J.K. Industries Ltd. vs Acit on 8 November, 2005

ORDER

M.V. Nayar, Accountant Member

1. This appeal is against the revisional order Under Section 263 passed by the CIT, Central-I, Calcutta for the A.Y. 1991-92. In the Grounds of appeal the assessee has taken several grounds but in sum and substance the assessee has objected to the legal validity of the CIT’s order Under Section 263 directing the A.O. to withdraw the deductions Under Section 80HH & 801 which the A.O. allowed in respect of profits derived from a New Industrial Undertaking situated at Kankroli, Dist. Udaipur, Rajasthan. Before dealing with the grounds of appeal and the arguments of the rival parties it is necessary to set out the undisputed facts.

2. The assessee is a Public Limited Company. It was carrying on the business of manufacture of Tyres and Tubes. For the A.Y. 1991-92 the assessee filed its original return on 31st December 1991 declaring income of Rs. 16,05,85,900/-. In this return deductions Under Section 80HH & 80I were not claimed. A revised return was thereafter filed on 30th March 1993 declaring total income of Rs. 8,71,85,950/-. In the said return the deductions Under Section 80HH & 80I of the Act were claimed with reference to the profits derived from Factory No. III at Kankroli, Dist. Udaipur, Rajasthan. In the course of assessment proceedings the Assessing Officer issued notice Under Section 142(1) and a letter of requisition dated 3rd December 1993 directing the assessee to furnish details and explanations supporting its claim for deductions Under Section 80HH & 80I of the Act. The assessee by its letter dated 7th February 1994 submitted the explanations, information and documents to support its claim of these deductions. Thereafter by an order dated 31st March 1994 the Assessing Officer completed the assessment Under Section 143(3) assessing total income of Rs. 20,64,75,230/-. In para 23 of the said order the A.O. discussed the assessee’s submissions with regard to deductions Under Section 80HH & 80I and allowed the claims after being satisfied that the conditions laid down in these sections were fulfilled by the assessee. A show cause notice dated 9th September 1994 was thereafter issued Under Section 263 by the CIT, Central-I, Calcutta. In the said notice the CIT informed the assessee that in his opinion the assessment order dated 31st March 1994, allowing deductions Under Section 80HH & 80I to its Factory No. III at Kankroli, Rajasthan, was prejudicial to the interest of the revenue and he intended to revise the said order by withdrawing the reliefs granted. In response to the show cause notice the assessee submitted its objections. The Ld. CIT however passed the order Under Section 263 on 16th March 2005 directing the A.O. to withdraw the relief/deductions granted Under Section 80HH & 80I of the Act for the reasons discussed in the said order. Against the said order Under Section 263 the assessee came in appeal before this Tribunal.

3. Before us Sri D. S. Damle, FCA, the Ld. A/R assailed the order of the CIT on various grounds. He argued that the order Under Section 263 directing the A.O. to withdraw the deductions Under Section 80I & 80HH was passed by the CIT in excess of jurisdiction conferred Under Section 263. Further on merits as well as in law the order directing the A.O. to withdraw the deductions Under Section 80I & 80HH was untenable. He further submitted that the findings were recorded by the Ld. CIT in the impugned order either without verifying the correct facts and/or by recording incorrect facts and inaccuracies. The order passed Under Section 263 was also framed with reference to the grounds which were not disclosed to the assessee in the show cause notice and therefore the order passed Under Section 263 was bad in law.

4. It is now a settled proposition that an order Under Section 263 of the Act can be passed by the CIT only on the grounds and reasons set out in the show cause notice and for which the assessee is given an opportunity of hearing. The order ultimately passed by the CIT should be on the grounds and materials fairly disclosed in the show cause notice. It is therefore pertinent to examine the reasons which the CIT disclosed out in his show cause notice Under Section 263 of the Act. In Para I(a) of the Notice dated 9.9.94 the CIT mentioned that the Undertaking situated in the backward area was not entitled to simultaneous reliefs under two sections i.e. Under Section 80I & 80HH, in view of the opinions expressed in the commentaries on Income Tax by M/s. Sampath and Iyengar & Kanga and Palkhiwala. Thereafter in Para I(b) of the show cause notice the CIT observed that since the provisions of Section 80HH were having precedence over Section 80I, no deduction was permissible Under Section 80I.

5. In clause II(a) the CIT observed that Under Section 80I(9) & 80HH(6) & (7) the A.O. was required to personally determine the reasonable profits attributable to new industrial undertaking which the A.O. had failed to do. In Para II(b) the CIT observed that although in the impugned assessment the A.O. had made addition on account of understatement of sale of tyres to close business associates, yet the A.O. accepted the working of profits of the new industrial undertaking as made by the assessee which resulted in determination of excessive profit relatable to eligible undertaking. According to the CIT the income of the new industrial undertaking was required to be determined by the A.O. personally and he should not have accepted the assessee’s working of profits of the new industrial undertaking particularly when comparison of various expenses incurred by the old units and the new unit indicated that there was no discernible or reasonable basis for determining profit of the new unit.

6. In clause III(a) the CIT observed that in absence of depreciation in respect of old unit and allocation of all other expenses coupled with claim for consumption of fuel, Excise Duty etc. in disproportionate manner led to belief that there was no newly established independent IIIrd Unit warranting allowances Under Section 80HH or 80I. In clause III(b) the CIT observed that the assessee was already in the business of manufacture of tyres and tubes at its factory at Kankroli and such business was carried on for the past several years and therefore the IIIrd Unit at Kankroli, Dist. Udaipur, Rajasthan could not be said to be newly established industrial undertaking qualifying for deduction Under Section 80HH or 80I. For these reasons the CIT directed the assessee to show cause as to why the relief allowed Under Section 80HH & 80I should not be withdrawn.

7. In the impugned order Under Section 263 the CIT examined the replies of the assessee and discussed various facts relating to the assessee’s case. He also made certain other observations and findings in the said order to come to conclusion that either no new unit was set up by the assessee during the A.Y. 1985-86 which qualified for deduction Under Section 80HH & 80I or that no deduction was permissible Under Section 80HH & 80I in view of the inadequacy of profits of the said industrial undertaking. In particular he held that the deductions both Under Section 80HH and 80I were not permissible because by allowing deductions under both sections the assessee was allowed benefit of double deductions in respect of same profits and this was not permissible in law. He ultimately concluded that since the assessee’s industrial undertaking was situated in Dist. Udaipur which was a Centrally notified backward District, deduction if any could only be allowed Under Section 80HH. He therefore directed the A.O. to withdraw the deduction allowed Under Section 80I.

