Full Judgment Text
$~1 to 3
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on : 28.04.2015
+ ITA 263/2015, C.M. APPL.7337/2015
+ ITA 264/2015, C.M. APPL.7349/2015
+ ITA 265/2015, C.M. APPL.7351/2015
SHRI LAL MAHAL LIMITED ..... Appellant
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through : Sh. Salil Aggarwal, Sh. Prakash Kumar
and Sh. Ravi Pratap Mall, Advocate, for the
appellant.
Ms. Suruchii Aggarwal, Sr. Standing Counsel and
Sh. Abhishek Sharma, for the revenue.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE R.K. GAUBA
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
%
Issue notice.
1. Ms. Suruchii Aggarwal, Sr. Standing Counsel accepts notice. With
consent of learned counsel for the parties, the matter was heard finally.
2. The following two questions of law are sought to be urged by the
assessee in this appeal under Section 260-A of the Income Tax Act, 1961
(hereafter referred to as “the Act”):
(a) Whether in the given facts of the case, the assessment could have
ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 1
been completed by invoking 153A of the Income Tax Act;
(b) Whether the amendment to Section 80HHC(3) by inserting three
provisos with retrospective effect from 01.04.1998 could have
been invoked to disallow the amounts in respect of concluded
assessments for AY 1999-2000 in the assessee’s case.
3. The admitted facts are that the assessee is an exporter entitled to the
benefits of Section 80HHC. Its assessment was finalized for AY 1999-2000
when the returns were processed under Section 143(1). The search
operations were conducted in the assessee’s premises on 18.06.2003. In the
meanwhile, on 01.06.2003, provisions of Chapter XIV were brought into
force with effect from 01.06.2003. In the circumstances, search operations
were to be and were conducted in accordance with its provisions.
4. Based upon the materials collected, the Assessing Officer (AO) issued
notice under Section 153A to the assessee on 31.05.2005. In response, the
assessee, through a letter, intimated on 27.08.2005 that it stood by the
original returns which had been processed under Section 153(1). However,
the AO thereafter proceeded to finalize the assessment under Section 153A.
Whilst doing so, he disallowed certain amounts in the sense that all the
deductions permissible under Section 80HHC and granted originally (to the
tune of 11,17,71,086/-), the deduction actually permitted pursuant to these
`
proceedings was ` 5,31,80,520/-. The CIT(A) on being approached by the
assessee rejected its contentions and gave full effect to the AO’s order in the
light of the retrospective amendment to Section 80HHC which had come
into force by then by Taxation Laws (Amendment) Act, 2005 with effect
from 01.04.1998. The appeal to the Income Tax Appellate Tribunal (ITAT)
met with a similar fate.
ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 2
5. It is contended at the outset by the assessee that the disallowance
sought to be made was solely on the basis of the retrospective amendment to
Section 80HHC(3) by virtue of Taxation Laws (Amendment) Act, 2005
since it was brought into force with retrospective effect. It is contended that
this amendment was challenged on both a substantive basis as well as on the
ground of its unreasonable retrospective operation, before the Gujarat High
Court in Avani Exports and Ors. v. CIT 2013 (348) ITR 391. Learned
counsel relied on the said decision to say that the classification made by the
said amendment as between those assessees who had an export turnover of
more than ` 10 crores and those who had less than that amount was held to
be unreasonable so far as the retrospective operation of the amendment is
concerned. Learned counsel submits that the ruling of the Gujarat High
Court was carried in appeal to the Supreme Court which by its order dated
30.03.2015 in CIT-5 and Anr. v. M/s. Avani Exports and Anr. (SLP(C)
9273/2013 decided on 30.03.2015) upheld the reasoning.
6. Learned counsel for the Revenue did not dispute the legal position but
submitted that the first question of law, i.e. as to the completion of the
assessment, does not arise. It was submitted that since the ruling of the
Gujarat High Court has been indeed allowed with some modification by the
Supreme Court, the decision in this appeal should be confined to that
question alone.
7. Section 80HHC to the extent it is relevant is as follows:
“[Deduction in respect of profits retained for export business.
