1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. INCOME TAX APPEAL NO.2159 OF 2009 The Commissioner of Income Tax-VI ..Appellant. Vs. M/s. Cebon Apparels Pvt. Ltd. ..Respondent. .... Mr. Suresh Kumar for the Appellant. Mr. Nishant Thakkar with Mr. Atul K. Jasani for the Respondent. ..... CORAM : DR. D.Y.CHANDRACHUD & J.P. DEVADHAR, JJ. 22 April, 2010. P.C.: 1. In this appeal by the Revenue under Section 260-A of the Income Tax Act, 1961 the following questions of law have been formulated : “(a) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law while deleting the enhancement of Rs.19,02,309/- u/s. 14A made by the CIT(A) without simultaneously directing to calculate the disallowance u/s. 14A r.w. Rule 8D which has been brought on statute by IT (5 th amendment) Rules 2008 w.e.f. 24.3.2008 which is procedural in nature and hence applicable to all pending proceedings; 2 (b) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in setting aside the issue as to whether interest income of Rs.7,07,445/- is business income or income from other sources without giving further direction that in case it is held to be business income, 90% of the same should be excluded from the profits of business for the purpose of calculation of deduction u/s.80HHC in view of Explanation (baa) to Section 80HHC of the IT Act; (c) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the Assessing Officer, not to exclude exchange difference amounting to Rs.27,21,136/- and compensation from customers Rs.3,46,699/- from the profits of business for the purpose of computation of deduction u/s. 80 HHC of the IT Act even though 90% of the same is deductible in view of clause (baa) to explanation below section 80 HHC of the IT Act; (d) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in restoring the matter to the file of the Assessing Officer in respect of interest income of Rs.7,07,445/- without appreciating the fact that interest income is not relatable to export business; (e) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the AO not to exclude 90% in respect of provision for diminution in the value of investment of Rs.1,17,618/- without appreciating the fact that diminution in investment is not relatable to export business; (f) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the 3 AO not to deduct 90% of sale of quota licences amounting to Rs.3,14,960/- from profits of business for the purpose of allowing deduction u/s. 80HHC even though the same is to be excluded in view of specific provisions of clause (baa) of explanation below Section 80 HHC of the IT Act;” 2. The appeal arises out of an order of the Income Tax Appellate Tribunal dated 9 September 2008 pertaining to Assessment Year 2004-05. Insofar as question (a) is concerned, the question before the Tribunal as raised in the grounds of appeal of the assessee was that the Commissioner of Income Tax (Appeals) erred in enhancing the disallowance under Section 14-A by Rs.19,02,309/- without providing an opportunity to the assessee as required by Section 251(2) of the Act. In the circumstances, question (a) as framed above would have to be recast as follows : Question (a) : Whether the Tribunal while setting aside the enhancement made by the Commissioner (Appeals) on the ground that notice was not provided to the assessee under Section 251(2) has erred in not remanding the proceedings back to the Commissioner (Appeals) so as to enable the Commissioner (Appeals) to proceed with 4 the appeal after the issuance of a notice. 3. Section 251(1) inter alia confers upon the Commissioner (Appeals) the power to enhance an assessment in an appeal against an order of assessment. Sub section (2) provides that the Commissioner (Appeals) shall not enhance an assessment or penalty or reduce the amount of refund unless the Appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. In the present case, as the Tribunal observed in paragraph 6 of its order, the Commissioner (Appeals) failed to provide a reasonable opportunity to the assessee of showing cause against the enhancement. In these circumstances, while the Tribunal was for those reasons justified in setting aside the enhancement made by the Commissioner (Appeals), at the same time the Tribunal ought to have remanded the proceedings back to the Commissioner (Appeals) to follow the due process of law by furnishing an opportunity to show cause against the enhancement to the assessee under Section 251(2). 