8. As regards deduction Under Section 80HH, the CIT observed that if the total income of the new industrial undertaking was computed treating the said industrial undertaking as the only source of income then the assessee did not have sufficient profits for the A.Y. 1991-92 after taking into consideration the brought forward business losses and depreciation. He, therefore, held that in view of the inadequacy of business income for A.Y. 1991-92 in respect of the said new industrial undertaking the assessee was also not eligible to deduction Under Section 80HH of the I.T. Act. The CIT accordingly directed the A.O. to withdraw the deductions Under Section 80I & 80HH.

9. At the time of hearing the Ld. A/R submitted that the CIT invoked the provisions of Section 263 even though the order passed by the A.O. was not erroneous and prejudicial to the interest of the revenue. According to him the order of the A.O. could be revised if and only if it was erroneous as well as prejudicial to the interest of the revenue. He argued that an order resulting in loss of revenue can be revised Under Section 263 only if an erroneous order has been passed by the A.O. Referring to the show cause notice dated 9th September 1994 the Ld. A/R submitted that in the said notice the CIT had not even suggested that the order passed by the A.O. Under Section 143(3) was erroneous but merely alleged that the order Under Section 143(3) was prejudicial to the interest of the revenue. He therefore argued that when the CIT did not point out any infirmity or an error in the order Under Section 143(3), the CIT was not competent to invoke revisional jurisdiction Under Section 263 only on the ground that the order Under Section 143(3) was prejudicial to the interest of the revenue.

10. The Ld. A/R further submitted that with reference to the reasons and the grounds set out in the show cause notice dated 9th September 1994 the order of the A.O. could not be held to be erroneous and prejudicial to the interest of the revenue. He submitted that in the show cause notice the CIT in the first instance doubted establishment of Factory No. Ill as an independent new industrial undertaking and also doubted the initial year of operation to be A.Y. 1985-86. However in the order Under Section 263 the CIT concluded that the A.O. did not bring on record any material to substantiate that Factory No. III at Kankroli was in fact established as new industrial undertaking in A.Y. 1985-86. According to the A/R the finding of the CIT that no new industrial undertaking was established in A.Y. 1985-86 or that there was no material before the A.O. to accept assessee’s contention that a new factory eligible for deductions Under Section 80I & 80HH was set up in A.Y. 1985-86 was factually incorrect. He submitted that up to A.Y. 1984-85 the assessee had only two manufacturing units at Kankroli, District Udaipur. In the Calendar year 1984 which was the previous year for A.Y. 1985-85 the assessee established Factory No. III at Kankroli. The said factory began production in March 1984. In the assessment year A. Y. 1985-86 the assessee suffered loss and therefore could not claim deductions Under Section 80HH and 80I in that year. In the computation of total income filed with the return for A.Y. 85-86 however a disclosure was made in Note No. 3 to the effect that Factory No. III was established during the relevant year but deductions Under Section 80HH and 80I were not claimed due to insufficiency of profit. Similar disclosures were also made in the computations filed with the I. T. Returns for A.Ys 1986-87 to 1991-92. The A/R argued that in all the returns filed from A.Y. 1985-86 & onwards the assessee consistently disclosed the facts about setting up of Factory No. III as new independent industrial undertaking eligible for deductions Under Section 80HH & 80I. These returns were filed much prior to completion of the assessment for A.Y. 1991-92 and therefore the existence of Factory No. III as a new industrial undertaking was made known to the Department much prior to completion of assessment for A.Y. 1991-92.

11. Referring to the A.O’s letter of requisition dated 3.12.93 the A/R pointed out that the A.O. had specifically required the assessee to furnish the details of establishment of new Industrial Undertaking, its location and address, date of establishment of the undertaking and the date from which new undertaking had begun manufacture of article etc. He further pointed out that the assessee by its letter dated 7.2.1994 had furnished details and explanations to the said queries before the A.O. The assessee also furnished documents and evidences to support its explanations. The A/R further submitted that during the course of revision proceeding also numerous documentary evidences were produced to prove that Factory No. III was set up as an independent manufacturing unit. Some of the documents filed before the lower authorities were filed before us in the paper book. For example, at pages 33 & 34 the Licence & Registration Certificate under Central Excise Rules was filed. At page 36 Certificate from the Central Excise Authorities certifying the first clearance of goods from the said Factory on 29th March 1984 was submitted. With reference to these papers the A/R argued that in the documents issued by the statutory authorities Factory No. III was considered as an independent industrial undertaking and therefore the finding of the CIT that no independent industrial unit was set up in A.Y. 1985-86 was factually incorrect.

12. The A/R further submitted that the said Factory No. III situated in Vill. Kankroli, District Udaipur was eligible for deduction Under Section 80HH because Udaipur District was a centrally notified backward district. Referring to the order Under Section 263 the Ld. A/R pointed out that the CIT’s finding that Udaipur was declared as Backward District by the Government only in the year 1986 was factually and legally incorrect. He pointed out that as per provisions of Section 80HH subsisting during the A.Y. 1985-86, the deduction Under Section 80HH was permissible to newly established industrial undertaking situated in the Districts mentioned in the Eighth Schedule to the I.T. Act. The said Schedule specified District Udaipur in the State of Rajasthan as a “Backward District”. The A/R further submitted that Taxation Laws [Amendment and Misc. Provision] Act 1986 amended provisions of Section 80HH and granted authority to the Central Government to notify the list of Backward District with retrospective effect but not prior to 1.4.1983. Simultaneous with the said amendment, the Eighth Schedule was omitted. The Central Government thereafter issued Notification No. 7056 dated 19.12.1986 notifying the Backward Districts, in which District Udaipur in the State of Rajasthan was included. However two blocks of the said District were excluded. The A/R argued that with reference to the Notification dated 19.12.86 the CIT probably inferred that the assessee could not have claimed the deduction in A.Y. 1985-86 since the notification was issued by the Central Government only on 19.12.1986.