69 70
80HHC. [(1) Where an assessee, being an Indian company or
a person (other than a company) resident in India, is engaged in
the business of export out of India of any goods or merchandise
to which this section applies, there shall, in accordance with and
ITA 263/2015, ITA 264/2015 & ITA 265/2015 Page 3
subject to the provisions of this section, be allowed, in computing
the total income of the assessee, [a deduction to the extent of
profits, referred to in sub-section (1B),] derived by the assessee
from the export of such goods or merchandise :
Provided that if the assessee, being a holder of an Export House
Certificate or a Trading House Certificate (hereafter in this
section referred to as an Export House or a Trading House, as
the case may be,) issues a certificate referred to in clause (b) of
sub-section (4A), that in respect of the amount of the export
turnover specified therein, the deduction under this sub-section is
to be allowed to a supporting manufacturer, then the amount of
deduction in the case of the assessee shall be reduced by such
74
amount which bears to the [total profits derived by the assessee
from the export of trading goods, the same proportion as the
amount of export turnover specified in the said certificate bears
to the total export turnover of the assessee in respect of such
trading goods].
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(2)(a) This section applies to all goods or merchandise, other
78
than those specified in clause (b), if the sale proceeds of such
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goods or merchandise exported out of India are [received in, or
80
brought into, India] by the assessee [(other than the supporting
81
manufacturer)] in convertible foreign exchange [, within a
period of six months from the end of the previous year
82
or, [within such further period as the competent authority may
allow in this behalf].]
83
[Explanation.—For the purposes of this clause, the expression
“competent authority” means the Reserve Bank of India or such
other authority as is authorised under any law for the time being
in force for regulating payments and dealings in foreign
exchange.]
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(b) This section does not apply to the following goods or
merchandise, namely :—
(i) mineral oil ; and
84 85 84
(ii) minerals and ores [(other than processed minerals and
ores specified in the Twelfth Schedule)].
86
[Explanation 1.—The sale proceeds referred to in clause (a)
shall be deemed to have been received in India where such sale
proceeds are credited to a separate account maintained for the
purpose by the assessee with any bank outside India with the
approval of the Reserve Bank of India.
Explanation 2.—For the removal of doubts, it is hereby declared
that where any goods or merchandise are transferred by an
assessee to a branch, office, warehouse or any other
establishment of the assessee situate outside India and such
goods or merchandise are sold from such branch, office,
warehouse or establishment, then, such transfer shall be deemed
to be export out of India of such goods and merchandise and the
value of such goods or merchandise declared in the shipping bill
87
or bill of export as referred to in sub-section (1) of section 50 of
the Customs Act, 1962 (52 of 1962), shall, for the purposes of
this section, be deemed to be the sale proceeds thereof.]
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[(3) For the purposes of sub-section (1),—
(a) where the export out of India is of goods or merchandise
89
manufactured [or processed] by the assessee, the
90
profits derived from such export shall be the amount which
90 90
bears to the profits of the business , the same proportion as the
export turnover in respect of such goods bears to the total
turnover of the business carried on by the assessee;
(b) where the export out of India is of trading goods, the profits
90
derived from such export shall be the export turnover in respect
of such trading goods as reduced by the direct costs and indirect
costs attributable to such export;
(c) where the export out of India is of goods or merchandise
91
manufactured [or processed] by the assessee and of trading
92
goods, the profits derived from such export shall,—
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91
(i) in respect of the goods or merchandise manufactured [or
processed] by the assessee, be the amount which bears to the
adjusted profits of the business, the same proportion as the
adjusted export turnover in respect of such goods bears to the
adjusted total turnover of the business carried on by the
assessee; and
(ii) in respect of trading goods, be the export turnover in respect
of such trading goods as reduced by the direct and indirect costs
attributable to export of such trading goods :
Provided that the profits computed under clause (a) or clause (b)
or clause (c) of this sub-section shall be further increased by the
amount which bears to ninety per cent of any sum referred to in
clause (iiia) (not being profits on sale of a licence acquired from
any other person), and clauses (iiib) and (iiic) of section 28, the
same proportion as the export turnover bears to the total
turnover of the business carried on by the assessee :
93
[ Provided further that in the case of an assessee having export
turnover not exceeding rupees ten crores during the previous
year, the profits computed under clause (a) or clause (b) or
clause (c) of this sub-section or after giving effect to the first
