VSF Projects Ltd., Hyd, Hyderabad V. DCIT, Cir-3(3), Hyderabad

ITA 367/HYD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74527 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 09-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: S RAMA RAO
• Keywords: Rectification of order; Opportunity of being heard; Principle of natural justice; Tax effect; Capital receipt
• Section: 43B; 143(3); 115JB; 6; 154; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.367/HYD/2011 ASSESSMENT YEAR: 2006-07. M/S. VSF PROJECTS LTD., -V- THE DCIT, CIR-3(3), HYDERABAD. HYDERABAD. PAN:AAACV7255K (APPELLANT) (RESPONDENT) APPELL ANT BY SHRI S . RAMA RAO RESPONDENT BY SHRI D. SUDHAKAR RAO DATE OF HEARING 0 7 - 11 - 201 3 . DATE OF PRONOUNCEMENT 17 - 0 1 - 2014 ORDER PER SAKTIJIT DEY, J.M: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER DATED 30-12-2010 OF CIT (A)-IV, HYDERABAD PASSED I N APPEAL NO.150/DCIT 3(3)/CIT(A)-IV/09-10 PERTAINING TO THE ASSESSMENT YEAR 2006-07. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS BE FORE US:- 2 ITA NO.367 OF 2011 VSF PROJECTS LTD., HYD. 1. THE ORDER OF THE CIT (A) IS ERRONEOUS TO THE EXTEN T IT IS PREJUDICIAL TO THE APPELLANT HEREIN. 2. THE CIT (A) ERRED IN HOLDING THAT THE ORDER U/S 154 OF THE IT ACT IS JUSTIFIED WHEN IT IS AGREED THAT NO S UCH NOTICE WAS ISSUED TO THE APPELLANT HEREIN. 3. THE CIT (A) ERRED IN HOLDING THAT THE AMOUNT OF RS.16,82,80,000/- FORMS PART OF THE BOOK PROFIT FOR THE PURPOSE OF DETERMINING THE TAX PAYABLE U/S 115JB OF THE I T ACT. THE CIT (A) OUGHT TO HAVE CONSIDERED THE FACT THAT THE CAPITAL RECEIPT EVEN IF IT WERE TO BE CRED ITED TO THE PROFIT AND LOSS ACCOUNT CANNOT FORM PART OF THE BOOK PROFIT. 4. THE CIT (A) OUGHT TO HAVE CONSIDERED THE FACT TH AT THE BOOK PROFIT HAS TO BE ARRIVED AT BY PREPARING THE P ROFIT AND LOSS ACCOUNT IN ACCORDANCE WITH THE COMPANIES A CT AND, THEREFORE, ANY CAPITAL RECEIPT SHOULD NOT FORM PART OF THE BOOK PROFIT FOR THE PURPOSE OF SEC. 115JB OF THE ACT. 5. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME O F HEARING. 3. IN GROUND NO.2, THE ASSESSEE HAS ASSAILED THE OR DER PASSED U/S 154 OF THE ACT TO BE IN VIOLATION OF RULES OF NATUR AL JUSTICE AS THE ASSESSING OFFICER DID NOT ISSUE ANY NOTICE BEFORE T HE ORDER U/S 154 OF THE ACT WAS PASSED. BRIEFLY THE FACTS ARE, THE ASSESSEE IS A COMPANY. FOR THE IMPUGNED ASSESSMENT YEAR, THE ASS ESSEE FILED RETURN OF INCOME ON 8-11-2006 DECLARING NIL INCOME AFTER CLAIMING SET OFF OF BROUGHT FORWARD LOSSES. AN ASSESSMENT O RDER WAS PASSED U/S 143(3) OF THE ACT DETERMINING THE TOTAL INCOME AT 3 ITA NO.367 OF 2011 VSF PROJECTS LTD., HYD. RS.16,06,50,742/-. WHILE DETERMINING SUCH INCOME, THE ASSESSING OFFICER THOUGH ALLOWED SET OFF OF BROUGHT FORWARD L OSSES OF RS.1,53,15,975/- BUT HE MADE AN ADDITION OF RS.16,8 2,80,000/- U/S 41(1) BEING THE AMOUNT OF PRINCIPAL AND INTEREST WA IVED BY THE SBH AND SOUTH INDIAN BANK LIMITED. AGAINST THE AFORE SAID ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A). 