13. The A/R however submitted that when the return for A.Y. 1985-86 was filed Dist. Udaipur was included in the Eighth Schedule and therefore new industrial undertaking situated in the said District was eligible to claim Under Section 80HH of the Act. The assessee’s disclosure made in the return for A.Y. 1985-86 was based on the provisions of Section 80HH read with the Eighth Schedule of the I.T. Act 1961 and not on the basis of Notification dated 19.12.86. During the course of hearing the Ld. A/R conceded that Village Kankroli was situated in Raj Samund Block of District Udaipur which was in excluded category of the Notification dated 19.12.1986 and therefore not eligible for deduction Under Section 80HH. However referring to the Circular No. 484 dated 1.5.1987 the Ld. A/R argued that the Board had clarified that the industrial undertaking situated in the excluded Blocks were eligible to claim deduction Under Section 80HH upto 10th September 1986 because the Taxation Laws (Amendment & Misc. Provisions) Act 1986 received Presidential ascent on the said date. He also submitted that the Board also clarified that all areas specified in the Eighth Schedule were continue to enjoy the benefit of Section 80HH, in respect of Industrial Undertaking which began manufacture articles before 10.9.86. Relying on the said Board Circular the A/R argued that since in the present case the first clearance of goods from the factory No. III was effected on 29th March 1984 i.e. prior to 10.09.1986 the said factory was an eligible undertaking Under Section 80HH of the Act.

14. The Ld. A/R further argued that in the impugned order Under Section 263 the CIT directed to withdraw deduction Under Section 80I of the Act only on the ground that the deduction was also allowed Under Section 80HH of the Act. According to the A/R the CIT’s finding was based solely on his interpretation of the commentaries on Income Tax by M/s. Sampath & Iyengar and Kanga & Palkhiwala. He submitted that neither the finding of the CIT nor the alleged opinions of the Ld. Authors were based either on specific provision of the I.T Act or decisions of judicial authorities. He submitted that merely with reference to the opinions expressed by Authors and without their being statutory prohibition in the Act or binding judicial decisions the CIT could reach a definite conclusion that deduction Under Section 80I was erroneously allowed. The A/R submitted that the CIT’s finding that a newly established Industrial Undertaking in a backward district could not avail deductions both Under Section 80HH & Under Section 80I was legally as well as factually untenable. He submitted that there was no restrictive condition either in 80HH &/or 801 which prevented the assessee’s from claiming deductions under both the sections. Referring to Section 80HH(9A) the A/R submitted that deduction Under Section 80HH was specifically made impermissible where deduction was also permissible Under Section 80HHA. He therefore submitted that wherever the legislature intended to prevent simultaneous deductions under two sections then it clearly provided therefor. However there was no specific prohibition in the Act which debarred the assessees from claiming deductions both Under Section 80HH and Under Section 80I. Further the Ld. A/R submitted various High Courts have held that where a new industrial undertaking in backward district satisfied the conditions laid down in Section 80HH and Under Section 80I then deductions were permissible under both the sections. In support the A/R relied on the decisions in 270 ITR 65(MP), 229 ITR 123(MP), 248 ITR 29(BOM), 274 ITR 495(P&H). The A/R argued that the order of CIT holding the A.O.’s order as erroneous was based on his interpretation of the I. T. Act but the same was specifically unapproved in these decisions. He therefore submitted following these judgements of the High Courts, the order of the A.O. could not be said to be erroneous. The A/R submitted that since the view taken by the A.O. in his assessment order being the permissible and sustainable view in law, the order of the A.O. could not be termed as erroneous within the meaning of Section 263 of the Act and therefore the CIT’s direction to withdraw deduction Under Section 80I was legally untenable.

15. Referring the CIT’s finding that Under Section 80I(9) & 80HH(6) & (7) the A.O. should have personally determined the profits of new industrial undertaking, the A/R submitted that the said finding of the CIT was fallacious. He further argued that the CITs findings that the profits of the eligible undertaking were inflated on account of suppression of sales was also factually and legally incorrect. The A/R submitted that in the assessment the A.O. had made addition of Rs. 6,39,97,992/- on account of suppression of sales but the alleged sale was never credited in the Audited Accounts of the assessee for the year ended 31st March 1991. The said addition was also not considered as income of the eligible undertaking by the A.O. for the purpose of computing deduction Under Section 80HH & 80I. With reference to the computation of profits of the eligible undertaking as filed before the A.O. the A/R submitted that the alleged suppresion sales was not considered as part of the eligible profit either by the assessee or by the A.O. and no deduction Under Section 80HH & 80I was allowed by the A.O. with reference to addition made. According to the Ld. A/R, the CIT’s finding that the deduction was allowed with reference to inflated profits was factually incorrect and no prejudice was caused to the revenue.

16. The Ld. A/R argued that the CITs finding regarding disproportionate levels of expenses and revenue between new unit and old unit was also incorrect. Drawing attention to the A.O’s requisition dated 3.12.93 the A/R submitted that the Assessing Officer had specifically required the assessee to explain as to how profits of the new undertaking were computed and the basis adopted for determining the profit. The A/R pointed that in the course of assessment the detailed explanations and the workings of the profit derived by the industrial undertaking was submitted before the A.O. vide its letter dated 7.2.94. The basis adopted for allocating the costs amongst different units was also explained with reference to various judicial decisions including that of the jurisdictional Calcutta High Court. After due examination of the assessee’s explanations, basis of allocation of revenue and expenses between various units, the A.O. accepted the working of the profit of the new unit and allowed the deductions. It was therefore not a case where the A.O. accepted the assessee’s computation without verification or without application of mind. According to the Ld. A/R the A.O. conducted proper enquiries before completion of assessment with regard to determination and computation of profits of the new industrial undertaking. The A/R submitted that when the assessment was framed by the A.O. after conducting due enquiries and after verifying the books of account and other materials then it could not be held by the CIT that the A.O. did not personally ascertain determine the profit of the undertaking. The A/R submitted that it might be a case that left to himself, the CIT might have allocated higher expenditure attributable to new undertaking thereby reducing eligible profits. However in such case it would only amount to substitution of the CITs opinion for that of the A.O. Referring to the show cause notice and the impugned order Under Section 263 the A/R submitted that the CIT had not pointed out any specific defect or infirmity in the basis of allocation of expenses and revenue amongst different units or in the statements furnished by the assessee. The CIT merely summarized the figures of expenses and revenue in a tabular form which only indicated that expenses incurred by 3 units were in different proportions. However this fact by itself did not lead to a definite conclusion that the profits of the new industrial undertaking were not properly ascertained. The A/R submitted that the new unit was installed with improved technology which produced better quality tyres at a reduced cost and therefore there could not be strict comparison between revenue and expenditure levels of old units and new unit as the technology involved was different. The A/R relying on the decision of the Bombay High Court in the case of Gabriel India Ltd. v. CIT in 203 ITR 108 submitted that merely because the CIT did not agree with the estimation of the A.O. or in his opinion the order was not elaborately written, the same was erroneous and prejudicial to the revenue Under Section 263. The A/R also relied on the decision of the ‘E’ Bench of the ITAT, Kolkata dated 27.7.2005 in ITA No. 968/K/05 wherein the Tribunal had set aside an order of the CIT Under Section 263. The Ld. A/R argued that when the old units and the new unit were set up with different technologies they were bound to have different levels of expenses and overheads and therefore comparison could not be made though these units manufactured the same products. The Ld. A/R further submitted that the basis for allocating revenue and expenses amongst different units was consistently followed in subsequent years as well. In the assessment year’s 1992-93 to 1994-95 the assessee’s claim for deductions Under Section 80HH and 80I were allowed by the A.O. accepting the assessee’s working of allocation of revenue and expenses. He also submitted that neither the appellate authorities nor the CIT had disturbed the orders of the A.O. granting these deductions. The Ld. A/R therefore argued that only in A.Y. 1991-92 the CIT could not hold the A.O’s order as erroneous on the ground of disproportionate levels of expenses.

