IT : As far as determining quantum of deduction is concerned, section 80-IA(5) overrides all other provisions of the Act. However, quantum of deduction is one thing while allowability of deduction is quite another thing. Sections 80A(2) and 80AB deal with allowability and not quantum. Therefore, section 80-IA does not override the latter sections. Besides, the emphatic language of section 80A(2) which uses the words "shall not, in any case" indicate its mandatory nature
Relevant provisions
• Section 80-IA(7)[now section 80-IA(5)] provides that notwithstanding anything contained in any other provisions of this Act, for the purpose of determining the quantum of deduction, the profits and gains of an eligible business shall be computed as if such eligible business were the only source of income of the assessee during the relevant assessment year.
• Section 80A(2) provides that the aggregate amount of deductions under Chapter VIA shall not, in any case, exceed the gross total income.
• Section 80AB provides that where any deduction is required to be made or allowed under any section included in this chapter under the heading "C - Deductions in respect of certain incomes"(which includes sec 80-IA also), in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.
Argument of assessee before ITAT
• In view of the overriding effect given to section 80-IA(7) [now section 80-IA(5)] over all other provisions of the Act by the non-obstante clause, amount of deduction computed under section 80-IA is eligible for deduction even if there is insufficient Gross Total Income or no GTI or negative GTI.
• Section 80-IA is an independent code to which sections 80A(2) and 80AB do not apply.
HELD
ITAT rejected assessee's arguments and dismissed assessee's appeal in view of the following:
• The determination of amount of deduction under section 80-IA is one thing and the quantum of amount actually allowable is another thing. In our view; section 80-IA(7) provides for determination of amount of deduction and section 80AB and section 80A(2) provide for the amount actually allowable while computing the total income.
• The contentions of the assessee that the provisions of section 80A is code by itself to which the provisions of section 80A(2) and 80AB shall not apply cannot be accepted.
• Besides, the words "in any case" attached to the words "Shall not" would indicate that the statute intends to make double sure its intention that the aggregate amount of deductions should not exceed the gross total income.
Notes
1. The decision pertains to assessment year 1999-2000. Section 80-IA was substituted by the Finance Act, 1999 w.e.f. A.Y.2000-01. The judgment refers to section 80-IA(7) of section 80-IA as it stood prior to its substitution. The corresponding provision in present section 80-IA is section 80-IA(5).
2. Non-obstante clause gives overriding effect to contrary provisions[See Advanced Law Lexicon by P.R. Aiyar; Sebastian M. Hongrary v. UOI AIR 1984 SC1022,1026 ;UOI v. G.M. Kokil, 1984 (Supp) SCC196). Before one concludes that another provision contradicts the provision with non-obstante clause and invokes non-obstante clause in the latter provision to give it overriding effect over the former provision, one should examine whether the apparent contradiction is real i.e. whether the former provision and the latter provision operate in same field. The Samnjasya principle ["Contradictions should not be too easily assumed"] finds enunciated thus in Jaimini's Sutra 9, Ch.II as under :
"The inconsistencies are not actually found. The conflicts consist in difference of application (of the injunction). ……."
This rule may be stated as 'the proper course for reconciling apparently conflicting texts is to see whether they apply to different sets of facts and to different purposes' [See K.L. Sarkar's Mimansa Rules of Interpretation, Second Edition - p. 84].
RELATED CASE
Tribhuvannath Misra v. D.I.O.S. [Writ Petition No. 17554 of 1990, decided on 30-3-1992 by Allahabad High Court]
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[2012] 26 taxmann.com 328 (Cochin - Trib.)
IN THE ITAT COCHIN BENCH
Hotel & Allied Trades (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Circle-1(1)
N.R.S.GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT APPEAL. NOS. 378 & 379 (COCH.) OF 2005, 552 (COCH.) OF 2006 & 598, 663-666 (COCH.) OF 2007
[ASSESSMENT YEARS 1999-2000 TO 2005-06]
OCTOBER 25, 2012
ORDER
B.R. Baskaran, Accountant Member - All these appeals filed by the assessee or the revenue, as the case may be, are directed against the orders passed by the Ld. CIT(A)-II, Kochi and they relate to the assessment years mentioned against the respective appeals in the caption stated above. All these appeals were heard together, since common issues are involved in them. Accordingly, these appeals are being disposed of by this common order, for the sake of convenience. However, we prefer to dispose of the appeals assessment year wise.
2. We shall take up the appeal filed by the assessee for the assessment year 1999- 2000. In this appeal, the assessee is challenging the validity of the re-opening of the assessment. It is noticed that the return of income filed by the assessee was initially processed u/s. 143(1) of the Act on 04-02-2002. Subsequently, the Assessing Officer reopened the assessment by issuing a notice u/s. 148 of the Act on 25-06-2002 after duly recording the reasons for the same. Thus, it is also noticed that the assessment has been re-opened within four years from the end of the assessment year and further the return filed by the assessee had been processed earlier only u/s. 143(1) of the Act. An identical question under identical set of facts was considered by the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. 291 ITR 500 and the Hon'ble Apex Court upheld the reopening of the assessment in that case. Hence, by following the said decision of the Hon'ble Supreme Court, we do not find any infirmity in the decision of the Ld. CIT(A) in upholding the re-opening of the assessment.
3. The next issue in this year relates to the deduction claimed u/s. 80HHD of the Act. The facts borne out of the record are that the assessee was operating two hotel units, viz., Hotel named at Bangaram Island and another hotel named Coconut lagoon. There is no dispute that both the units are eligible for deduction u/s 80HHD of the Act. It appears that the assessee claimed deduction u/s. 80 HHD of the Act in respect of each of the unit separately. However, the Assessing Officer aggregated the results of both the units and allowed deduction u/s. 80HHD of the Act on the combined profit. The Ld. CIT(A) also upheld the method followed by the Assessing Officer. Hence, the assessee is in appeal before us.
4. Both the parties has agreed that the impugned issue has been decided against the assessee by the Hon'ble Jurisdictional High Court of Kerala in the assessee's own case reported in (2007) 294 ITR 67. We have gone through the said decision and notice that the very same issue was considered by the Hon'ble Jurisdictional High Court in the assessee's own case relating to the assessment years 1992-93 and 1993-94, wherein the High Court has held that deduction u/s. 80HHD has to be computed with reference to the "profits and gains of the business as a whole". Thus the contention of the assessee that the deduction u/s 80HHD is required to be computed for each eligible business separately has already been rejected by the Jurisdictional High Court. We notice that the decision rendered by the Ld. CIT(A) is in accordance with the binding decision of the Hon'ble Jurisdictional High Court of Kerala and hence, we do not find any reason to interfere with his decision.
5. The next issue in this year relates to the deduction u/s. 80-IA of the Act. The hotel unit named "Coconut lagoon" was eligible for deduction u/s 80-IA of the Act during this year. The AO computed the profit from this unit, after making certain disallowances, at Rs.1,69,55,436/-. The Assessing Officer noticed that the Gross total income of the assessee after aggregation of income from all heads stood at Rs.1,28,45,976/-. Accordingly, the AO took the view that the deduction u/s 80-IA should be computed on the Gross total income of Rs.1.28 crores and not on Rs.1.69 crores, as the Gross total income was less than the actual profit from the above said unit. Accordingly, the AO computed the deduction u/s 80-IA at Rs.48,87,518/- as given below:-
| Profit from Coconut lagoon after disallowances | 1,69,55,436/- | |
| Restricted to Gross Total income | 1,28,45,976 | |
| Less:- Profit allowed as deduction u/s 80HHD | 28,70,940 | |
| Profit eligible for computation of deduction | 99,75,036 | |
| Deduction at 50% | 49,87,518 |
The Ld CIT(A) also confirmed the order of the AO on this issue.
6. By adverting our attention to the provisions of sub sec.7 of sec. 80-IA (sub. Sec. 5 in new section 80-IA introduced with effect from 2000-2001 and the said sec. 80-IA(5) is made applicable to sec. 80IB also as per the sub sec. 13 of sec. 80IB), the learned counsel for the assessee contended that deduction u/s. 80-IA has to be computed on the profits of the eligible unit, by treating the same as the only source of income. He further submitted that sec. 80-IA/80IB is a self contained regulation and it has overriding effect over all other provisions of the Act. Hence the amount of deduction computed there under is eligible for deduction even if the Gross total income results in a lesser figure or loss, since sub section 5 of sec. 80-IA overrides any other provisions of the Act including sec. 80A(2) and sec. 80AB of the Act. Thus, according to the assessee, the amount of deduction computed u/s 80-IA is eligible for deduction even if there is no Gross Total income or the Gross Total income results in a minus figure. On the contrary, the Ld D.R strongly supported the order of Ld CIT(A) on this issue.
7. We have heard the rival contentions on this issue. The provisions of sec. 80A(2) and sec. 80AB and sub sec. 7 of sec. 80-IA are relevant here. Hence, we extract the relevant provisions for the sake of convenience.
80A(2) : The aggregate amount of the deductions under this chapter* shall not, in any case, exceed the gross total income of the assessee.
(* Chapter VI-A, which includes deductions specified in sec. 80C to 80VV, including deduction u/s 80-IA).
80AB:- Where any deduction is required to be made or allowed under any section included in this chapter under the heading "C – Deductions in respect of certain incomes"** in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.
(** Deduction u/s 80-IA falls in this category)
80-IA(7):- Notwithstanding anything contained in any other provisions of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purpose of determining the quantum of deduction under sub-section (5) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
8. A careful reading of section 80-IA(7), referred supra, suggests that the said sub section overrides any other provisions of the Act only for the limited purpose of determining the quantum of deduction under sub sec. 5 of sec. 80-IA. However, it can be seen that the provisions of sec. 80AB overrides the provisions of sec. 80-IA, since the deduction u/s 80-IA falls in under the heading "C – Deductions in respect of certain income". The legal position in this regard was explained by the Hon'ble Supreme Court in the case ofIPCA laboratory Ltd v. DCIT (266 ITR 521) as under:-
"Section 80AB is also in Chapter VI-A. It starts with the words "where any deduction is required to be made or allowed under any section of this Chapter". This would include section 80HHC. Section 80AB further provides that "notwithstanding anything contained in that section". Thus section 80AB has been given overriding effect over all other sections in Chapter VI-A. Section 80HHC does not provide that its provisions are to prevail over section 80AB or over any other provisions of this Act. Section 80HHC would thus be governed by section 80AB."
According to sec. 80AB, the amount of income of the nature specified in sec. 80-IA, which is included in the Gross Total Income, shall be deemed to be the amount of income of that nature derived or received by the assessee for the purpose of computing deduction u/s 80-IA of the Act, i.e., the amount of deduction u/s 80-IA shall be computed only with reference to the amount of income from eligible business, which is included in the "Gross Total Income". This provision shall have application if the profits and gains of eligible business computed under sec. 80-IA get reduced while including the same in the Gross total income.
9. Accordingly, in our view, a combined reading of the provisions of sub sec. 7 of sec. 80-IA and sec. 80AB would suggest that
(a) the "Profits and gains of an eligible business", to which the provisions of sec. 80-IA(1) shall apply, shall be restricted to the amount of income of that nature that is included in the Gross total income and
(b) the quantum of deduction shall be computed on such profit, as if such eligible business were the only source of income of the assessee.
The question whether the quantum of deduction so computed is fully eligible for deduction or not has to be determined by considering the provisions of sub sec. 2 of 80A, which provides that the aggregate amount of deductions under Chapter VIA shall not, in any case, exceed the gross total income. In our view, the words "in any case" have greater significance in this sub section. The words "Shall not", by themselves indicate the mandatory nature of this section. The words "in any case" attached to the words "Shall not" would indicate that the statute intends to make double sure its intention that the aggregate amount of deductions should not exceed the gross total income. We may here mention that the determination of amount of deduction u/s 80-IA is one thing and the quantum of amount actually allowable is another thing. In our view; sub. Sec. 7 of 80-IA provides for determination of amount of deduction and sec. 80AB & sub. Sec. 2 of sec. 80A provide for the amount actually allowable while computing the total income. Hence we are unable to agree with the contentions of the assessee that the provisions of sec. 80-IA is code by itself to which the provisions of sec. 80A(2) and 80AB shall not apply.
10. In the instant case, it is seen that the AO has computed deduction u/s 80-IA on the amount of Gross total income as reduced by the deduction given u/s 80HHD of the Act. According to the discussions made in the preceding paragraphs, the computation of deduction u/s 80-IA made by the AO would be correct only if the Gross total income consisted of, only income of that nature which is eligible for deduction u/s 80-IA of the Act. Otherwise, the deduction u/s 80-IA is required to be computed with reference to the amount of income of that nature, which is included in the Gross total income. The aggregate amount of deductions under chapter VIA shall be restricted to the amount of Gross total income. In the instant case, the break up details of the Gross total income is not borne out of record. Hence, the issue of computation of deduction u/s 80-IA requires fresh examination in the light of discussions made supra. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh in the light of discussions made supra.
11. The next issue in the assessment year 1999-2000 relates to the computation of interest u/s. 234C of the Act on the tax payable u/s. 115JA of the Act. This issue is now decided by the Hon'ble Supreme Court in the case of CIT v. Rolta India Ltd., 330 ITR 470, in which it has been held that the assessee is liable to pay interest for short payment of advance tax even on the income computed u/s 115JB of the Act. Accordingly we uphold the order of the Ld. CIT(A) on this issue.
12. We shall now take up the appeal filed by the assessee for the assessment year 2000-2001. The assessee is assailing the decision of the Ld CIT(A) in confirming the computation of deduction made u/s 80HHD and sec. 80IB of the Act. We notice that the assessee has claimed deduction u/s 80IB of the Act in this year, where as in the immediately preceding year, it had claimed deduction u/s 80-IA of the Act for the very same source of income from hotel business. No explanation is available on record in respect of this shift from sec. 80-IA to sec. 80IB. Be that as it may, it is an admitted fact that the Gross total income returned by the assessee resulted in negative figure and the AO has also computed the Gross total income, after making certain disallowances and adjustments, at (-) Rs.2.15 crores. In view of the said loss, the AO denied the deduction claimed by the assessee u/s 80HHD as well as u/s 80IB of the Act. The said order of the AO was also confirmed by the Ld CIT(A).
13. We have already noticed that the provisions of sec. 80A(2) mandates that the aggregate amount of deductions under Chapter VI-A shall not, in any case, exceed the gross total income of the assessee. In view of the discussions made in the preceding paragraphs, we are of the view that the Ld CIT(A) was right in law upholding the denial of deduction u/s 80HHD and 80IB of the Act. Accordingly, we uphold his order.
14. We shall now take up the appeal filed by the assessee for the assessment year 2001-02. In this year also, the assessee has declared loss in its return of income. The Gross total income computed by the AO has also resulted in a loss of Rs.9,49,711/-. In view of the specific provisions of sec. 80A(2), in our view, the assessee is not eligible for any deduction under Chapter VI-A of the Act. Accordingly, we uphold the order of Ld CIT(A) in confirming the denial of deduction u/s 80HHD and 80IB of the Act. The assessee has raised one more issue in this year, i.e., the determination of loss to be carried forward to the succeeding year. In our view, the determination of amount of loss eligible for carry forward is required to be worked out afresh in accordance with our decision on various issues and hence it is consequential in nature. Accordingly this issue does not require any adjudication.
15. Now we shall take up the appeals filed by both the parties for the assessment year 2002-03. In this year, the AO completed the assessment u/s 143(3) r.w.s. 147 of the Act. It is seen that the return of income filed by the assessee was initially processed u/s 143(1) of the Act. Thereafter, the assessing officer issued notice u/s 154/155 of the Act in order to rectify certain mistakes. However, subsequently, the AO noticed escapement of income and hence reopened the assessment by issuing notice u/s 148 of the Act by recording the reasons. In the assessment order, the AO has specifically stated that the proceedings initiated u/s 154/155 gets merged with that of section 147/148 of the IT Act, 1961. Before the ld CIT(A), the assessee contended that, as per the Kelvinator India decision of Hon'ble Delhi High Court (256 ITR 1), which takes into consideration a numerous other courts decision, no reopening u/s 147 can be made after the due date of completing scrutiny assessment u/s 143(3) has been allowed to be lapsed by the AO. It was also contended that there should not be simultaneous action by the AO under sec. 154 and 147 by placing reliance on the decision of Hon'ble Gujarat High Court in the case reported in 245 ITR 775. The Ld CIT(A) was convinced with the said contentions and accordingly held that the reopening of assessment is void ab initio. Hence, the Ld CIT(A) did not adjudicate the grounds raised on merits. Aggrieved, the revenue has filed appeal before us. On an abundant caution, the assessee has also filed appeal on merits of the case, which were not adjudicated by the Ld CIT(A).
