High Court of KeralaDivision Bench2010-10-04Appeals partly allowed in the sense that the Tr...

M/S. N.C. JOHN & SONS (P) LTD. v. Commissioner of Income Tax, Kottayam

Case / Petition Number:ITA Nos. 1483/2009 & 1559/2009

Case Details & Bench

Court: High Court of Kerala
Hon'ble Judges: C. N. Ramachandran Nair
K. Surendra Mohan
Judgment Date: 2010-10-04
Court Decision / Holding: The High Court reversed the Tribunal’s order, holding that the Tribunal’s interpretation of Section 263 as analogous to Section 154 was unsustainable. It directed that the assessment be re-worked under 80HHC in light of the Ravindranathan Nair decision and that the officer give the assessee full opportunity. It noted that the revenue is free to contest in subsequent years and that the issues are left to be decided on merits following appropriate reconsideration.
Final Disposition: Appeals partly allowed in the sense that the Tribunal’s orders are set aside and the matter is remanded to the Assessing Officer/Commissioner to re-work the relief under Section 80HHC in accordance with Ravindranathan Nair, with full opportunity to the assessee; department free to challenge in subsequent years.

Parties to the Case

Appellants / Petitioners

M/S. N.C. John & Sons (P) Ltd., Alleppey

Respondents

The Commissioner of Income Tax, Kottayam

Legal Representation & Advocates

Counsels for Respondents

• S. Arun Raj
• P. K. R. Menon
• S. Joseph

Case Synopsis & Summary

This Kerala High Court judgment consolidates ITA Nos. 1483/2009 and 1559/2009 challenging revisional orders under Section 263 of the Income Tax Act, issued by the Commissioner of Income Tax in respect of the assessments for the years 1995-96 and 1996-97. The central issue is whether the Commissioner’s suo motu revision under 263, which sought to disallow certain deductions by excluding amounts fell under the scope of Explanation (baa) to section 80HHC, was justifiable. The Tribunal had allowed the appeals, treating the revision as a mere ‘possible view’ and resembling a rectification under Section 154, a stance the High Court disapproved. The court notes the Supreme Court decision in Commissioner of Income Tax v. K. Ravindranathan Nair (295 ITR 228), which mandated exclusion of income not connected with export business when computing export profits under 80HHC, and emphasizes that the merits of the case are prima facie against the assessee, though the crucial question is whether the assessment order prejudicially affected the revenue. The High Court ultimately reverses the Tribunal, holding that the Tribunal’s approach is unsustainable and that the Commissioner’s revision is open to the officer to rework the relief under 80HHC consistent with Ravindranathan Nair, after giving the assessee full opportunity, with the department free to contest in subsequent years. The matter is remanded with directions for a fresh, merits-based reconsideration.

Provisions of Law Cited

Section 263 of the Income Tax ActSection 80HHC of the Income Tax ActExplanation (baa) to Section 80HHCSection 154 of the Income Tax Act

Submissions & Arguments

Contentions of Appellants / Petitioners

The assessee contends that the Commissioner’s revision under Section 263 amounts to an improper rectification rather than a valid revisional exercise. The Tribunal’s view, which treated Section 263 as akin to a rectification under Section 154, is not legally sustainable. The department’s power to revise must rest on preventing prejudice to revenue, and any re-computation under 80HHC should be guided by the decision in Ravindranathan Nair (295 ITR 228). The department’s course of action in years prior to 1995-96 and 1996-97 should not prejudice the assessee beyond the scope of the statutory provisions. The assessee submits that merits should be examined with proper opportunity, and that any re-work of relief under 80HHC be done in light of the Supreme Court’s ruling, rather than relying on a misinterpretation of 263.

Contentions of Respondents

The Revenue argues that the Commissioner acted within his revisional powers under Section 263 to correct an order prejudicial to revenue, specifically regarding the scope of Explanation (baa) to Section 80HHC. It asserts that the AO failed to apply the explanation and that the Tribunal erred in treating 263 as mere rectification under Section 154. Relying on Ravindranathan Nair (295 ITR 228), the respondents contend that amounts not connected with export should be excluded from export profit computations, and that the revision is warranted to re-work relief under 80HHC. The department maintains that the Tribunal’s decision cannot stand since the revenue’s position is supported by controlling law and Supreme Court authority, and that the matter may also impact subsequent years, which remains open to challenge.

Cited Precedents (2)

Case Name	Citation	Treatment	Explanation
Commissioner of Income Tax v. K. Ravindranathan Nair	295 ITR 228	Positive	Supreme Court held that income not connected with export should be excluded while computing export profits under 80HHC, guiding the Kerala High Court’s approach.
Commissioner of Income Tax, Cochin v. Veepees Enterprises	175 Taxman 11	Positive	Cited as a case where the Tribunal was reversed in similar suo motu revision contexts, supporting the High Court’s reversal of the Tribunal’s order.

Diagnostic Tool

Beta

Does this judgment govern your specific facts?

Don't risk relying on a distinguishable precedent. Enter your facts or proposition below. We will test it against M/S. N.C. JOHN & SONS (P) LTD. v. Commissioner of Income Tax, Kottayam and instantly map out authorities that support, challenge, or govern your position.

Extracted Judgment Text

Exact text extracted from official judgment records.