17. With reference to the CIT’s finding that the Factory No. III could not be considered as new industrial undertaking because the Unit Nos. I to II, situated in the immediate vicinity, also produced the same products, the A/R argued that this fact also did not lead to conclusion that order Under Section 143(3) was erroneous. With reference to the Licences granted under the Factories Act and the Central Excise Law the A/R argued that the Factory No. III was recognized as distinct and different industrial undertaking. The A/R stated that the said factory was established with substantial capital outlay and with new technology and it employed requisite number of persons and satisfied the conditions laid down in Section 80HH & 80I. The Ld. A/R further submitted that merely because Factory No. III produced the same products, could not disentitle the said undertaking from availing deductions permissible in Section 80HH & 80I. In support of this proposition the Ld. A/R relied on the decision of the Apex Court in the case of Textile Machinery Corporation v. CIT 107 ITR 195 and CIT v. Indian Aluminium Co. Ltd. 108 ITR 367. He also relied on the decision of the Madras High Court in the case of Super Spinning Mills Ltd. v. CIT 125 Taxman 331. He also pointed that the Assessing Officer had allowed the deductions Under Section 80HH & 80I to the assessee in A.Y. 1992-93 to 1994-95 on the same set of facts and these orders were never made subject matter of revision by the department thereby accepting the said Factory No. III as a new industrial undertaking eligible for deduction.

18. As regards CIT’s finding that deduction Under Section 80HH was not permissible because of lack of adequate gross total income, the A/R submitted that this ground was never disclosed in the show cause notice issued Under Section 263 of the Act and opportunity of hearing was never given on this ground. The A/R submitted that in the impugned order the CIT furnished a chart of business loss, unabsorbed depreciation and investment allowance of the said unit since inception and observed that if the profits of the said Unit were computed treating it as only source of income then there was no positive business income for A.Y. 1991-92 after allowing set off for unabsorbed depreciation and investment allowance. The CIT also referred to the decisions of the Kerala High Court in 165 ITR 174 and the Gujarat High Court in 210 ITR 535 where it was held that deduction Under Section 80HH was permissible only after setting off past business loss, depreciation and investment allowance. The Ld. A/R however submitted that the business loss, unabsorbed depreciation and investment allowance relatable to Factory No. III had been set off against profits of other units for and up to A.Y. 1989-90 and as per the assessment records there was no unabsorbed depreciation or investment allowance or business loss available for set off in A.Y. 1991-92. Referring to the computation of income and the assessment order the A/R pointed that after claiming deductions Under Section 80HH and 80I, substantial business income was reported by the assessee. This established that unabsorbed depreciation, investment allowance and business loss was not available for set off in A.Y. 1991-92. The A/R referring to the decision of the jurisdictional Calcutta High Court in the case of CIT v. Balmer Lawrie & Co. Ltd. 215 ITR 249 submitted that it was held by the Court that where losses of new industrial undertaking were already set off against other income of earlier years then for the purpose of Section 80HH set off of losses against the income of new industrial undertaking was not permissible. The A/R also relied on the decision of the Madhya Pradesh High Court in the case of CIT v. K.N. Oil Industries 95 Taxman 557 wherein the High Court had held that in working out the deductions Under Section 80HH and 80I the earlier year’s losses could not be deducted from the current year’s income. The A/R also submitted that in the assessee’s own case in the subsequent Assessment Year i.e. 1992-93 the CIT(A) had directed the A.O. not to set off such losses and allow deduction Under Section 80HH with reference to the profit of A.Y. 1992-93, following the decision of the Calcutta High Court(Supra). He stated that an appellate order for A.Y. 1992-93 was accepted by the department. The Ld. A/R therefore submitted that when the jurisdictional Calcutta High Court had held that in computing the deductions Under Section 80HH past losses which were set off against other income in earlier years, could not be taken into consideration, then the CIT was unjustified in directing the A.O. to disallow the deduction Under Section 80HH on the ground of inadequacy of business income.

19. In conclusion the A/R submitted that the A.O. had completed the assessment after calling for information, documents and explanations regarding the claims made Under Section 80HH & 80I. The A.O. considered the judicial decision on which asssessee had relied for claiming these deductions. After due examination of the information, explanations and application of mind the A.O. passed the order Under Section 143(3) allowing deductions Under Section 80HH & 801. He argued that on the grounds on which the CIT held the order of A.O. was prejudicial, more than one permissible views were available in law. In most of the grounds, the findings recorded by the CIT were not supported either by statutory provisions of law or the views of the CIT were not approved by judicial authorities. The A/R therefore submitted that on the facts and circumstances available on record the order of the A.O. could not be considered to be erroneous within the meaning of Section 263 because the A.O. apparently followed the views which could not be considered in law to be unsustainable. Referring to the decision of the Apex Court in the case of Malabar Industrial Co. v. CIT 243 ITR 83 the A/R submitted that it has been held that it is not every order which results in loss of revenue, can be termed as erroneous Under Section 263. According to the Supreme Court, if on any issue, two permissible views are possible and the A.O. follows one of the permissible view then the said order of the A.O. cannot be considered as erroneous unless the view taken by the A.O. is unsustainable in law. The A/R submitted that in the present case the A.O. had certainly followed the legally sustainable view while allowing deduction Under Section 80HH and 80I of the Act and therefore the order of the A.O. was not erroneous. The A/R also relied on the unreported decision of the jurisdictional Calcutta High Court in the case of CIT, Central-I v. Subhash Projects and Marketing Ltd. wherein the High Court held that Under Section 263 of the Act the order of the A.O. can be considered as erroneous only if an impossible view has been taken by the A.O. The A/R submitted that in the present case it could not be said that the A.O. had taken an impossible view. Rather the Assessing Officer had taken one of the legally possible view and the said views was well supported by numerous judicial decisions. The A/R, therefore, submitted that the order of the Assessing Officer being neither erroneous nor prejudicial to the interest of the revenue within the meaning of Section 263, the CIT was unjustified in directing to withdraw the deductions Under Section 80I and 80HH of the Act.

