IT : Where Assessing Officer in order of penalty did not come to a clear finding regarding penalty being imposed on concealment of income or on furnishing inaccurate particulars of income, Tribunal was justified in setting aside impugned penalty order
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[2013] 34 taxmann.com 65 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax-I
v.
Jyoti Ltd.*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NOS. 341 & 342 OF 2013
APRIL 25, 2013
Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income [Satisfaction of Assessing Officer] - In course of assessments Assessing Officer disallowed assessee's claim of payment of commission - Such disallowance was made on ground that assessee could not even obtain confirmation from commission recipient - Assessing Officer also passed a penalty order under section 271(1)(c) - Tribunal set aside penalty order holding that, in order of penalty, Assessing Officer had not given a clear finding whether penalty was imposed on assessee for having concealed particulars of income or having furnished inaccurate particulars of income - Whether since Assessing Officer in order of penalty did not come to a clear finding regarding penalty being imposed on concealment of income or on furnishing inaccurate particulars of income, Tribunal was justified in setting aside impugned penalty order - Held, yes [Para 7] [In favour of assessee]
CASES REFERRED TO
CIT v. Manu Engineering Works [1980] 122 ITR 306 (Guj.) (para 8) and New Sorathia Engineering Co. v. CIT [2006] 282 ITR 642/155 Taxman 513 (Guj.) (para 8).
K.M. Parikh for the Appellant.
ORDER
Akil Kureshi, J. - For the purpose of this judgment since facts are common, we may notice facts arising in Tax Appeal No.342 of 2013.
2. Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 31.8.2012 raising following question for our consideration:-
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the penalty for concealment of income by holding that in the penalty order the Assessing Officer has not given a clear cut finding as to whether the assessee has concealed particulars of income or furnished inaccurate particulars of income?"
3. Issue pertains to penalty of Rs.11.31 lakhs imposed by the Assessing Officer against the respondent assessee under Section 271(1)(c) of the Income Tax Act, 1961 (" the Act" for short). In the original assessment, the Assessing Officer had disallowed the claim of Rs. 25.58 lakhs (rounded off) towards commission paid by the assessee. Such disallowance was made inter alia on the ground that the assessee could not even obtain confirmation from the commission recipient. There was nothing on record to suggest that such party was in a position to carry on the business on behalf of the assessee to earn commission of sizable amount of Rs. 24.58 lakhs. It was not known whether party was assessed to tax at all or not. Simultaneously, he also ordered issuance of notice for penalty under Section 271(1)(c) of the Act.
4. In the penalty proceedings the Assessing Officer imposed a penalty of Rs. 11.31 lakhs by his order dated 29.5.2006, which was 100% of the tax sought to be evaded. Such penalty was confirmed by CIT (Appeals). On further appeal, the Tribunal reversed the decision of the Revenue Authorities on the ground that the Assessing Officer had, in the order of penalty, not given a clear finding whether the penalty was imposed for the assessee having concealed the particulars of income or having furnished inaccurate particulars of the income. The Tribunal held and observed as under:
"8. In the case in hand also, the Assessing Officer, in the penalty order has not given a clear cut finding, as to whether the assessee has concealed particulars of income or furnished inaccurate particulars of income. In this case also, the Assessing Officer as well as the Ld CIT(A) has taken both the items in levying the penalty. Therefore, respectfully following the judgment of Hon'ble Gujarat High Court rendered in the case of New Sorathia Engineering v. CIT and CIT v. Manu Engineering (supra) and also decision of the Hon'ble Co-ordinate Benches rendered in the case ofGanapati Bhai M. Mistry Furnishers (P.) Ltd. v. ACIT in ITA No. 505/Ahd/2009 and in the case of Krishna Developers v. ITO in the ITA Nos.4447, 4448 and 4449/Ahd/2007, the appeal of the assessee is allowed and the Assessing Officer is directed to delete the penalty."
5. Counsel for the Revenue took us extensively through the orders of the original assessment as well as those passed by the Revenue authorities on penalty proceedings. He submitted that after the detailed inquiry, the Assessing Officer in the original assessment had come to the conclusion that the claim of commission payment was not genuine. During the penalty proceedings, the assessee could not bring any further material to dislodge such findings. He, therefore, submitted that the Tribunal ought not to have reversed the order of penalty.
6. We do not find any reason to interfere. The Assessing Officer in his penalty order noted as under:-
"In view of the above facts, it is clear that the assessee concealed income/furnished inaccurate particulars of income. I, therefore, consider it a fit case for levy of penalty under Section 271(1)(c)"
7. The Tribunal was thus correct in holding that the Assessing Officer in the order of penalty also did not come to a clear finding regarding penalty being imposed on concealment of income or on furnishing inaccurate particulars of income.
8. In view of the decisions of this Court in case of CIT v. Manu Engg. Works [1980] 122 ITR 306 and in case of New Sorathia Engineering Co. v.CIT [2006] 282 ITR 642/155 Taxman 513 (Guj.), ordinarily' we would have confirmed the decision of the Tribunal only on this ground. We, however, notice that the Appellate Commissioner did give clear finding in this respect. It may perhaps be open to the Revenue to contend in such a situation that the penalty can still be sustained. We need not enter into such a question because we find that even otherwise in the order in original of the assessment or in the penalty order, being the original order of assessment, the Assessing Officer had come to the conclusion that for want of supplying sufficient material by the assessee, the claim of commission cannot be accepted. He had not come to any definite finding that the claim was not genuine or totally bogus.
9. In that view of the matter, in the facts of the present case, keeping this question noted above open, these Tax Appeals are dismissed.
ST : Construction of roads for NHAI/Government on Build, Operate and Transfer (BOT) basis and receiving consideration therefor by collection of toll charges for a fixed tenure cannot be charged under Business Auxiliary Services or any other category of service
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[2013] 34 taxmann.com 87 (Mumbai - CESTAT)
CESTAT, MUMBAI BENCH
IDAA Infrastructure (P.) Ltd.
v.
Commissioner of Service Tax - II, Mumbai*
P.R. CHANDRASEKHARAN, TECHNICAL MEMBER
AND ANIL CHOUDHARY, JUDICIAL MEMBER
AND ANIL CHOUDHARY, JUDICIAL MEMBER
ORDER NOS. A/509-517/2013/CSTB/C-I
APPEAL NOS. ST/726, 750, 774 TO 777 & 780 TO 782 OF 2012
APPEAL NOS. ST/726, 750, 774 TO 777 & 780 TO 782 OF 2012
MARCH 13, 2013
I. Section 65(19) of the Finance Act, 1994 - Business Auxiliary Services - Assessee was engaged in construction of roads for State Road Development Corporation, National Highway Authority of India (NHAI), Central and State Government - Such construction was done on Build, Operate and Transfer (BOT) basis and consideration, therefor, was allowed to be recovered by collection of toll charges for a fixed tenure - Department levied service tax on toll charges under Business Auxiliary Services - HELD : Assessee's activity of construction of roads was excluded from levy under 'Commercial or Industrial Construction Service' under section 65(25b) as well as 'Works contract service' under section 65(105)(zzzza) - Further, Maintenance and Repair of roads was also exempt - Since assessee permitted to collect toll charges from users of roads only to finance/compensate for cost of roads constructed by it, thus, toll charges were collected by assessee on its own account - In that view, assessee had not rendered any 'Business Auxiliary Service' to Government or NHAI or anybody else - Also, no service tax was leviable thereon in view of CBEC Circular No. 152/3/2012-ST, dated 22-2-2012 [Paras 5.1, 5.2, 5.3, 5.5, 5.6 and 6] [In favour of assessee]
II. Section 73 of the Finance Act, 1994 - Recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded - Scope of show-cause notice - Department sought levy of service tax on toll charges under Business Auxiliary Services - HELD: Neither in show cause notice nor in adjudication order was there any proposal to classify service rendered by assessee under any of sub-clauses of business auxiliary service - Only allegation was that assessee was authorized by government or NHAI to collect toll charges on use of highways/roads constructed by them and, therefore, they have rendered a service - Non-specification of charge was a gross violation of principles of natural justice and on that ground alone, show cause notice and adjudication order were liable to be set aside [Para 5.4] [In favour of assessee]
Circulars and Notifications : Notification No. 24/2009-ST, dated 27-7-2009, Circular No. 152/3/2012-ST, dated 22-2-2012
Bharat Raichandani and Philip Abraham for the Appellant. V.K. Agarwal for the Respondent.
ORDER
P.R. Chandrasekharan, Technical Member - In these appeals, a common issue is involved. Therefore, they are being taken up together for consideration and disposal.
2. The appellants herein were awarded contracts for the construction of roads by Maharashtra State Road Development Corporation, National Highway Authority of India, Government of Maharashtra and also Government of India. These contracts were on Build, Operate and Transfer (BOT) basis. The consideration for the services rendered under these contracts were allowed to be recovered by collection of toll charges for a fixed tenure and appropriating the same towards the cost incurred. The case of the Revenue is that collection of toll charges by the appellants under these contracts comes within the purview of 'Business Auxiliary Services'. Notices were issued and demands for service tax along with interest were confirmed apart from imposing equivalent amounts of penalty. Hence the appellants are before us.
3. The learned Counsel for the appellants submits that they have not rendered any 'Business Auxiliary Service' to the Government or to the persons who awarded the contracts to them. The service they have rendered in construction of roads which is not taxable under the Finance Act, 1994 and the same have been specifically excluded from the purview of service tax levy both under 'Commercial and Industrial Construction Service' as also under 'Works Contract Service'. Even in respect of maintenance and repairs of roads, exemption from levy of service tax has been provided under Notification No. 24/2009-ST, dated 27/07/2009 and the said exemption has been given retrospective effect from inception of levy in 2005 in the budget 2012. Thus, it is evident that the government does not want to levy any service tax on the activity of road construction. The appellants who were awarded the contracts for road construction were allowed to collect toll charges towards meeting the cost of construction and they did not pass any part of the toll charges to the Government or the NHAI. Therefore, they cannot be brought under the tax net under the category of 'Business Auxiliary Service'.
4. The learned Additional Commissioner (AR) appearing for the Revenue reiterates the findings in the impugned orders.
5. We have carefully considered the submissions made by both the sides.
5.1 The activity undertaken by the appellants herein is construction of roads. The same is excluded specifically from the scope of levy of service tax under the category of 'Commercial or Industrial Construction Service' under section 65(25b) of Finance Act, 1994 which defines the said service as follows:-
[(25b) "commercial or industrial construction" means -
| (a) | construction of a new building or a civil structure or a part thereof; or | |
| (b) | construction of pipeline or conduit; or | |
| (c) | completion and finishing services such as …; or | |
| (d) | repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, which is— |
| (i) | used, or to be used, primarily for; or | |
| (ii) | occupied, or to be occupied, primarily with; or | |
| (iii) | engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;] | |
5.2 Similarly, the said activity is also excluded from the scope of service tax levy on works contract service under section 65(105) (zzzza) which is defined as follows:-
"(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams."