16. We have heard the parties and also perused the record. First of all, we notice that there is no simultaneous action u/s 154 and also u/s 147 of the Act, as contended by the assessee. We have already noticed that the AO has specifically stated in the assessment order that the proceedings initiated u/s 154/155 has got merged with the reassessment proceedings. Secondly, the return of filed by the assessee was processed u/s 143(1) and subsequently the AO has issued notice u/s 148 of the Act within four years from the end of the assessment year. Hence, as per the decision of the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. 291 ITR 500, the reopening of assessment is perfectly in accordance with the law. In view of the above, we set aside the order of Ld CIT(A) on this legal issue. We have already noticed that the first appellate authority has not adjudicated the grounds raised by the assessee on merits. Hence, we feel it appropriate to set aside all matters to the file of Ld CIT(A) in order to enable him to adjudicate the grounds raised on merits and we order accordingly. Accordingly the appeals filed by both the parties are disposed of.
17. Now we shall take up the appeal filed by the revenue for the assessment year 2003-04. Following two issues are contested in this appeal.
(a) Eligibility of deduction u/s 80HHD and 80IB of the Act.
(b) Validity of decision of Ld CIT(A) in allowing deduction of carry forward depreciation while computing book profit u/s 115JB of the Act.
18. The Gross total income computed by the AO in this year, after making certain disallowances and adjustments, resulted into "NIL" figure. We have already held that the provisions of sec.80A(2) have mandatory application, according to which the aggregate amount of deductions under Chapter VI-A shall not, in any case, exceed the gross total income. Accordingly, we are of the view that the AO was right in law in denying deduction u/s 80HHD of the Act, which falls under Chapter VI-A of the Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore that of the AO.
19. The next issue in the appeal filed by the revenue for the assessment year 2003-04 relates to the deduction of carry forward depreciation while computing book profit u/s 115JB of the Act. The AO noticed that the assessee has deducted the carry forward depreciation amounting to Rs.73,54,058/-, which was computed under the Income tax Act, where as the clause (iii) of Explanation 1 to section 115JB provides for deduction as under:-
"(iii) the amount of loss brought forward or unabsorbed depreciation whichever is less as per books of account.
Explanation:- For the purposes of this clause,--
(a) the loss shall not include depreciation;
(b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil".
Accordingly the AO held that the assessee is not entitled to deduct the carry forward depreciation computed under the income tax provisions from the book profit computed u/s 115JB of the Act. The AO further noticed that the books of account did not show any brought forward loss. Since the brought forward loss as per books of account was NIL, the AO held that the assessee is not eligible for deduction of any amount as per clause (iii) of Explanation 1 to sec. 115JB of the Act. However, the Ld CIT(A) directed the AO to allow deduction of carry forward depreciation as claimed by the assessee with the observation that the AO has disallowed the claim without assigning any reason. We notice that the Ld CIT(A) did not give any reason or finding in support of his decision.
20. However, we find merit in the observations made by the AO. First of all, clause (iii) of Explanation 1 to sec. 115JB, which is extracted above mandates that the deduction of amount of loss brought forward or unabsorbed depreciation whichever is less should be as per books of account. Hence the assessee was wrong in law in claiming deduction of carry forward depreciation, which was determined under the income tax Act. Secondly, the AO has given a specific finding that there is no carry forward loss as per the books of account, in which case, the assessee is not eligible to claim any deduction under clause (iii) in view of specific provisions contained in clause (b) of the Explanation given under the above said clause (iii). Accordingly, we set aside the order of Ld CIT(A) on this issue and restore that of the AO.
21. Now we shall take up the appeal filed by the revenue for the assessment year 2004-05. Following two issues are contested in this appeal.
(a) Eligibility of deduction u/s 80HHD
(b) Validity of charging interest u/s 234C of the Act on the tax payable u/s 115JB of the Act.
22. The Gross total income computed by the AO in this year, after making certain disallowances and adjustments, resulted into "NIL" figure. We have already held that the provisions of sec.80A(2) have mandatory application, according to which the aggregate amount of deductions under Chapter VI-A shall not, in any case, exceed the gross total income. Accordingly, we are of the view that the AO was right in law in denying deduction u/s 80HHD of the Act, which falls under Chapter VI-A of the Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore that of the AO.
23. The issue regarding charging of interest u/s 234C on the tax payable u/s 115JB of the Act has since been settled by the Hon'ble Supreme Court in the case of Rolta India Limited (330 ITR 470), in which it has been held that the assessee is liable to pay interest for short payment of advance tax even on the income computed u/s 115JB of the Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore that of the AO.
24. Now we shall take up the appeal filed by the revenue for the assessment year 2005-06. Following two issues are contested in this appeal.
(a) Eligibility of deduction u/s 80HHD of the Act.
(b) Validity of decision of Ld CIT(A) in allowing deduction of carry forward depreciation while computing book profit u/s 115JB of the Act.
25. We notice that the AO has computed the Gross total income for this year at Rs.2,32,46,035/-, but did not discuss/consider the eligibility of deduction u/s 80HHD of the Act. It is also not known whether the assessee has claimed the said deduction in its return of income. The Ld CIT(A) directed the AO to allow the deduction u/s 80HHD of the Act. The revenue is aggrieved by the said decision of Ld CIT(A).
26. The matter of eligibility of deduction u/s 80HHD of the Act has since been settled by the Hon'ble High Court of Kerala in the assessee's own case reported in 294 ITR 67. We have also discussed about this issue in the preceding paragraphs. Accordingly, we modify the order of Ld CIT(A) on this issue and direct the AO to consider the eligibility of deduction in accordance with law and also by following the binding decision of jurisdictional High Court in the assessee's own case referred supra.
27. The next issue relates to the validity of allowing deduction of carry forward depreciation while computing book profit u/s 115JB of the Act. We notice that the AO has computed the income under normal provisions of the Act, since it exceeded the book profit. Hence the issue raised by the revenue is academic in nature. In any case, we have dealt with this issue while adjudicating the appeal of the revenue for the assessment year 2003-04 in the preceding paragraphs, which shall apply in this year also.
28. In the result, the appeal filed by the assessee for the assessment year 1999- 2000 is treated as partly allowed. The appeals of the assessee for the assessment years 2000-01 and 2001-02 are dismissed. The appeal of the assessee and the appeal of the revenue for the assessment year 2002-03 are treated as partly allowed. The appeals of the revenue for the assessment years 2003-04 to 2005-06 are allowed.
IT : Turnover v. gross profit - In computing undisclosed income, addition can be made only to extent of gross-profit earned on unaccounted/suppressed sales and not of entire suppressed sales
IT : Admission u/s 132(4) - Admission under section 132(4) is not conclusive
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[2012] 26 taxmann.com 239 (Pune - Trib.)
IN THE ITAT PUNE BENCH 'A'
Jyotichand Bhaichand Saraf & Sons (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Circle 11(1)*
SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND R.K. PANDA, ACCOUNTANT MEMBER
IT APPEAL NO. 08 (PN) OF 2011
[BLOCK PERIOD 1996-97 TO 2002-03]
JULY 27, 2012
Section 158BB, read with section 158BC, of the Income-tax Act, 1961 - Block assessment in search cases - Undisclosed income, computation of - Block Period 1996-97 to 2002-03 - Assessing Officer, while computing undisclosed income, made addition of entire unaccounted/suppressed sale as income of assessee - Whether addition could be made only to extent of gross profit earned on unaccounted/suppressed sales - Held, yes - [Paras 14 to 20] [In favour of assessee]
Section 132 of the Income-tax Act, 1961 - Search and Seizure - Whether admission made under section 132(4), though important piece of evidence, is not conclusive - Held, yes - Whether assessee can retract from it showing that it was made under mistaken belief of fact or law - Held, yes [Paras 14 to 20] [In favour of assessee]
FACTS
• The assessee company was engaged in the business of dealing in gold ornaments and jewellery. During search & seizure action differences were found in physical inventory and books of account.
• The value of actual shortage of stock was arrived at. undisclosed sales were admitted in statement under section 132(4) by the director of the company together with the statement that the cash generated from unaccounted sales was invested in purchase of agricultural land.
• Subsequently, the assessee retracted from the statement given by the director under section 132(4) in the course of search stating that the said admission was made under mistaken belief of law and fact. In fact he intended to declare profit earned out of the unrecorded sales and not the total amount of unrecorded sales.
• The assessee also retracted from the statement made by the director that the sale proceeds out of the unrecorded sales were invested in purchase of agricultural land and instead contended that said investment was in fact shown as an advance to respective members of the family by company. Accordingly, the return was filed.
• In block assessment assessee's undisclosed income as declared was accepted by Assessing Officer.
• The Commissioner set aside the assessment order vide order under section 263.
• The Assessing Officer in set-aside proceedings instead of verifying investment in agricultural land and development thereof, made various presumptions and made addition of Rs. 50 lakhs as undisclosed income in addition to gross profit of Rs. 4 lakhs.
• The Commissioner (Appeals) confirmed the above addition.
• The Tribunal, on appeal, against the order under section 263, restored the matter to the file of Assessing Officer, without considering same and relying on statement of director.
• As a result, the Assessing Officer 'ignoring the retraction' confirmed the addition of Rs. 50 lakhs. Since the entire unrecorded sale were assessed as undisclosed income no separate addition on account of suppressed gross profit in respect of such unrecorded sales were considered by the Assessing Officer.
• The Commissioner (Appeals) confirmed the order of Assessing Officer.
• On appeal:
HELD
Addition of entire suppressed sales not justified
• The Assessing Officer has made addition of entire unaccounted/suppressed sales without appreciating the fact that the entire sales could not be added as the income of the assessee but the addition could be made only to the extent of gross profit earned on the unaccounted/suppressed sales. [Para 15]
Statement of assessee cannot be sole basis of addition
• Addition of Rs. 50 lakhs has been made solely on the basis of statement of the director of assessee company without corroborating the same with the material unearthed by search. Statement of the assessee cannot be sole basis without any cogent and corroborative evidence. [Para 16]
Statement under section 132(4) can be retracted
• The revenue authorities have heavily relied on the evidentiary value of the statement recorded under section 132(4) during the course of search action without appreciating the fact that the statement was given under mistaken belief of law that the suppressed sale is unaccounted/undisclosed income instead of correct legal position that the gross profit arising from unaccounted sale is the undisclosed income. It is a settled position that admission made by assessee under section 132(4) is an important piece of evidence but the same is not conclusive.
• It is open to the assessee who made the admission to show that it is incorrect and the same is given under mistaken belief of fact or law. It is settled legal position that unless the provision of statute warrant or there is a necessary implication on reading of section that the principles of natural justice are excluded, the provision of section should be construed in manner incorporating principles of natural justice and quasi-judicial bodies should generally read in the provision relevant section a requirement of giving a reasonable opportunity of being heard before an order is made which will have adverse civil consequences for parties effected. [Para 17]
• There is nothing on record to suggest that any evidence was found in the course of search action or post search enquiries to the effect that the assessee has made any investment over and above sale price with regards to agricultural land transaction in question. There is also nothing on record to suggest that any enquiry has been made by revenue authorities to establish the nexus of disclosure with purchase of agricultural land in question.
• Revenue authorities have made no effort to find out whether respective persons have disclosed purchase of agricultural land in their books of account in respective years which is not justified. Further, the revenue authorities have not bothered to look into the issue when assessee has submitted valuation report according to which value of land was stated to be Rs. 34,46,667 at relevant point of time which is close to total value of land i.e., Rs. 34,51,575. Such clinching evidence should not be brushed aside by revenue authorities. It amounts to violation of principles of natural justice because assessee was not provided due opportunity of hearing on issue.
Tax not on gross receipt/Turnover, but on gross profit
• Revenue authorities have not been able to establish nexus between unrecorded sale with investment in agricultural land. There is no cogent reasoning for reaching conclusion of undisclosed income in question. The case of the assessee is that the statement/admission was made under the mistaken belief of law that Rs. 50 lakhs represents the sale value of stock found short was undisclosed income of the assessee instead of the correct legal position that the gross profit on suppressed sale is the income of the assessee. The assessee has tried to explain his mistake in the statement recorded on behalf of it.
• The assessee has accounted for the suppressed sales by way of declaration of gross profit on account of the suppressed sales. The assessee tried to clarify his stand immediately after the receipt of the statement and after realizing that there has been mistake in the statement.
• Such factual retraction should not be brushed aside without verifying the facts and circumstances of same.
• The addition in question is not justified while assessee has already declared gross proceeds on unaccounted sales. [Para 20]
CASE REVIEW
CIT v. President Industries [2002] 258 ITR 654/124 Taxman 654 (Guj.) (para 15) followed.
Dr. SC Gupta v. CIT [2001] 248 ITR 782/118 Taxman 252 (All.) (para 18) distinguished.
CASES REFERRED TO
CIT v. President Industries [2002] 258 ITR 654/124 Taxman 654 (Guj.) (para 15), Janta Tiles v. Asstt. CIT [2000] 66 TTJ 695 (Pune) (para 15), Asstt. CIT v. Rasana Industries [2008] 114 TTJ 283 (Jd.) (para 15), Asstt. CIT v. Janak Raj Chauhan [2006] 102 TTJ 316 (Asr) (para 17), Dr. SC Gupta v. CIT [2001] 248 ITR 782/118 Taxman 252 (All.) (para 18), Mahesh B Shah v. Asstt. CIT [1999] 238 ITR 130/103 Taxman 91 (Ker.) (para 18) and Maheshwani Industries v. Asstt. CIT [2005] 148 Taxman 74 (Jodh) (Mag.) (para 18).
Vipin K. Gujrathi for the Appellant. Adarsh Kumar Modi for the Respondent.
ORDER
Shailendra Kumar Yadav, Judicial Member - This appeal filed by the assessee is directed against the order of CIT(A) dated 30-03-2010 relating to Block Period 1996-97 to 2002-03 on following grounds :
"1. On the facts and in the circumstances of the case and in law, the Hon'ble Commissioner of Income Tax (Appeal) erred in confirming addition of Rs. 50,00,000/- as undisclosed income on account of declaration of income during the course of search action on account of shortage of stock of gold without appreciating the facts of the case in the proper perspective. The Hon'ble CIT(A) failed to appreciate the fact that no evidence in respect of additional investment in the agricultural land was found during the course of search action. The appellant prays that the disallowance may please be deleted.
2. On the facts and in the circumstances of the case and in law, the Hon'ble Commissioner of Income Tax (Appeal) erred in not considering the valuation report in proper perspective.
3. The Hon'ble CIT(A) directed the assessing officer to add gross profit of Rs. 4,73,262/- after giving a opportunity to assessee of being heard. The direction by the CIT (Appeals) amounted to enhancement of assessment without giving an opportunity to the appellant in terms of section 251(2) of the I.T. Act and hence, exceeded his jurisdiction. The directions issued by the Hon'ble CIT (Appeals) to the assessing officer is bad in law. The appellant hereby requests that the direction may please be quashed".