20. Sri B. D. Kaler, the Ld CIT D/R on the other hand fully supported the order of the CIT. He argued that the CIT was well justified in holding that the deduction Under Section 80I was wrongly allowed because the said deduction resulted double deduction in respect of the same profits. He argued that when the new industrial undertaking situated in a backward district commenced production then it could claim deduction only under one section i.e. 80HH and not Under Section 80HH & 80I. According to him since provisions of Section 80HH had precedence over section Under Section 80I, the deduction was permissible only Under Section 80HH and therefore the CIT was well justified in holding that the assessee was not entitled to deduction Under Section 80I of the Act. He further stated that the finding of the CIT was certainly based on his interpretation of the I.T. Act and in his capacity as a Supervisory authority he had statutory power to direct the A.O. to reframe the assessment according to his finding. The Ld. CIT D/R further submitted that the facts on record indicated that the A.O. had not conducted proper enquiries to ascertain whether the assessee’s Factory No. III was situated in an area covered by the Notification of the Central Government dated 19.12.86. Since the order of the A.O. was silent regarding the exact location of the said Factory it was quite apparent that the A.O. had not conducted full and proper enquiry to ascertain as to whether the assessee’s said unit was situated in Backward District specified in the Notification. The CIT was therefore justified in invoking revisional jurisdiction. The Ld. CIT D/R also submitted that it was pointed out by the CIT in the impugned order that the past losses, unabsorbed depreciation and investment allowance relatable to the said unit were not fully set off against profits of the same unit. The said Factory No. III did not have sufficient gross total income in A.Y. 1991-92 against which the deduction could be actually allowed. He stated that the finding of the CIT was well supported by the decision of the Kerala High Curt in the case of CIT v. Kerala Solvent Extraction 165 ITR 174 and the Gujarat High Court in the case of Paushak Limited v. CIT 210 ITR 535. The Ld. D/R therefore submitted that the order of the CIT Under Section 263 was legally valid and no interference was called for in the said order.

21. We have heard the rival submissions, perused the orders of the authorities below, considered the applicable provisions of law and various decisions cited at the Bar. In the present case the order under Appeal has been passed by the Commissioner of Income Tax Under Section 263 of the Act. It is now settled proposition of law that Under Section 263 a Commissioner can pass a revisional order only if the order of the A.O. is erroneous so far as it is prejudicial to the interest of the revenue. The prejudice to the revenue, contemplated in Section 263, should be caused as a result of passing of an “erroneous” order. Merely if an order results in loss of revenue, the Commissioner cannot revise the order unless he proves that the order resulting in such loss was also “erroneous”. In the present case in the show cause notice dated 9 Sept. 1994 the Commissioner however only held that the order Under Section 143(3) dated 31st March 1994 was “prejudicial” to the interest of the revenue. In the said show cause notice dated 9X Sept. 1994 the Commissioner nowhere indicated that in his opinion the order was “erroneous” nor the CIT mentioned any grounds on which he held the order as “erroneous”. In the present case the CIT therefore assumed jurisdiction Under Section 263 only on the ground that the order Under Section 143(3) was prejudicial to the interest of the revenue without in any manner indicating in his notice that the said order was “erroneous” as contemplated Under Section 263 of the Act. In our opinion an infirmity was committed by the CIT in issuing the notice Under Section 263 of the Act. Be that as it may, in the impugned order Under Section 263, the CIT discussed various facts and issues in coming to conclusion that the order of the Assessing Officer was prejudicial to the interest of the revenue. We find that some of the reasons and grounds were discussed for the first time in the order Under Section 263 and these were not mentioned in the Notice dated 9.9.94. In particular the Commissioner discussed at length the question on non-allowability of deduction Under Section 80HH on account of inadequacy of gross total income of Unit III due to unabsorbed depreciation, investment allowance and business loss relatable to Factory No. III. In the impugned order the CIT also referred to the decisions in 165 ITR 174 (Kerala) and in 210 ITR 535 (GUJ) to support his conclusion. No doubt these decisions could have been applied in the present case. However, we find that this ground was never disclosed in the show cause notice and the assessee was never given an opportunity of being heard on this issue. The jurisdictional Calcutta High Court in the case of CIT v. General Trade Agencies 1973 TLR 1383 has held that where show cause notice issued by the Commissioner did not fairly indicate the grounds used by him for cancellation of the assessment, then the Tribunal was justified in setting aside the order of the Commissioner as the assessee was deprived to fair opportunity to show cause. In the present case we find that in the show cause dated 9th September 1994 the Commissioner had not disclosed this ground and the assessee was never directed to meet CIT’s observations that deduction Under Section 80HH was not permissible on account of lack of gross total income. We therefore find that the impugned order Under Section 263 also suffered from the infirmity of not allowing proper opportunity of being heard to the assessee.

22. From the notice dated 9th September 1994 and the impugned order dated 16.3.1995 Under Section 263 we note that CIT initiated revision proceeding mainly on the ground that claims were not permissible both Under Section 80I and 80HH In the CIT’s opinion the deductions allowed Under Section 80HH and 80I resulted in double deduction being allowed in respect of same profits, which prejudice to the interest of the revenue. For this reason the CIT ultimately directed the A.O. to withdraw deduction Under Section 80I. However before issuing the direction the CIT also raised doubts regarding the actual establishment of a new industrial undertaking at Kankroli, Dist. Udaipur. He in fact questioned the order of the A.O. on the ground that the A.O. did not conduct any enquiry regarding establishment of Factory No. III as a new industrial undertaking during the A.Y. 1985-86.