5.3 Further, service tax levy on under 'Maintenance and Repair of roads' vide section 65(105) (zzg) of the said Finance Act, has also been exempted under notification No. 24/2009-ST dated 27/07/2009 and the said exemption was given retrospective effect from the date of inception of the levy, that is, from 16th June, 2005 vide section 97 of the Finance Act, 2012. Thus, it is very clear that the construction/maintenance/repair of roads have been specifically excluded from the service tax levy by the Government.
5.4 The Revenue's case is that the activity undertaken by the appellant comes within the category of 'business auxiliary service' leviable to service tax. As per section 65(19) of the Finance Act, 1994, business auxiliary service has been defined as follows:-
(19) "business auxiliary service" means any service in relation to,-
(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or
(ii) promotion or marketing of service provided by the client; or
[***]
(iii) any customer care service provided on behalf of the client; or
(iv) procurement of goods or services, which are inputs for the client; or
[(v) production or processing of goods for, or on behalf of, the client;]
(vi) provision of service on behalf of the client; or
(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision,'
Neither in the show cause notice nor in the impugned order is there any proposal to classify the service rendered by the appellants under any of the sub-clauses of business auxiliary service. The only allegation is that the appellants have been authorized by the government or NHAI to collect toll charges on the use of the highways/roads constructed by them and, therefore, they have rendered a service. Non-specification of the charge is a gross violation of the principles of natural justice and on that ground along, the show cause notice and the impugned order are liable to be set aside. Be that as it may, let us see whether there is any merit in the allegation against the appellants.
5.5 The appellants herein have undertaken the construction of roads. To finance/compensate for the cost of construction, the contractors have been permitted by the Government/NHAI to collect toll charges from the users of these roads. Thus the toll charges have been collected by the appellants on their own account. If that be so, they cannot be said to have rendered any 'Business Auxiliary Service' to the Government or NHAI or anybody else.
5.6 Further, the Central Board of Excise & Customs vide Circular No. 152/3/2012-ST dated 22/02/2012 have clarified as follows:
"Subject: Toll in the nature of 'user charge' or 'access fee' paid by roads users -regarding.
A representation has been received by the Board, seeking clarification regarding leviability of service tax on toll fee (hereinafter referred as 'toll') paid by users, for using the roads. The representation has been examined.
2. Service tax is not leviable on toll paid by the users of roads, including those roads constructed by a Special Purpose Vehicle (SPV) created under an agreement between National Highway Authority of India (NHAI) or a State Authority and the concessionaire (Public Private Partnership Model, Build-Own/Operate-Transfer arrangement). 'Tolls' is a matter enumerated (serial number 59) in List-II (State List), in the Seventh Schedule of the Constitution of India and the same is not covered by any of the taxable services at present. Tolls collected under the PPP model by the SPV is collection on own account and not on behalf of the person who has made the land available for construction of the road.
3. However, if the SPV engages an independent entity to collect toll from users on its behalf and a part of toll collection is retained by that independent entity as commission or is compensated in any other manner, service tax liability arises on such commission or charges, under the Business Auxiliary Service [section 65(105)(zzb) read with section 65(19) of the Finance Act, 1994].
4. Further, an SPV formed as a result of agreement between NHAI or State Authority and the concessionaire under the BOT arrangement, cannot be considered as an agent of the NHAI. Renting, leasing or licensing of vacant land by the NHAI or State Authority to an SPV for construction of road and such construction do not attract service tax.
5. This Circular may be communicated to the field formations and service tax assessees, through Public Notice/ Trade Notice. Hindi version to follow."
The above circular issued by the Board makes it abundantly clear that there is no liability to pay service tax on the toll charges collected by the service providers who have undertaken construction of roads on BOT basis under the category of Business Auxiliary Service. In spite of these clear instructions by the Board, which are binding on the departmental officers, a contrary view has been taken by the adjudicating authority for reasons best known only to him.
6. Thus, we are of the considered view that the activity of the appellant in construction of roads on BOT basis is not leviable to service tax either under commercial or industrial construction service, works contract service, maintenance, management or repair of immovable property service or under Business Auxiliary Service. Accordingly, we set aside the impugned orders and allow the appeals, with consequential relief, if any. Since we have allowed the appeals on merits, we do not go into the other issues raised by the appellants.
We all should try to avoid unneccessary and useless litigation.lots of our time is wasted in this. Further there is cost to the department. It is better if we are more judicious in our approach and devote our time more in constructive work.
IT: Assessment proceedings could not be resorted to in case of amalgamated company after date of amalgamation
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[2013] 34 taxmann.com 261 (Gujarat)
HIGH COURT OF GUJARAT
Khurana Engineering Ltd.
v.
Deputy Commissioner of Income-tax (OSD) - I*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 605 OF 2013
JANUARY 28, 2013
Section 143 of the Income-tax Act, 1961 - Assessment - General [In case of amalgamated company] - Assessment year 2010-11 – As per scheme of amalgamation, transferor-company resolved to merge with transferee company – Appointed date for amalgamation was 1-4-2009 - High Court sanctioned said amalgamation - Thereafter, a notice was issued to transferor company to furnish some details for purpose of assessment for assessment year 2010-11 - Whether effective date for amalgamation being date as envisaged under scheme, transferor-company would no longer be amenable to assessment proceedings for assessment year 2010-11 and impugned notice was invalid - Held, yes [Para 6] [In favour of assessee]
CASE REVIEW
Marshall Sons & Co. (India) Ltd. v. ITO [1997] 223 ITR 809/[1996] 89 Taxman 619 (SC) (para 6) followed.
CASES REFERRED TO
Marshall Sons & Co. (India) Ltd. v. ITO [1997] 223 ITR 809/[1996] 89 Taxman 619 (SC) (para 6).
S.N. Soparkar and B.S. Soparkar for the Petitioner. M.R. Bhatt and Mrs. Mauna M. Bhatt for the Respondent.
ORDER
1. Rule. Learned counsel Mrs. Bhatt appearing for the respondent on caveat waived service of rule. Considering the short question which is otherwise also covered by the decision of the Supreme Court, we took up the petition for hearing forthwith.
2. Brief facts are that the petitioner has challenged notice dated 20th June 2012 issued by the respondent under section 142(1) of the Income Tax Act, 1961, calling upon one M.S. Khurana Infrastructure and Toll Road Pvt. Ltd. (a company registered under the Companies Act and hereinafter to be called as 'the transferor company') to furnish certain details for the assessment year 2010-11. The petitioner is also a company registered under the Companies Act, which shall be hereinafter to be referred to as 'the transferee company' Under a scheme of amalgamation, copy of which is produced at Annexure G to the petition, entered into between the petitioner and the transferor company, it was resolved to merge the transferor company into the transferee company. As per definition clause 1(ii) of the Scheme, 'appointed date' is defined to mean 1st April 2009 or such other date as may be approved by the High Court of Gujarat. Definition clause 1(iii) defines the term 'effective date' as to mean the day on which the order passed by the High Court of Gujarat sanctioning the proposed scheme after obtaining other relevant approval is filed with the Registrar of Companies.
3. In clause 6 of the scheme of amalgamation, it was provided as under:
"6. Operative date of the scheme.
The scheme, although operative from the appointed date, shall become effective from the effective date."
Clause 9 of the Scheme pertained to the conduct of business by transferor company till effective date, relevant portion of which reads as under:
"With effect from the Appointed Date and upto the Effective Date, the Transferor company:
9.1 shall carry on and be deemed to carry on all its business and activities and stand possessed of its properties and assets for and on account of and in trust for the Transferee Company and all the incomes or profits accruing to the Transferor Company or expenditure or losses arising or incurred by it shall, for all purposes, be treated as the incomes or profits or expenditure or losses of the Transferee Company as the case may be."
4. Such amalgamation scheme was presented before the Gujarat High Court for its sanction. The High Court by the order dated 18th March 2011 passed in Company Petition No.161 of 2010 sanctioned the scheme as presented to it. Significantly in such order, the Court did not make any deviation in the appointed date as defined in the scheme itself. Thus, by virtue of the scheme being sanctioned by the High Court, by order dated 18th March 2011, the transferor company merged in the transferee company, however, with effect from the appointed date, namely, 1.4.2009.
5. It is the case of the petitioner that by virtue of such amalgamation, now since the transferor company no longer survives from 1.4.09, question of assessing such company for the purpose of income tax would not survive. It is on this ground that the notice issued by the respondent calling upon the transferor company to provide the details with respect to the assessment year 2010-11 is challenged in this petition.
6. Having heard the learned counsel for the parties, it emerges from the record that the transferor company had merged in transferee company with effect from 1.4.09. The High Court did not provide for any modification in the appointed date as envisaged in the merger scheme itself. In that view of the matter, as held by the Supreme Court in the case of Marshall Sons & Co. (India) Ltd. v. ITO [1997] 223 ITR 809/[1996] 89 Taxman 619, the effective date for amalgamation would be the date as envisaged under the scheme. The Supreme Court in the said decision observed as under:
"14. Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place. The scheme concerned herein does so provide viz. January 1, 1982. It is true that while sanctioning the scheme it is open to the Court to modify the said date and prescribe such date of amalgamation/transfer as it thinks appropriate in this facts and circumstances of the case. If the Court so specifies a date, there is little doubt that such date would be the date of amalgamation/date of transfer. But where the Court does not prescribe any specific date but merely sanctions the scheme presented to it - as has happened in this case - it should follow that the date of amalgamation/date of transfer is the date specified in the scheme as "the transfer date". It cannot be otherwise. It must be remembered that before applying to the Court under Section 391(1) a scheme has to be framed and such scheme has to contain a date of amalgamation/transfer. The proceedings before the Court may take sometime; indeed, they are bound to take some time because several steps provided by Sections 391 to 394-A and the relevant Rules have to be followed and complied with. During the period the proceedings are pending before the Court, both the amalgamating units, i.e., the Transferor Company and the Transferee Company may carry on business, as has happened in this case but normally provision is made for this aspect also in the scheme of amalgamation. In the scheme before us, clause 6(b) does expressly provide that with effect from the transfer date, the Transferor Company (Subsidiary Company) shall be deemed to have carried on the business for and on behalf of the Transferee Company (Holding Company) with all attendant consequences. It is equally relevant to notice that the Courts have not only sanctioned the scheme in this case but have also not specified any other date as the date of transfer/amalgamation. In such a situation, it would not be reasonable to say that the scheme of amalgamation takes effect on and from the date of the order sanctioning the scheme. We are, therefore, of the opinion that the notices issued by the Income-tax Officer (impugned in the writ petition) were not warranted in law. The business carried on by the Transferor Company (Subsidiary Company) should be deemed to have been carried on for and on behalf of the Transferee Company. This is the necessary and the logical consequence of the Court sanctioning the scheme of amalgamation as presented to it. The order of the Court, sanctioning the scheme, the filing of the certified copies of the orders of the Court before the Registrar of Companies, the allotment of shares etc. may have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be January 1, 1982. This is also the ratio of the decision of the Privy Council in Raghubar Dayal v. Bank of Upper India Ltd. AIR 1919 PC 9.