2. Facts of the case, in brief, are that the assessee is a private limited company and is engaged in business of dealing in gold ornaments and jewellery at Baramati, District Pune, under name and style Jyotichand B Saraf & Sons Pvt. Ltd., hereinafter called JBS in short. A search and seizure action under section 132 of the Income Tax Act, 1961 was conducted at the business premises of the assessee situated at Jayashree Complex, Station Road, Pune on 06-11-2001. In the course of search action, physical inventory of stock was taken by the Income Tax Department. Stock of gold ornaments and jewellery as per physical inventory was 95,056 grams as against stock of 1,10,870 grams as per books of accounts of the assessee indicating a deficit of stock by 13,514 grams (After accounting for stock of 2300 grams on account of theft). Explaining the reason for deficit in stock Mr. Shantikumar Shah, Director of the assessee company in his statement recorded on 06-11-2001 u/s. 132(4) of the Income Tax Act, 1961 stated that there have been unrecorded sales which were not reflected in books of account and further stated that proceeds out of such sales were invested in purchase of agricultural land at Malad, Tal : Daund, District Pune and towards development of the said land and declared unaccounted income of Rs. 50,00,000/-. However, in a letter failed on 21-06-2002, assessee retracted from the statement given by Mr. Shantikumar Shah u/s. 132(4) in the course of search stating that the said admission was made under mistaken belief of law and fact. In fact he intended to declare profit earned out of the unrecorded sales and not the total amount of unrecorded sales. Assessee also retracted from the statement made by Mr. Shantikumar Shah that the sale proceeds out of the unrecorded sales were invested in purchase of agricultural land and instead contended that said investment was in fact shown as an advance of respective members of the family by company. Accordingly in the return filed on 23-07-2002 in response to notice issued u/s. 158BC, assessee declared undisclosed income of Rs. 4,01,321/- which included gross profit of Rs. 3,80,518/- on account of unaccounted sales relatable to shortage of gold ornaments. Assessing Officer accepted the contention of the assessee and assessed undisclosed income of Rs. 4,01,321/- as disclosed by assessee in the return filed. Subsequently the CIT (Central), Pune set aside the assessment order passed by the Assessing Officer u/s. 158BC dated 25-07-2003 vide his order u/s. 263 dated 14-03-2006 on the ground that said order of the Assessing Officer was erroneous and prejudicial to the interest of revenue in so far as Assessing Officer accepted the retraction of statement made u/s. 132(4) by Mr. Shantikumar Shah without verifying investment made in purchase of agricultural land at Malad, Tal: Daund, Distt. Pune and development expenses incurred to the tune of Rs. 50,00,000/- which was admitted by Mr. Shantikumar Shah as out of proceeds of unrecorded sales in the above said statement. The CIT also observed that prevailing value of the gold at the time of search was Rs. 4,601.80 per 10 grams as on the date of search. In the return filed value adopted by assessee was only 3,700/- per 10 gram, thus declaring gross profit of Rs. 3,80,518/- as against Rs. 4,19,055/- ought to have been declared as per then prevailing value. Consequently, concern Assessing Officer initiated assessment proceedings wherein he refused to accept retraction made by assessee from declaration of undisclosed income of Rs. 50,00,000/- made at the time of search stating that statement recorded u/s. 132(4) at the time of search has evidentiary value at par with material found in the course of search. Accordingly, the Assessing Officer proceeded to assess investment made in agricultural land of Rs. 50,00,000/- as undisclosed income of the assessee for block period. Further Assessing Officer observed that value of deficit stock totalling to Rs. 11426.97 grams noticed at the time of search was done @ Rs. 4601.80 per 10 gram, the value of which comes to Rs. 52,58,463/- and the gross profit on the same @ 9% works out to Rs. 4,73,262/-. However, assessee in the block return filed offered gross profit to the extent of Rs. 3,80,518/- only resulting in under declaration of gross profit to the tune of Rs. 92,744/-. Accordingly the said amount was added to the undisclosed income of the assessee. In the meantime, assessee approached the Tribunal against the order of the CIT (Central) passed u/s. 263 of the Income Tax Act, 1961 and though ITAT upheld the assumption of jurisdiction by CIT u/s. 263 it was observed by the Tribunal that CIT was justified in giving direction in his order u/s. 263 that certain amounts needed to be assessed as undisclosed income of the assessee. Modifying the order of CIT passed u/s. 263 the Tribunal directed the Assessing Officer to examine and verify the issue raised by CIT in his order passed u/s. 263. Consequently fresh assessment proceedings were initiated by the Assessing Officer.
3. Stand of the assessee before the Assessing Officer at this stage was that the unrecorded sales of assessee cannot be assessed as undisclosed income merely because assessee could not correlate/identify corresponding purchases. It was further contended that the shortage of stock itself indicate that all the purchases were accounted for properly but only sales were not accounted for. Therefore in respect of such unaccounted sales only gross profit ought to have been added instead of adding the entire unrecorded sales because investment in agricultural land was found at the time of search. Moreover the development expenses in respect of said land were incurred through crossed cheque by various family members/shareholders which are duly reflected in their respective books. Without prejudice to the above, it was contended that in case the Assessing Officer proceeds to assess the entire undisclosed sale of Rs. 50,00,000/- as undisclosed income same should be reduced by Rs. 4,01,321/- being gross profit already disclosed by assessee on the said unrecorded sales. However, the Assessing Officer refused to accept the retraction of statement made by Director of the company u/s. 132(4) at the time of search offering to declared undisclosed investments of Rs. 50,00,000/- holding that such retraction is clearly an afterthought as assessee failed to prove by leading evidence that said statement during search was given under threat or coercion. Accordingly retraction made by assessee vide his letter dated 21-10-2002 was rejected and entire amount of Rs. 50 lakhs declared in the assessment recorded u/s. 132(4) was drawn as undisclosed income of the assessee for block period under consideration. Since the entire unrecorded sale were assessed as undisclosed income no separate addition on account of suppressed gross profit in respect of such unrecorded sales were considered by the Assessing Officer.
4. Matter was carried before the first appellate authority who after considering the various statements put forward on behalf of the assessee dismissed the appeal by observing that Assessing Officer was justified in treating the amount of Rs. 50 lakhs as undisclosed income for the block period. Accordingly addition made on this account was justified and Assessing Officer was also directed to assess the gross profit of Rs. 4,73,262/- separately after giving opportunity of being head to the assessee.
5. Before us, stand of the assessee is that CIT(A) erred in confirming the addition of Rs. 50,00,000/- as undisclosed income on account of declaration of income during the course of search action on account of shortage of stock of gold without appreciating the facts of the case in the proper perspective. The CIT(A) failed to appreciate the fact that no evidence in respect of additional investment in the agricultural land was found during the course of search action and CIT(A) also erred in considering the valuation report in proper perspective. The direction to assessing officer to add gross profit of Rs. 4,73,262/- amounted to enhancement of assessment without giving an opportunity to the appellant in terms of section 251(2) of the I.T. Act and hence exceeded the jurisdiction. The directions issued by CIT(A) to Assessing Officer are bad in law. Accordingly the learned Authorised Representative requested to delete the addition in question and quash the direction given to Assessing Officer.
6. On the other hand, learned Departmental Representative submitted that CIT(A) was justified in confirming the addition of Rs. 50 lakhs on account of declaration of income during the course of search actions on account of shortage of the stock of gold. Assessing Officer was justified in rejecting the retraction of the statement made by Director of the company u/s. 132(4) at the time of search offering to declare undisclosed investment of Rs. 50 lakhs by holding that such retraction is clearly an afterthought as assessee has failed to prove by cogent reasoning that said statement was given under threat or coercion. The retraction made by assessee vide his letter dated 21-06-2002 was rightly rejected by the Assessing Officer and entire amount of Rs. 50 lakhs declared in statement recorded u/s. 132(4) was rightly held as undisclosed income of the assessee for block period under consideration. It was also submitted that CIT(A) was justified to direct the Assessing Officer to assess the gross profit of Rs. 4,73,263 separately after giving opportunity of being heard to the assessee. Accordingly the appeal filed by the assessee should be dismissed.
7. After going through rival submissions and material on record, we find that the assessee is a private limited company and is engaged in business of dealing in gold ornaments and jewellery at Baramati, District Pune. A search and seizure action under section 132 of the Income Tax Act, 1961 was conducted at the business premises of the assessee situated at Jayashree Complex, Station Road, Pune on 06-11-2001. During the course of search action physical inventory of gold ornaments was taken by the search party. The stock of gold ornaments as per physical inventory was 95,056 grams as compared to stock of 1,10,870 grams as per books of account. Therefore, the actual stock found was short by 15,814 grams as compared to stock as per books of account. Mr. Shantikumar Shah, the Director of the assessee brought to the notice of search party that there was theft in shop premises about 6 months back and gold weighing 2,300 grams was stolen for which an FIR has been lodged with Baramati Police Station. Same was brought to the notice of search party. Therefore, the actual shortage of stock was 13,514 grams (15816-2300 grams) the value of which was arrived at Rs. 50,00,000/- considering the market rate of gold Rs. 370 per gram.
8. During the course of search action, statement of Mr. Shantikumar Shah, the Director of the assessee was recorded under section 132(4) of the Income Tax Act, 1961 on 6th November 2001. In response to question No. 27 of the statement, Mr. Shantikumar Shah agreed to declare the unaccounted income of Rs. 50,00,000/- equivalent to sale value of shortage of stock and he further stated that the cash generated from unaccounted sales was invested in purchase of agricultural land at Malad, Tal: Daund, Distt. Pune.
9. The assessee was given copies of the statement recorded under section 132(4) of the I.T. Act, 1961 on 20th May 2002. On receipt of the copy of the statement the assessee realized that there was a mistake in the declaration of income. The assessee instead of declaring gross profit on unaccounted sale represented by shortage of gold had wrongly declared the entire sale proceeds as unaccounted/undisclosed income. The assessee submitted a letter clarifying the mistake on 21st June 2002 to the Assessing Officer, placed at page 16 & 17 of paper book certified to be filed before authorities below, relevant portion of same reads as under:
"Subject: Mistake in the Statement Recorded Under Section 132(4) of the Act
Honourable Sir,
A search and seizure action u/s. 132 of the Income Tax Act, 1961 was carried out on the registered office of the company as stated above on 6th November 2001. During the course of search action statement of one of the Director of the company Mr. Shantikumar Shah was recorded on 6th November 2001 u/s. 132(4) of the Income Tax Act, 1961. The company in receipt of the notice under section 158BC(c) of the Act to file the return for the Block Period. We have received the copy of the statement of Mr. Shantikumar Shah on or about 20th May 2002.
During the course of search action jewelry/gold ornaments found as per physical inventory was 95,069.96 Grams (Net) whereas jewellery/gold ornaments as per books of account were 110870.75 Grams (Net). Thus there was short fall of 15,214.28 grams. Mr. Shantikumar Shah was asked the explanation for shortage of jewelry/gold ornaments. Mr. Shantikumar Shah brought to the notice of search party that there was theft in the shop and jewellery weighing 2,300 grams was stolen and FIR was lodged with the concerned Police Station. Therefore, there was actual shortage of jewellery to the tune of 13,514.28 grams. Mr. Shantikumar Shah in reply to question No. 27 of his statement stated that the shortage was due to unrecorded sales that is sale without bills. The total amount of unrecorded sale was arrived at Rs. 50,00,000 by applying gold rate of Rs. 3,700 per 10 grams to the shortage of 13514.28 grams. Mr. Shantikumar Shah further stated that the amount of unrecorded sale was invested in purchase and development of land at Malad, Tal Daund, Distt. Pune. He further agreed to declare the amount of unrecorded sale Rs. 50,00,000 as undisclosed income in the hands of company i.e. J.B. Saraf & Sons Pvt. Ltd. In this connection it humbly submitted as follows
(1) We have gone through the Statement of the director Mr. Shantikumar Shah and Panchanama of the jewellery found. In the Panchanama there are several mistake in physical verification of the jewellery. Similarly the valuer has, without application of the mind, determined gross weight and respective net weight of the jewellery. For example jewellery item "Thusi" is a pure gold item and it does not contain any alloys. However, the valuer has considered the net weight at 50% of the gross weight. (Please refer item no.29 page no.2 of the Panchanama). There are several other instances also. Similarly, the gold items in lying in silver section of the shop was not considered in valuing gold jewelelry summery. Such differences in jewellery weight are to the tune of 2,087 grams. The details of difference in gross weight and net weight and jewellery lying in silver section are given on separate sheets enclosed herewith. Therefore, actual shortage is 11426.97 grams as follows:
| a. | Shortage | 13,514.28 | |
| b. | Excess weight considered by search party | 1,637.31 | |
| c. | Gold lying in silver section not considered | 450.00 | |
| 11,426.97 |
(2) Mr. Shantikumar Shah in statement agreed to declare the total sale proceeds of the unrecorded sale as undisclosed income. However, he intended to declare profit earned from unrecorded sale and the not the amount of total sale as undisclosed income. Your honour may kindly appreciate that the shortage in stock cannot be undisclosed income. What can be taxed is reasonable profit earned from such unrecorded sales. Therefore, the gross profit of about 9% percent on the unrecorded sale of Rs. 42,27,978 (11,426.97 Grams × Rs. 3,700/- per 10 Grams) i.e. Rs. 3,80,000/- may be the undisclosed income of the company.
(3) Your honour may kindly appreciate that during the course of search action no evidence was found indicating the undisclosed investment in agricultural lands at Malad Tal Daund Distt. Pune. Similarly, the development expenses are properly recorded in the books of account. There is no undisclosed investment in the land or the development of the land at Malad. The statement was given only with the intention of declaring unrecorded sale proceeds and profit arising from such sale. There was no intention to declare Rs. 50,00,000 as undisclosed income which may kindly be noted.
Your honour is requested to consider the mistake in the statement of Mr. Shantikumar Shah. Therefore, considering the above factual position the company declines to abide by the declaration made the director Mr. Shantikumar Shah and refuses to declare the undisclosed income of Rs. 50,00,000 (Rs. Fifty Lacs only) as agreed by Mr. Shantikumar Shah.
Kindly take note of the above and oblige.
Thanking you,
Yours faithfully,
For J.B.S & Sons Pvt. Ltd.
Sd/-
Director"
Subsequently the assessee submitted return of income declaring undisclosed income at Rs. 4,01,321/-. The undisclosed income was unaccounted profit on gold found short at the time of search action treating it as suppressed sale. The Assessing Officer completed assessment at Rs. 4,01,321/- on 25th September 2003 u/s. 158BC(c) r.w.s. 143(3) of the I.T. Act, in its first round.
10. The CIT set aside the assessment order vide his Order under section 263 of the I.T. Act dated 14th March 2006 on the ground that the said order was erroneous in so far as it was prejudicial to the interest of revenue. According to CIT the Assessing Officer accepted the retraction of the admission in routine manner without applying his mind. The CIT directed the Assessing Officer to make enquiry in respect of investment in purchase of agricultural land and expenses incurred on development of agricultural land at Malad Tal : Daund, Dist. Pune, because the assessee during search action had admitted that the cash generated out of unaccounted sale was invested in the said agricultural lands.
11. Concern Assessing Officer in set aside proceedings instead of verifying investment in agricultural land and development thereof, made various presumptions and made additions of Rs. 50,00,000/-as undisclosed income in addition to the gross profit of Rs. 4,01,321/- declared by the assessee in the return. Similarly, the Assessing Officer made addition of Rs. 92,744/- being difference in the gross profit worked out by the assessee on the cost instead of selling price. The Assessing Officer completed the assessment u/s. 158BC (c) r.w.s. 263 on 12th December 2006.
12. The assessee preferred the appeal before concern CIT(A) against assessment order. Meanwhile the assessee challenged jurisdiction of CIT to pass the revisionary order under section 263 before the ITAT Pune Bench, Pune, wherein ITAT, Pune Bench upheld the order of the CIT vide its order No. ITA 614/PN/2006 dated 31st July 2007 but with the modification as under:
"11. However, the CIT's that part of the order whereby he has given a finding or direction or has made an observation to assess certain amount as undisclosed income of the assessee is found to be not justified without making further enquiry or either by the A.O. or by the CIT himself. We, therefore, modify the order of the CIT by holding that the assessment order is to be set aside to the file of the A.O. to verify the issues dealt with by the CIT in his order, with a further direction to the A.O. to examine and verify these issues dealt with by the CIT in his order and take his own decision as per the law after examining and verifying all the materials and particulars available on record and after affording reasonable opportunity of being heard to the assessee.
12. In light of discussion made above, the order of the CIT under section 263 is upheld with the modification and observations made by us hereinabove."
Thus the assessment order was set aside to the file of the Assessing Officer to examine and verify the issue dealt with by the CIT in his order and pass order afresh.
13. The Assessing Officer initiated the assessment proceedings afresh in pursuance of the directions of the ITAT, Pune, as discussed above. The concern Assessing Officer asked the assessee vide letter dated 5th December 2008 to explain as to why Rs. 50,00,000/- should not be added as undisclosed income. Same was replied vide letter dated 18th December 2008. The assessee also submitted the valuation report of the approved valuer dated 20th December 2008 along with sale instance inter alia, the Government approved valuer Mr. Chintamani T. Ganpule certified the value of the agricultural land for the year 2001 at Rs. 34,46,667/-. Same is placed at page 71 of paper book which reads as under:
"This is to certified that, the undersigned has visited the village Madlad-Patas, Tal Daund, Distt. Pune for valuation of Agricultural land situated in Gat No.678/1 to 678/15, 662, 664, 311 admeasuring 37 Hector and 82 R i.e., 94 Acres and 22 guntha of Shri Shantikumar Jambukumar Shah and others 11, As per Index II 2001 which is enclosed here with the total valuation of Agricultural land for the year 2001 is of Rs. 34,46,667/- (i.e. Thirty Four Lacs Fourty Six Thousand Six Hundred and Sixty Seven only). To the best of my knowledge the valuation of above agricultural land is correct.