proviso, as the case may be, shall be further increased by the
amount which bears to ninety per cent of any sum referred to in
clause (iiid) or clause (iiie), as the case may be, of section 28, the
same proportion as the export turnover bears to the total
turnover of the business carried on by the assessee :
Provided also that in the case of an assessee having export
turnover exceeding rupees ten crores during the previous year,
the profits computed under clause (a) or clause (b) or clause (c)
of this sub-section or after giving effect to the first proviso, as the
case may be, shall be further increased by the amount which
bears to ninety per cent of any sum referred to in clause (iiid)
of section 28, the same proportion as the export turnover bears
to the total turnover of the business carried on by the assessee, if
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the assessee has necessary and sufficient evidence to prove
that,—
(a) he had an option to choose either the duty drawback or the
Duty Entitlement Pass Book Scheme, being the Duty Remission
Scheme; and
(b) the rate of drawback credit attributable to the customs duty
was higher than the rate of credit allowable under the Duty
Entitlement Pass Book Scheme, being the Duty Remission
Scheme :
Provided also that in the case of an assessee having export
turnover exceeding rupees ten crores during the previous year,
the profits computed under clause (a) or clause (b) or clause (c)
of this sub-section or after giving effect to the first proviso, as the
case may be, shall be further increased by the amount which
bears to ninety per cent of any sum referred to in clause (iiie)
of section 28, the same proportion as the export turnover bears
to the total turnover of the business carried on by the assessee, if
the assessee has necessary and sufficient evidence to prove
that,—
(a) he had an option to choose either the duty drawback or the
Duty Free Replenishment Certificate, being the Duty Remission
Scheme; and
(b) the rate of drawback credit attributable to the customs duty
was higher than the rate of credit allowable under the Duty Free
Replenishment Certificate, being the Duty Remission Scheme.
Explanation.—For the purposes of this clause, “rate of credit
allowable” means the rate of credit allowable under the Duty
Free Replenishment Certificate, being the Duty Remission
Scheme calculated in the manner as may be notified by the
Central Government :]
94
[ Provided also that in case the computation under clause (a) or
clause (b) or clause (c) of this sub-section is a loss, such loss
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shall be set off against the amount which bears to ninety per cent
of—
(a) any sum referred to in clause (iiia) or clause (iiib) or clause
(iiic), as the case may be, or
b) any sum referred to in clause (iiid) or clause (iiie), as the case
may be, of section 28, as applicable in the case of an assessee
referred to in the second or the third or the fourth proviso, as the
case may be,
the same proportion as the export turnover bears to the total
turnover of the business carried on by the assessee.]
Explanation.—For the purposes of this sub-section,—
(a) “adjusted export turnover” means the export turnover as
reduced by the export turnover in respect of trading goods ;
(b) “adjusted profits of the business” means the profits of the
business as reduced by the profits derived from the business of
export out of India of trading goods as computed in the manner
provided in clause (b) of sub-section (3) ;
(c) “adjusted total turnover” means the total turnover of the
business as reduced by the export turnover in respect of trading
goods ;
(d) “direct costs” means costs directly attributable to the trading
goods exported out of India including the purchase price of such
goods ;
(e) “indirect costs” means costs, not being direct costs, allocated
in the ratio of the export turnover in respect of trading goods to
the total turnover ;
(f) “trading goods” means goods which are not
95
manufactured [or processed] by the assessee.]”
8. The second, third and fourth proviso to Section 80HHC(3) were
introduced by the Taxation Laws (Amendment) Act, 2005 but with
retrospective effect from 01.04.1998.
9. After discussing the nature of the amendment and noticing that the
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provision, i.e. Section 80HHC(3) as existing have been interpreted by
several judicial decision, the Gujarat High Court observed as follows:
“10. After hearing the learned counsel for the parties and after
going through the impugned amendment, we find that
classification based on export turnover is a recognized way of
classification throughout the world. We find substance in the
contention of the learned counsel for the Revenue that
progressive levy is based on income classification in terms of
both, the basis of taxation and the rate of tax, and on this ground,
the same cannot be said to be arbitrary. In this connection, we
may profitably refer to the following observations of the Supreme
Court in the case of KERALA HOTEL AND RESTURANT
ASSOCIATION VS. STATE OF KERALA reported
in MANU/SC/0170/1990
: AIR 1990 SC 913 dealing with the
question in detail:
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12. After hearing the learned counsel for the parties, we are of
the view that the benefit based on pendency of the proceedings of
assessment and discrimination based thereon definitely violates
Article 14 of the Constitution of India. In the matter of
completion of assessment, the assessees have little role to pay.
