM HAS BEEN TREATED AS EXEMPT U/S. 10(2A) IN THE HANDS OF THE PARTNERS. SIMILARLY, ANY INTEREST OR REMUNERATION T HAT IS DISALLOWED AND MADE LIABLE TO TAX IN THE HANDS OF THE FIRM HAS BEEN EXCLUDED BY VIRTUE OF THE PROVISO TO SEC. 28(V). 7. IN THE ABOVE CONTEXT, THERE IS NO SCOPE FOR THE MISCHIEVOUS INTERPRETATION AS PROPOSED IN THE NOTICE DT. 24/10/ 2011. INFACT, WITH DUE RESPECT, IT IS SUBMITTED THAT THE FACTS OF THE CASE HAVE BEEN GROSSLY MISUNDERSTOOD AND THIS HAS PERHAPS LED TO THE SHOW CAUSE ON THE ISSUE AS PROPOSED. YOU HAVE OBSERVED THAT, 'THE DISALLOWED AMOUNT (OF REMUNERATION) IN THE HAN DS OF THE FIRM HAS GONE TO INCREASE THE ELIGIBLE BENEFIT U/S. 10C (ERRONEOUSLY REFERRED IN PLACE OF SEC.80-IE) AND THE SAME AMOUNT IS CLAIMED NOT TAXABLE AS PER PROVISO PLACED UNDER SECTION 28(V).' 8. IT NEEDS TO BE APPRECIATED THAT IF NO REMUNERATI ON HAD BEEN PAID BY THE FIRM TO THE PARTNER, THE SAME WOULD HAVE COME TO BE RECEIVED BY THE PARTNER IN THE FORM OF SHARE OF PROFIT, ON WHICH NO TAX IS PAYABLE IN ANY CASE AS PER SEC. 10(2A). THE ENTIRE BUSINESS INCOME OF THE FIRM, OUT OF WHICH THE SHARE OF PROFIT IS ALLOCATED TO THE ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 16 PARTNER, IS ALSO IN ANY CASE ENTITLED TO THE BENEFIT OF DEDUCTION U/S. 80-IE. THEREFORE, IT IS GROSSLY INCORRECT TO OBSERV E THAT 'THE DISALLOWED AMOUNT (OF REMUNERATION) IN THE HANDS OF THE FIRM HAS GONE TO INCREASE THE ELIGIBLE BENEFIT U/S. 10C (ERR ONEOUSLY REFERRED IN PLACE OF SEC.80-IE).' WHETHER OR NOT REMUNERATION PAID BY THE FIRM TO THE PARTNER IS DISALLOWED, THE SAME HAS NO BEARING OR IMPACT ON THE ELIGIBILITY AND EXTENT OF THE CLAIM O F THE FIRM UNDER SEC.80-IE. 9. YOU HAVE OBSERVED IN THE NOTICE TO THE EFFECT THAT, 'SEC.40(B) IS PROTECTION FOR THE REVENUE FROM EXCESS CLAIM OF REMUNERATION IN THE HANDS-OF THE FIRM AND THE PROVISO PLACED UNDER SEC. 28(V) IS A SAFETY FOR THE ASSESSEE AGAINST DOUBLE TAXATION OF THE AMOUNT WHICH THE ASSESSING OFFICER DISALLOWS AS PER SEC.40(B).' WE WISH TO SUBMIT THAT THE WORDS 'WHICH THE ASSESSING OFFICER DISALLOWS' AS INSERTED IN YOUR OBSERVATION ARE IN N O MANNER JUSTIFIED. THE INTENTION OF THE PROVISO TO SEC.28(V) IS MEANT TO AVOID DOUBLE TAXATION OF ANY DISALLOWANCE UNDER SEC .40(B), WHETHER MADE BY THE ASSESSEE SUO-MOTU OR BY THE ASSESSING OFFICER. THE LEGISLATIVE INTENTION IN THIS CONTEXT IS CLEARLY REFLECTED IN THE CBDT CIRCULAR NO. 636 EXTRACTED HEREINABOVE. 