23. From the facts on record and submissions made by the A/R we however find that from A.Y. 1985-86 onward the assessee had consistently disclosed in the computation statement that Factory No. III was set up as a new industrial undertaking eligible for deductions Under Section 80HH & 80I. We also find that in the letter dated 3rd December 1993 the A.O. had required the assessee to give specific information regarding establishment of the Factory No. III as new industrial undertaking and also required the assessee to prove that it fulfilled the conditions laid down in Section 80HH and 80I. We also note that the assessee by its letter dated 7.2.94 furnished its explanations and documentary evidences to prove that the said Factory No. III was set up as a new industrial undertaking and commenced production in March 1984 relevant to A.Y. 1985-86. We also note that the said factory No. III was given a new Factory Licence and Central Excise Licence. The Central Excise authorities also certified the first dispatch from the said factory took place only on 29th March 1984. We are therefore satisfied that before the A.O. in the assessment proceedings the assessee had brought on record sufficient material and evidence to prove that a new industrial undertaking was set up during the calendar year 1984 relevant to A.Y. 1985-86. We also find that in A.Ys. 1992-93 to 1994-95 the deductions Under Section 80I & 80HH were allowed in respect of profits of Factory No. III. In A.Y. 1992-93 the deductions were allowed by the A.O. in the proceeding Under Section 251 of the Act whereas in A.Ys 1993-94 & 1994-95 the deduction Under Section 80HH was allowed Under Section 143(3). In the course of hearing the Ld. A/R submitted that these orders were not made subject matter of appeals or revision and the deductions allowed by the A.O. had become final. The Ld. D/R did not controvert these facts. In the above factual circumstances therefore we find that in the succeeding assessment years on the same set of facts the revenue authorities accepted Factory No. III as new industrial undertaking eligible to deductions Under Section 801 and 80HH. On these facts therefore we see no justification for the Commissioner to doubt the establishment of Factory No. III as new industrial undertaking only in the assessment in A.Y. 1991-92. Though the principle of resjudicata is not strictly applicable to revenue proceedings, yet the said principle is no stranger to the tax proceedings. If on the same set of facts the revenue authorities in the later years allowed deduction Under Section 80HH & 80I to Factory No. III treating it as an industrial undertaking set up in A.Y. 1985-86 then there was no reason for the CIT to disturb the finding of the A.O. in A.Y. 1991-92 as the CIT did not bring on record any specific evidence to prove contrary. We therefore hold that the CIT was not justified in doubting the establishment of Factory No. III as new industrial undertaking during 1985-86.

24. We also find that during the A.Y. 1985-86 the deduction Under Section 80HH was permissible to a newly established undertaking if it was situated in any of the Districts specified in the Eighth Schedule. In the Paper Book copy of the said Eighth Schedule was filed which shows that the District Udaipur in the State of Rajasthan was mentioned as Backward District. We also note that by Notification dated 19.12.1986 the Central Government notified list of Backward Districts and District Udaipur was included therein. We also note that the Raj Samund Block of Udaipur District where Factory No. III is situated was in excluded category of the said Notification. We however note that the CBDT in its Circular No. 484 dated 1,5.87 had clarified that all areas specified in the Eighth Schedule continued to enjoy the benefit of Section 80HH if the Industrial Undertaking had begun manufacture before 10.09.86. We therefore find that Factory No. III situated in Rajsamund Block of Udaipur District was eligible for deduction Under Section 80HH since it began production in March 1984 as certified by the Central Excise Authorities.

25. In the impugned order the CIT observed that new Factory No. III manufactured Tyres and Tubes which were also manufactured by Factory Nos. I & II and therefore no new business was started. According to CIT, Factory No. III was therefore not eligible for reliefs Under Section 80HH & 80I. In other words according to the CIT Factory No. III merely represented expansion of assessee’s existing business and therefore not eligible for beneficial deductions as no new business was set up. We however find that this proposition has not been accepted by the Supreme Court as well as by the various High Courts. In the case of CIT v. Indian Aluminium Co. Ltd. 108 ITR 367 the Supreme Court upheld the decision of the Calcutta High Court allowing relief Under Section 15C of the I.T. Act 1922. In that case the assessee had made additional investment in the form of extension of the existing factories, installation of plant and machinery at Belur and Alupuram Plants as a result of which production went up by double. The High Court held that in view of the nature of substantial investments it could not be said that the units were not new industrial undertaking and therefore eligible for relief Under Section 15C of the I.T. Act 1922. This decision of the Supreme Court was rendered following its earlier decision in the case of Textile Machinery Corporation Ltd. v. CIT 107 ITR 195. We also find that the Gujarat High Court in CIT v. Sri Digvijay Cement Ltd. 144 ITR 532 held that provisions of Section 15C of the I.T. Act 1922 were similar to Section 85 & 80J of the I.T. Act 1961. In that case the assessee was engaged in the business of manufacture of Cement and it had set up Fourth Kiln. The assessee claimed deduction Under Section 80J of the Act, which was denied on the ground that the assessee was already in the business of manufacture of cement and no new product was manufactured by the Fourth Kiln which was situated at the same place. The High Court upheld the order of the Tribunal allowing the deduction Under Section 80J on the ground that there was investment of fresh capital and additional labour force was employed by the assessee as a result of the installation of the Fourth Kiln. The Court also found that the expanded unit had a separate and distinct identity and there was substantial increase in the production of the assessee and therefore the assessee was entitled for deduction Under Section 80J of the Act. We also find that similar view has been expressed by the Madhya Pradesh High Court in CIT v. Bhilai Industrial Corporation Ltd. 133 ITR 687, Calcutta High Court in the case of Indian Aluminium Co. Ltd. v. CIT 140 ITR 114, Punjab & Haryana High Court in the case of Oswal Woolen Mills Ltd. v. CIT 138 ITR 338 and the Madras High Court in the case of Super Spinning Mills Ltd. v. CIT 125 Taxman 331. We also find that in the assessee’s own case for A.Y. 1992-93 to 94-95 the department has allowed deduction Under Section 80I & 80HH in respect of profits derived by Factory No. III. We are therefore satisfied that the order of the A.O. allowing deductions Under Section 80HH and 80I considering Factory No. III as new industrial undertaking was supported by various judicial decisions wherein it was held that for claming the deductions it was not necessary to manufacture a new or different product. We therefore find that on this issue also the order of the A.O. could not be considered as erroneous.