5 3A. Counsel appearing on behalf of the assessee submits that compliance with Section 251(2) is a jurisdictional requirement and in the absence of compliance, there was no necessity for the Tribunal to remit the proceedings to the Commissioner (Appeals). We do not find any merit in the submission that an order of remand was not warranted. The power of the Commissioner (Appeals) to enhance assessment is statutorily recognized in Section 251(1) but sub section (2) conditions the exercise of that power by requiring that the assessee should have a reasonable opportunity of showing cause. In a situation such as the present, where the Commissioner overlooked the requirement of furnishing a reasonable opportunity of showing cause to the assessee, the Tribunal ought to have restored the proceedings back to the Commissioner for compliance with the requirements of the law by furnishing a reasonable opportunity to the assessee. In the circumstances, we modify the order passed by the Tribunal and while we confirm the order insofar as it sets aside an enhancement on the ground that there was no compliance with Section 251(2), we direct that the proceedings shall stand restored to the Commissioner 6 (Appeals). The Commissioner (Appeals) shall in the event that he proposes to make an enhancement furnish an opportunity under Section 251(2) to the assessee and thereupon make a determination in accordance with law. We, however, clarify that we have not expressed any opinion one way or the other on the merits of the enhancement since that issue has not arisen before this Court in the appeal. Question (a) shall accordingly stand answered with the aforesaid directions. 4. Insofar as questions (b) and (d) are concerned, the Tribunal has restored the issue to the Assessing Officer. We only clarify that in determining the issue upon remand, the Assessing Officer shall determine the issue in accordance with law and after taking due cognizance of the relevant judgments holding the field, particularly the judgments of this Court in Commissioner of Income Tax v. Asian Star Company Ltd. (ITA 200 of 2009 decided on 18/19 March 2010) and Commissioner of Income Tax v. Swani Spice Mills Pvt. Ltd. (ITA 1019 of 2007 decided on 19 April 2010). 7 5. Insofar as question (c) is concerned, it relates to two items viz. (i) the exchange difference on account of foreign exchange fluctuation and (ii) compensation from customers. The issue of exchange difference is covered in favour of the Revenue by the judgment of this Court delivered today in Commissioner of Income Tax v. M/s. Shah Originals (ITA 431 of 2008). Insofar as the question of compensation from customers is concerned, the facts are not in dispute. The assessee had received export orders from foreign buyers and had purchased fabric in pursuance thereto. The foreign buyers cancelled the export orders. The assessee was recouped for the cost incurred by it as compensation for loss of profits. The Tribunal has observed that the loss crystallized during the year when the compensation was paid by the foreign buyers. The payment made by the foreign buyers to the assessee in the amount of Rs.3.46 lacs evidently arose out of the cancellation of export orders and so as to provide recompense to the assessee for the expenses incurred towards fulfillment of the orders. In these circumstances, the case of 8 the assessee that this was directly and proximately related to the export activity would have to be accepted. Hence the second part of question (c) insofar as it relates to compensation received from the customers in the amount of Rs.3.46 lacs shall stand answered against the Revenue and the order of the Tribunal to that extent is confirmed. 6. Insofar as question (e) is concerned, the order passed by the Tribunal would show that the amount of Rs.1.17 lacs represented a provision for diminution in the value of investment. Counsel appearing on behalf of the assessee submits that this would not amount to a receipt within the meaning of explanation (baa) to Section 80HHC. Evidently, this aspect of the matter has not been enquired into by the Tribunal. Hence, by consent the order of the Tribunal as regards question (e) is set aside and the proceedings are remitted back to the Tribunal for reconsideration of the issue afresh by consent. 7. Insofar as question (f) is concerned, counsel appearing on 9 behalf of the Revenue and counsel appearing on behalf of the assessee are agreed in stating that the question would stand covered in favour of the Revenue and against the assessee by the judgment of this Court in Commissioner of Income Tax v. Dresser Rand India Pvt. Ltd. (ITA 2186 of 2009 decided on 8 April 2010). In the circumstances, the question of law is answered in favour of the Revenue and against the assessee. 8. The questions of law shall accordingly stand answered in the aforesaid terms. The Appeal is accordingly disposed of. There shall be no order as to costs. (Dr. D.Y.Chandrachud, J.) (J.P. Devadhar, J.)