Sd/-
Shri C.T.Ganpule
Govt. Approved
Agrl. Land Valuer
Regd. No.CAT/II/427
of 1997"
In this background it was stated on behalf of assessee that the valuation report in respect of agricultural lands revealed that the assessee did not make any undisclosed investment in the agricultural land. In fact the assessee had acquired the agricultural land for the consideration of Rs. 34,51,575/- in the calendar year 2000 as detailed on page 72 of paper book same is reproduced below:
| Sr. | Date of Document | Type of Documents | Identification | Shiwar | Area under Documents in Hectors | Consideration | Name |
| 1. | 25.05.00 | Sale Deed | 678/11 & 12 | Malad | 03.03 & 03-02 | 375000 | Padamkumar J Shah & Sushma Shah |
| 2. | 25.05.00 | Sale Deed | 311 | Malad | 1.23 | 490000 | Padamkumar J Shah & Sushma Shah Sirishkumar J Shah & 7 Shah members |
| 3. | 25.05.00 | Sale Deed | 678/13 | Malad | 2.01 | 280325 | Padamkumar J Shah & Sushma Shah Sirishkumar & Mangal Shah |
| 4. | 25.05.00 | Sale Deed | 678/05 & 6 | Malad | 01.53 & 01.34 | 350000 | Swapnil Shah, Kaushal Shah Shatikumar, Shobha S Shah, Rohit Shah |
| 5. | 25.05.00 | Sale Deed | 678/07, 8, 9, 10 | Malad | 1.34 | 325000 | Sheetal Shah Sirishkumar, Manjal Shah, Swapnil & Kausar S.Shah |
| 6. | 25.05.00 | Sale Deed | 678/03 & 04 | Malad | 1.54 & 1.53 | 270000 | Sirishkumar, Manjal Shah, Swapnil & Kausar S.Shah |
| 7. | 25.05.00 | Sale Deed | 678/01 & 2 | Malad | 1.54 | 490000 | Smt. Swapnil Shah, Padmakumar Jambukar Shah, Shri Shital Shantikumar Shah |
| 8. | 20.01.00 | Sale Deed | 664 | Malad | 2.4 | 165000 | Shantikumar J. Shah, Sheetal Shah, Rohit Shah, Shobha Shah |
| 9. | 25.05.00 | Sale Deed | 678/14 & 15 662 | Malad | 5.19 | 300000 | |
| 10. | 05.09.00 | Sale Deed | 664 | Malad | 2.46 | 93750 | Srimati Archana Kausal Shah |
| 11. | 05.09.00 | Sale Deed | 664 | Malad | 2.45 | 93750 | Shital S Shah |
| 12. | 10.11.00 | Sale Deed | 284/06 | Malad | 0.03 | 75000 3307825 | Shantikumar J Shah |
| 13. | 05.09.00 | Sale Deed | 664 | Malad | 2.45 | 93750 | Rohit J Shah & Mrs. Tina R Shah |
| 14. | 10.11.00 | Sale Deed | 664 | Malad | 8.81 | 50000 | Shantikumar J Shah |
| 3451575 |
14. The Assessing Officer did not agree with the contention of the appellant and assessed the undisclosed income at Rs. 50,00,000/-being the sale value of gold jewellery found short. The Assessing Officer held that the gross profit of Rs. 4,73,262/- (Declared by the assessee in the block) is included in the undisclosed income of Rs. 50,00,000/- and hence, a separate addition on this account would amount to double taxation of the undisclosed income. Therefore, he restricted the total addition of Rs. 50,00,000/-.
15. The assessee preferred appeal before the CIT(A) against the order of the Assessing Officer who confirmed the addition of Rs. 50,00,000/- as the undisclosed income. The shortage of gold stock found at the time of search/survey action as compared to the stock as per books of account, the presumption is about unaccounted sale of difference between the actual stock found on physical verification and the stock as per book of accounts. The entire unaccounted sale price should not be treated as an undisclosed income. It is the gross profit embedded in the suppressed or unaccounted sale which should be added. The Assessing Officer has made addition of entire unaccounted/suppressed sales without appreciating the fact that the entire sales could not be added as the income of the assessee but the addition could be made only to the extent of gross profit earned on the unaccounted/suppressed sales. Hon'ble Gujarat High Court in CIT v. President Industries [2002] 258 ITR 654/124 Taxman 654 held that Tribunal was justified in holding that entire undisclosed sale could not be added as income of assessee. Addition could be made only to the extent of estimated profit embedded in sale for which net profit was to be adopted. Similar view was taken by ITAT Pune Bench in Janta Tiles v. Asstt. CIT [2000] 66 TTJ 695 (Pune). The Jodhpur ITAT Bench in Asstt. CIT v. Rasana Industries [2008] 114 TTJ 283 (JD) has held that when the stock is found short the addition could be made to the extent of GP involved therein. Only profit element can be subjected to tax and not the entire sales.
16. Addition of Rs. 50,00,000/- has been made solely on the basis of statement of the director of the assessee company Mr. Shantikumar J Shah without corroborating the same with the material unearthed by search. We find force in the submission of the Ld. Counsel for the assessee that the statement was given under the mistaken belief of law that suppressed sale is undisclosed income instead of the gross profit earned from the suppressed sales. The department has not brought on record any corroborative evidence so as to establish undisclosed income having been invested in agricultural land. Statement of the assessee cannot be sole basis without any cogent and corroborative evidence. This is the reason that the mistake in the statement is immediately clarified on the receipt of the statement by the appellant as stated above. Moreover, no material/evidence was found during the course of search action indicating on money payment or any undisclosed investment in agricultural land at Malad. The assessee has clarified the mistake in the statement immediately on receipt of the statement. Thus the statement has been retracted on realization of the mistake. The assessee has also submitted valuation report of agricultural land (along with sale instance) which certified the Fair Market Value at Rs. 34,46,667/- for the year 2001 when the agricultural lands under consideration were acquired (2000). The assessee has acquired the said land for the consideration of Rs. 34,51,575/- as indicated above. The Assessing Officer as well as CIT(A) have brushed aside the above mentioned valuation report as well as details of purchase of agricultural land at Malad by various family members as detailed above.
17. The Revenue authorities have heavily relied on the evidentiary value of the statement recorded u/s. 132(4) during the course of search action without appreciating the fact that the statement was given under mistaken belief of law that the suppressed sale is unaccounted/undisclosed income instead of correct legal position that the gross profit arising from unaccounted sale is the undisclosed income. It is a settled position that admission made by the assessee u/s. 132(4) is an important piece of evidence but the same is not conclusive. It is open to the assessee who made the admission to show that it is incorrect and the same is given under mistaken belief of fact or law. Statement of Mr. Shantikumar Shah indicate that he was not mentally composed at relevant point of time. There is nothing on record to suggest that said undisclosed income declared on behalf of assessee has nexus with undisclosed investment in the said agricultural land. Amritsar ITAT Bench in Asstt. CIT v. Janak Raj Chauhan [2006] 102 TTJ 316, observed that admission made at the time of search action is an important piece of evidence, but the same is not conclusive. It is open to the assessee who made the admission to show that it is incorrect and same was made under mistaken belief of law and fact. Jodhpur ITAT Bench in Maheshwari Industries v. Asstt. CIT [2005] 148 Taxman 74 (Jodh) (Mag.) has held that additions should be considered on merits rather than on the basis of the fact that the amount was surrendered by the assessee. It is settled legal position that unless the provision of statute warrant or there is a necessary implication on reading of section that the principles of natural justice are excluded, the provision of section should be construed in manner incorporating principles of natural justice and quasi judicial bodies should generally read in the provision relevant section a requirement of giving a reasonable opportunity of being heard before an order is made which will have adverse civil consequences for parties effected.
18. The Revenue authorities have relied heavily on the proposition that once the assessee makes admission he cannot go back from his own stand unless any evidence is furnished to show that the admission was obtained under coercion or threat or pressure. Hon'ble Allahabad High Court in case of Dr. SC Gupta v. CIT [2001] 248 ITR 782/118 Taxman 252 wherein assessee surrendered additional income in the statement recorded during the course of survey action but retracted later from the same. It was the contention of the assessee that Assessing Officer should have independently come to the conclusion that there was additional income and there was no material to indicate that there was no such income. The Hon'ble Allahabad High Court held that the burden lay on the assessee to establish that the admission made in the said statement was wrong and in fact there was no additional income. In the said case assessee did not make any attempt to discharge this burden. The Tribunal's finding was that no pressure or duress was exercised on the assessee when he made the statement and it was a finding of fact. So the ratio of Dr. S.C. Gupta (supra) is not applicable to facts of present case. Decision of Hon'ble Kerala High Court in the case of Mahesh B Shah v. Asstt. CIT [1999] 238 ITR 130/103 Taxman 91 has also been relied by Revenue authorities. In this case assessee agreed to treat certain expenditure as a capital expenditure both before ITO and CIT. No evidence was furnished to show that the assessee was coerced to make concession. The allegation of compulsion or coercion cannot be accepted on a mere statement of the assessee. The assessee cannot be allowed to go back on his own stand before the authorities below. The case of the assessee before us is that the statement has been made under mistaken belief of law and fact and there has been wrong interpretation of his admission to mean that the assessee has made declaration of income at Rs. 50,00,000/-being suppressed sales and not the gross profit arising thereof. The assessee before us has tried to discharge the burden that the statement was incorrect since it was given under mistaken belief of the fact and law. The assessee tried to clarify the mistake in the statement immediately on receipt of the same so it can be inferred that assessee has retracted from his statement on realizing the mistake in the statement soon after receiving the same as stated above.
19. We also find that the assessee in assessment proceedings has produced all evidences in respect of investment in agricultural land. The assessee has also produced the valuation report issued by Government approved valuer in respect of the fair market value of the agricultural land at Boribei, Malad, Tal : Daund, Distt. Pune on or about the year 2000 in which the said agricultural land was purchased by the shareholders/members of JBS. According to said valuation cost of agricultural land has been stated to be Rs. 34,46,667/- which is close to total value of agricultural land purchased by members of family. The case of the assessee is that the statement has been given under the mistaken belief of law appeals to common sense.
20. The concern CIT initiated the revision proceedings u/s. 263 of the Income Tax Act on the ground that the Assessing Officer has accepted the retraction of the statement without verification of investment made in the agricultural land at Boribel, Malad, Tal. Daund, Distt. Pune. In the order u/s. 263 the CIT directed the Assessing Officer to make enquiry on the issue of undisclosed investment made in acquisition and development of agricultural land on account of which the director of the assessee has made declaration of undisclosed income. There is nothing on record to suggest that any evidence was found in the course of search action or post search enquiries to the effect that the assessee has made any investment over and above sale price detailed above with regards to agricultural land transaction in question. There is also nothing on record to suggest that any enquiry has been made by Revenue authorities to establish the nexus of disclosure with purchase of agricultural land in question. Revenue authorities have made no effort whether respective persons have disclosed purchase of agricultural land in their books of accounts in respective years which is not justified. Further, Revenue authorities have not bothered to look into the issue when assessee has submitted valuation report according to which value of land was stated to be Rs. 34,46,667/- at relevant point of time which is close to total value of land i.e., Rs. 34,51,575/-. Such clinching evidence should not be brushed aside by Revenue authorities. It amounts to violation of principles of natural justice because assessee was not provided due opportunity of hearing on issue. Moreover, Revenue authorities have not been able to establish nexus between unrecorded sale with investment in agricultural land. There is no cogent reasoning for reaching conclusion of undisclosed income in question. The case of the assessee is that the statement/admission was made under the mistaken belief of law that Rs. 50 lakhs represents the sale value of stock found short was undisclosed income of the assessee instead of the correct legal position that the gross profit on suppressed sale is the income of the assessee. The assessee has tried to explain his mistake in the statement recorded on behalf of it. The assessee has accounted for the suppressed sales by way of declaration of gross profit on account of the suppressed sales. Assessee tried to clarify his stand immediately after the receipt of the statement recorded u/s. 132(4) on 20-05-02 and after realizing that there has been mistake in the statement. Such factual retraction should not be brushed aside without verifying the facts and circumstances of same. The addition in question is not justified while assessee has already declared gross proceeds on unaccounted sales as discussed above. The Assessing Officer is directed accordingly.
21. In the result, the appeal is allowed.
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IT : In case of firm and partners - Where assessee-firm could not properly explain source of amount drawn by its partner which was claimed to have been received in advance from different persons, said amount was rightly added to its income
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[2012] 26 taxmann.com 221 (Karnataka)
HIGH COURT OF KARNATAKA
Kaveri Associates
v.
Assistant Commissioner of Income-tax, Circle 5(1)*
D.V. SHYLENDRA KUMAR
AND B. MANOHAR, JJ.
IT APPEAL NO. 27 OF 2011†
JULY 10, 2012
Section 68 of the Income-tax Act, 1961 - Cash credits - Assessment year 1999-2000 - One 'R' was a partner in assessee-firm - In search 'R' made a statement that amount of Rs. 75.50 lakhs found in his account books was drawn from firm - Assessee-firm, in response to notice issued under section 148, read with section 147 for first time filed a nil return of income for assessment year 1999-2000 claiming that aforesaid amount did not represent any parts of its income, and it had received said amount from as many as 14 persons by way of advance for sale of shops that were being constructed by it - Assessing Officer added aforesaid amount to income of assessee as unexplained cash credits under section 68 - Whether in view of finding of Assessing Officer that amount of Rs. 75.50 lakhs had not been properly explained by assessee, particularly being in nature of cash credits, Assessing Officer was justified in adding said amount to income of assessee as unexplained cash credits - Held, yes [Para 35] [In favour of revenue]
Section 147, read with section 6, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts - Assessment year 1999-2000 - Whether in view of facts mentioned under heading 'Cash credit', since reopening of assessment was on basis of submission or explanation offered by one of its partner 'R', and a bona fide reason was recorded for reopening, reopening of assessment proceedings was valid - Held, yes [Para 9] [In favour of revenue]
FACTS
Facts
• One 'R' was a partner in the assessee-firm in his capacity as Karta of Hindu undivided family. The authorized officer conducted, search under section 132 upon 'R' and the latter at that time made a statement to the effect that the amount of Rs. 75.50 lakhs found in his account books, which was in turn advanced to a person, was drawn from the firm.
• The Assessing Officer issued on the assessee-firm a notice under section 148, read with section 147 for bringing to tax the aforesaid amount in its hands. In the impugned notice, the Assessing Officer had mentioned the name of the assessee as Cauvery Associates; whereas the name of the firm was Kaveri Associates. The Assessing Officer had not mentioned the status of the firm in the notice.
• In response to notice, the assessee for the first time filed a nil return of income for the assessment year 1999-2000 claiming that (i) the aforesaid amount did not represent any part of its income, and (ii) it had received the said amount from as many as 14 persons by way of advance for sale of shops that were being constructed by it.
• The Assessing Officer rejected the stand of the assessee that the said amount was not the income. He further having noticed that the said amount had been shown as cash credits in the books of account and as received from fourteen persons applied the provisions of section 68 and added the said amount to the income of the assessee as unexplained cash credits under section 68.
• Both the Commissioner (Appeals) and the Tribunal upheld the action of the Assessing Officer.
• On appeal to High Court:
Assessee's arguments
• The very re-opening of the assessment was bad and bringing to tax cash credits as its income was also bad.
Issue involved
• Whether reopening of assessment was valid?
• Whether addition of Rs. 75.50 lakhs made to the income of the assessee under section 68 was justified?