Counsel for the Revenue contended that if the aforesaid view is adopted then several complications will ensue in case the Court refuses to sanction the scheme of amalgamation. We do not see any basis for this apprehension. Firstly, an assessment can always be made and is supposed to be made on the Transferee Company taking into account the income of both the Transferor and Transferee Company. Secondly, and probably the more advisable course from the point of view of the Revenue would be to make one assessment on the Transferee Company taking into account the income of both of Transferor or Transferee Companies and also to make separate protective assessments on both the Transferor and Transferee Companies separately. There may be a certain practical difficulty in adopting this course inasmuch as separate balance-sheets may not be available for the Transferor and Transferee Companies. But that may not be an insuperable problem inasmuch as assessment can always be made, on the available material, even without a balance-sheet. In certain cases, best-judgment assessment may also be resorted to. Be that as it may, we need not pursue this line of enquiry because it does not arise for consideration in these cases directly."
In view of the above concluded position of law, we have no hesitation in holding that the transferor company would no longer be amenable to assessment proceedings for the assessment year 2010-11. The notice for producing documents for such assessment would, therefore, be invalid. Reference of the Revenue to clause 6 of the scheme is wholly misplaced. Clause 6 refers to two dates, namely, appointed date and the effective date. It only clarifies that the scheme shall be operative from the appointed date, but shall become effective from the effective date. This, in our opinion, does not alter the position of law. The term 'appointed date' as defined in clause 1(ii) itself envisages 1st April 2009 as the appointed date unless, of course, any other date as may be approved by the High Court. In the present case, the High Court made no change in this respect. The appointed date for the said scheme, therefore, must be held to be 1.4.2009.
In the result, the petition is allowed. The impugned notice Annexure A is quashed. Rule is made absolute accordingly.
2013-TIOL-547-ITAT-AHM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A' AHMADABAD
BENCH 'A' AHMADABAD
ITA No.1329/Ahd/2012
Assessment Year: 2009-10
Assessment Year: 2009-10
RIDDHI STEEL & TUBES PVT LTD
83/84, PIPLAJ PIRANA ROAD
ASLALI, PIPLAJ, VILLAGE KAMOD
AHMEDABAD
PAN NOP:AACCR01755J
83/84, PIPLAJ PIRANA ROAD
ASLALI, PIPLAJ, VILLAGE KAMOD
AHMEDABAD
PAN NOP:AACCR01755J
Vs
ASSTT COMMISSIONER OF INCOME TAX
RANGE-5, AHMEDABAD
RANGE-5, AHMEDABAD
Mukul Kr Shrawat, JM and T R Meena, AM
Dated: April 12, 2013
Appellant Rep by: Shri Tushar P Hemani, AR
Respondent Rep by: Shri Shelley Jindal, CIT-DR
Respondent Rep by: Shri Shelley Jindal, CIT-DR
Income Tax - Sections 69B, 251, 253 - Whether appellate authorities under the I-T Act can entertain a new claim which was raised, but not made before the AO by way of revised return - Whether stock statement furnished to bank for obtaining credit facility is sacrosanct - Whether any addition on the basis of such statement can be made without pointing out any defect in regular audited books of account of the assessee.
Assessee Company engaged in manufacturing of steel, filed its ROI. During the course of assessment proceedings the AO observed that the assessee had wrongly claimed lesser depreciation; however the AO could not allow the claim of the assessee for correct depreciation on the ground of non-filing of the revised return. Beside this the AO also made addition under section 69-B on the ground that the stock statement furnished to bank did not match with the book's stock. The CIT(A) affirmed the order of the AO. On appeal before the Tribunal, the AR pointed out several judgments for contesting the issues.
After hearing the parties the ITAT held that,
++ we agree with the arguments made by the Ld. Counsel that the Supreme Court decision in the case of Goetze (supra) bars only AO but not the Appellate Authorities to entertain fresh / new claim made before AO without filing revised return of income. Therefore, we accept the claim as made by the Assessee and direct the Assessing Officer to allow the differential depreciation amount of Rs.7,62,206/- after verifying the claim as made in the Tax Audit Report in Form No.3CD;
Assessee Company engaged in manufacturing of steel, filed its ROI. During the course of assessment proceedings the AO observed that the assessee had wrongly claimed lesser depreciation; however the AO could not allow the claim of the assessee for correct depreciation on the ground of non-filing of the revised return. Beside this the AO also made addition under section 69-B on the ground that the stock statement furnished to bank did not match with the book's stock. The CIT(A) affirmed the order of the AO. On appeal before the Tribunal, the AR pointed out several judgments for contesting the issues.
After hearing the parties the ITAT held that,
++ we agree with the arguments made by the Ld. Counsel that the Supreme Court decision in the case of Goetze (supra) bars only AO but not the Appellate Authorities to entertain fresh / new claim made before AO without filing revised return of income. Therefore, we accept the claim as made by the Assessee and direct the Assessing Officer to allow the differential depreciation amount of Rs.7,62,206/- after verifying the claim as made in the Tax Audit Report in Form No.3CD;
++ the Assessee is covered by the Gujarat High Court decisions in the case of Arrow Exim Pvt. Ltd and Meico Bonds Pvt. Ltd. It is seen that Hon'ble the Gujarat High Court in the case of Arrow Exim Pvt. Ltd. has confirmed the order of ITAT and CIT(A) in deleting addition made u/s 69B of the Act under identical circumstances of the case after making observations that (a) the stock statement showing inflated quantity and value of stock was furnished to the banking authorities to avail more credit facilities; (b) the stocks were hypothecated and not pledged and (c) the books of accounts are not found to be defective or non-genuine by the AO. (d) The assessee explained the difference either on account of inflated valuation of stock or excess quantity shown to bank. We further find that Hon'ble the Gujarat High Court in the case of Meico Bonds Pvt. Ltd. has also confirmed the order of ITAT in deleting the addition made on account of understatement and undervaluation of stock after making observations that (a) the assessee had been contending that the valuation supplied to the Bank did not reflect the accurate or the correct picture; (b) the statement was drawn on the basis of estimation and such estimate is based on higher side to borrow higher loan and (c) the closing stock reflected in the books maintained for income-tax reflects the correct picture. Hon'ble Gujarat High Court in the case of Meico Bonds Pvt. Ltd has further strengthened the view taken in Arrow Exim Pvt. Ltd.
Assessee's appeal allowed
ORDER
Per: T R Meena:
This is an appeal at the behest of the assessee which has emanated from the order of CIT(A)-XI, Ahmedabad, dated 25.05.2012 for A.Y. 2009-10. The effective grounds of appeal are as under:
1. The ld. CIT(A) has erred in law and on facts of the case in confirming the action of ld. AO in making disallowance of an expenditure amounting to Rs.1,93, 150/- u/s 40(a)(ia) of the Act purely on guess work and without appreciating the facts that no such expenditure was debited to Profit & Loss account and consequently there was no violation of TDS provisions.2. The ld. CIT(A) has erred in law and on the facts of the case in not maintaining the ground raised with regard to differential amount of depreciation of Rs.7,62,206/- after holding that the same was not disallowed by the ld. AO and therefore the Appellant cannot have any grievance against the assessment order.3. The ld. CIT(A) ought to have appreciated the facts that the ld. AO has dealt with the issue with regard to claim of the Appellant to allow depreciation at Rs.86,01,248/-as given in the Tax Audit Report as against Rs.78,39,042/- shown in the Return of Income, however, the ld. AO has not allowed the differential amount of Rs.7,62,206/- as deduction while computing assessable income, and therefore, the Appellant can have grievances against such action of the ld. AO.4. The action of ld. CIT(A) in not adjudicating the ground on merits in as much as law is patently bad, untenable and illegal in the eyes of law.5. Both the lower authorities have failed to allow / grant legitimate deduction with regard to differential depreciation of Rs.7,62,206/-, which ought to have been allowed to the Appellant.6. The ld. CIT(A) has erred in law and on the facts of the case in confirming the action of ld. AO in making huge addition of Rs. 10,39,75,306/-u/s 69B of the Act.7. The ld. CIT(A) has further erred in law in erroneously holding that Bank Manager had inspected godown of the appellant on 25/04/2009. Firstly there is no such inspection report of any physical verification and secondly even as per the CIT(A) the said alleged inspection of stock took place on 26/04/2009 whereas the addition is made for the so called discrepancy of stock as on 31/03/2009.8. Alternatively and without prejudice to above, the Appellant has explained stock worth of 2654 M.T. out of alleged unexplained stock of 3319.037 M.T. and therefore addition to that extent may be deleted.9. Ld. CIT(A) has erred in not following and respecting the decision of Hon'ble Jurisdiction High Court in the case of Arrow Exim Ltd (230 CTR 293) which was directly covering the issue in favour of the appellant. The artificial and hyper technical distinctions given by the ld. CIT(A) for not following the decision of the Hon'ble Jurisdictional High Court is nothing but an attempt not to follow binding decision which amount to contemptuous defiance of the law of the land which is not permissible under any circumstances and should not be allowed to be perpetuated.10. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.11. The ld. CIT(A) has erred in law and on the facts of the case in onfirming the action of ld. AO in charging interest u/s 234A/B/C of the Act.12. The ld. CIT(A) has erred in law and on the facts of the case in confirming the action of ld. AO in initiating penalty proceedings u/s 271(1)(c) of the Act.
2. Ground No.1 challenged in the grounds of appeal is regarding disallowance of expenditure of Rs.1,93,150/- u/s 40(a)(ia) of the Act. During the course of assessment proceedings, the assessing officer was of the view that the Assessee has made provisions of Rs.49,255/- on account of TDS payable on Contractor, whereas the assessee could produce challan of Rs.45,392/- only. Accordingly, the assessing officer worked out expenditure amounting to Rs.1,93,150/-on reverse working mechanism i.e (Rs.3,863/2%) and disallowed the same u/s 40(a)(ia) of the Act for non-deposition of tax deducted at source.
3. The CIT(A) also sustained the disallowance made by the assessing officer after holding the assessee could not furnish the details of account in which excess provisions of TDS payable amounting to Rs.3,863/- was made.
4. Now the assessee is before us against the said action of the assessing officer. The ld. Counsel submitted that both the lower authorities have failed to appreciate that the Assessee had made excessive provisions by Rs.3,863/- on account of TDS payable on contractors payment, and it was not a case that the Assessee has failed to deduct tax at source or deducted tax at source but not deposited with the Government Treasury account, inasmuch as it was also not the case of AO that on certain expenditure, tax had not been deducted and / or paid. Ld. Counsel further drew our attention to pg. nos.17 to 21 @ 18 of P/B, para 6 and pg. nos.140 to 147 of P/Bregarding details of entire amount of expenditure of various expenditure including contract payment and deduction of tax at source thereon, and it was argued that the Assessee has duly deducted tax at source and deposited the same in due time on entire amount of all the expenditure including contract payment wherever applicable. It was further argued that even Tax Auditor has categorically stated that the Assessee has complied with the provisions of Chapter XVII-B of the Act. The Ld. Counsel finallyargued that both the lower authorities have failed to bring on record such expenditure on which tax has not been deducted or deposited as per scheme of the Act, and in absence of which no disallowance can be made u/s 40(a)(ia) of the Act.