10. WE ALSO WISH TO POINT OUT THAT YOUR OBSERVATION TO THE EFFECT THAT, 'THE INTENTION OF THE PROVISO IS NOT TO FACILITATE THE ASSESSEE TO SUO- MOTU DISALLOW FULL AMOUNT TO GET UNDUE BENEFIT OF E XCESS DEDUCTION AND DEPRIVE THE REVENUE OF DUE TAX,' IS WHOLLY MISP LACED, UNJUSTIFIED AND UNCALLED FOR ON THE FACTS OF OUR CASE. AS POINTED OUT HEREINABOVE, NEITHER THE PARTNERSHIP FIRM OF ZYDUS HEALTHCARE, SIKKIM, NOR THE PARTNER CADILA HEALTHCARE LTD. HAS DERIVED ANY UNDUE BENEFIT AS ALLEGED IN THE NOTICE. I N FACT, IT NEEDS TO BE NOTED THAT THE ASSESSEE COMPANY VIZ. CADILA HEALTHCARE LTD., W HO IS REQUIRED TO PAY INCOME-TAX UNDER THE PROVISIONS OF MAT U/S. SEC.115JB, HAS DULY DISCHARGED ITS TAX OBLIGATION B Y PAYING MAT ON THE AFORESAID AMOUNT OF REMUNERATION OF RS.4.73 CRORES. THE COMPANY NEVER HAD ANY MISCHIEVOUS INTENTIONS. ELSE, IT COULD HAVE BEEN SMART IN NOT DRAWING ANY REMUNERATION AT ALL, BUT RECEIVE THE SAME AS SHARE OF PROFIT. IN THAT CASE, TAX LIABILIT Y OF MAT U/S. 115JB WOULD NOT HAVE ARISEN AT ALL IN THE HANDS OF THE CO MPANY. 11. YOU HAVE OBSERVED THAT THE USAGE OF THE PHRASE 'HAS NOT BEEN ALLOWED TO BE DEDUCTED UNDER CLAUSE (B) OF SEC. 40' INDICATES THAT THE PROVISO TO SEC.28(V) CAN BE INVOKED ONLY IN A C ASE WHERE THE DISALLOWANCE UNDER SEC.40(B) IS MADE BY THE AO WHILE FRAMING AN ASSESSMENT AND NOT BY THE ASSESSEE IN ITS RETURN OF INCOME. HERE AGAIN YOU HAVE REFERRED TO MISUSE OF THE PROVISO TO DERIVE UNDUE AND UNINTENDED BENEFIT. WE WISH TO RESPECTFULLY SUBMIT THAT EXCEPT FOR MAKING A WILD CHARGE, YOU HAVE NOT BEEN ABLE TO IN ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 17 ANY MANNER SHOW OR SUBSTANTIATE AS TO HAVE WE HAVE MISUSED THE PROVISO FOR DERIVING UNDUE AND UNINTENDED BENEF IT AS ALLEGED. MOREOVER, THE INTERPRETATION SOUGHT TO BE STRETCHED BY YOU OUT OF THE WORDS 'HAS NOT BEEN ALLOWED TO BE DEDUCT ED UNDER SEC.40(B)' IS ALTOGETHER UNJUSTIFIED IN LAW. THE WO RDS 'HAS NOT BEEN ALLOWED TO BE DEDUCTED UNDER SEC.40(B)' OBJECTIVELY REFER TO THE FACT OF DISALLOWANCE KEEPING IN VIEW THE CONDITIONS AND GUIDELINES UNDER SEC.40(B). THIS DISALLOWANCE MAY COME T O BE COMPUTED UNDER SEC.40(B) BY THE ASSESSES, A T THE STAGE OF FILING THE RETURN OR BY THE ASSESSING OFFICER AT THE STAGE OF ASSESSMENT. IN EITHER CASE, THE SITUATION CAN BE DESCRIBED BY THE SAME WORDS 'HAS NOT BEEN ALLOWED TO BE DEDUCTED UND ER SEC.40(B).' OUR LOGICAL REASONING AND EXPLANATION IN REGARD TO THE UNDERLYING LEGISLATIVE INTENTION AND DUE CLARIF ICATION IN THE MATTER UNDER THE CBDT CIRCULAR, AS ELABORATELY DISC USSED HEREIN BEFORE, SHOULD BE CONSIDERED BY YOUR GOODSEL F ON MERITS. 12. WE HAVE TO EARNESTLY REQUEST YOUR GOODSELF TO K INDLY APPRECIATE THE MERITS OF OUR SUBMISSIONS HEREIN ABOVE AND WE ARE CONFIDEN T THAT YOU WILL BE PLEASED TO DROP YOUR PROPOSAL TO DISALL OW AND ADD-BACK RS.4,73,19,405/- . IN CASE YOU ARE STILL INCLINED TO TAKE A DIFFEREN T VIEW IN THE MATTER, WE SHALL BE OBLIGED IF YOU WILL KINDLY POINT OUT ANY FLAWS IN OUR LOGICAL REASONING AND JUSTIFIC ATION SUBMITTED HEREIN ABOVE, SO THAT WE CAN SPECIFICALLY MEET WITH THE SAME POINT BY POINT. 