HELD
• It is difficult to assume that either the wrong description of the name of the assessee and not indicating the status of the assessee as a firm in the notice issued under section 148 has really worked to the prejudice of the assessee and at the best it being an irregularity does not affect the further proceedings. Insofar as the re-opening aspect is concerned, the reopening of the assessment of the firm was because of the submission or explanation offered by one of its partners 'R', who claimed that the amount found in his books of account, which was in turn advanced to some other person, was drawn by him from the firm. A firm always acts through its partners and, therefore, there cannot be a dichotomy of the stand in the case of the individual partner being different from that of the firm. What the partner states whether he is a partner in the capacity of HUF or in his individual capacity, nevertheless it is on behalf of the firm, because only through this finding this aspect has been noticed by the authorities below also. It is in the wake of such a stand taken by the partner, there was an occasion for investigating the transactions of the firm, who had claimed the amount as its amount and which was the very version of the assessee and its partner. [Para 26]
• Insofar as the recording of the reasons is concerned, this has been thoroughly examined by the three authorities below and in the facts and circumstances of the case it is accepted that a bona fide reason is recorded for re-opening. The issue of notice has been proceeded by a follow up action taken by the Assessing Officer subsequent to the search of the premises of 'R' and after recording the statements of some persons, who were available and claimed to be creditors. Ultimately the Assessing Officer was of the opinion that a firm which had the capacity to lend an amount of Rs.75.50 lakhs to one of its partners or others is reasonably presumed to have the taxable income and if the assessee had never disclosed its expenditure or otherwise earlier and in such circumstances, if the officer records that he has reason to believe that assessee had taxable income and a non-filing of the return is not merely suspicion and, therefore, in bringing to tax such amount by re-opening, it cannot amount to a mere suspicion or a surmise. [Para 27]
• As to whether the recording of reasons to believe constitutes a real reason or otherwise has to be culled out from the facts and circumstances of each case and in this regard one cannot lose sight of the fact that information is provided in respect of the assessee by its own partner. [Para 28]
• A return was being filed for the first time only after issue of notice under section 148, no doubt showing nil income, but that is a matter to be examined for acceptance by the Assessing Officer who had proposed reopening and that the authorities below have concurrently opined that the recording of the reasons by the Assessing Officer was sufficient for the purpose of issue of notice under section 148. [Para 29]
• In the circumstances and on the basis of the findings recorded by the authorities follow, one is unable to accept the submission of the assessee that there was no reason and it was only a suspicion based on which the reopening has been made. [Para 30]
• The case of the assessee firm was not that credit entries were in dispute. It is urged very strongly by the assessee that at least one or two of the creditors had independent income in their own capacity and that they were quite capable of lending such amounts, etc. and the department has not made good that the amount is actually not lent by such creditors. This argument cannot be accepted for more than one reason. It is to be noticed that in the first instance, it is one of the partners, who had sought to explain that the amount in question was drawn by him from the account of the firm justifying that kind of lending by the partner of the firm in favour of some third party and the source was attributed to the firm. The action taken against the firm was a follow-up action as a result of search of the premises of the partner. If the version of the partner is to be accepted then there is no choice for the revenue to proceed further as against the person, who has lent the money to the firm. The firm though had transactions had not indicated the income from its transactions but claiming that it had no income liable to tax was not further accepted by the authorities below. [Para 32]
• The argument to the effect that the department has not established through the factual position as against the stand taken by the assessee is principally based on the premises that the department is expected to prove or produce material to counter the circumstances of the assessee. Assessment proceedings are not adversary proceedings in nature and it is not as though there is alis between the assessee and the Assessing Officer. The Assessing Officer is the statutory functionary and is required to perform statutory duty. An order passed by an Assessing Officer if is erroneous on facts, there is scope for interference by the Tribunal and if it is erroneous on law, there is scope for interference even up to the High Court in an appeal. But it does not mean that the revenue having not proved certain position or not made good such position, the order renders itself to be bad in law. [Para 34]
• There is no question of the revenue proving anything against the assessee, but it is the duty of the assessee for proving taxable income. The Assessing Officer had examined the amount of Rs.75.50 lakhs, which according to him had not been properly explained particularly, being in the nature of cash credits as claimed by the assessee. Therefore, he brought it to tax as the income earned during the relevant period. There is no occasion to interfere in a matter of this nature. Therefore, the appeal of the assessee was liable to be dismissed. [Para 35]
CASES REFERRED TO
Ganga Saran & Sons (P.) Ltd. v. ITO [1981] 130 ITR 1/6 Taxman 14 (SC) (para 16), ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) (para 16), Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) (para 16), Indian Oil Corpn. v. ITO [1986] 159 ITR 956/26 Taxman 336 (SC) (para 16), Rallis India Ltd. v. Asstt. CIT [2010] 323 ITR 54/190 Taxman 1 (Bom.) (para 16), CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC) Aravali Trading Co. v. ITO [2010] 187 Taxman 338 (Raj.) (para 17), Nemi Chand Kothariv. CIT [2003] 264 ITR 254/[2004] 136 Taxman 213 (Gau.) (para 17), Kanhaialal Jangid v. Asstt. CIT [IT Appeal No. 85 of 2001, dated 2-1-2007] (para 17), CIT v. Lovely Exports (P.) Ltd. [Application No. 11993 of 2007, dated 11-1-2008] (para 18), Asstt. CIT v.Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) (para 21), Asstt. CIT v. Vishwanath & Co. [2007] 292 ITR 225/161 Taxman 32 (Kar.) (para 22), Mukesh Shaw v. ITO [2012] 204 Taxman 615/18 taxmann.com 18 (Jhar.) (para 22),Tirath Ram Gupta v. CIT [2008] 304 ITR 145/[2009] 177 Taxman 294 (Punj. & Har.) (para 22) and Raymond Woollen Mills Ltd. v.ITO [1999] 236 ITR 34 (SC) (para 23).
A. Shankar and M. Lava for the Appellant. K.V. Aravind for the Respondent.
JUDGMENT
1. This is an appeal by the assessee under section 260-A of the Income Tax Act, 1961 [for short 'the Act'] against the order of the Tribunal dated 23.09.2010 and on the premise that the Tribunal has committed errors and illegalities in dismissing the appeal of the assessee.
2. The assessee - appellant is a partnership firm said to have been constituted on 16.3.1996 in the name and style of M/s. Kaveri Associates and has been continued thereafter, with change of composition of partners, but under the same name and style and the questions raised for examination in this appeal arose for the period relating to assessment year 1999-2000.
3. The appellant - assessee has filed the appeal raising the following questions as substantial questions of law arising for determination in this appeal.
"1. Whether the Tribunal was justified in law in holding that reopening of assessment under section 148 of the Act is valid and complies with all the mandatory conditions for reopening on the facts and circumstance of the case?
2. Whether the Tribunal was justified in law in confirming the addition of Rs.75,50,000/-made by the Assessing officer under section 68 of the Act on the facts and circumstance of the case?
3. Whether the Tribunal was justified in law in confirming the addition of Rs.75,50,000/-when the Assessing Officer summoned and recorded the statement from all the persons and all of them have confirmed the advance paid for purchase of shops and explained their sources on the facts and circumstance of the case consequently gave a perverse finding?
4. Whether the authorities below are justified in law in charging- interest under section 234A sum of Rs. 18,84,432/- and 234B sum of Rs. 24,52,570/- contrary to the provisions of section 234A(3) and 234B(3) of the Act on the facts and circumstance of the case?"
4. Notice had been issued to the respondent - revenue regarding admission of the appeal on 18.4.2011 and thereafter on the appearance of learned standing counsel for the revenue, appearing for the respondent, had been directed to produce original records including the statement recorded pertaining to Mr. Rathanlal K Jain - a person who is said to have given certain amount by way of credit to the assessee - firm.
5. Counsel for the other side having taken time, it was submitted by learned counsel for the appellant as well as respondent that they had been given to understand that the matter though is in the admission list, can be heard and disposed of finally.
6. It is in this background, we have heard Sri A. Shankar, learned counsel for the appellant - assessee and Sri K V Aravind, learned counsel for the respondent - revenue.
7. Elaborate submissions have been heard on behalf of the appellant by Sri Shankar, learned counsel and brief reply on behalf of the respondent by Sri K V Aravind, learned standing counsel appearing for the revenue.
8. The genesis of these proceedings lies in a search that was conducted at the premises of one Rishabchand Bhansali who is also a partner of the firm and it is claimed that he is partner in his capacity as Kartha of Hindu Undivided Family comprising of himself and his brothers. However, a perusal of the copy of the partnership deed dated 16.8.1997 available in the assessment records indicates that the firm had come to be reconstituted as per this deed and Rishabchand Bhansali had a share of 20% in the firm on reconstitute and in fact three other brothers also had shares of 20%, 20% and 12.5% respectively in the very firm and they had held shares in their individual capacity etc.
9. Be that as it may, insofar as this appeal is concerned, to complete the narration of facts, search of the premises of Rishabchand Bhansali - partner of the firm had indicated that said Rishabchand Bhansali had drawn a sum of Rs.75,50,000/ from the firm and said amount had been drawn for the purpose of loaning this amount to Sri Balakrishna and his educational institution Vishwabharathi Vidhya Mandir and as a sequel, the Assessing Officer had after follow up action etc., had issued notice to the firm under section 148 of the Act, reopening the assessment under section 147 of the Act for bringing to tax the said amount in the hands of the firm. In response to notice issued under section 148 of the Act, the assessee firm filed a 'Nil' return of income claiming that the amount did not represent any part of the income of the firm; that it had been received from as many as 14 persons by way of advance for sale of shops in a shopping complex that was being constructed by the assessee - firm etc.
10. The Assessing Officer did not find the explanation offered by the partner of the firm to claim elicit source of the sum of Rs.75,50,000/-, rejected the stand of the assessee that it was not income, but concluded that the amount having been shown as cash credit in the books of account of the assessee and as received from fourteen persons, applied the provisions of section 68 of the Act, assessed the cash credit amount as undisclosed income of the assessee during the assessment year relevant to the period when the amount had been so credited in the books of account of the firm and brought it to tax as per the assessment order dated 21.3.2005.
11. The aggrieved assessee appealed to the Commissioner of Income Tax - (Appeals)-II, Bangalore.-. Assessee had raised various contentions before the Appellate Commissioner and the appeal came to be dismissed as per the order dated 29.9.2009 (copy at Annexure-D).
12. A further appeal to the Appellate Tribunal also having been dismissed. by the Appellate Tribunal, finding no occasion to differ from the views taken by the Assessing Authority and the First Appellate Authority and in this background the present appeal.
13. Sri Shankar, learned counsel for the appellant has made very elaborate submissions to support the case of the assessee in the context of substantial questions of law as indicated above and as raised in the memorandum of appeal.
14. Sri Shankar, learned counsel has made submissions on two aspects.
15. It is firstly contended that assumption of jurisdiction for re-opening the assessment for the year 1999-2000 by issue of a notice under Section 148 was erroneous without any basis and therefore, the very initiation of the proceedings is clearly illegal and further proceedings cannot be sustained. In this regard, it is urged that first of all there is total non-application of mind on the part of the Assessing Officer and that the very reasons are recorded before the issue of notice under Section 148 which reads as under :-
"It is noticed that the firm M/s. Kaveri Associates has not filed any return of income for the Asst. Year 1999-2000 till today. As per the information in the HUF file of Shri Rishabchand Misrimal Bhansali, who is a partner of M/s. Cauvery Associates he has withdrawn Rs. 71,75,000/- from the above firm as on 31.3.1999. For lending Rs. 71,50,000/-, the assessee-firm must be having taxable income. As the assessee has not filed the return of income, the income has escaped assessment as per clause (a) toExplanation 2 to section 147. Hence the assessment proceedings initiated under Section 147 of the Act.
Issue notice under Section 148."
reveals that the assessing officer had mentioned the name of the assessee wrongly at least in one place for this reason in the sense it had been mentioned as M/s. Cauvery Associates whereas the name of the firm was M/s. Kaveri Associates and this in itself indicated there was some confusion in the minds of the assessing officer with regard to the very name of the firm. However, it is more importantly contended that the so called reasons recorded does not really indicate any formation of belief on the part of the assessing officer to arrive at the inference. He had reasons to believe that income of the assessee, which was required to be subjected to tax during the assessing year had escaped assessment; that the recording never revealed that the assessing officer had reason to believe that at the best it amounted to suspicion and it is well settled on authority of law that a mere suspicion or a mere satisfaction, that there may be some income, which had not been taxed is not at all a ground for re-opening the assessment, at any rate determination on this question has been quite settled that a mere suspicion or information by itself cannot constitute a reason for re-opening a concluded assessment and therefore, there was no occasion for the assessing officer to pass an assessment order on the basis of re-opening of the assessment.
16. In support of this contention, Mr. Shankar has placed reliance on the following authorities, which touches upon the vivid situation and hues and shades involving occasions when, the revenue had sought to re-open the concluded assessment but, which were found fault by the court opining that there is no real reason to believe for the re-opening as indicated by the assessing authorities etc.
1. Ganga Saran & Sons (P.) Ltd. v. ITO [1981] 130 ITR 1/6 Taxman 14 (SC)
2. ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC)
3. Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC)
4. Indian Oil Corpn. v. ITO [1986] 159 ITR 956/26 Taxman 336 (SC)
5. A. Nagappa v. Asstt. CIT (Unreported Judgment of Hon'ble High Court of Karnataka dated 11-1-1991)
6. Rallis India Ltd. v. Asstt. CIT [2010] 323 ITR 54/190 Taxman 1 (Bom.).
17. It is also contended by Sri Shankar, learned counsel that apart from the impugned order of the assessing authority the first appellate authority as also the Tribunal being vitiated by a clear incorrect understanding of the legal position for the purpose of re-opening an assessment within the scope of Section 147 of the Act, the assessing authority has committed an error in law in assuming and presuming that, the fact situation of the goods warranted application of the provisions of Section 68 of the Act; that the assessing officer had called in aid the provisions of section 68 to bring to tax the amount of Rs. 75,50,000/-, even when the assessee had very satisfactorily explained the sources of such credits that the assessing officer opining such source had not been properly explained or was found to be convincing is a extraneous consideration for bringing to tax cash credit amounts as income of an assessee under Section 68 of the Act; that a recording or finding to the effect such amounts which were cash credits and which were properly explained by the assessee, nevertheless is income of the assessee during the previous year when the entries were made, is nothing short of recording a perverse finding and the Tribunal has committed an error in law in affirming such findings of the lower authorities and that the order of the Tribunal is not sustainable for such reasons. In support of such submissions Mr. Shankar, learned counsel, has placed reliance on the following decisions both of the Supreme Court as well as other High Courts viz.,
a. CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC)
b. Aravali Trading Co. v. ITO [2010] 187 Taxman 338 (Raj.)
c. Nemi Chand Kothari v. CIT [2003] 264 ITR 254/[2004] 136 Taxman 213 (Gau.)
d. Kanhaialal Jangid v. Asstt. CIT [IT Appeal No. 85 of 2001, dated 2-1-2007]
e. CIT v. Lovely Exports (P.) Ltd. [Application No. 11993 of 2007, dated 11-1-2008].
18. On the contrary, Sri K.V. Aravind, learned Standing counsel appearing for the revenue has submitted that having regard to the concurrent findings recorded by all the three authorities, there is absolutely no scope for interference under Section 260A of the Act; that all the three authorities have in great detail discussed the fact situation and have concluded that the amount not only was undisclosed income of the assessee firm during the period when the cash credit entries had been made, but also is a situation, which clearly attracted the provisions of Section 68 of that Act that the reopening was based on material as found in the premise that it was the partner of the firm, who had claimed that he had drawn the amount from the account of the firm; that all transactions though were huge in terms of the amount having, not been depicted in the books of account of the assessee, but for the first time being revealed after the search and the fact that all transactions were settled through cash payments though were transactions of money in lakhs and one such transaction being 20 lakhs of rupees, all did indicate that the assessee did not at all properly elicit source of income; that mere indicating of the creditors in itself is not the end and therefore, contends that there is no need for interference. It is also submitted that the reasons had in fact been recorded before the issue of notice; that it had been so recorded prior to issue of notice on 28.1.2004; that the very reason indicated the basis for re-opening. This was thoroughly examined by all the three authorities, who had satisfied such recording and therefore, submits that there is no cause for examining the same again in a appeal under Section 260-A of the Act.
19. Mr. K.V. Aravind, learned standing counsel has also brought to our notice the provisions of Clause (a) of Explanation 2 to Section 147 reading as under:-
"Explanation 2 - For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :-
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;"
20. Mr. Aravind, learned standing counsel submits that the assessee had never filed any return of income that it had never disclosed existence of a firm that though the assessee had transactions involving immovable property and huge amounts, had never, at any point of time, revealed such transactions to the revenue; that the explanation putforth subsequent to the notice claiming that the firm had not started its business and therefore, that no income was earned was rejected by the authorities; that the firm had been receiving amounts and even as per its own version for commercial purposes and therefore, the explanation having been rejected, bringing to tax this amount was inevitable as it disclosed income which had escaped assessment. It is therefore, urged that the appeal has no merit and has to be dismissed.
21. Mr. Aravind, learned Standing counsel for the revenue has also drawn our attention to the judgment of the Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 which has been referred to and applied by the Tribunal to reject the contention on behalf of the assessee to the effect that the reopening of the assessment was bad, on noticing the following paragraph:-
"The expression "reason to believe" in section 147 would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. What is "required is "reason to believe" but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the Assessing Officer."