4. THE CIT (A) VIDE ORDER DATED 15-12-2009 DISPOSED OF THE APPEAL BY DELETING THE ADDITION OF RS.16,06,50,742/ - REPRESENTING THE LOAN AND INTEREST WAIVED BY THE BANK BY HOLDING THAT THE PRINCIPAL AMOUNT BORROWED FOR WORKING CAPITAL AMOU NTING TO RS.4,07,07,000/- NOT BEING AN INCOME WITHIN THE TER MS OF SECTION 2(24) OF THE ACT CANNOT BE TREATED AS INCOME EITHER U/S 41(1) OR 28(4) OR 2(24) OF THE ACT. SO FAR AS INTEREST COMP ONENT OF RS.12,75,73,000/- IS CONCERNED, THE CIT (A) DIRECT ED THE ASSESSING OFFICER TO VERIFY AND DELETE THE ADDITION IF IT H AS BEEN DISALLOWED IN THE ASSESSMENT YEARS 1997-98 TO 2005-06 U/S 43B OF THE ACT, AS SECTION 41(1) HAS NO APPLICATION TO THE INTEREST CO MPONENT. DURING THE PENDENCY OF THE AFORESAID APPEAL BEFORE THE CIT (A), THE ASSESSING OFFICER ON 27-1-2009 PASSED AN ORDER PURP ORTEDLY U/S 154 OF THE ACT COMPUTING BOOK PROFIT UNDER THE PROVISI ONS OF SECTION 115JB OF THE ACT THEREBY DETERMINING THE TAX PAYABL E INCLUDING INTEREST AT RS.1,77,73,617. SINCE THE TAX COMPUTED IN THE ASSESSMENT ORDER PASSED UNDER THE NORMAL PROVISIONS OF THE ACT WAS HIGHER THE SAME WAS TREATED AS THE ASSESSED TAX. H OWEVER, AFTER THE ADDITIONS MADE IN THE ASSESSMENT ORDER PASSED U NDER THE NORMAL PROVISIONS OF THE ACT WAS DELETED BY THE CIT (A) THE TAX COMPUTED U/S 115JB BECAME PAYABLE. THE ASSESSEE PR EFERRED AN APPEAL BEFORE THE CIT (A) AGAINST THE ORDER PASSED U/S 154 OF THE 4 ITA NO.367 OF 2011 VSF PROJECTS LTD., HYD. ACT RAISING INTER ALIA AMONG OTHER GROUNDS THAT THE ORDER U/S 154 WAS PASSED WITHOUT SERVING ANY NOTICE ON THE ASSESS EE. THE CIT (A) HOWEVER REJECTED SUCH GROUND OF THE ASSESSEE BY HOL DING THAT SINCE THE INCOME DETERMINED UNDER THE NORMAL PROVISIONS WAS MORE THAT THE INCOME DETERMINED UNDER THE PROVISIONS OF SECTI ON 115JB, THERE WAS NO CASE OF ENHANCEMENT OF INCOME OR REDUCING A NY REFUND OR INCREASING THE LIABILITY OF THE ASSESSEE AT THE REL EVANT TIME THEREFORE THE ISSUANCE OF NOTICE TO THE ASSESSEE WAS NOT A MA NDATORY REQUIREMENT. 