26. In the show cause notice and the order Under Section 263 the CIT observed that disproportionate levels of expenses and overheads between old units and new unit led to conclusion that there was no discernible basis for determination of the profits of Factory No. III. The CIT further observed that since addition for suppression of sales were made, the A.O. should have personally examined and recomputed profit of the eligible undertaking. According to the CIT since suppressed sales were effected to close business associates Under Section 80I(9) & 80HH(6)&(7), A.O. should not have accepted assesses version of profit. The failure on the part of the A.O. to personally compute profits of the said undertaking therefore resulted in inflation of eligible profits which resulted in excessive deductions. From the facts on record however we are unable to appreciate order of the CIT on this issue. In the notice dated 02.12.1993 the A.O. had required the assessee to furnish separate statement of accounts to determine the profits of the eligible undertaking. The A.O. also required the assessee to explain with sufficient reasons the basis of computation Under Section 80HH & 80I. We, find that the assessee vide its letter dated 02.07.1994 submitted statement of operating profit of the Factory No. III and also explained the basis on which the profits of the new industrial undertaking were worked out Under Section 80HH and 80I. Copies of these statements were furnished before us at page Nos. 15 to 17 of the Paper Book. We also note that before the A.O., the assessee explained that production, purchases, sales, consumption of raw materials, stores and spares, repairs, conversion costs and income were considered on actual basis. The cost of power and fuel was allocated on the basis of actual consumption. The other expenses and overheads were apportioned on production value basis. We also find that in the written submissions placed before the A.O. the assessee had relied on the decision of Calcutta high Court in 107 ITR 182 and decisions of the Apex Court in 60 ITR 11 and 67 ITR 89 in support of apportionment of common business expenses and overheads in determining profits of the eligible undertaking.

27. From the above facts and submissions we therefore note that the A.O. called for details and explanation relating to computation of profits of Factory No. III and after it’s examination the A.O. completed the assessment. On these facts therefore we are unable to agree with the CIT’s finding that there was no discernible basis for ascertaining profits of Factory No. III and the A.O. failed to personally determine profit of the eligible undertaking. It may be a case that disproportionate levels of expenses of different units prompted the CIT to initiate enquiries Under Section 263. However, in the order Under Section 263 the CIT could not record a finding that only because of disproportionate levels of expenses, the profits of the eligible undertaking were wrongly computed.

28. It may be a case that the CIT did not agree with the basis adopted by the assessee and accepted by the A.O. and left to himself he would have adopted different basis or allocated higher expenses to the new undertaking thereby reducing its profits. In exercise of power Under Section 263 the CIT however cannot substitute his subjective opinion in place that of the A.O. The proceedings Under Section 263 are not intended to enable the CIT to reframe the assessment by substituting his subjective opinion in place of the ITO. The proceedings Under Section 263 can only be invoked if the basis adopted by the A.O. is patently wrong or the deduction or relief was allowed in contravention of statutory provisions. This view finds support in the decision of the Bombay High Court in the case of Gabriel India Ltd. v. CIT in 203 ITR 108. We also note that the “E” Bench of the ITAT, Kolkata, in ITA No. 968/K/05 dated 27.07.2005 considered a similar issue. In that case the A.O. had allowed deduction Under Section 80IB to the assessee engaged in housing projects. The deduction was claimed in respect of Housing Project No. III and profits of the said project were determined by the A.O. after allocating certain common expenses and overheads on pro rata basis. In an order Under Section 263, order of the A.O. was held to be erroneous on the ground that the A.O. should have allocated higher percentage of construction expenses and overheads and thereby should have reduced the eligible profits and corresponding deduction Under Section 80IB. The coordinate Bench of the ITAT however vacated the order of the CIT on the ground that in proceedings Under Section 263 the CIT could not revise the order of the A.O. only on the ground that the allocation of expenses and estimate of the profits by the A.O. should have been lower.

29. We find in the present case also the CIT merely doubted the correctness of the working of the profit of the eligible unit because of disproportionate level of expenses. However, the CIT did not point out any specific infirmity in the said working, but concluded that the profits were inflated. In the circumstances therefore, we are unable to uphold the CIT’s order since the A.O. had accepted profit of the eligible undertaking only after examining the relevant information, explanation and after verifying records. Moreover no infirmity was pointed by the CIT in the order of the A.O. or the working of profits and the basis adopted.

30. We also agree with the contention of the learned AR that profits of the eligible unit were not inflated and no deduction Under Section 80HH & 80I was allowed by the A.O. in respect of addition made on account of alleged suppression of sales. From the working of deductions Under Section 80HH and 80I we note that these deductions were computed with reference to the net profit disclosed in the accounts and the alleged suppressed sale was not credited to the Profit & Loss Account. Such suppressed sale therefore was not part of the net profit disclosed in the accounts. We also note that such addition was not considered as part of the profit of Factory No. III and no deduction was allowed by the A.O. with reference to addition made on account of alleged suppressed sales. We are therefore of the considered opinion that no prejudice was caused to the revenue because the income resulting from suppressed sale was not considered by the A.O. for the purposes of computing relief Under Section 80HH and 801. We are therefore unable to agree with the CIT’s finding that the A.O. allowed excessive relief to the assessee with reference to inflated profit of the said unit.