22. Mr. Aravind, learned counsel has also submitted that the authorities have gone into the question of accepting or otherwise, the explanation offered by the assessee on the touchstone of the genuineness and creditworthiness of the creditors and that the Tribunal and lower appellate authority found no occasion warranting a different finding from the view of the assessing authority on this aspect, but to reject the explanation; that there is no occasion to interfere on such findings by the High Court in an appeal under Section 260A of the Act. In support of this contention reliance is sought to be placed on the following decision :-
1. Asstt. CIT v. Vishwanath & Co. [2007] 292 ITR 225/161 Taxman 32 (Kar.)
3. Tirath Ram Gupta v. CIT [2008] 304 ITR 145/[2009] 177 Taxman 294 (Punj. & Har.)
23. Reliance is also placed on the decision of the Supreme Court in Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 to contend that sufficiency of reasons cannot be gone into in a case of re-opening of assessment under Section 147 of the Act, in terms of this decision.
24. Even having regard to the contention of the learned counsel for the assessee to the effect that initially notice not having mentioned the status of the assessee all further proceedings are vitiated, submission is that at the best it may amount to an irregularity and not an illegality as contended by the learned counsel for the assessee and in support of this proposition reliance is placed on the judgment of this court in the case of Vishwanath & Co. (supra).
25. We have bestowed our attention to the submissions made at the Bar and the contentions urged with the supporting decisions.
26. What is contended basically on behalf of the assessee is that the very re-opening of the assessment is bad and bringing to tax cash credits as income of the assessee, is also bad on settled legal principles. The basic undisputed facts were that the assessee had claimed the status of a firm and whether or not the notice mentioned it, the stand of the assessee is that it is a partnership firm and in income tax parlance a partnership firm is a person and an assessable entity at the relevant period and that is not in dispute. Insofar as the argument of application of mind or lack of it, regarding the discrepancy in the name of the assessee and therefore, the assessment proceedings is vitiated, is concerned, we find that the description is only in the name of the assessee firm and not as to, who is the firm. At any rate the wrong spelling assuming that to be so, in describing the name of the assessee has not caused any prejudice per se to the assessee as the assessee was quite aware of the proceedings that it was in respect of the very firm. In our considered view, it is difficult to assume, that either the wrong description of the name of the assessee and not indicating the status of the assessee as a firm has really worked to the prejudice of the assessee and at the best it being an irregularity, does not affect the further proceedings. Insofar as the re-opening aspect is concerned we cannot avoid noticing and even as recorded by the authorities below the re-opening of the assessment proceedings of the firm was because of the submission or explanation offered by one of its partner Rishabchand Bhansali, who claimed that an amount found in his books of account which was in turn advanced to some other person, was drawn by this partner from the account of the firm, is by none other than the partner of the very firm. A firm always acts through its partners, and therefore, there cannot be a dichotomy of the stand in the case of the individual partner being different from that of the firm. What the partners states whether he is a partner in the capacity of HUF or in his individual capacity, nevertheless it is on behalf of the firm, because only through this finding this aspect has been noticed by the authorities below also. It is in the wake of such a stand taken by the partner, there was an occasion for investigating the transactions of the firm, who had claimed the amount as its amount and which was the very version of the assessee and its partner.
27. Insofar as the recording of the reasons is concerned this has been thoroughly examined by the three authorities below and in the facts and circumstances of the case, it is accepted that a bona fide reason is recorded for re-opening. Though Sri Shankar, learned counsel submits that the records had been called for only to examine this aspect as to whether reasons recorded is right or it is otherwise. We cannot accept this submission for the reason that issue of notice has been proceeded by a follow up action taken by the assessing officer subsequent to the search of the premises of one of the partners and after recording the statements of some persons, who were available and claimed to be creditors. Ultimately the assessing officer was of the opinion that a firm, which had the capacity to lend an amount of Rs. 71,50,000/- that too, to one of its partners or others is reasonably presumed to have the taxable income and if the assessee had never disclosed its expenditure or otherwise earlier and in such circumstances, if the officer records that he has reason to believe that assessee had taxable income and a non-filing of the return is not merely suspicion and therefore in bringing to tax such amount by re-opening. We do not find, it can amount to a mere suspicion or a surmise as submitted by Sri Shankar, learned counsel.
28. As to whether the recording of reasons to believe constitutes a real reason or otherwise has to be culled out from the facts and circumstances of each case and in this regard, we cannot lose sight of the fact that information is provided in respect of the assessee by its own partner and while the assessee had never filed its returns not disclosing its expenditure and therefore, there was no record available with the revenue with respect to the assessee.
29. A return was being filed for the first time only after issue of notice under Section 148 of the Act, no doubt showing nil income in the return, but that is a matter to be examined for acceptance by the assessing authority who had proposed reopening and that the authorities below have concurrently opined that the recording of the reasons by the revenue was sufficient for the purpose of issue of notice under Section 145 of the Act. The judgment of the Supreme Court not only in the decision of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) but in other cases also wherein it is held that sufficiency cannot be gone into applies.
30. In the circumstances and on the basis of the findings recorded by the authorities follow, we are unable to accept the submission of the learned counsel for the appellant-assessee that there was no reason and it was only a suspicion based on which the re-opening has been made. In our considered opinion, until and unless the statutory provisions are mis-used or abused or invoked arbitrarily to victimize an assessee or the action is in a biased manner, interference is not warranted particularly, to render ineffective the statutory provisions. The very purpose of issuing notice under Section 148 of the Act is to bring to tax the income, which is otherwise suspicious assessment. Therefore, in the wake of the findings recorded by the authorities below, we are not very impressed that we can exercise appellate jurisdiction under Section 260-A of the Act to hold that the very reopening cannot be sustained.
31. Insofar as merits of the matter relating to bringing the amount to tax is concerned, this amount is an income brought to tax in the hands of the firm on the authorities finding the explanation offered being not acceptable.
32. The case of the assessee firm was not that credit entries were in dispute and though it is urged very strongly by Sri Shankar, learned counsel, that at least one or two of the creditors had independent income in their own capacity and that they were quite capable of lending such amounts etc., and the Department has not made good that the amount is actually not lent by such assessees, who had borrowed the amount. We are afraid this argument cannot be accepted for more than one reason. It is to be noticed that in the first instance, it is one of the partners, who had sought to explain that the amount in question was drawn by him from the account of the firm justifying that kind of lending by the partner of the firm in favour of some third parties and the source was attributed to the firm. The action taken against the firm was a follow-up action, as a result of search of the premises of the partner. If the version of the assessee partner is to be accepted then there is no choice for the revenue to proceed further as against the person, who has lent the money to the firm. The firm though had transactions had not indicated the income from its transactions but claiming that it had no income liable to tax was not further accepted by the authorities below.
33. We sitting in appeal under Section 260-A of the Act do not find it proper to examine the appeal for the purpose of finding as to whether explanation offered by the assessee firm should have been accepted by the authorities below.
The explanation was rejected and in the circumstances, we find that if the authorities had opined on the facts and circumstances that the re-opening was not bad in law and justified in the facts and circumstances, and to bringing to tax the cash credits of the assessee was also justified and finding recorded, which was examined by the authorities, we do not find occasion to interfere in respect of an order of this nature.
34. We also find that the arguments to the effect that the Department has not established through the factual position as against the stand taken by the assessee is arguments, which is principally based on the premises that the Department is expected to prove or produce material to counter the circumstances of the assessee. Assessment proceedings are not adversary proceedings in nature and it is not as though there is a lis between the assessee and the assessing authority. The assessing authority is the statutory functionary and is required to perform statutory duty. An order passed by an assessing authority if is erroneous on facts, there is scope for interference by the Tribunal and if it is erroneous on law, there is scope for interference even up to the High Court in an appeal. But it does not mean that the revenue having not proved certain position or not made good such position, the order renders itself to be bad in law.
35. There is no question of the revenue proving anything against the assessee, but it is the duty of the assessee for proving taxable income. Therefore, to pay corresponding tax is the statutory duty of the assessee and not because the assessing authority determines or quantifies the liability of the tax, the liability is fastened on the assessee and in this background. We find that if the authorities had occasion to examine the amount of Rs. 75,50,000/- which according to the authorities had not been properly accounted for, particularly, being in the nature of cash credits as claimed by the assessee and therefore, thought it fit to bring it to tax as the income earned during the relevant period, we do not find occasion to interfere in a matter of this nature and therefore dismiss the appeal.
SKJ IT-I : Manufacture - Process of bottling of LPG into smaller cylinders amounts to 'manufacture' so as to allow deduction under sections 80HH, 80-I/80-IA
IT-II : Dividends - Distribution of dividend is application of income and not expenditure laid out for earning income and, thus, same is not an allowable business expenditure
■■■
[2012] 26 taxmann.com 220 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'G'
Hindustan Petroleum Corpn. Ltd.
v.
Deputy Commissioner of Income-tax, Special Range 13, Mumbai*
VIJAY PAL RAO, JUDICIAL MEMBER
AND RAJENDRA, ACCOUNTANT MEMBER
IT APPEAL NOS. 2124, 5856 TO 5858 (MUM.) OF 1999
[ASSESSMENT YEARS 1992-93 TO 1995-96]
JULY 31, 2012
I. Section 80-IA, read with section 80HH, of the income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings - Assessment year 1992-93 - Whether process of bottling of LPG into smaller cylinders amounts to 'manufacture' and, thus, assessee's claim for deduction under sections 80HH and 80-I/80-IA in respect of said activity was to be allowed - Held, yes [Para 7.4] [In favour of assessee]
Circulars and Notifications: Notification No. S.O. 627(E), dated 4-8-1999.
II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1993-94 - Whether distribution of dividend is application of income and not an expenditure laid out for earning income and, therefore, assessee's claim for deduction under section 37(1) in respect of payment of dividend was to be rejected - Held, yes [Para 26] [In favour of revenue]
FACTS-I
Facts
• The assessee claimed deduction under sections 80HH, 80-I and 80-IA on LPG bottling plant.
• The Assessing Officer disallowed the claim of the assessee on the ground that the manufacturing of LPG took place in the refineries and not at bottling plant. Once LPG was manufactured in the refinery, for industrial and bulk users, it was sold in tanks and tankers; but for the domestic use, it was sent to bottling plants. The major activity carried out at bottling plant was refilling and bottling of the LPG into smaller cylinders. Accordingly, the Assessing Officer held that there was no manufacturing involved in the said bottling plant.
• The Commissioner (Appeals) confirmed said disallowance.
Assessee's contentions
• According to assessee, LPG cylinder was a different commercial product than the bulk LPG and, thus, various processes carried out to make LPG as a marketable commodity which was different from its original form, amounted to manufacture.
Revenue's contentions
• Revenue submitted that when there was no change in the chemical composition or other properties of the gas in the activity of filling the cylinder, then this activity could not amount to manufacture.
Issue involved
• Whether process of bottling of LPG into smaller cylinders amounted to 'manufacture' so as to allow assessee's claim for deduction under sections 80HH, 80-I/80-IA.
HELD-I
Activity of filling up cylinder with LPG
• There is no dispute that the LPG produced in the refinery cannot be directly supplied to the consumer for domestic use because of various reasons of handling, storage and safety. LPG bottling or filling the gas in the cylinder is not a simple activity and cannot be performed under normal conditions. This is a highly technical and complex activity which requires precise functions of technically expert persons or machines. [Para 6]
• Even prior to the process of filling the gas into cylinder, there are certain measures to ensure that the cylinder is entirely empty; without any air or other particles, dirt and grease or any other substance. In order to prepare the cylinder ready to fill up with the gas, the air inside the cylinder is removed by using vacuum pumps and then filled with a few grams of LPG. The cylinders will then be washed by medium pressure water jets to remove all the dirt and grease from the cylinder surface. The cylinders are then filled with LPG by automatic filling carousel. After filling the gas, the cylinder is checked for the correctness and to ensure that no cylinder is remained under filled or over filled. The cylinders are then sent for in-line test both for checking the valve bung leak and the body leaks. The defective cylinders are separated and sent for the valuation. All the good cylinders are then sent to hot air sealing unit where the cylinders are sealed with the PVC seal by hot crimping. [Para 6.1]
• Further, as per notification number 627 issued under section 80-IB, dated 4-8-1999, Gas distribution and bottling activities are treated as manufacture or producing industry. [Para 7.3]
• As per the Gas Cylinders Rule, 2004, filling of cylinder with the compressed gas including transfer of compressed gas from one cylinder to other cylinder is treated as manufacture. Under Excise Act, compressed natural gas marketing is treated as manufacture. Though the Assistant Commissioner Central Excise vide his decision order dated 23-10-1998 has held the bottling of LPG cylinder as manufacture; however, in the absence of the status of the finality of the said order one cannot lay much reliance on the same. Bottling Plant of LPG is an essential process for rendering the product marketable and useable for the end consumer. [Para 7.4]
Word 'Production' as used in sections 80HH, 80-I/80-IA
• It is to be noted that the term used in the sections 80HH, 80-I/80-IA is manufacturing or production. It is settled proposition of law, that the word 'production' as used in these sections has a wider connotation in comparison to the word 'manufacture'. Thus, every manufacture can be characterised as production; but every production need not amount to manufacture. The activity, which brings the commercially new product into existence, constitutes production. [Para 7.5]
• The process of bottling of LPG makes the LPG capable of being marketed and used by the individual consumers as a domestic kitchen fuel. As discussed earlier, the process by which the LPG is filled up in the cylinder makes it possible and viable commercial product. [Para 7.6]
• In view of the above it has to be held that the bottling plant wherein the LPG is filled in the cylinders for domestic and non-domestic kitchen use involves various specialized process and therefore, it is an activity of manufacture/production. Accordingly, the assessee's claim for deduction has to be allowed. [Para 7.7]
EDITOR'S NOTE
• Following the order passed by the Tribunal in Hindustan Petroleum Ltd. v. Dy. CIT [2005] 96 ITD 186/[2004] 141 Taxman 33 (Mum.) (Mag.), the Assessing Officer was to be directed to allow deduction for entire amount of excise duty and custom duty paid by the assessee irrespective of the excise duty and custom duty included in the valuation of assessee's closing stock at the end of the accounting year. Case Review : Hindustan Petroleum Corpn. Ltd. v. Dy. CIT [2005] 96 ITD 186/[2004] 141 Taxman 33 (Mum.) (Mag.) (para 14) followed. [Para 14]
• Following the order passed by the Tribunal in assessee's own case relating to assessment year 1989-90, assessee's claim for expenditure on 20 point programme was to be allowed.[Para 17]
• Where the assessee claimed 50 per cent of the expenditure incurred towards entertainment as attributable to the staff of the assessee on estimate basis, which was reduced by the Assessing Officer to 25 per cent. In the absence of any material and details regarding the exact number of staff and guest on various occasions, there was no reason to interfere with the orders of the Assessing Officer on this issue. [Para 21]
CASES REFERRED TO
State of Gujarat v. Kosan Gas Co. [1992] 87 STC 236 (Guj.) (para 4), Hindustan Petroleum Corpn. Ltd. v. MSDCEL [Writ Petition No. 9455 of 2011, dated 19-1-2012] (para 5), Berger Paints India Ltd. v. CIT [2004] 266 ITR 99/135 Taxman 586 (SC) (para 12),Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240/27 Taxman 462 (Guj.) (para 12) and Hindustan Petroleum Corpn. Ltd. v. Dy. CIT [2005] 96 ITD 186/[2004] 141 Taxman 33 (Mum.) (Mag.) (para 13).
J.D. Mistry for the Appellant. Pavan Ved for the Respondent.
ORDER
Vijay Pal Rao, Judicial Member - These 4 appeals by the assessee are directed against separate orders of CIT(A) for the assessment year 1992-93 to 1995-96 respectively.
2. For the assessment year 1992-93 the assessee has raised the following concise grounds:
1. Deduction u/s. 8OHH/801/801A- LPG Bottling Plant - Rs. 6,08,21,000/-
On the Facts and in the Circumstances of the case and in law, the CIT(A) erred in confirming the disallowance of Rs. 6,08,21,000/- being the claim for deduction u/s 8OHH, 801/801A towards LPG Bottling Plant.
3. Ground no. 1 is regarding disallowance of deduction u/s 80HH, 80I/80IA towards LPG Bottling Plant, which is common in all the 4 years.