5. THE LEARNED AR SUBMITTED BEFORE US THAT ADMITTE DLY THE ASSESSING OFFICER HAS PASSED THE ORDER U/S 154 OF T HE ACT WITHOUT ISSUING NOTICE TO THE ASSESSEE. THE LEARNED AR SUB MITTED THAT THE RECTIFICATION ORDER PASSED COMPUTING TAX U/S 115J B OF THE ACT CREATED A LIABILITY WHICH ULTIMATELY BECAME ENFORCE ABLE UPON THE ASSESSEE AFTER THE ADDITIONS MADE IN THE ASSESSME NT ORDER PASSED UNDER NORMAL PROVISIONS OF THE ACT WAS DELETED BY T HE CIT (A) AND THE TAX PAYABLE UNDER THE NORMAL PROVISIONS BECAME LESS THAN THE TAX COMPUTED U/S 115JB OF THE ACT. THE LEARNED A R SUBMITTED THAT THE ASSESSING OFFICER BEING CONSCIOUS OF THE FACT T HAT THE ADDITION MADE BY HIM UNDER THE NORMAL PROVISIONS I.E., PRINC IPAL AND INTEREST WAIVED WHICH HAS BEEN ADDED U/S 41(1) OF THE ACT WO ULD NOT STAND SCRUTINY OF LAW AND GOING TO BE DELETED BY THE CIT (A) RESORTED TO RECTIFICATION U/S 154 OF THE ACT IN A SURREPTIOUS M ANNER TO CREATE A LIABILITY ON THE ASSESSEE. THE LEARNED AR SUBMITTE D THAT IF THE TAX PAYABLE UNDER THE NORMAL PROVISIONS IS LESS THAN 115JB, THEN ONLY ASSESSING OFFICER IS REQUIRED TO PASS AN ORDER U/S 115JB OF THE ACT OTHERWISE THERE WAS NO NECESSITY TO PASS AN ORDER U /S 115JB OF THE ACT WHICH IS VERY MUCH CLEAR FROM THE SAID PROVISIO NS. IT WAS 5 ITA NO.367 OF 2011 VSF PROJECTS LTD., HYD. FURTHER SUBMITTED THAT WHEN THERE IS NO TAX EFFECT THE GENERAL PRINCIPLE IS INVOKING OF SECTION 154 IS TO BE AVOID ED. IN THIS CONTEXT, THE LEARNED AR RELIED UPON A DECISION REPO RTED IN 56 ITR 310. IT WAS FURTHER SUBMITTED BY THE LEARNED AR T HAT IN CASE OF A LOSS MAKING COMPANY, PROVISIONS OF SECTION 115JB IS NOT APPLICABLE. IT WAS FURTHER CONTENDED BY THE ASSESSEE THAT IN TH E APPEAL ORDER PASSED AGAINST THE QUANTUM ASSESSMENT ORDER, THE FI RST APPELLATE AUTHORITY HAS DELETED THE ADDITION MADE OF THE INTE REST AND PRINCIPAL WAIVED BY THE BANK BY HOLDING THAT IT CANNOT BE AN INCOME U/S 41(1) OF THE ACT. THEREFORE WHETHER SUCH AMOUNT CAN ALSO BE CONSIDERED AS A PROFIT OF THE ASSESSEE WHILE COMPUTING INCOME U/S 115JB OF THE ACT IS A HIGHLY DEBATABLE ISSUE. THE LEARNED AR SUBMITTED THAT THE INCOME-TAX APPELLATE TRIBUNAL , HYDERABAD BENCH IN CASE OF VISTA PHARMACEUTICALS LTD. VS. DCIT (ITA NO.840/HYD /11 DATED 17- 2-2012) HAS HELD THAT THE INTEREST WAIVED IF NOT AL LOWED AS A DEDUCTION IN THE EARLIER YEAR CANNOT BE CONSIDERED TO BE PART OF BOOK PROFIT U/S 115JB OF THE ACT. IN THESE CIRCUMS TANCES, THE PROCEEDINGS U/S 154 WAS NOT AT ALL MAINTAINABLE. T HE LEARNED AR SUBMITTED THAT HAD THE ASSESSING OFFICER ALLOWED AN OPPORTUNITY OF HEARING TO THE ASSESSEE, THE ASSESSEE WOULD HAVE MA DE ALL THESE CONTENTIONS BEFORE THE ASSESSING OFFICER. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTING THE ORDER OF THE CIT (A) SUBMITTED THAT THERE BEING NO TAX EFFECT THERE WAS NO REQUIREMENT OF GIVING A N OTICE OF HEARING TO THE ASSESSEE. 7. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF THE LO WER AUTHORITIES. IT IS NOT DISPUTED THAT THE ASSESSING OFFICER HAD PASS ED AN ORDER U/S 6 ITA NO.367 OF 2011 VSF PROJECTS LTD., HYD. 154 OF THE ACT WITHOUT AFFORDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THIS CONTEXT, IT IS NECESSARY TO LOOK INTO THE PROVISIONS AS CONTAINED U/S 154(3) OF THE ACT WHICH READS AS UNDER:- ............ (3) AN AMENDMENT WINCH HAS THE EFFECT OF ENHANCING AN ASSESSMENT OR REDUCING A REFUND OR OTHERWISE INCREA SING THE LIABILITY OF THE ASSESSEE [OR THE DEDUCTOR], SHALL NOT BE MADE UNDER THIS SECTION UNLESS THE AUTHORITY CONCERNED H AS GIVEN NOTICE TO THE ASSESSEE [OR THE DEDUCTOR] OF ITS INT ENTION SO TO DO AND HAS ALLOWED THE ASSESSEE [OR THE DEDUCTOR] A REASONABLE OPPORTUNITY OF BEING HEARD. A PLAIN READING OF THE AFORESAID PROVISION MAKES IT CLEAR THAT A RECTIFICATION WHICH HAS EFFECT OF ENHANCING AN ASS ESSMENT OR REDUCING A REFUND OR OTHERWISE INCREASING THE LIAB ILITY OF THE ASSESSEE SHALL NOT BE MADE WITHOUT ALLOWING A REASO NABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THE CASE BEFORE US UNDISPUTEDLY THERE WAS NO COMPUTATION OF INCOME UND ER THE PROVISIONS OF SECTION 115JB OF THE ACT WHEN THE ASS ESSING OFFICER PASSED THE ASSESSMENT ORDER U/S 143(3) OF THE ACT. THE ASSESSING OFFICER HAD TREATED THE INTEREST AND PRINCIPAL WAIV ED TO THE TURN OF RS.12,75,73,000/- AND RS.4,07,07,000/- BY THE BANK AS INCOME U/S 41(1) OF THE ACT. SUBSEQUENTLY, THE ASSESSING OFFIC ER PASSED A RECTIFICATION ORDER U/S 154 OF THE ACT VIDE ORDER D ATED 27-1-2009 WITHOUT ISSUING A NOTICE TO THE ASSESSEE BY COMPUTI NG THE INCOME U/S 115JB OF THE ACT AND CREATING A TAX LIABILITY O F RS.1,79,73,617. 7 ITA NO.367 OF 2011 VSF PROJECTS LTD., HYD. HOWEVER, THE FIRST APPELLATE AUTHORITY DELETED THE ADDITION MADE OF THE PRINCIPAL AND INTEREST WAIVED AMOUNTING TO RS.1 6,06,50,742/- BY HOLDING THAT IT CANNOT BE AN INCOME U/S 41(1) OF TH E ACT. THEREFORE, ULTIMATELY THE TAX COMPUTED U/S 115JB OF THE ACT VI DE ORDER DATED 27-1-2009 U/S 154 OF THE ACT BECAME ENFORCEABLE ON THE ASSESSEE. THEREFORE, IT HAS TO BE HELD THAT THE ORDER PASSED U/S 154 OF THE ACT HAS THE EFFECT OF INCREASING THE LIABILITY OF THE A SSESSEE REQUIRING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN TERMS OF SUB-SECTION (3) OF SECTION 154. IT IS A FURTHER FACT TO BE NOT ED THAT THOUGH THE ORDER WAS PASSED U/S 154 OF THE ACT DATED 27-1-2009 BUT THE SAME WAS SERVED ON THE ASSESSEE ON 20-10-2009 I.E. AFTER ALMOST 9 MONTHS FROM THE DATE OF ORDER. THERE IS ABSOLUTELY NO EXPLANATION WHY IT WAS SERVED ON THE ASSESSEE WITH SUCH AN INOR DINATE DELAY. IT CERTAINLY CREATES AN APPREHENSION THAT THE ASSESSIN G OFFICER BEING CONSCIOUS OF THE FACT THAT THE ADDITION MADE BY HIM IS GOING TO BE DELETED