After the assessees have submitted their returns within the time
fixed by law, if for any reason the respondent delays in making
the assessment, taking advantage of their own delay, the Revenue
cannot deprive a class of the assessees of the benefit whereas
other assessees of the same class whose assessment have already
been completed would get the benefit. We, therefore, find that
discrimination based on two classes, first, whose assessments
have become final and secondly, whose assessment are pending,
definitely violates Article 14 of the Constitution of India as there
is no rationale nexus with the object of the amendment, and,
therefore, such classification fails the test of Article 14 of the
Constitution, being a case of 'palpable arbitrariness'.
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13. We fully agree with the submissions made by the learned
counsel for the petitioners that the burden was upon the Revenue
to prove that the restrictions imposed by the amending Act are
reasonable. We find that the Revenue has failed to discharge that
burden by pointing out the reason for making classification
based on the above two aspects which have no reasonable
connection with the object of amendment.
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19. After hearing the learned counsel for the parties and after
going through the decisions cited at the bar, we are of the view
that although in taxing statute laxity is permissible and after
giving a benefit to the assessee based on some specific
conditions, such benefit can definitely be curtailed but the same
must be effective from a future date and not from an earlier point
of time. If after inducing a citizen to arrange his business in a
manner with a clear stipulation that if the existing statutory
conditions are satisfied, in that event, he would get the benefit of
taxation and thereafter, the Revenue withdraws such benefit and
imposes a new condition which the citizen at that stage is
incapable of complying whereas if such promise was not there,
the citizen could arrange his affairs in a different way to get
similar or at least some benefit, such amendment must be held to
be arbitrary and if not, an ingenious artifice opposed to law. In
the case before us, the object of the amendment, as it appears
from the statements of the Finance Minister while moving the
bill, is to get rid of the alleged wrong decision of the Tribunal
interpreting the then provision of the Statute in a way beneficial
to the assesses, which according to the Finance Minister, was
never the intention of the legislature. If such be the position, the
Revenue has definitely right to challenge the decision of the
Tribunal as a wrong one before the higher forum; but on a plea
of delay in disposal of appeal if filed, without challenging the
decision of the Tribunal before High Court or Supreme Court,
the Revenue cannot curtail such benefits by proposing
amendment, incorporating a new provisions in the Statute from
an anterior date. According to the existing law enacted by the
Parliament itself, wrong orders passed by a Tribunal should be
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challenged by the aggrieved party before the appropriate High
Court and if such party is still aggrieved by the order of the High
Court, he should move the Supreme Court.”
10. The Court thereafter noticed that the legislation was not just an
amendment of the taxing statute creating a new provision retrospectively.
Recognising that the legislature could confer benefits prospectively or
retrospectively and noticing several past judgments, the Court held as
follows:
“24. In the case before us, it is not one where the executive has
failed to carry out the object of the Parliament necessitating
exercise of control by retrospective amendment what the
executive ought to have achieved.
In the present case, according to the Finance Minister presenting
the Bill, a valid piece of legislation has been wrongly interpreted
by the Tribunal. We have already pointed out that according to
the existing law, if a valid piece of legislation is wrongly
interpreted by the Tribunal, the aggrieved party should move
higher judicial forum for correct interpretation. As pointed by
the Apex Court in the case of Pritvi Cotton Mills Ltd (supra), the
legislature does not possess or exercise power to reverse the
decision in exercise of judicial power. Thus, we are of the view
that the principles laid down in the case of R. C. Tobacco (P)
Ltd. (supra) has no application to the facts of the present case.
The impugned amendment granting benefit restricting it to a
class of assessee whose turnover is less than Rs. 10 Crore is
permissible prospectively but the way it has been enacted, it
takes away an enjoyed right of a class of citizen who availed of
the benefit by complying with the requirements of the then
provisions of law.