4. The assessee claimed that deduction under section 80 HH, 80I & 80 on LPG bottling plant. The Assessing Officer was of the view that bottling plant on which assessee is claiming deduction under section 80HH and 80IA/80I are not eligible for such deduction as no manufacturing activities were carried out therein. Relying on the decision of the Gujarat High Court in case of State of Gujarat v.Kosan Gas Co. [1992] 87 STC 236, the Assessing Officer disallowed the claim of the assessee on the ground that the manufacturing of LPG takes place in the refineries and not at bottling plant. Once LPG is manufactured in the refinery, for industrial and bulk users, it is sold in tanks and tankers; but for the domestic use, it is sent to bottling plants. The major activity carried out at bottling plant is refilling and bottling of the LPG into smaller cylinders. Accordingly, the Assessing Officer held that there is no manufacturing involved in the said bottling plant.
4.1 On appeal, the CIT(A) confirmed the disallowance made by the Assessing Officer on identical reasons.
5. Before us, the learned senior counsel for the assessee has explained the process of bulk LPG unloading, storage, handling and filling in cylinders. He has further contended that the Hon'ble jurisdictional High Court, in the case of the assessee, while deciding the dispute of electricity tariff charged by the Maharashtra State Electricity Distribution Co Ltd (MSEDCL) vide decision dated 19.1.2012 in Writ Petition No. 9455 of 2011 in case of Hindustan Petroleum Corpn. Ltd v. MSDCEL has held that the activity of a gas bottling plant is a manufacturing activity. He has pointed out that the Hon'ble jurisdictional High Court followed the decision of Hon'ble Gujarat High Court in case of BPCL v. State of Gujarat wherein an identical issue of electricity tariff was involved. The learned senior counsel has further submitted that in pursuant to the decision of honourable jurisdictional High Court, Electricity Ombudsman has decided the issue vide order dated 26th of March 2012 and held that the assessee is conducting manufacturing activity in its bottling plant situated at Hazarwadi, district Sangli.
5.1 The ld senior counsel then referred the notification number S.O.627(E) issued under section 80 IB(4) dated 4/8/1999 and submitted that at serial number 13 of the said notification, gas based intermediate products industry manufacturing or producing includes gas distribution and bottling. Thus, the ld Sr counsel has submitted that as per the said notification, gas distribution and bottling has been treated as manufacturing or producing industry.
5.2 The ld Sr counsel has also referred the Gas Cylinders Rules 2004 and submitted that as per rule 2 (xxxii), the definition of 'manufacture of gas' means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to another cylinder.
5.3 The ld Sr counsel has thus pointed out that the honourable Gujarat High Court has considered the cylinders rules while deciding the issue in the case of Bharat Petroleum Corpn. Ltd. v. State of Gujarat, which has been followed by Hon'ble jurisdictional High Court in the case of the assessee while deciding the dispute of levy of tariff on the basis of the category of the activity of the assessee.
5.4 The ld Sr counsel, then referred Chapter 27 of Central Excise Tariff Act and submitted that the process of compression of natural gas for the purpose of marketing it as compressed natural gas for use as a fuel or any other purpose shall amount to manufacture. The LPG is also compressed for the purpose of marketing and that can be used and therefore, falls under the term manufacture.
5.5 He has further submitted that in the case of BPCL, the Asstt. Commissioner of Central Excise vide his order dated 23/10/1998 held that the change from bulk to smaller cylinders with regulator amounts to manufacture.
5.6 The learned senior counsel has referred the Bombay Sales Tax Act and submitted that as per schedule C II, sales of petroleum products including liquefied petroleum gas manufactured or produced by the any of the companies or corporations are exempt. The ld. Sr. counsel has thus submitted that LPG cylinder is a different commercial product than the bulk LPG. He has contended that the decision of honourable Gujarat High Court relied upon by the Assessing Officer as well as CIT(A) has been distinguished by the honourable jurisdictional High Court while deciding the case of the assessee on the issue of electricity tariff. Thus, the ld. Sr. counsel has submitted that the various process carried out with respect to the commodity as a marketable commodity which is different from its original and therefore, the process has taken place to transform the commodity into a commercially different commodity.
5.7 On the other hand, the learned CIT-D.R. has submitted that the Cylinders Rules 2004 framed under Explosives Act came into force from the year 2004 are not relevant and applicable for the assessment year under consideration. He has further contended that input is gas and output is also gas and there is no change in the main commodity. Filling the gas cylinder is only a mode of supply and marketing and the property of gas remains the same. The ld DR has further contended that the odour which is mixed in gas only for safety purpose and in compliance of safety rules therefore, mixing of odour does not change any property of the original comedy.
5.8 The learned D.R. has referred the definition of manufacture under section 2 (29BA) and submitted that the manufacturing means that change in a non-living physical object or article or thing, resulting in transformation of the object or article or thing into a new and distinct object or article or thing; bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.
5.9 The ld DR has thus, submitted that when there is no change in the chemical composition or other properties of the gas in the activity of filling the cylinder, then this activity could not amount to manufacture. He has further submitted that the notification under section 80 IB(4) has also been issued on 4.8.99, which is subsequent to the assessment years under consideration. He has further submitted that the notification was issued to give benefit of the activities, which are otherwise not eligible for deduction. The learned DR has further contended that the definition under Central Excise Act is a deeming meaning of manufacture in a similar manner as it is deemed income under the Income Tax Act. Therefore, the meaning given under the Central Excise Act cannot be adopted under the Income Tax Act. He has further submitted that the decision of honourable jurisdictional High Court is under electricity tariff Act which is a State Act and cannot overrule the Central Act. The value addition is an important factor for deciding the activity being manufacturing. There is no value addition is an important factor for deciding the activity as manufacture. There is no value addition in the activity of filling the gas in the cylinder; therefore, the same cannot be treated as manufacture. The learned D.R. has relied upon the orders of the authorities below.
5.10 In the rebuttal, the Sr counsel has submitted that the Hon'ble High Court has relied upon the Gas Cylinders Rules as notified under the Explosives Act 1884; therefore, when the Hon'ble High Court has considered the same rules while deciding the question of nature of activity, then the same has to be followed.
6. We have considered the rival submissions as well as relevant material on record. Liquefied Petroleum Gas (in short LPG) is one of the petroleum fuels; however, we are concerned with LPG used as domestic and non-domestic fuel, particularly for kitchen use. There is no dispute that the LPG is produced in the refinery cannot be directly supplied to the consumer for domestic use because of various reasons of handling, storage and safety. LPG bottling or filling the gas in the cylinder is not a simple activity and cannot be performed under normal conditions. This is a highly technical and complex activity which requires precise functions of technically expert persons or machines.
6.1 Even prior to the process of filling the gas into cylinder, there are certain measures to ensure that the cylinder is entirely empty; without any air or other particles, dirt and grease or any other substance. In order to prepare the cylinder ready to fill up with the gas, the air inside the cylinder is removed by using vacuum pumps and then filled with a few grams of LPG The cylinders will then be washed by medium pressure water jets to remove all the dirt and grease from the cylinder surface. The cylinders are then filled with LPG by automatic filling carousel. After filling the gas, the cylinder is checked for the correctness and to ensure that no cylinder is remained under filled or over filled. The cylinders are then sent for in-line test bath for checking the valve bung leak and the body leaks. The defective cylinders are separated and sent for the valuation. All the good cylinders are then sent to hot air sealing unit where the cylinders are sealed with the PVC seal by hot crimping.
7. The honourable High Court while passing the decision in case of Hindustan Petroleum Corpn. Ltd. (supra) has observed in para 18 to 24 as under:
"18. In so far as the other aspect whether the activity of running a gas bottling plant is a Commercial activity or a manufacture activity, prima facie, I find that neither the CGRF nor the Ombudsman have considered the relevant provisions of the Explosives Act, 1884 and the Gas Cylinder Rules 2004. The Petitioner has elaborately explained before the Authority below that the process of the industry is not simple refilling LPG Cylinder. It is explained that the activity comprises of LPG suction, vapour distribution, de-gassification, compression of LPG vapour, external and internal cleaning, hydro pressure test, refilling, sealing, quality control etc. Prima facie, the aforesaid activity will contribute a "Manufacturing Activity".
19. Section 4 (h) of the Explosives Act, 1884 defines the word "manufacture" and the same reads thus:
(i) "manufacture" in relation to an explosives includes the process of-
(1) dividing the explosive into its component parts or otherwise breaking up or unmaking the explosives, or making fit for use any damaged explosive; and
(2) re-making, altering or repairing the explosive"
20. In exercise of the power conferred by Sections 5 and 7 of the Explosives Act, 1884, the Central Government has framed the Gas Cylinder Rules, 2004. Rule 2 (XXXIII) defines the word "manufacture of gas" which reads thus:"(xxxiii) "manufacture of gas" means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder".
21. The Petitioner had relied upon various Judgments before the Electricity Ombudsman, but unfortunately those Judgments have not been discussed and considered. The Petitioner had relied upon the Judgment in the case of Bharat Petroleum Corporation Ltdv. State of Gujarat & Others wherein Hindustan Petroleum Corporation Limited was also a party and the said Judgment is in respect of the Gas Bottling Plant. Special Civil Application No. 6220 of 2001 was filed by the Hindustan Petroleum Corporation Limited. In the said Judgment, the question whether the activity of a Gas Bottling Plant is the manufacturing activity or not, was specifically raised. There the High Court had considered the provisions of The Indian Explosives Act, 1884 and the Gas Cylinder Rules 1981 (Rules which were in force prior to the making of Gas Cylinder Rules, 2004). The High Court has clearly held that the activity of a Gas Bottling Plant is a manufacturing activity. I respectfully agree with the aforesaid Judgment of the Gujarat High Court.
22. Unfortunately, the learned Ombudsman has not considered all these Judgments and has dismissed the representation of the Petitioner. Hence, on the second point, as to whether the Petitioner carries on a manufacturing activity when it is running its Gas Bottling Plant, the matter deserves to be remanded to the Electricity Ombudsman.
23. On remand only, the limited issue as to whether the Petitioner is conducting manufacturing activity or not, will have to be considered and gone into by the Electricity Ombudsman. I have already held that the grievances made by the Petitioner are within limitation.
24. Hence, I pass the following order: Rule is made partly absolute by setting aside the impugned Judgment and Order dated 17th August, 2011 passed by the Electricity Ombudsman in Representation No. 82 of 2011 and the matter is remanded back to the Electricity Ombudsman for a de-novo hearing of the issue as to whether the activity of Gas Bottling Plant is a manufacturing activity or not. In the light of the observation made in paragraphs 17 and 20, the Ombudsman shall apply his mind to the Provisions of the definition of the word "manufacture" under the Explosives Act, 1884 and the term "manufacture of Gas" under the Gas Cylinder Rules, 2004 as also the various Judgments of the different High Courts who have occasion to decide the similar issues. Rule made partly absolute with no order as to costs."
7.1 It is clear that the honourable High Court has made certain observations with respect to the activities of bottling plant of the assessee which amounts to manufacture. In pursuant to the decision of honourable High Court, the electricity ombudsman has it held in para 8 & 9 in the order dated 26th March 2012 as under it:
"8. It is clear from the above that the Gas Cylinder Rules, 2004, framed Linder the Explosives Act, 1884, came into force from the year, 2004. Rule 2 (xxxii) of the said Rules define "manufacture of gas" as filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder. The judgment of honorable division bench of Gujarat High Court in the case of the State of Gujarat and Kosan Gas Company was passed much before the said Gas Cylinder Rules, 2004, came into force. In the case of Bharat Petroleum Corporation Ltd versus State of Gujarat & 3 - Respondent(s) decided on 6th May. 2010 , the honorable High Court of Gujarat held:
"16. having heard the learned advocates appearing for the parties and having considered their rival submissions in light of the statutory provisions and decided case law on the subject and having judiciously examined the decisions/orders under challenge, the Court is of the view that the respondent authorities are not justified in collecting/adjusting and/or enforcing the recovery of electricity duty at the rate of 100% by reclassifying the electrical energy consumed by the petitioner for their activities. The Court has at length discussed this issue in Special (Civil Application No. 5400 of 2001 decided today and for the reasons stated and findings recorded therein, the petitions deserve to be allowed and are accordingly allowed.
17. A part from the said reasoning, one more point which is in favour of the petitioners is that as per the definition of industrial undertaking given in Section 2(bh) of the Act, the petitioners' activities foil within the ambit of this definition. The Government of India in exercise of power conferred by Sections 5 and 7 of the Indian Explosives Act, l884 has made Rules known as Gas Cylinder Rules, 1981. The Rule-2, subsequently defines the expression manufacturing of gas which means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder. Thus, filling of LPG Gas cylinder is evidently a process of manufacture and, therefore. the petitioners are Industrial Undertakings consuming high tension energy as provided by Section -3(1) and Clause 5 (a) of the Schedule to the Act and as such the respondents had initially correctly levied duty at 20% of the consumption charges."
9. in pursuance of the definition of the words "manufacture of gas" stipulated in the Gas cylinder Rules, 2004 and respectfully agreeing with the above said judgment, passed on 6th May. 20 10, by the honorable High Court of Gujarat, I pass the following order:
The Appellant is conducting manufacturing activity at its Gas Bottling plant, situated at Hazarwadi, district Sangli."
7.2 The honourable Jurisdictional High Court has relied upon the decision of Hon'ble Gujarat High Court in case of BPCL v. State of Gujarat wherein it was held in paras number 16 to 18 as under:
"16. Having heard the learned advocates appearing for the parties and having considered their rival submissions in light of the statutory provisions and decided case law on the subject and having judiciously examined the decisions/orders under challenge, the Court is of the view that the respondent authorities are not justified in collecting/adjusting and/or enforcing the recovery of electricity duty at the rate of 60% by reclassifying the electrical energy consumed by the petitioners for their activities. The Court has at length discussed this issue in Special Civil Application No.5400 of 2001 decided today and for the reasons stated and findings recorded therein, the petitions deserve to be allowed and are accordingly allowed.
17. Apart from the said reasoning, one more point which is in favour of the petitioners is that as per the definition of industrial undertaking given in Section 2(bb) of the Act, the petitioners' activities fall within the ambit of this definition. The Government of India in exercise of power conferred by Sections 5 and 7 of the Indian Explosives Act, 1884 has made Rules known as Gas Cylinder Rules, 1981. The Rule-2, Sub-clause-xxv defines the expression 'manufacturing of gas' which means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder. Thus, filling of LPG Gas Cylinder is evidently a process of manufacture and, therefore, the petitioners are Industrial Undertakings consuming high tension energy as provided by Section-3(1) and Clause 5(a) of the Schedule to the Act and as such the respondents had initially correctly levied duty at 20% of the consumption charges.
18. The petitioners' claim is further supported by the decision of this Court in the case of Vadilal Gas Pvt. Ltd. v. State of Gujarat(Special Civil Application No. 9691 of 2000 decided on 25.11.2009) wherein the Court after considering the nature of the process undertaken by the petitioner took the view that the petitioner unit is a manufacturing unit within the definition of the Act and hence the petitioners require to pay only 10% duty charges and not 60% charges as demanded by the respondent."
7.3 Further, as per notification number 627 issued under section 80 IB dated 4.8.99, Gas distribution and bottling activities, being treated as manufacture or producing industry. As considered by the honourable Gujarat High Court as well as hon'ble jurisdictional High Court, the Gas cylinder Rule 2004 issued under Explosive Act 1884 defined manufacturing of gas under section 2(xxxii) as under:
"manufacture of gas' means filling of a cylinder with any compressed gas and also includes transfer of compressed gas from one cylinder to any other cylinder."
7.4 As per the Gas Cylinders Rule 2004, filling of cylinder with the compressed gas including transfer of compressed gas from one cylinder to other cylinder is treated as manufacture. Under Excise Act, compressed natural gas marketing is treated as manufacture. Though the Assistant Commissioner Central Excise vide his decision order dated 23rd October 1998 has held the bottling of LPG cylinder as manufacture; however, in the absence of the status of the finality of the said order, we cannot lay much reliance on the same. Bottling Plant of LPG is an essential process for rendering the product marketable and useable for the end consumer.
7.5 It is to be noted that the term used in the section 80HH, 80I/80IA is manufacturing or production. It is settled proposition of law, as laid down by the honourable Supreme Court that the word 'production' as used in these sections has a wider connotation in compare to the word 'manufacture'. Thus, every manufacture characterised as production; but every production need not amount to manufacture. Even the activity, which is something which brings the commercially new product into existence, then the activity constitutes production.
7.6 The case in hand, the process of bottling of LPG makes the LPG capable of being marketed and used by the individual consumers as a domestic kitchen fuel. As we have discussed the process by which the LPG is filled up in the cylinder makes it possible and viable commercial product.