5. Ld. DR has relied upon the orders of the CIT(A) and AO.
6. We have heard both the sides and gone through the orders of both the lower authorities. It is seen that the assessing officer has made disallowance of expenditure u/s40(a)(ia) of the Act only on the basis of reversal of entries made regarding provision for TDS payable on contractors payment. The assessing officer has not brought on record any such instance of expenditure, on which tax is not deducted or deducted but not paid so, and in the absence of which disallowance cannot be made u/s 40(a)(ia) of the Act. Further Ld. Counsel has drawn our attention to pg. nos.140-147 of P/B and submitted that on each and every expenditure for contractor's payment, tax has been deducted at source and paid wherever it is applicable. We are of the firm view that if the expenditure has been subject matter of tax deduction at source and if the compliance to the Chapter XVII-B has been made then no disallowance can be made u/s 40(a)(ia) of the Act on presumption basis. Therefore, in the interest of justice, we set aside this issue to the file of Assessing Officer and direct him to verify the details as furnished by the Assessee on pg. nos.140-147 of P/B and find out as to whether tax has been deducted at source on the expenditure as contented by the ld. Counsel or not, and if the compliance has been made then no disallowance should be made u/s 40(a)(ia) of the Act on presumptive basis.
7. Ground nos. 2 to 5 challenged in the Grounds of Appeal are regarding disallowance of differential depreciation amounting to Rs.7,62,206/-. The Assessee in the Return of Income has inadvertently claimed depreciation at Rs.78,39,042/-, however, the same was rightly quantified at Rs.86,01,248/- in the Tax Audit Report in Form No.3CD. During the course of the assessment proceedings, upon realization when the assessee claimed the differential depreciation, the assessing officer did not allow differential depreciation amounting to Rs.7,62,206/- after holding that the said fresh claim was not claimed in the revised return of income, and therefore, in view of Goetze India Ltd. 157 Taxman 1 (SC) = (2006-TIOL-198-SC-IT), it cannot be allowed.
8. The CIT(A) has not adjudicated this issue on the ground that since AO has not made addition of Rs.7,62,206/-, the assessee cannot be said to be aggrieved against the order of AO, and therefore, the same is not maintainable as per provisions of S.246A of the Act.
9. The ld. Counsel argued that the Assessee had already made a claim of depreciation in the return of income and it was only a matter of quantification of amount of depreciation, and therefore, it was not a fresh / new claim before AO. It was further argued that even if it is treated as a fresh / new claim, then also, the Supreme Court decision in the case of Goetze (supra) bars only AO to entertain any fresh / new claim without filing revised return of income.However the Appellate Authorities are not barred to allow the same, and accordingly reliance was placed on various authorities including Goetze (supra) itself. The Ld. Counsel further argued that CIT(A) while dismissing this ground on the technical ground failed to appreciate that grievances cannot be restricted only to addition / disallowance made by AO, instead it can also have grievance against the action of AO in not allowing any claim made by the Assessee, and therefore, the CIT(A) ought to have adjudicated the ground on merits and ought to have allowed the claim made by the Assessee.
10. Ld. DR has relied upon order of both the lower authorities.
11. We have heard the Counsels of both sides and gone through the orders of AO and CIT(A). We agree with the arguments made by the Ld. Counsel that the Supreme Court decision in the case of Goetze (supra) bars only AO but not the Appellate Authorities to entertain fresh / new claim made before AO without filing revised return of income. Therefore, we accept the claim as made by the Assessee and direct the Assessing Officer to allow the differential depreciation amount of Rs.7,62,206/- after verifying the claim as made in the Tax Audit Report in Form No.3CD.
12. Ground nos.6 to 10 challenged in the grounds of appeal are regarding making addition of Rs.10,39,75,306/- u/s 69B of the Act. The AO has made addition on account of difference between stock declared to the Canara Bank and stock reflected as closing stock as at 31st March, 2009, details given on pg. no.8 para 9.2 of the assessment order, is summarized as under :
| Particulars | Quantity (MT) | Amount (Rs.) |
| Raw Material | ||
| As per Statement furnished to Bank | 4854.782 | 14,68,86,248 |
| As per Books | 1735.745 | 5,70,72,922 |
| Difference added by AO (A) | 3119.037 | 8,98,13,326 |
| Finished Goods | ||
| As per Statement furnished to Bank | 694.918 | 2,40,19,071 |
| As per Books | 253.271 | 98,57,091 |
| Difference added by AO (B) | 441.647 | 1,41,61,980 |
Total (A+B) | 10,39,75,306 |
13. The CIT(A) has sustained the addition made by the AO after holding that (a) the discrepancy in stock were never explained by the Assessee with the help of books of account, bills, vouchers etc.; (b) stock hypothecated to Canara Bank were physically verified by the banker on 25/04/2009 and (c) the difference in stock was detected at the end of year i.e on 31st March, 2009. The CIT(A) has further held that the Assessee could not prove any linkage of purchase of 2654 M.T. of steel vide bills dated 31/03/2009 with the inventory of stocks as on 31/03/2009 furnished to the Canara bank, and accordingly, CIT(A) has rejected the contention of the assessee that stock of 2645 M.T. for which bills were raised by SAIL on 31/03/2009 were included in the stock statement furnished to the Canara Bank.
14(i). The Ld. Counsel at the first place argued before us that the entire issue is covered by the Gujarat High Court decisions in the case of CIT vs. Meico Bonds Pvt. Ltd. bearing Tax Appeal No.2041 of 2010 (pg.nos.1-4 of P/B) and CIT vs. Arrow Exim Pvt. Ltd. 230 CTR 293 (Guj). The Ld. Counsel has further relied upon CIT vs. Veerdip Rollers (P) Ltd. - 323 ITR 341 (Guj.); CIT vs. Khan & Sirohi Rolling Mills – 200 CTR 595 (All.) and CIT vs. N. Swamy - 241 ITR 363 (Mad.). After placing reliance on these decisions, it was submitted that the Hon'ble Courts, after making following observations, has held that merely relying on statement given to a bank, addition cannot be made in the hands of the assessee and onus is on revenue to prove that the assessee has undisclosed income :
(a) The stock is inflated in the statement furnished to the bank to avail larger credit facilities;(b) The inflated stock was hypothecated and not pledged;(c) The assessee has maintained stock register;(d) The assessee books of accounts are not found to be defective or nongenuine by AO.
14(ii). The Ld. Counsel further submitted that the stock detail has been inflated in the statement furnished to bank to avail larger credit facilities, which is not denied by AO; admittedly, the stock was hypothecated and not pledged; Quantitative details (month wise) of raw materials, finished goods and semifinished goods has been placed on records before both the lower authorities (Pgs.17 to 22 @ 18 & 20 of P/B)(Pg.75 of P/B being part of Company's Audit Report); admittedly, AO has not pointed out any defects in the books of accounts maintained by the Assessee and has accepted the same, and accordingly relying on the decisions cited above, it was argued that no addition can be made merely relying on the statement furnished to the bank without brining on record any evidentiary proof to establish that the assessee had undisclosed income.
14(iii). Ld. Counsel further submitted that the assessee has been subjected to tax audit and tax auditor has qualified the report in any manner which is at pages 35-54 of the Paper book filed before us. It was further submitted that the assessee is subjected to excise and VAT and none of these authorities have taken any action against assessee for the alleged stock discrepancy.
14(iv). The Counsel further submitted that most importantly, there was an Excise Revenue Audit wherein the excise department, after detailed scrutiny of the books of accounts, stock registers, excise records, has accepted the books of accounts and other record maintained by the assessee to be true, correct and without any discrepancies in so far as inventory is concerned. Such report was placed on record at pages 165-166 of the paper book.
14(v). The Counsel while drawing attention to page 10 of the assessment order submitted that if the addition as suggested by the assessing officer is made, the book result viz. GP and NP as also the stock turnover ratio would show highly abnormal picture compared to other comparable years. Ld. Counsel, upon direction from the Bench, placed on record a statement containing these three ratios from A.Y. 2006-07 to A.Y. 2012-13 to substantiate his argument.
14(vi). The Ld. Counsel further, drawing attention to the letter furnished on 05/12/2011 to the AO enclosed on pg. nos.17 to 22 of P/B, argued that the Assessee had submitted quantitative details (month wise) in respect of Raw Materials, Finished Goods and Semi-finished goods to prove that entire stock register was maintained and the stock recorded in the books of account was correct, which has not been controverted by the AO.
14(vii). Insofar as the contention of CIT(A) that the bank manager has inspected the assessee's godown on 25/04/2009 and verified the stock declared to the Bank, the Ld. Counsel has argued that the said inspection report was for the "Godown" and not for the physical verification of "stock" and even inspection of stock on 25/04/2009 can never be taken as physical verification of stock as at 31/03/2009. No one would be in a position to take physical verification of stock on 25/04/2009 for the stock lying on 31/03/2009. At page no. 217 of the paper book, the total value of goods shown 17.09 crore. Thereafter, margin @ 30% at Rs. 5.12 crore had been reduced and net value had been calculated Rs.11.96 crore and sanction limit was shown Rs.10 crore till 04.05.2009 whereas this loan was sanctioned by the Bank at Rs.11.03 crore as on 31.03.2009.
14(viii). The Ld. Counsel further explained the difference to the extent of 2654 MT out of total difference of 3119.037 MT by submitting that the Assessee had received 2654 MT stock on 07/04/2009 which was very well recorded in R.G.23 A register in April 2009 (Pgs. 210 to 214 of P/B), since the invoices of the same were dated 31/03/2009, the same was included in the stock statement furnished to Canara bank for showing the stock position as on 31/03/2009.However the same was not accounted for in the books of accounts upto 31/03/2009.The Ld. Counsel to further support his argument drew out attention to pg. no.220 of P/B and submitted that the bank manager while preparing inspection report on 25/04/2009 has also noted that the Assessee had received 2654 MT stock which has been included in the stock statement for the month of March, 2009.
14(ix). Insofar as the balance difference of 465.037 MT stock (3119.037 MT – 2654 MT) is concerned, Ld. Counsel further submitted that during the course of hearing, the stock statement was furnished purely on estimated basis and taking into account the requirement of margin of 30%. By drawing attention to pg. nos.68 read with 217, the ld. Counsel submitted that the Assessee had already borrowed an amount of Rs.11.03 Crores from Canara Bank as at 31/03/2009, and therefore, making upward adjustment of 30% thereon for margin required to be maintained by the Bank, the value of stock was worked out at Rs.17.09 Crores on estimated basis (Pg. no.217 of P/B) so as to fulfill the requirements of the loan agreement entered into with Canara Bank. Accordingly, the Ld. Counsel closed his argument by submitting that the stock statement was furnished on estimated basis taking into account the borrowed amount as of 31/03/2009 and requirement to maintain 30% margin over and above the borrowed amount.