20. CONSIDERING THE AFORESAID FACTS IT IS SEEN THAT FOR A.Y. 2006-07 AND A.Y. 2008-09, AO HAD HAD MADE FULL INQUIRIES BY RAISING THE QUERI ES WITH RESPECT TO THE ISSUE UNDER CONSIDERATION AND THE SAME WERE ALSO REPLIED BY THE ASSESSEE AND ON RECEIPT OF THE REPLIES ACCEPTED THE CLAIM OF THE AS SESSEE. WE FURTHER FIND THAT HBLE APEX COURT IN THE CASE OF CIT VS. MAX INDIA L TD. (2007) 295 ITR 282 (SC) HAS HELD THAT WHERE TWO VIEWS ARE POSSIBLE AND THE ITO HAS TAKEN ONE VIEW WITH WHICH THE CIT DOES NOT AGREE, IT CANNOT BE TREATED AS AN ERRONEOUS ORDER PREJUDICIAL TO THE INTEREST OF REVENUE, UNLESS THE VIEW TAKEN BY THE ITO IS UNSUSTAINABLE IN LAW. IT IS A GENERALLY NOTICED TH AT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO EXAMINES NUMEROUS IS SUES AND GENERALLY, THE ISSUES WHICH ARE ACCEPTED DO NOT FIND MENTION IN TH E ASSESSMENT ORDER AND ONLY SUCH POINTS ARE TAKEN NOTE OF ON WHICH THE ASSESSEE S EXPLANATIONS ARE REJECTED AND ADDITIONS/DISALLOWANCES ARE MADE. IN SUCH A SIT UATION, WE ARE OF THE VIEW ITA NOS. 1096/ A/13 & ITA NO. 910/A/14 . A.YS. 2006 -07 & 2008-09 18 THAT PROVISIONS OF S. 263 CANNOT BE RESORTED TO AND FOR WHICH WE DRAW SUPPORT BY THE DECISION OF HBLE BOMBAY HIGH COURT IN THE CASE OF GABRIEL INDIA LTD (SUPRA). WE ALSO DRAW SUPPORT FROM THE DECISION OF HBLE DEL HI HIGH COURT IN THE CASE OF CIT VS. HONDA SIAL POWER 333 ITR 547 (DEL). WHERE I T HAS BEEN HELD THAT WHEN A REGULAR ASSESSMENT IS MADE U/S 143(3) A PRESUMPTION CAN BE RAISED THAT THE ORDER HAS BEEN PASSED UPON ON APPLICATION OF MIND. BEFORE US, REVENUE HAS NOT BROUGHT ANY MATERIAL ON RECORD TO DEMONSTRATE THAT THE VIEW TAKEN BY THE AO WAS AN IMPERMISSIBLE VIEW AND WAS CONTRARY TO LAW OR WA S UPON ERRONEOUS APPLICATION OF LEGAL PRINCIPLES NECESSITATING THE E XERCISING OF REVISIONARY POWERS U/S 263. FURTHER, THE CASES LAWS RELIED UPON BY THE REVENUE ARE DISTINGUISHABLE ON FACTS AND THEREFORE CANNOT BE APPLIED TO THE FAC TS OF THE PRESENT CASE. IN THE VIEW OF THE AFORESAID FACTS, WE ARE OF THE VIEW THA T IN THE PRESENT CASE FOR AY 2006-07 AND FOR AY 2008-09, CIT WAS NOT JUSTIFIED I N RESORTING TO THE REVISIONARY POWERS U/S 263 OF THE ACT. WE THEREFORE SET ASIDE T HE ORDERS OF CIT FOR AY 2006- 07 AND AY 2008-09, SETTING ASIDE THE ASSESSMENT ORD ER PASSED U/S 143(3) OF THE ACT. THUS THE GROUND OF ASSESSEE ARE ALLOWED IN BOT H THE YEARS. 21. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 17 - 10 - 2014 . SD/- SD/- (KUL BHARAT) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD. TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT, AHMADABAD