25. On consideration of the entire materials on record, we,
therefore, find substance in the contention of the learned counsel
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for the petitioners that the impugned amendment is violative for
its retrospective operation in order to overcome the decision of
the Tribunal, and at the same time, for depriving the benefit
earlier granted to a class of the assessees whose assessments
were still pending although such benefit will be available to the
assessees whose assessments have already been concluded. In
other words, in this type of substantive amendment, retrospective
operation can be given only if it is for the benefit of the assessee
but not in a case where it affects even a fewer section of the
assesses.
26. We, accordingly, quash the impugned amendment only to this
extent that the operation of the said section could be given effect
from the date of amendment and not in respect of earlier
assessment years of the assessees whose export turnover is above
Rs. 10 Crore. In other words, the retrospective amendment
should not be detrimental to any of the assesses. The writ-
applications are, thus, disposed in terms of the above order. In
the facts and circumstances, there will be, however, no order as
to costs.
In view of the above order passed in the writ-applications, the
Civil Applications do not survive and are disposed of
accordingly.”
11. The Revenue filed several appeals before the Supreme Court by
special leave, claiming direction against the operative part of the Gujarat
High Court in Avani Exports extracted above. After noticing the reasoning
of the High Court, the Supreme Court stated that the entitlement of benefits
to exporters with turnover of more than 10 crores was premised upon the
`
conditions spelt out in the third and fourth proviso brought in through
amendments. The Court discussed these aspects as follows:
“..................the amendment also carved out two categories of
exporters, namely, those whose export is less than Rs. 10 crores
per year and those exporters whose exports turn over is more
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than Rs. 10 crores per annum. Insofar as entitlement of these
benefits to the exporter having turn over of more than Rs. 10
crores p.a. is concerned, two conditions contained in third and
fourth proviso to the said amendment were to be satisfied for
claiming the benefits. Those were:
(a) He had an option to choose either the duty drawback or the Duty
Entitlement Pass Book Scheme, being the Duty Remission
Scheme; and
(b) The rate of drawback credit attributable to the customs duty was
higher than the rate of credit allowable under the Duty
Entitlement Pass Book Scheme, being Duty Remission Scheme.
All the respondents in these SLPs, who are the exporters, belong
to the second category. They filed the writ petitions challenging
conditions mentioned in third and fourth proviso to Section 80
HHC(3). In fact it was their precise contention that these
conditions are severable and therefore these two conditions
should be declared ultra vires and severed. The rationale behind
seeking such a prayer was obvious inasmuch as the writ
petitioners did not want entire Notification to be declared ultra
vires which was to their advantage. What they wanted was that
the benefit of amended provision be accorded, without insisting
on the aforesaid conditions.”
12. Subsequently, the Court extracted the operative portion of the Gujarat
High Court judgment – which has been reproduced above. The Supreme
Court recorded its conclusion and reasoning in the following terms:
“We find that in essence the High Court has quashed the
severable part of third and fourth proviso to Section 80HHC(3)
and it becomes clear therefrom that challenge which was laid to
the conditions contained in the said provisos by the respondent
has succeeded. However, to make the position crystal clear, we
substitute the direction of the High Court with the following
direction:
“Having seen the twin conditions and since 80HHC benefit is not
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available after 1.4.05, we are satisfied that cases of exporters
having a turnover below and those about 10 cr, should be treated
similarly. This order is in substitution of the judgment in Appeal.
With the aforesaid clarification all these SLPs including that of
assesses fled against the judgment of M.P. High Court are
disposed of.”
13. In the light of the above developments, this Court is of the opinion
that the appellants are entitled to the reliefs claimed by them to the extent it
is admissible – in line with the final order of the Supreme Court.
Accordingly, the substantial question of law (b) relating to the rejection
made is answered in favour of the assessee. The matter shall be re-examined
by the AO in the light of the Supreme Court’s final order. Since this Court
has already ruled upon the merits of the disallowance made, the question as
to whether the assessments could have been made under Section 153A is
rendered academic; the same is accordingly kept open. The appeals are
allowed in the above terms.
S. RAVINDRA BHAT
(JUDGE)
R.K. GAUBA
(JUDGE)
APRIL 28, 2015
‘ajk’
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