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT :** **THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN MONDAY, THE 4TH OCTOBER 2010 / 12TH ASWINA 1932** **ITA.No. 1483 of 2009()** **--------------------------ITA.841/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH** **....................** **APPELLANT/ APPELLANT** **-----------------------------** **THE COMMISSIONER OF INCOME TAX, KOTTAYAM.** **BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX** **RESPONDENT(S)/ RESPONDENT** **-------------------------------------** **M/S.N.C.JOHN & SONS (P) LTD., ALLEPPEY.** **R1 BY ADV. SRI.S.ARUN RAJ** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04/10/2010, ALONG WITH ITA NO. 1559 OF 2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** ## **SVS/** ## **C.N.RAMACHANDRAN NAIR & K. SURENDRA MOHAN, JJ.** **-----------------------------------------------------------I.T.A.NOS: 1483 & 1559 OF 2009 ----------------------------------------------------------Dated this the 4[th] October, 2010.** ## **JUDGMENT** ## Ramachandran Nair, J. Heard senior standing counsel appearing for the appellant and Shri. Arun Raj appearing for the respondent-assessee. Orders under challenge are those issued by the Tribunal for the assessment years1995-96 and 1996-97. Even though Tribunal has issued separate orders for both the years the issues raised are almost the same and therefore, we proceed to dispose of the connected appeals by this common judgment. 2. The original assessments for both years were subjected to revision by the commissioner under Section 263 of the Income Tax Act for the reason that deduction under Section 80 HHC of the Income Tax Act was computed without excluding charges which fall within the scope of explanation (baa) to Section 80HHC of the Act. The assessee is engaged in manufacture and export of coir products. In the course of business assessee has earned certain income in respect of various activities, the details of which pertaining to the year 1995-96 are given hereunder:- ITA Nos: 1483/2009 & 1559/2009 2 |1) Dyeing and Bleaching charges:|Rs.14,31,054/-| |---|---| |2) Baling charges<br>|: Rs. 65,460/-| |3) Garment Making charges|: Rs. 49,528/-| |4) Rent|: Rs. 3,261/-| |5) Boat Hire charges|: Rs. 1,61,183/-| The first three items appear for the next year also. There is no receipt for boat hire charges received by the assessee for the year viz., 1996-97. For the assessment year 1995-96 another issue involved is deduction of bad debts amounting to Rs.4,59,450/- from the total turnover which is a denominator to be applied for working out relief under Section 80HHC. The Tribunal allowed the appeals by cancelling the impugned orders issued by the Commissioner under Section 263 for the reason that the view taken by the Commissioner is only a possible view and the view taken by the Officer is also a view possible under the relevant provisions of the Act. 3. After hearing both sides we notice that Tribunal has interpreted the scope of Section 263 as similar to proceedings for rectification under Section 154 of the Income Tax Act. In fact the ITA Nos: 1483/2009 & 1559/2009 3 issue on merit is covered by later decision of the Supreme Court reported in **Commissioner of Income Tax v. K. Ravindranathan Nair (295 ITR 228).** Under this decision the Supreme Court held that income received by the assessee which have no connection to export business should be excluded while computing deduction of export profit under Section 80HHC of the Income Tax Act. Therefore, prima facie the case on merits is against the assessee. The question to be considered is whether the order for assessment was prejudicial to the interest of the revenue justifying revision by Commissioner. In this case the finding of the Commissioner in the orders issued under Section 263 is that the Assessing Officer has not considered the scope of explanation (baa) of Section 80HHC of the Act. In similar cases in I.T.Appeal 21/2003 reported in **Commissioner of Income Tax, Cochin v. Veepees Enterprises (175 Taxman 11)** we reversed the order of the Tribunal interfering with suo motu revisional order issued by the Commissioner. 4. We therefore find that the Tribunal's orders are not sustainable because the Commissioner had only pointed out the mistake prima facie committed by the Officer in making assessment ITA Nos: 1483/2009 & 1559/2009 4 without reference to the relevant statutory provisions and directed him to re-work the relief under Section 80 HHC. Even though counsel for the assessee contended that for the year 1993-94 Tribunal allowed these issues on merit, Senior counsel appearing for the appellant submitted that on account of the low stakes involved revenue has not filed appeal and it is open to the department to challenge the order for later year, no matter earlier order of ITAT was not appealed against by the Revenue. Since filing of appeal by the Government is essentially a matter of policy and if there is no substantial benefit of tax the department is free to accept the order of the Tribunal for that year. We therefore feel that the department is free to contest the issue for subsequent years. However, on merits of the case that is with regard to the exclusions to be considered from the total income as well as the turnover covered by the Commissioner's order, we leave the issues open for the Officer to consider based on the decision of the Supreme Court and after giving opportunity to the assessee. 5. Counsel for the assessee submitted that pursuant to orders issued by the Commissioner assessment was revised making ITA Nos: 1483/2009 & 1559/2009 5 substantial disallowance against which another appeal was filed which the Tribunal closed as infructuous in view of the orders impugned by the revenue in these appeals. Since we have now reversed the orders of the Tribunal, it is for the assessee to move the Tribunal to reopen the closed appeals to get decision on merit. If assessee considers merit in their appeals, they are free to apply for reopening appeals closed as infructuous by the Tribunal. C.N.RAMACHANDRAN NAIR Judge K. SURENDRA MOHAN Judge jj ITA Nos: 1483/2009 & 1559/2009 6