BY THE CIT (A), HAS PASSED THE ORDER U/S 15 4 OF THE ACT COMPUTING THE INCOME U/S 115JB OF THE ACT WITHOUT A FFORDING ANY OPPORTUNITY TO THE ASSESSEE. IT IS ALSO A FACT TO BE NOTED THAT ADMITTEDLY THE CIT (A) HAS DELETED THE ADDITION O N ACCOUNT OF WAIVER OF INTEREST AND PRINCIPAL BY HOLDING THAT IT IS NOT AN INCOME U/S 41(1) OF THE ACT. THE INCOME-TAX APPELLATE TRI BUNAL HYDERABAD BENCH IN CASE OF M/S VISTA PHARMACEUTICALS LIMITED , HYDERABAD VS. DCIT (SUPRA) HAS ALSO HELD THAT IF THE INTEREST WAI VED HAS NOT BEEN ALLOWED AS A DEDUCTION IN THE EARLIER YEAR, IT CANN OT FORM PART OF BOOK PROFIT U/S 115JB OF THE ACT. 8. THEREFORE, INVOKING OF PROVISIONS OF SECTION 15 4 OF THE ACT IN THE GIVEN CIRCUMSTANCES IS HIGHLY DEBATABLE. HAD TH E ASSESSING OFFICER GIVEN AN OPPORTUNITY OF HEARING TO THE AS SESSEE, THE 8 ITA NO.367 OF 2011 VSF PROJECTS LTD., HYD. ASSESSEE WOULD HAVE PUT FORTH ALL HIS CONTENTIONS A GAINST INVOKING THE PROVISIONS OF SECTION 154 OF THE ACT. THE ASS ESSING OFFICER HAVING NOT GIVEN ANY OPPORTUNITY AND PASSED AN ORDE R U/S 115JB OF THE ACT CREATING A LIABILITY ON THE ASSESSEE WHICH ULTIMATELY BECAME ENFORCEABLE, IN OUR VIEW THE ORDER PASSED IS NOT O NLY IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE BUT ALSO AGAINST THE STATUTORY MANDATE AS CONTAINED U/S 154(3) OF THE ACT. IN AFORESAID V IEW OF THE MATTER, THE ORDER PASSED U/S 154 OF THE ACT CANNOT BE SUSTA INED. HOWEVER, THE COURTS HAVE HELD THAT AN ORDER PASSED IN VIOLAT ION OF RULES OF NATURAL JUSTICE IS NOT AB INITIO VOID BUT VOIDABLE. THE LACUNA IN THE ORDER ON ACCOUNT OF NOT AFFORDING AN OPPORTUNITY OF HEARING CAN BE CURED BY PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THAT VIEW OF THE MATTER, WE SET ASIDE THE ORDER PASSED BY THE CIT (A) AND DIRECT THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD T O THE ASSESSEE AS PROVIDED U/S 154(3) OF THE ACT. SINCE WE HAVE DECID ED TO REMIT THE MATTER BACK TO THE ASSESSING OFFICER FOR DECIDING A FRESH AFTER GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE, WE C ONSIDER IT UNNECESSARY TO DEAL WITH OTHER GROUNDS. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 17-01-2014. SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER SD/- (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 17 TH JANUARY, 2014. JMR* 9 ITA NO.367 OF 2011 VSF PROJECTS LTD., HYD. COPY TO:- 1) C/O SRI S. RAMA RAO, ADVOCATE, FLAT NO. 102, DOOR NO.3-6-643, SHRIYAS ELEGANCE STREET NO.9, HIMAYATNAGAR, HYDERABAD. 2) DCIT, CIR-3(3), HYDERABAD. 3) CIT (A)-IV,, HYDERABAD. 4) CIT-III, HYDERABAD. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABAD. 10 ITA NO.367 OF 2011 VSF PROJECTS LTD., HYD.