15. Ld. CIT DR supported the orders of the lower authorities. He further put emphasis of the order of CIT(A) more particularly paras6.2 to 6.7. He thus submitted that lower authorities have passed proper order requiring no interference at all. He further relied upon CIT vs. Chemmeens, 207 ITR 909 (Ker.), wherein the ITAT deleted the addition on the basis of inconsistency of earlier year not on merit e.g. the assessee inflates the stock for getting higher margin of credit.
16(i) We have at length heard both the sides. We agree with the arguments of the Ld. Counsel of the Assessee that the case of the Assessee is covered by the Gujarat High Court decisions in the case of Arrow Exim Pvt. Ltd.(supra) and Meico Bonds Pvt. Ltd.(supra). It is seen that Hon'ble the Gujarat High Court in the case of Arrow Exim Pvt. Ltd. (supra) has confirmed the order of ITAT and CIT(A) in deleting addition made u/s 69B of the Act under identical circumstances of the case after making observations that (a) the stock statement showing inflated quantity and value of stock was furnished to the banking authorities to avail more credit facilities; (b) the stocks were hypothecated and not pledged and (c) the books of accounts are not found to be defective or non-genuine by the AO. (d) The assessee explained the difference either on account of inflated valuation of stock or excess quantity shown to bank. We further find that Hon'ble the Gujarat High Court in the case of Meico Bonds Pvt. Ltd. (supra) has also confirmed the order of ITAT in deleting the addition made on account of understatement and undervaluation of stock after making observations that (a) the assessee had been contending that the valuation supplied to the Bank did not reflect the accurate or the correct picture; (b) the statement was drawn on the basis of estimation and such estimate is based on higher side to borrow higher loan and (c) the closing stock reflected in the books maintained for income-tax reflects the correct picture. Hon'ble Gujarat High Court in the case of Meico Bonds Pvt. Ltd. (supra) has further strengthened the view taken in Arrow Exim Pvt. Ltd. (supra).
16(ii) This view is further supported by Hon'ble Allahabad High Court's decision in the case of Khan & Sirohi Rolling Mills (supra), wherein also, the Hon'ble Court did not find any error in the order of Tribunal in accepting that (a) the assesse inflated the value of the stocks in the bank declaration to obtain a number of drafts from the bank; (b) there was actually no verification of the stock made by any bank official; (c) the stocks were only hypothecated and not pledged; (d) the income – tax officer could not point out any defect in the trading accounts of the assessee and (e) the books of accounts maintained by the assessee has also been accepted by the Central Excise Department as well as by the Sales Tax Department could not be disbelieved.
16(iii) On perusal of the decisions as referred above, it is gathered that Hon'ble Courts have laid down that additions cannot be made on account of difference arising in the quantity and value of stock shown in the books of accounts and the statement furnished to the banking authorities, admittedly to avail higher credit facilities. Courts have laid down the following guidelines while dealing with the issue:
(a) The stock in quantity and value is inflated on estimate basis in the statement furnished to the banking authorities to avail higher financial credits ;(b) The inflated and estimated stock is hypothecated and not pledged;(c) No actual physical verification of stock is carried out by the officer of banking authorities during the year or as on date of valuation of stock;(d) The assessee has maintained stock register;(e) The assessee's books of accounts are not found to be defective or nongenuine by AO;(f) The books of accounts maintained by the assessee are accepted by the Central Excise and / or Sales Tax Department.
Applying these tests to the facts of the present case, the following conclusions emerge:
Applying test (a), we find that the stock details have been inflated purely on estimate basis in the statement furnished to bank to avail larger credit facilities.This aspect is duly supported by the fact that the Assessee had already borrowed an amount of Rs.11.03 Crores from Canara Bank as at 31/03/2009, and therefore, by making upward adjustment of 30% thereon for margin required to be maintained as per the loan agreement entered with the Bank, the value of stock was estimated and inflated to Rs.17.09 Croresso as to justify the amount already drawn from the Bank.
Applying test (b), we further find that in the present case, stock is only hypothecated with the bank and not pledged. Unlike pledge, under hypothecation, the stock is not kept in lock and key of the bank. Therefore the submission of the assessee that the figure of closing stock was estimated and inflated with a view to meet the margin requirements of the bank can be accepted.
Applying test (c), we also find that there was no physical verification of stock by the Bank authorities as on 31/03/2009. A perusal of CIT(A) order reveals that he has placed a great reliance on the godown visit of Bank Manager on 25/04/2009. However, the said reliance is completely misplaced in as much as firstly, this is not even the case of the assessing officer who made the addition. Secondly the said visit took place on 25/04/2009 i.e. much after the close of the year under consideration. Thirdly, the said visit was only a godown visit and not physical verification and counting of stock. Fourthly and most importantly, in the very inspection report the Bank Manager himself notes that in so far as 3000 tonnes of coil is concerned, the same was included in the stock of Month of March, 2009. Because of this inclusion, stock position of March shows increase. This aspect is conveniently overlooked and ignored by the CIT(A).
Applying test (d),We further find that the assessee has maintained stock register giving complete quantitative details including month-wise details of Raw Materials, Finished Goods and Semi-finished goods. In fact these details have been placed on record before the AO (Pg. Nos.17 to 22 @ 18 & 20 of P/B), which is not controverted by the AO and books of accounts of the assessee has not been found to be defective or non-genuine by AO.
Applying test (e),We further find that the assessee has been subjected to statutory audit under the Companies Act, 1956, also subjected to tax audit under the Income Tax Act, and none of these auditors have qualified their reports in any manner whatsoever. In fact the assessee has been filing regular returns since last 8 years and has been consistently following method of accounting as prescribed u/s 145 and valuing closing stock and inventories as prescribed u/s 145A of the Act. No such practices have been questioned or doubted or found to be erroneous by the AO.
Applying test (f), we find that the assessee is subjected to excise and VAT and none of these authorities have noticed or for that matter taken any action against assessee for the alleged stock discrepancy. In fact on perusal of pg. nos.165-166 of paper book placed before us, we find Excise Audit Report for the period Jan'2009 to Dec'2009 which was carried out by Excise Revenue Audit team wherein the excise department, after detailed scrutiny of the books of accounts, stock registers, excise records, has accepted the books of accounts and other record maintained by the assessee to be true, correct and except few discrepancies in so far as inventory is concerned. We find that the period of audit covers 31st March, 2009. If the assessee has in fact purchased and stored such unaccounted stock allegedly shown to the bank, it is impossible not to leave a single trail more so when the assessee is a manufacturer and not a trader. It is not possible to acquire unaccounted stock, carry out manufacturing activities, consume energy, remove the finished stock and sale away the same in the market. We therefore find considerable force in the submission of the counsel for the assessee that the books of accounts are found to be genuine and recorded appropriately and no such kind of discrepancies were found to be noted in the Excise Audit Report which could remotely suggest that the Assessee has invested in unexplained stock which is not recorded in books of accounts.
16(iv). If the discrepancies of stock at 3119.037 & 441.647 MT valued Rs.10.39 crore accepted as suppressed stock than same is to be included in closing stock of A.Y. 09-10 & opening stock of A.Y. 10-11 which would be again give distorted position of accounting result for A.Y. 10-11. The ld. AO had not brought on record any evidence of purchase and sale made outside the book in A.Y. 09-10. Therefore, the entire set of facts of the case falls within the parameters / guidelines framed by Hon'ble the High Courts, and we are of the view that merely relying on the statement furnished to the banking authorities to avail larger credit facilities, addition cannot be made on account of difference between the quantity and value of stock shown in the books of accounts and the statement furnished to the banking authorities.
16(v). Independent of these tests, we also find that the assessee has also explained the difference to the extent of 2654 MT out of total difference of 3119.037 MT. We find that the Assessee had received 2654 MT stock on 07/04/2009 which was recorded in R.G.23 A register on 7thApril 2009 (Pgs. 210 to 214 of P/B),and since the invoices of the same were dated 31/03/2009, the same was included in the stock statement furnished to Canara bank for showing the stock position as on 31/03/2009 though these purchases were accounted for in the books of accounts after 31/03/2009. As regards the remaining difference of 465.037 MT, as held earlier, the same was purely on inflated estimate basis so as to fulfill margin requirements of the Bank. Hence, we accept the contention of Ld. Counsel that the stock statement was furnished to the Canara bank on estimated basis to avail larger credit facilities.
16(vi) There is another angle which is required to be considered while deciding this issue and that is the effect in the financial statements on account of addition made by AO. To verify the same, during the course of hearing, we called for the actual financial ratios for 7 years and for the current year under appeal after giving effect to the addition made by the AO, which would show results as under :
| Parameters | AY 2006-07 | AY 2007-08 | AY 2008-09 | Results as shown by the Assessee AY 2009-10 |
| Gross Profit | 26332662 | 27814168 | 37648224 | 47326840 |
| Turnover | 304229927 | 395692659 | 506977341 | 610575238 |
| Percentage | 8.66% | 7.03% | 7.43% | 7.75% |
| Net Profit | 2100700 | 4611189 | 6242279 | 7797575 |
| Turnover | 304229927 | 395692659 | 506977341 | 610575238 |
| Percentage | 0.69% | 1.17% | 1.23% | 1.28% |
| Stock-intrade | 34717925 | 36842936 | 51938382 | 68641931 |
| Turnover | 304229927 | 395692659 | 506977341 | 610575238 |
| Percentage | 11.41% | 9.31% | 10.24% | 11.24% |
| Parameters | After including addition of Rs.10.40 crs. AY 2009-10 | AY 2010-11 | AY 2011-12 | AY 2012-13 |
| Gross Profit | 151301876 | 61967833 | 91443364 | 137825226 |
| Turnover | 610575238 | 890096455 | 1196543944 | 1475315486 |
| Percentage | 24.78% | 6.96% | 7.64% | 9.34% |
| Net Profit | 111772611 | 13737397 | 17686422 | 17025992 |
| Turnover | 610575238 | 890096455 | 1196543944 | 1475315486 |
| Percentage | 18.31% | 1.54% | 1.48% | 1.15% |
| Stock-intrade | 172616967 | 112963244 | 128033129 | 174150936 |
| Turnover | 610575238 | 890096455 | 1196543944 | 1475315486 |
| Percentage | 28.27% | 12.69% | 10.70% | 11.80% |
16(vii) Going through the financial ratios furnished by Ld. Counsel from A.Ys.2006-07 to 2012-13 it is seen that the Gross Profit ratio is ranging from 6.96% to 9.34%, whereas, after including the addition made for the current year, the Gross Profit ratio would show 24.78% as against actual ratio of 7.75% for the current year under appeal. Similarly Net Profit ratio is ranging from 0.69% to 1.54% and after including the addition made for the current year, the Net Profit ratio would show 18.31% as against actual ratio of 1.28% for the current year under appeal. In the same way, Stock-in-trade ratio is ranging from 9.31% to 12.69% and after including the addition made for the current year, the same would show 28.27% as against actual ratio of 11.24% for the current year under appeal.
Hence, after including the addition made by the AO, the financial statement would completely be distorted and will not show the correct, true and fair view, which is on more factor which substantiates our finding that the figure of stock was inflated, adhoc and estimated purely for showing to the bank without there being any actual stock acquired by the assessee. Therefore in any which way, the addition made by the assessing officer is not justified and the same is hereby directed to be deleted.