31. In the impugned order the Commissioner directed the A.O. to withdraw deduction Under Section 80I ultimately on the ground that deductions both Under Section 80HH & 80I were not permissible as it resulted in double deduction of the same income and this was not permissible in law. In support of this finding the Ld. CIT relied on the commentaries and observations of Ld. Authors M/s. Sampath & Iyengar and Kanga & Palkhiwala. In our opinion the CIT was unjustified in initiating revision proceedings Under Section 263 of the Act merely on the basis of opinions expressed by the Authors in the Commentaries on Income Tax. These opinions might have prompted the CIT to form a prima facie belief that the order was incorrect. However before coming to the definite finding, the Commissioner should have brought on record specific provision of the I.T. Act or any decision of a judicial authority. We however find that the CIT neither pointed out any specific provision of the I.T. Act 1961 which disentitled the assessee from claiming deductions under both the sections nor decision of any High Court or Supreme Court which specifically prohibited simultaneous deduction being allowed under two sections. From provisions of Section 80HH(9A) we note that the deduction Under Section 80HH was impermissible where deduction was also permissible Under Section 80HHA of the Act. However no such prohibition or restriction was found either in Section 80HH or Under Section 80I. We also find sufficient force in the argument of the A/R that wherever the legislature intended to prevent or deny double deduction, specific provision was enacted by the legislature. We are therefore satisfied with the A/R’s submission that if a new industrial undertaking fulfilled the conditions laid down in the respective sections i.e. 80HH and 80I, then deductions were permissible under both the sections. We also note that the Madhya Pradesh High Court in 270 ITR 65 & 229 ITR 123, Bombay High Court in 248 ITR 29 & the Punjab & Haryana High Court in 274 ITR 495 have held that deductions were permissible both Under Section 80HH & 80I. We therefore find that the order of the A.O. allowing deduction Under Section 80I was not erroneous in as much as various High Courts have held that deductions were permissible both Under Section 80HH & 80I of the Act. For the reasons discussed in the foregoing therefore we hold that the CIT was unjustified in directing the A.O. to withdraw the deduction Under Section 80I.

32. The CIT also directed the A.O. to withdraw the deduction allowed Under Section 80HH on the ground of inadequacy of gross total income. In the impugned order Under Section 263 the CIT set out a chart of unabsorbed business loss, depreciation and investment allowance relatable to factory No. III since its inception in A Y 1985-86 & concluded that if gross total income was computed treating unit No. III as the only source of income, then there was no positive gross total income and therefore no deduction Under Section 80HH was permissible. According to CIT his finding was based on provisions of Section 80I(6) of the Act and the decisions of the Kerala High Court in 165 ITR 174 and Gujarat High Court in 210 ITR 535. We however find that in the assessee’s case the unabsorbed loss, depreciation and investment allowance related to Factory No. III were already set off against the profits of the other undertakings in the earlier years and no loss, depreciation or investment allowance was available for set off in the A Y 1991-92. In fact from the facts on record we find that the assessee itself had declared total income of Rs. 8,71,85,950/- even after claiming deduction Under Section 80HH and 80I and no claim was made in the return for A.Y. 1991-92 or allowed in the assessment for set off of brought forward loss and depreciation. As against the decisions of Kerala High Court and Gujarat High Court, the jurisdictional Calcutta High Court in the case of CIT v. Balmer Laurie & Co. Ltd. held that where the losses of the new unit were set off against other income of the assessee in earlier years, then such losses could not be considered in allowing deduction permissible Under Section 80HH of the Act. The court particularly noted that the deeming fiction visualized in Section 80I(6) was absent in Section 80HH and therefore deduction Under Section 80HH could not be reduced where the losses of the eligible unit were set off in earlier years against income from other sources. We also find that a same view was taken by the Madhya Pradesh High Court in the case of CIT v. K.N. Oil Industries 95 Taxman 557 with regard to deductions Under Section 80HH & 80I. In view of the decision of the jurisdictional High Court and the Madhya Pradesh High Court we note that the order of the A.O. allowing deduction Under Section 80HH with reference to profits of Factory No. III for the A.Y. 91-92 was not erroneous.

33. In the present case we are called upon to consider the legal validity of an order passed by the CIT where he has directed withdrawal of reliefs on the ground that the order of the A.O. was erroneously passed. The Supreme Court in the case of Malabar Industrial Co. v. CIT has set out the parameters to ascertain as to which orders can be considered as erroneous and therefore open to revision Under Section 263. It has been held that every order which results in loss of revenue cannot be revised by the CIT unless the order of the A.O. is erroneous. The court has held that on any issue where more than one views or courses are permissible and the A.O. follows one of the permissible view then the order of the A.O. cannot be held to be erroneous unless the view or course adopted by the A.O. is unsustainable in law. The jurisdictional Calcutta High Court in the case of CIT Central-I v. Subhash Projects & Marketing Ltd. has held that in proceedings Under Section 263 the order of the A.O. can be said to be erroneous only if an impossible view has been taken by the A.O. If however, the A.O. follows one of the possible view, then the order cannot be considered as erroneous. In our opinion, the ratios laid down in the above mentioned judicial decisions are squarely applicable in the present case. Before the impugned order Under Section 143(3) were passed on 31.3.94 the A.O. called for specific information to ascertain the admissibility of the reliefs claimed Under Section 80HH and 80I of the Act. After due examination of facts, explanation and records the A.O. completed the assessment. In the order the A.O. discussed at length the assessee’s explanations and after recording finding that the assessee satisfied the conditions laid down in Section 80HH and 80I, he allowed these deductions. No doubt in the show cause notice dated 09.09.2004 and in the order Under Section 263 the CIT raised several questions of fact and law and questioned the correctness of the order granting simultaneous deductions Under Section 80HH and 80I. However, we find that on every question raised by the CIT, conceivable more than two views were legally permissible. In fact we find that on these questions the judicial authorities have rendered several judgments in favour of the assessee. In these factual circumstances therefore, we find that the A.O. followed permissible course available to him in law. We also note that considering the Assessment Year 1985-86 to be the initial year of operation of Factory No. III the assessee claimed deductions Under Section 80I upto A Y 1992-93 and Under Section 80HH upto A Y 1994-95. From the facts on record we note that in A Y 1992-93 the A.O. in an order Under Section 251 allowed deductions both Under Section 80HH and 80I. The said order Under Section 251 granting both the deductions was accepted by the CIT and became final. We also note that in A Y 1993-94 and 1994-95 the A.O. himself allowed deduction Under Section 80HH and these orders were not made subject matter of revision Under Section 263. We thus find that the departmental authorities in the assessee’s own case in the later years have accepted that profit of Factory No. III was eligible for reliefs Under Section 80HH and 80I. On these facts therefore, we hold that the A.O. certainly followed the same course in A Y 1991-92 and also in A.Y. 92-93 to 94-95 and therefore the said assessment order could not be held to be erroneous within the meaning contemplated Under Section 263 of the Act. As the order Under Section 143(3) dated 31.3.94 is held to be not erroneous we hold that the CIT was not justified in invoking provisions of Section 263 and directing the A.O. to withdraw deductions allowed Under Section 80HH & 80I. We accordingly cancel the impugned revision order Under Section 263 dated 11.3.95 and restore the order of the A.O. dated 31.3.94.

34. In the result, the appeal of the assessee is allowed.