8. In view of the above discussion as well as the decisions has relied upon by the Ld Sr counsel, we hold that the bottling plant wherein the LPG is filled in the cylinders for domestic and non-domestic kitchen use involves various specialised process and therefore, it is an activity of manufacture/production. Accordingly, this issue is decided in favour of the assessee
9. During the course of hearing the Ld Sr counsel has submitted that the assessee does not press ground number 1 for the assessment year 1993-94 which reads as under:
"The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 1,40,87,339/- towards right to use technical know-how u/s 37(1) and allowing only 1/6th u/s 35AB."
9.1 The learned Senior counsel has submitted that for the assessment year 1993-94 the Assessing Officer disallowed the claim regarding right to use technical know-how under section 37(1) and also denied the claim for 1/6th under section 35AB on the ground that the assessee is in appeals. Thus, the learned senior counsel has submitted that if the claim under section 35AB is allowed for 1/6th of the amount, then the assessee does not press the allowance of the claim at 100% under section 37(1).
9.2 The learned A.R. has no objection, if the ground number 1 for the assessment year 1993-94 is dismissed as not pressed.
10. Accordingly, we dismiss the ground number 1 for the assessment year 1993-94 being not pressed and the Assessing Officer is directed to allow the claim under section 35AB to the extent of 1/6th of the amount for the assessment year 1993-94, 1994-95 and 1995-96 as it was allowed in the first year.
11. The next ground raised by the assessee for the assessment year 1993-94, 1994-95 and 1995-96 as under:
"On the facts and in the circumstances of the case and in law Commissioner of Income Tax (Appeals) erred in disallowing the appellant's claim of excise/custom duty paid of Rs. 7,40,51,245/- and included in closing inventory u/s 43B."
11.1 The assessee had claimed deduction under section 43 B in respect of excise and custom duty paid during the year and included in the value of closing inventory. The Assessing Officer disallowed the claim of the assessee and observed that for the purpose of valuation of closing stock, all cost is attributable to the same including excise duty are to be considered.
11.2 On appeal the CIT(A) has confirmed the disallowance made by the Assessing Officer on the ground that the similar disallowance was made for the assessment year 1984-85 have been confirmed at by this Tribunal.
12. Before us, the senior counsel has submitted that the issue has been considered and decided by this Tribunal in assessee's own case for the assessment year 1988-89, 89-98 followed by the decision for the assessment year 1990-91 and 1991-92. Has further submitted that this issue is covered by the decision of Hon'ble Supreme Court in the case of Berger Paints India Ltd. v. CIT [2004] 266 ITR 99/135 Taxman 586 as well as decision of honourable Gujarat High Court in case of Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240/27 Taxman 462.
12.1 On the other hand the learned DR has relied upon the orders of authorities below.
13. We have considered the rival submissions as well as relevant material on the court. At the outset, we note that for the assessment year 1989-90 in order reported in Hindustan Petroleum Corpn. Ltd. v. Dy. CIT [2005] 96 ITD 186/[2004] 141 Taxman 3 (Mum.) (Mag.) this Tribunal has considered and decided it this issue in para 12 and 13 as under:
12. In the second ground of appeal, the assessee is aggrieved that the CIT(A) erred in confirming the partial disallowance of excise/custom duty paid during the year and included in the closing inventory under section 43B, thereby ignoring the ratio of Gujarat High Court in Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240.
13. Learned representative fairly agree that the issue is now covered, in favour of the assessee, by Hon'ble Supreme Court's judgment in the case of Berger Paints India Ltd. v. CIT [2004] 266 HR 99. Respectfully following the same, we uphold the contention of the assessee and direct the Assessing Officer to allow deduction for entire amount of excise duty and custom duty paid by the assessee irrespective of the excise duty and custom duty included in the valuation of assessee's closing stock at the end of the accounting year. The assessee gets relief accordingly.
14. Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue.
15. The next ground raised by the assessee for the assessment year 1993-94, 1994-95 and 1995-96 is regarding disallowance of expenditure on 20 point programme. We reproduce the ground number 2 for the assessment year 1993-94 as under:
"On the facts and in the circumstances of the case and in law, Commissioner of Income Tax (Appeals) erred in disallowing the expenditure incurred u/s 37(1) toward 20 point programme amounting to Rs. 41,86,000/-"
16. We have heard the ld Sr counsel as well as the ld DR and considered the relevant material on record. At the outset, we note that this issue has been considered and decided by this Tribunal in assessee's own case for the assessment year at 1989-90 in paras 7 to 10 as under:
7. We find that as held by Hon'ble Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836, while 'the basic requirements for invoking sections 37(1) and 80G are quite different', 'but nonetheless the two sections are not mutually exclusive'. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because an expenditure is in the nature of donation, or, to use the words of the CIT(A), 'promoted by altruistic motives', it does not cease to be an expenditure deductible under section 37(1). InMysore Kirloskar Ltd.'s case, Their Lordships have observed that even if the contributions by the assessee is in the forms of donations, but if it could be termed as expenditure of the category falling in section 37(1), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be defined. What is material in this context is whether or not the expenditure in question was necessitated by business considerations or not. Once is found that the expenditure was dictated by commercial expediencies, the deduction under section 37(1) cannot be declined. As to what should be relevant for examining this aspect of the matter, we may only refer to the observations of Hon'ble Supreme Court in the case of Sri Venkata Satyanaráyna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101:
... any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in the benefit to the assessee's business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause' or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of assessee's business.
8. In the case of CIT v. Madras Refineries Ltd. [2004] 266 ITR 170, Hon'ble Madras High Court has upheld deductibility of the amount spent by the assessee even on bringing drinking water to locality and in aiding local school. While doing so, Their Lordships observed as follows:
The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the locality in which business is located in particular. Being a good corporate citizen brings goodwill of the local community as also with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill.
9. Let us now take a look at the undisputed facts of this case. The assessee is a company owned by the Government of India and working under the control and directions of the Government of India. As the statement of facts clearly sets out, the expenditure on 20-Point Programmes was incurred in view of specific directions of the Government of India. This factual aspect is not even disputed or challenged by the Revenue at any stage. It cannot but be in the business interest of the assessee company to abide by the directions of the Government of India which also owns the assessee-company. In any event, as observed by the Hon'ble Madras High Court in Madras Refineries Ltd.'s case, monies spent by the assessee as a good corporate citizen and to earn the goodwill of the society help creating an atmosphere in which the business can succeed in a greater measure with the help of such goodwill. The monies so spent therefore are required to be treated as business expenditure eligible for deduction under section 37(1) of the Act. What is the expenditure for the implementation of 20-point plant after all? It !solely for the welfare of the oppressed classes of Society, for which even the Constitution of India sanctions positive discrimination, and for contribution to all around development of villages, which has always been the central theme of Government's development initiatives. An expenditure of such a nature cannot but be, to use the words employed by the Hon'ble Madras High Court in Madras Refineries Ltd.'s case, 'a concrete expression of care and concern for the society at large' and an expenditure to discharge the responsibilities of a 'good corporate citizen which brings goodwill of with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill'.
10. Turning to Revenue's stand that these expenses are not wholly and exclusively for the purpose of business of the assessee-company but, on the contrary, these expenses are voluntarily incurred by the company for the benefit of non-employees, and as such the incurring of such expenditure must be construed as application of income rather than expenditure to earn income, we may only quote a passage from the judgment of House of Lords in the case of Atherton v. British Insulated & Heisbey Cables Ltd.[1925] 10 Tax Cases 155, referred to with approval by the Hon'ble Supreme Court in the case of CIT v. Chandulal Keshavlal & Co. [1960] 8 ITR 601, which reads as follows:
"It was made clear in the above cited cases of Usher's Wilshire Brewery v. Bruce and Smith v. Incorporated Council of Law Reporting 1914 (6 Tax Cases 477) that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of the business may yet be expended wholly and exclusively for the purpose of the trade.
It will, therefore, be clear that even if an expense is incurred voluntarily, it may still be construed as 'wholly and exclusively'. Just because the expenses are voluntary in nature and are not forced on the assessee by a statutory obligation, these expenses cannot cease to be a business expenditure. Keeping all these factors in mind, as also entirety of the case, we are not inclined to sustain the disallowance of Rs. 10,55,648 as expenditure incurred on implementation 20-Point Programrnes. We are, therefore, of the considered view that the authorities below indeed erred in law in declining deduction of expenses incurred on 20-Point Programmes which was, beyond dispute or controversy, at the instance of the Government, and was to discharge the assessee's obligations towards society and as a responsible corporate citizen.
17. Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue.
18. The next ground raised by the assessee for the assessment year 1993-94 is ground number 4 as under:
"Commissioner of Income Tax (Appeals) erred in allowing only 25% as against the appellants claim of 50% towards entertainment expenses towards employees accompanying the guests."
19. Out of total expenditure incurred by the assessee on entertainment, the assessee claimed that its staff has participated in these occasions and accordingly attributed to 50% of expenditure so incurred on its staff. Thus, the assessee disallowed 50% towards entertainment u/s 37(2) of the income tax act. The Assessing Officer observed that in any party, the host and staff can't equal to the numbers of guest and hence as against 50% of the said expenditure, only 25% allocated to its employees. Accordingly, the Assessing Officer disallowed the entertainment expenditure under section 37(2) to the extent of 75% amounting to Rs. 1,69,546/- and allowed only Rs. 58,182/-.
19.1 On appeal the Commissioner of Income Tax (Appeals) has confirmed the disallowance made by the Assessing Officer on similar grounds.
20. We have heard the learned Sr counsel as well as the learned D.R. and carefully considered the relevant material on record. The assessee has claimed 50% of the expenditure incurred towards entertainment as attributable to the staff of the assessee on estimate basis, which was reduced by the Assessing Officer to 25%.
21. In the absence of any material and details regarding the exact number of staff and guest on these occasions, we do not find any reason to interfere with the orders of the lower authorities on this issue. Accordingly, we confirmed the disallowance made by the authorities below.
22. The assessee has also raised additional grounds as under:
"1. Commissioner of Income Tax (Appeals) failed to appreciate that the mandatory jurisdictional conditions precedent to reopening of the assessment u/s 147/148 of the IT Act were not satisfied in the present case and hence the reassessment was bad in law andvoid-ab-initio."
2. Claim for Dividend paid Rs. 2553.60 lakhs as allowable business and revenue expenditure:-
The Appellants have paid an amount of Rs. 2553.60 lakhs as Dividend for Financial Year 1992-93 (A. Y. 1993-94) Appellants submit that the Company and its shareholders are different persons and hence payment of Dividend is I in fact a payment to its shareholders and not to itself. It is settled by several judgments of the Supreme Court that even when 100% shares are held by GOI, (100% Government Company) the company is not the Government or a Government department but is a separate corporate legal entity. There is no joint Ownership between the Company and its shareholders and the company is a separate Corporate Legal Entity. Dividend once declared has to be paid to. the shareholders and even if it remains unclaimed it has to be deposited in separate account form which shareholders can claim. Capital raised from shareholders is used for the purpose of business and Dividend is paid to maintain the goodwill and to service the capital already raised and not to create any new capital base or capital asset. Therefore Dividend is a revenue expenditure and not a capital expenditure."
23. The additional ground raised against the validity of reopening is involved only for the assessment year 1992-93 and 1993-94. The additional ground regarding the dividend paid as allowable business expenditure is raised for all the 4 years.
24. At the time of hearing on the Ld Senior counsel has submitted that the assessee does not pressed the additional ground regarding validity of reopening. Accordingly, we dismiss the additional ground regarding validity of reopening of assessment.
25. As regards the additional ground in respect of dividend paid by the assessee claimed as business expenditure.
26. We have heard ld Sr counsel as well as the learned D.R. and considered the relevant material on record. The distribution and payment of dividend is application of income and not an expenditure laid out for earning the income or incurred wholly and exclusively for the purpose of business of the assessee. Accordingly, we do not find any merit in the additional ground raised by the assessee claiming that dividend paid as the business is business expenditure. Hence the same is dismissed.
27. In the result, the appeals filed by the assessee are partly allowed.
ST : In case of a co-owned property, where all assessee co-owners rent out such property separately to a person, prima facie, rent received by each such co-owner is to be considered separately for threshold exemption of Rs. 10 lakhs
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[2012] 26 taxmann.com 339 (Ahmedabad - CESTAT)
CESTAT, AHMEDABAD BENCH
Smt. K D Chaudhary
v.
Commissioner of Service tax, Ahmedabad*
M.V. RAVINDRAN, JUDICIAL MEMBER
AND B.S.V. MURTHY, TECHNICAL MEMBER
ORDER NOS. S/1833-1835/WZB/AHD/2012
APPLICATION NOS. ST/S/ 442 TO 444 OF 2012
APPEAL NOS. ST/185 TO 187 OF 2012
SEPTEMBER 3, 2012
Section 65(90a) of the Finance Act, 1994 - Renting of Immovable Property - Stay Order - Renting of Immovable Property - Assessees, being co-owners of a building, rented it out - Tenant was paying rent through different cheques separately to all such co-owners - Receipts of every co-owner were less than Rs. 10 lakhs - Assessees claimed small service provider exemption under Notification No. 6/2005-ST - HELD : If all assessees were considered as provider of service individually, their aggregate value did not exceed threshold exemption limit - Stay granted [Para 6] [In favour of assessee]
Circulars and Notifications : Notification Nos. 6/2005-ST, dated 1-3-2005 and 8/2008-ST, dated 1-3-2008
EDITOR'S NOTE
• A property may be co-owned by more than one person, in which case, each such person has the right to rent or not-rent his portion.
• In case such a co-owned property is rented, each person is entitled to receive rent in his own right and if such rent is up to Rs. 10 lakhs, then, the same is eligible for small service provider's exemption.
• Co-owners v. AOP : Though there is no quarrel to the above proposition, the larger question is whether in such cases, each such co-owner is to be regarded as a separate person or they are to be regarded as an Association of Persons. If they are regarded as association of persons, then, exemption shall not be available separately. This shall depend upon the facts and circumstances of each case.
P.G. Mehta for the Appellant. P.R. Meena for the Respondent.
ORDER
M.V. Ravindran, Judicial Member - All these three applications are filed against a common order in appeal for waiver of pre-deposit of amounts of service tax liability of Rs.51,640 /- confirmed against each appellant, interest thereof and penalties under Section 76, 77 and 78 of Finance Act, 1994.
2. Heard both sides and perused the record.
3. The issue involved in this case is regarding service tax liability on the above mentioned individuals as a provider of service under the category of renting out of immovable property.
4. Learned counsel on behalf of the appellants would submit that all the above individuals are co-owner of a particular building and have rented out the premises to M/s. Indian Overseas Bank at a monthly rent of Rs.96,415/-, who issues different cheques to all the above three appellants as they are co-owners. It is his submission that the amount received by the individuals would be within the threshold limit of SSI exemption as granted by Notification No.6/2005-ST dated 01.03.2005 and amended vide Notification No. 08/2008-ST dated 01.3.2008. It is his submission that the Revenue has considered the amounts received by all of the applicants as collectively and seeking to charge the service tax liability individually on the persons.
5. Learned Departmental Representative on the other hand would submit that the property involved in this case is jointly owned by all the persons and the said property is being rented out and hence there is service of renting out of an immovable property. It his submission that for individual purposes, and for the purpose of benefit of individual co-owners, the appellants sought the payment individually. It is his submission that the department is correct in assessing the service tax liability after considering the amount collectively received by the individual appellant.
6. After considering the submissions made by both sides, we find that benefit of SSI exemption Notification No.6/2005-ST dated 01.3.2005 as amended vide Notification No.8/2008-ST dated 01.3.2008, grants the benefit of exemption of service tax per year, provided that the assessee has not crossed the threshold limit of rupees ten lakhs in the preceding financial year. On perusal of the said notification, we find that the said notification talks about the aggregate value of the taxable services rendered, should be considered for the purpose of exemption and in this case if individually all the appellants be considered as provider of such service, their aggregate value does not exceed the threshold limit. Prima-facie, we find that the appellants have made out a case for waiver of pre-deposit of amounts involved. Accordingly, the applications for waiver of pre-deposit of amounts are allowed and recoveries thereof stayed till disposal of appeals.
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Sent: Wednesday, 31 October 2012 12:49 AM
Subject: RBI Report on Monetary Policy
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To: Kanigalla <kanigalla@hotmail.com>
Sent: Wednesday, 31 October 2012 12:49 AM
Subject: RBI Report on Monetary Policy
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