17. Ground no.11 is consequential to the above finding. The A.O. is directed to take decision as per law.
18. Ground no.12 is pre-mature. Therefore, no adjudication is required.
19. In the result, the assessee's appeal is partly allowed.
(This Order pronounced in open Court on 12.4.2013)
2013-TIOL-535-ITAT-CHD
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' CHANDIGARH
BENCH 'B' CHANDIGARH
ITA Nos.293 & 294/Chd/2012
Assessment Years: 2007-08 & 2008-09
Assessment Years: 2007-08 & 2008-09
RFCL LTD
NEW DELHI
PAN NO:AABCR7314N
NEW DELHI
PAN NO:AABCR7314N
Vs
DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE, PARWANOO
CIRCLE, PARWANOO
Sushma Chowla, JM and Mehar Singh, AM
Dated: April 2, 2013
Appellants Rep by: Shri Sriram Seshadri & Raghunath Rao
Respondents Rep by: Shri Akhilesh Gupta, DR & Shri Manjeet Singh, DR
Respondents Rep by: Shri Akhilesh Gupta, DR & Shri Manjeet Singh, DR
Income Tax - Section 32(1)(ii) - Whether depreciation on goodwill is allowable in view of the principle of ejusdem generis as decided by various High Courts and the Benches of Tribunal.
Assessee Company is running a diagnostic Lab and veterinary care center, also conducting chemical research, filed its ROI claiming depreciation goodwill relatable to business acquired from Ranbaxy Laboratories Ltd - AO disallowed the claim of the assessee on the ground that goodwill is an intangible asset not covered under the provisions of section 32- CIT(A) also held that depreciation is not allowable because provisions of section 32(1)(ii) are restrictive and the same cannot be extrapolated to those things which are not covered, Ld CIT(A) also observed the Tax auditors of the assessee has also disallowed the depreciation on this item- Matter reached to the ITAT wherein the AR of the assessee placed reliance on certain judgments.
After hearing the parties the ITAT held that,
++ the acquisition of the above said items is bundle of rights acquired by the assessee for which lump sum price was fixed and no break up in the value of price was determined either by the assessee or by the auditors but the same constituted bundle of rights akin to a licence or comparable to a license to carry on the business of Animal Health Care and Diagnostics Business divisions which was being carried on by the seller i.e. M/s Ranbaxy Laboratories Ltd. The above said assets acquired by the assessee were the "business or commercial rights or licence acquired" in order to carry on new business acquired by the assessee including list of employees and also various licences owned by Ranbaxy Laboratories Ltd. In line with the ratio laid down by the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT, we are of the view that the consideration of Rs.12.74 crores paid by the assessee was for acquisition of the intangible assets on which the assessee is entitled to the claim of depreciation under section 32(1)(ii) of the Act.
Assessee Company is running a diagnostic Lab and veterinary care center, also conducting chemical research, filed its ROI claiming depreciation goodwill relatable to business acquired from Ranbaxy Laboratories Ltd - AO disallowed the claim of the assessee on the ground that goodwill is an intangible asset not covered under the provisions of section 32- CIT(A) also held that depreciation is not allowable because provisions of section 32(1)(ii) are restrictive and the same cannot be extrapolated to those things which are not covered, Ld CIT(A) also observed the Tax auditors of the assessee has also disallowed the depreciation on this item- Matter reached to the ITAT wherein the AR of the assessee placed reliance on certain judgments.
After hearing the parties the ITAT held that,
++ the acquisition of the above said items is bundle of rights acquired by the assessee for which lump sum price was fixed and no break up in the value of price was determined either by the assessee or by the auditors but the same constituted bundle of rights akin to a licence or comparable to a license to carry on the business of Animal Health Care and Diagnostics Business divisions which was being carried on by the seller i.e. M/s Ranbaxy Laboratories Ltd. The above said assets acquired by the assessee were the "business or commercial rights or licence acquired" in order to carry on new business acquired by the assessee including list of employees and also various licences owned by Ranbaxy Laboratories Ltd. In line with the ratio laid down by the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT, we are of the view that the consideration of Rs.12.74 crores paid by the assessee was for acquisition of the intangible assets on which the assessee is entitled to the claim of depreciation under section 32(1)(ii) of the Act.
Assessee's appeal allowed
ORDER
Per: Sushma Chowla:
These two appeals filed by the same assessee are against separate orders of the Commissioner of Income-tax (Appeals), Shimla dated 28.12.2011 and 12.12.2011 relating to assessment years 2007-08 and 2008-09 against the order passed u/s 143(3) of the Income Tax Act, 1961 (in short 'the Act').
2. The grounds of appeal raised by the assessee in ITA No.293/Chd/2012 read as under:
1) That the order passed by the Hon'ble Commissioner of Income-tax(Appeals)-I "CIT(A)"] under section 250 of the Act is contrary to the provisions of the law.
2) That the Hon'ble CIT(A) erred in upholding the order of the learned Assessing Officer in making an addition of Rs. 27,871,700 on account of disallowance of depreciation claimed on intangible assets recorded as Goodwill in the books of accounts;3) That the Hon'ble CIT(A) erred in law and on facts by disregarding the contention of the Appellant that the Goodwill recorded in the books represents intangible assets eligible for depreciation under section 32(1 )(ii), although the same was recorded as Goodwill in the books of accounts;4) That the Hon'ble CIT(A) erred in law and on facts by holding that depreciation on 'Goodwill' is not allowable since the same does not find a mention in the words used in section 32(1)(ii) of the Act, although the Appellant has submitted that the amount recorded as 'Goodwill' in fact represents amount paid towards intangible assets eligible for depreciation;5) That the Hon'ble CIT(A) erred in law and on facts by granting restrictive meaning to section 32(1 )(ii) of the Act;
3. The assessee in ITA No.294/Chd/2012 has raised the following grounds of appeal:
1) That the order passed by the Hon'ble Commissioner of Income-tax (Appeals) ["CIT(A)"] under section 250 of the Act is contrary to the provisions of the law.2) That the Hon'ble CIT(A) erred in upholding the order of the learned Assessing Officer ("AO") in making an addition of Rs33,482,355 on account of disallowance of depreciation claimed on intangible assets recorded as Goodwill in the books of accounts;a. That the Hon'ble CIT(A) erred in law and on facts by disregarding the contention of the Appellant that the Goodwill recorded in the books represents intangible assets eligible for depreciation under section 32(1)(ii), although the same was recorded as Goodwill in the books of accounts;b. That the Hon'ble CIT(A) erred in law and on facts by holding that depreciation on 'Goodwill' is not allowable since the same does not find a mention in the words used in section 32(1)(ii) of the Act, although the Appellant has submitted that the amount recorded as 'Goodwill' in fact represents amount paid to wards intangible assets eligible for depreciation;c. That the Hon'ble CIT(A) erred in law and on facts by granting restrictive meaning to section 32(1)(ii) of the Act;3. That the Hon'ble CIT(A) has erred in upholding the order of the learned Assessing Officer ("AO") in making an addition of Rs.22,599,964 on account of compensation received towards cancellation of share purchase agreement ("SPA")a. That the Hon'ble CIT(A) erred on facts and in law by not holding the compensation received towards cancellation of the SPA as a capital receipt.b. That the Hon'ble CIT(A) erred on facts in holding that there was no breach of contract or cancellation of any contract and the compensation received for giving up the rights to purchase the shares by cancellation of the agreement was merely compliance on the part of the parties;c. That the Hon'ble CIT(A) erred in equating the penalty received under the original SPA with the compensation received on the cancellation of the agreement. "
4. Both these appeals by the assessee on similar issue were heard together and are being disposed off by this consolidated order for the sake of convenience.
ITA No.293/Chd/2012 :: Asst. Year 2007-08
5. The brief facts of the case are that the assessee company was engaged in diversified business i.e. diagnostic laboratory solutions, chemical research and veterinary care. During the year under consideration the assessee had filed return of income declaring total income of Rs.8,81,93,276/- on 31.10.2007. The case of the assessee was picked up for scrutiny after issue of notice under section 147/148 of the Act. The reasons for reopening the assessment were that in the computation of income the assessee had claimed depreciation on goodwill, which as per the Assessing Officer was not allowable as goodwill was an intangible asset. The Assessing Officer while reopening the assessment had found support from the judgment of the Hon'ble Bombay High Court in CIT Vs. M/s Techno Shares and Stocks Ltd. decided on 11.9.2009. The extract of the relevant portion of the judgment was reproduced by the Assessing Officer under paras 3 to 5 at pages 2 and 3 of the assessment order. The Assessing Officer consequently issued notice under section 148 of the Act to the assessee. The assessee in reply submitted that the copy of return of income earlier filed by it may be treated as filed under section 148 of the Act. The assessee also raised objection to the reopening of assessment under section 148 of the Act which was disposed off by the Assessing Officer. The Assessing Officer observed that under the amended provisions of section 32 of the Act w.e.f. 1.4.1998 though the assessee was entitled to depreciation on tangible/intangible assets but the same was allowable only on the restricted categories of tangible/intangible assets which were specifically enumerated in the said section. The assessee had claimed depreciation on goodwill which as per the Assessing Officer was not allowable and notice issued under section 148 of the Act was justifiable. During the assessment proceedings the contention of the assessee before the Assessing Officer was that it had entered into business Purchase Agreement(in short referred as 'BPA') with Ranbaxy Laboratories Limited during the financial year 2005-06 and had purchased the entire Animal Health Care and Diagnostics Business divisions of Ranbaxy. As part of the said agreement all the assets, personnel, marketing capabilities, licenses, permits, leases, tenancy rights, contracts and all other rights and powers, etc. related to the Allied Business divisions were transferred by Ranbaxy to assessee at consideration of Rs.62 crores. Out of the total consideration of Rs.62 crores, sum of Rs.49.26 crores was apportioned towards brands, building, plant and machinery, furniture and fixtures, vehicles and current assets. The balance amount of Rs.12.74 crores mainly representing the value attributable to the intangible assets comprising of licenses, permissions, health registrations, approvals, concessions, manufacturing know-how, specifications, marketing capabilities such as the distribution network comprising of wholesale stockists, information and documents in relation to products etc was recorded as goodwill in the books of account of the assessee. In respect of the said goodwill, depreciation was claimed under section 32(1)(ii) of the Act which as per the assessee was allowable in view of the amended provisions of the Act. Reference was made to various covenants of the agreement and also the list of the intangible assets and their description, which was acquired by the assessee. The Assessing Officer in the order has reproduced submission of the assessee under para 16 at pages 10 to 19 of the assessment order. Reliance was placed on various decisions for allowance of said expenditure. The Assessing Officer noted that the Accountant's report on which the assessee was placing reliance and claiming depreciation reflected that the brands were valued at Rs.1061.76 lacs and other tangible assets were also valued by the Accountant and the balance was included under the head 'goodwill' at Rs.1273.78 lacs. The Assessing Officer vide para 19 thus observed that A perusal of the table shows that the valuer had separately assigned a value to the intangible assets representing specific intellectual property rights in the form of 'brands' and also assigned values to the tangible assets, and the balance 'slump' price, which could not be allocated to any other specific tangible or intangible asset, was given a consolidated value as goodwill acquired by the company. The Assessing Officer vide para 25 enlisted the reasons for non-allowance of claim of depreciation of goodwill acquired at Rs. 12.74 crores.
6. Reliance was placed by the Assessing Officer on the restrictive interpretation of section 32(1)(ii) of the Act made by the Hon'ble Bombay High Court and implicitly approved by the Hon'ble Supreme Court in the case of M/s Techno Shares & Stocks [327 ITR 323 (SC)] = (2010-TIOL-67-SC-IT) and it was held that the assessee was not entitled to the claim of depreciation on the aforesaid goodwill. The Assessing Officer also distinguished the facts of other cases on which reliance was placed by the assessee and held the same to be not applicable. In contrast, the Assessing Officer relied upon R.G.Keswani Vs. ACIT (2009) 308 ITR (AT) 271 (Mum) = (2008-TIOL-682-ITAT-MUM), Bharatbhai J.Vyas (2005) 97 ITD 248 (Ahd) = (2005-TIOL-218-ITAT-AHM) and Guruji Entertainment Network Ltd. (2006) 14 SOT 556 (Del) = (2007-TIOL-196-ITAT-DEL). The next plank of objection of the Assessing Officer was that the goodwill grows or appreciates as evident from the increase in sale figures of the assessee for financial years 2005-06 to 2008-09 which had increased from year to year. The Assessing Officer vide para 40 thus held as under:
"40. Thus, Goodwill can be described as the intangible name of the business, which gets its advantage in business especially for marketing the products. This advantage is likely to grow over the years, rather than diminishing. Therefore it is safe to conclude that Goodwill does not fall or fit into the description of an asset that would depreciate with passage of time or with usage. In fact goodwill would usually grow over the years."
7. The Assessing Officer thus held that the assessee was not entitled to the claim of depreciation on goodwill of Rs.12.74 crores resulting in addition of Rs.2,78,71,700/-.
8. The CIT (Appeals) noted from the perusal of BPA that the assessee was a wholly owned subsidiary company of the seller i.e. Ranbaxy. On page 2 at sr.no. C, it is clearly mentioned that the business of Ranbaxy Labs has been sold "as a going concern on a slump sale basis". The term "allied business" has been defined meaning "the animal Health care and Diagnostic business carried on by the seller at India and overseas market and includes the employees employed by the seller in relation thereto". Similarly the term "contract" has been defined in detail in the said BPA. Reference was made to clause 2.2 of the BPA which is reproduced by the CIT (Appeals) at pages 15 and 16 of the appellate order and the CIT (Appeals) observed that though in the BPA attention was paid to minute details while executing BPA but similar attention was not paid to the valuation of each and every item separately i.e. in respect of intangible asset. Reference was also made to the valuation made by the Accountants under paras 57 and 58 wherein the Accountants had allocated slump price of Rs.62 crores to various asset i.e. both the tangible and intangible and it was observed by the CIT (Appeals) in para 5.9 that A perusal of the above makes it amply clear that the Valuers have strictly followed the norms of apportionment of the slump price as laid down in para 35 and 36 of AS-10 issued by the ICAI. They have taken all the assets including the fixed assets and the intangible assets at their respective fair market value. "Goodwill" is calculated as the difference between the aggregate slump price and aggregate fair market value of other assets including the fixed assets and intangible assets. According to the CIT (Appeals) the assessee had failed to furnish the break-up of the value assigned by the Accountants to the given components namely employees, contracts, licenses, approvals etc. in spite of queries raised by the Assessing Officer and in view of the confession of the assessee that no such break-up was available and the assessee having failed to substantiate its claim during the appellate proceedings, the CIT (Appeals) observed that the assessee was trying to mis-interpret the term 'goodwill'. The CIT (Appeals) further held that the Income Tax Act though recognizes the concept of intangible assets and their value to the business and the allowability of depreciation on the same assets which are eligible for depreciation under section 32 of the Act clearly and consciously leaves out goodwill from this list. As per the CIT (Appeals) the provisions of section 32 were restrictive in nature and goodwill being not covered under section 32(1)(ii) of the Act, the assessee was not entitled to the claim of depreciation on the same. The case of the assessee that the goodwill represented employees contracts, licences, agreements, manufacturing, know-how, was rejected by the CIT (Appeals) as even tax Auditors had denied the benefit of depreciation on goodwill booked in the books of account. The CIT (Appeals) vide para 5.23 held the assessee not to be entitled to the claim of depreciation on goodwill because of reasons enumerated. Para 5.23 reads as under:
"5.23 In view of discussion above, it is concluded that, the appellant's claim far depreciation on "goodwill" is not sustainable for the following reasons:-(1) The term 'goodwill' has neither been defined in the I. T. Act, nor in the BPA. Therefore goodwill has to be understood in its generic denotative form, as per its normally defined meaning. Hence appellant's logic that it stands for other intangible assets does not hold ground.(2) 'Goodwill' is not a synonym for contracts, licenses, technical know-how etc. It is a much larger concept, and there are set accounting practices to determine the value or 'goodwill'.(3) The appellant has separately booked the value of the real intangible assets on which depreciation has also duly been availed.(4) 'Goodwill' has been separately mentioned, considered and evaluated in the BPA and the valuation report.(5) Method of valuation of 'Goodwill' has been discussed in the Valuation Report.(6) Tax auditors and statutory auditors have also not allowed depreciation on the 'goodwill', while they have allowed depreciation on other intangible assets.(7) 'Goodwill' simplicitier is not entitled to depreciation as per the provisions of Section 32(ii) and Section 55 (1). It was never the intention of the legislature to allow depreciation on goodwill.(8) Every business and commercial right is not eligible for depreciation within the meaning of Section 32(1 )(ii). It has to be in the nature of intellectual property rights, like trade-marks, patents, franchises, copyrights etc.(9) The words "any other business or commercial rights of similar nature" have to be interpreted ejusdem generis.(10) The appellant has not been able to show as to how employees, contracts, licenses etc. are individually valued and incorporated under the head 'goodwill', when all the assets for the purpose of apportionment of slump price have been distinctly identified.(11) The appellant has not been able to show as to what is the value of 'goodwill ' simpliciter.(12) It is not the appellant's case that the value of 'goodwill' simpliciter is Nil.(13) The appellant has not been able to, explain as to what prevented the Valuers and the management from separately booking the value of assets like licenses, approvals etc. despite detailed discussion about the same in the BPA.(14) The appellant has not been able to establish as to how the Valuers have included the value of other intangible assets under the head goodwill, despite clearly delineating the method of accounting of allocation of slump price.(15) The appellant has been shifting its stand even regards the so-called intangible assets included in the goodwill."
9. The assessee is in appeal against the order of CIT (Appeals). Both the authorized representatives had elaborately addressed the Bench on the issues raised in the present appeal and the matter thereafter was fixed again for seeking certain clarifications. The learned A.R. for the assessee made elaborate submissions in this regard. Both the authorized representative had filed written submissions which have been taken on record and shall be dealt with by us in the paras hereinbelow.
10. The learned A.R. for the assessee pointed out that the facts of the present case are referred to by the CIT (Appeals) in para 3.2 at page 8 of the appellate order. The learned A.R. for the assessee referred to BPA entered into between the assessee and M/s Ranbaxy Laboratories Ltd., placed at page 29 to 126 of the Paper Book and referred to the clauses 2.2.1 to 2.4 and stated that the items referred in the clauses were transferred to the assessee for which sale consideration was paid by the assessee. The learned A.R. for the assessee thereafter referred to the Valuation Report of the Chartered Accountant placed at pages 127 to 138 of the Paper Book. In the preliminary para 2.1, it has been stated that the role of the valuer was only to work out the fair value of certain brands acquired as part of business division and also the fair basis for apportioning slump price of Rs.62 crores. The learned A.R. for the assessee thereafter referred to the report of the Accountants, under which vide para 7.3 the brands were valued at Rs.10.62 crores and also the valuation of the tangible assets was worked out by the Accountants as per item Nos.1 to 6 and the balance consideration was attributed to the goodwill i.e. Rs.12.73 crores. The learned A.R. for the assessee referred to the chart already filed on record under which it had filed the list of other items taken over by the assessee. The learned A.R. for the assessee pointed out that the Assessing Officer had allowed depreciation on the tangible assets and even on the brand value holding it to be intangible assets but the depreciation on goodwill of Rs.12.73 crores had been denied. Reliance was placed by the learned A.R. for the assessee in CIT Vs. SMIFS Securities Ltd. [348 ITR 302 (SC)] = (2012-TIOL-53-SC-IT) and on Areva T and D India Ltd. Vs. DCIT [345 ITR 421 (Del)] = (2012-TIOL-234-HC-DEL-IT). The learned A.R. for the assessee concluded by stating that the assessee had acquired business/commercial rights which were covered under section 32 (1)(ii) of the Act on which depreciation was allowable as per ratio laid down by the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra) and even if it is treated as goodwill, it will still to be intangible asset qualifying for depreciation under section 32 of the Act, as per the ratio laid down by the Hon'ble Supreme Court in CIT Vs. SMIFS Securities Ltd. (supra). The learned A.R. for the assessee has submitted written submissions in this regard and the same have been considered.
11. The learned D.R. for the Revenue had also filed written submissions in which firstly reliance was placed on the orders of the authorities below. Further the learned D.R. for the Revenue referred to the reasoning of the Assessing Officer for making aforesaid disallowance which were as under:
4. The Ld. A.O. had made the disallowance on account of the following reasons:a) The assessee claimed depreciation of Rs. 2,78,71,700/- even though the depreciation on 'goodwill' was denied even by the Assessee's Tax Auditors in the tax audit report attached with the return of income.b) The Chartered Accountants, in their valuation report had separately assigned a value to the intangible assets, representing specific intellectual property rights in the form of 'Brands'. It was observed that separate value was assigned to the tangible assets and the balance "slump price", which could not be allocated to any other specific tangible or intangible asset, was given a consolidated value as 'goodwill'. Since a separate value has been specifically assigned to the 'intangible assets', it falsified the argument of the assessee that the 'goodwill', in fact, represented the 'intangible assets'.c) The assessee when asked to elaborate the various components included under the head 'goodwill' and the value assigned by the Valuers to each such component submitted that no such breakup was available and whatever was contained in the valuation report was final.d) The assessee when asked as to what kind of right or bundle of rights to do business is conferred on the company by virtue of goodwill acquired submitted that "We acquired goodwill from Ranbaxy Lab., by acquiring Animal Health Care and Diagnostics Business from them. This goodwill has generated from the acquisition of business in RFCL business portfolio'.e) In view of the above, it was concluded by the A. O. that the assessee had failed to establish as to what 'intangible assets' were included in the valuation of the 'goodwill' which could qualify for depreciation. The A. O. finally concluded that it was a business division as a going concern, together with its trade marks, trade names and brands which was acquired by the assessee.
12. The learned D.R. for the Revenue further pointed out that the learned A.R. of the assessee has cited various judicial authorities to support his case, however, with due deference to the same it is submitted that the peculiar facts of the case do not deserve the ratio of the given case laws. Further objections of the learned D.R. for the Revenue were as under:
A) During the course of appellate proceedings, the CIT(A) observed that the assessee submitted a list of intangible assets as part of goodwill which was at variance with the list as submitted before the Ld. A. O. It was observed that the assessee was trying to enlarge or adjust the scope of goodwill without any concrete basis. The Ld. CIT(A) observed that there was no mention of name licence, export registrations etc. before the A.O., while during the course of appellate proceedings, the lease hold rights/tenancy rights, permits, licenses, approval and registrations for carrying on the allied business have not been considered as apart of goodwill.B) A perusal of the business Purchase Agreement (BPA) between the assessee Ranbaxy Fine Chemicals Ltd. and the Ranbaxy Laboratories Ltd. show that the assessee was a wholly owned subsidiary company of the seller i.e. Ranbaxy Laboratories Ltd. On page 2 at Sr. No. C(of BPA), it is clearly mentioned that the business of Ranbaxy Labs has been sold "as a going concern on a slump sale basis". The term "allied business" has been defined meaning "the animal Health care and Diagnostic business carried on by the seller at India and overseas market and includes the employees employed by the seller in relation thereto". Similarly, the term contract had been defined in detailed in the said BPA. It is pertinent to mention that a reference may be made to paras 2.2, 2.2.1, 2.2.2, 2.2.3 & 2.2.4. A perusal of these paras make it clear that on the payment of the purchase price the assessee was entitled to all the rights, titles and interest of the seller in the allied business. The trade marks alongwith the trade names and the brand names, all licenses, covenants, permissions, health registrations, approvals and concessions, manufacturing knowhow including specifications and test methods etc. have been specifically mentioned as those rights/interests which the assessee was bound to receive as a matter of right on payment of the purchase price. Thus, these rights were inherent in the purchase price and were specifically mentioned in the BPA.C) Para 2.2.1 puts special focus on the trade marks which are described in Schedule VI and on "goodwill". This para specially mentions that the trade marks are used in connection with the 'goodwill' of the business. Thus it is clear that both the seller as well as the assessee were very clear about the rights, titles and interests which were being transferred/acquired in the said business deal. That is why everything has been separately mentioned in clear and unambiguous terms. So has the goodwill been separately mentioned in the BPA. It has been acknowledged that the trademarks are used in connection with the goodwill of the business. Accordingly the trade marks and the goodwill have been separately valued in the valuation report. Contrasted to this, licences, permissions, manufacturing knowhow etc. have not been mentioned in connection with the goodwill of the business.D) Further, the BPA in para 5.1 also makes it clear that all the employees of Ranbaxy were to become the employees of the assessee on the same terms and conditions of employment as were offered by the seller to them. In fact the BPA ensures that the terms and conditions of the employment of the erstwhile employees of the seller remain unaffected by way of slump sale of its business. Thus, far from ascribing value to the employees in terms of technical knowhow, the focus of the BPA is on securing their continuation in the employment on already existing terms and conditions.E) It is further pertinent to mention that the valuers have strictly followed the norms of apportionment of the slump price as laid down in para 35 & 36 ofAS-10 issued by the ICAI. They have given a fair allocation of slump price of Rs. 6200 Lakhs paid/to be paid by RFCL to RLL and specified the same in clause 3.1 of the agreement as under:
| Sr.No. | Assets | Rs. In Lakhs |
| 1. | Brands | 1061.76 |
| 2. | Building | 126.99 |
| 3. | Plant and Machinery | 397.12 |
| 4. | Furniture & Fixture | 28.71 |
| 5. | Vehicles | 24.24 |
| 6. | Net Current Assets | 3287.40 |
| 7. | Goodwill | 1273.78 |
| Total | 6200.00 |
It is clear from the above that the valuer have taken all the assets including the fixed assets and the intangible assets at their respective fair market value. "Goodwill" is calculated as the difference between the aggregate slump price and aggregate fair market value of other assets including the fixed assets and intangible assets Under the heading "Identification of Assets", the valuers have clearly identified the various heads of assets which could be considered as the components of the Business divisions acquired by the assessee, and against which the slump price was required to be apportioned on a fair basis. It is in this process of identification of assets that brands have been specifically mentioned and evaluated. Therefore, there is no scope for any ambiguity, as the slump price has been allocated to all the assets identified in the said business deal and the 'goodwill' has been separately and categorically ascribed the value as per the accepted accounting standard.F) In view of the paras mentioned above the assessee's claim that the residual 'goodwill' contained the various rights, licenses, approvals etc. as enumerated in the table in para 5.1 above is not correct. Moreover, during the course of appellate proceedings, the assessee has only reiterated the submissions made during the course of assessment proceedings without bringing on record anything to substantiate its claim that while ascribing value to 'goodwill', the Valuers had added the value of many other rights, licenses, employees, manufacturing knowhow etc. The Ld.CIT(A) has rightly concluded that this goes on to show that the assessee is just trying to misrepresent by including in the term 'goodwill' every possible thing/right referred to in the BPA.G) It may be pointed out that even the Tax Auditor of the assessee have denied the benefit of depreciation on 'goodwill' booked in the books of accounts. Although the assessee is dismissive of the opinion expressed by its Tax Auditors duly appointed by the Board of Assessee's Company, the assessee has failed to explain as to what is the pro-rata allocation of the value of the above mentioned intangible assets in the value of 'goodwill' with reference to the commercial or other rights derived by the assessee from the acquisition of the said assets. The assessee's argument simply means that the value of 'goodwill' simplicitor is NIL in the BPA and the valuation report. The Ld. CIT(A) has rightly concluded that the assessee has chosen to name all these intangible assets as 'goodwill' without elaborating which identifiable asset acquired was for what value and what method of valuation was adopted to arrive at that particular value.H) It may be mentioned here that depreciation on specific intangible assets in the form of IPRs has been claimed and allowed by the Tax Auditors of the assessee simply because as per the BPA and the Valuers' report, the said 'intangible assets' denote the total value of the specific 'intangible assets' in the form of trade-marks/brands acquired by the assessee in the given business deal which were identified for separate evaluation. The BPA also makes it clear that the said intangible assets are used in connection with the goodwill of the business. This clearly means there were no other assets acknowledged in connection with the goodwill. It is thus obvious that by making a claim for depreciation on 'goodwill' while treating it to be a synonym for other 'intangible assets', the assessee is trying to take double benefit of depreciation as it has already availed of the depreciation on the real 'intangible assets' shown in the balance sheet.
13. We have heard the rival contentions and perused the record. The assessee company during the financial year 2005-06 entered into Business Purchase Agreement with Ranbaxy Laboratories Ltd. for purchase of entire Animal Health Care and Diagnostics Business divisions of Ranbaxy Laboratories Ltd., both in India and overseas market in addition to the employees employed by the said company. The copy of BPA is placed at pages 29 to 126 of the Paper Book and in the preamble it is mentioned that;
"A. The Seller is engaged in business activities pertaining to pharmaceuticals, including inter alia, Animal Health Care and Diagnostics business.B. The Purchaser is a wholly owned subsidiary of the Seller.C. The Seller is desirous of transferring by sale, and the Purchaser is desirous of acquiring by purchase, the entire Animal Health Care and Dignostics business divisions, excluding the Excluded Liabilities and Dade Behring Business, to the Purchaser, as a going concern on a slump sale basis("Transaction").
14. The parties thereto intended that;
2. TRANSFER OF ALLIED BUSINESS."2.1 The Purchaser agrees to purchase, acquire and accept from the Seller and the Seller hereby agrees to sell, assign and convey to the Purchaser as a going concern on a slump sale basis, the Allied Business with effect from the Effective Date.In order to expeditiously achieve Transfer, the Parties shall, on or prior to the Closing Date execute such deeds, deliver and execute delivery or possession, letters or agreements as required to transfer legal title in each of the Allied Business, in compliance with applicable Laws."
15. Clause 2.2 of the BPA is relevant clause of transfer of assets i.e. both the tangible and intangible, which reads as under:
2.2 On the closing date, the seller will, in consideration of receipt of the Purchase Price from the Purchaser sell, transfer, convey, assign and deliver to the Purchaser and the Purchaser shall purchase, acquire and accept from the seller, all of sellers right, title and interest in the Assets free of all encumbrances (Save and except to the extent specifically disclosed to the Purchaser by the Seller vide the Disclosure Letter) including without limitation, the following:2.2.1 The trademarks along with the trade names and the brand names owned by or applied for or registered in the name of the seller in relation to the products as described in Schedule 6 together with the goodwill of the business in connection with which the Trademarks are used. For the purposes of transfer of Trademarks, the Seller shall, on or before the Closing date, execute a deed of assignment in favour of the Purchaser, thereby transferring and assigning absolutely to the Purchaser the title to and any and all rights and interests in the trademarks, in the form as set forth in Schedule 7 hereto:2.2.2 The relevant client portfolio consisting of the detailed list of wholesale stockists and all marketing and promotions information and documents in relation to the products;2.2.3 All licenses, covenants, permissions, health registrations, approvals and concessions required from any Governmental Authority for carrying on the Allied Business asset out in Schedule 8 hereto2.2.4 All other relevant information and technology in relation to the Allied Business including without limitation -a) The manufacturing know-how, in particular the specifications and test methods, manufacturing and packaging instructions, master formulae, validation reports, stability data, analytical methods and any other documents necessary to manufacture, control and release the Products;b) Any drug safety reports in relation to the products
16. As per clause 3 the total lump-sum consideration for transfer of the allied business to the assessee was agreed upon at Rs.62 crores. As per clause 4 the allied business shall be conducted by the seller and operated for the benefit of the purchaser during the period commencing from the effective date i.e. the date of execution of this agreement to the closing date i.e. the date on which closing occurs i.e. the date on which allied business shall be transferred from the seller to the purchaser, as defined under clause 1.1 of the BPA. As per clause 5 all the employees as set out in Schedule 2 shall w.e.f. the effective date become the employees of the purchaser i.e. the assessee before us, on the same terms and conditions of employment as were offered by the seller. Clause 6 of the BPA enlists the representations, warrants and disclaimers of the seller including licenses, permits other approvals required under law necessary to carry out the manufacturing activities, list of contracts, amounts receivable from other parties etc. Clause 7, on the other hand, enlists the representations and warrantees of the purchaser. Further terms and conditions of BPA deal with various steps to be taken by both the purchaser and seller in order to execute the agreement. The list of intangible assets acquired by the assessee on the acquisition of the Animal Health Care and Diagnostics Business divisions of Ranbaxy were enlisted in Schedules to the BPA which alongwith relevant pages of the Paper Book are as under:
S.No. | Details of Intangible Assets acquired | Paper Book Reference Page Numbers |
1. | Stockist Agreements | 51-75 |
2. | Distribution Agreements | 76-79 |
3. | Lease Agreements | 81 |
4. | Distribution and Marketing Agreements | 82 |
5. | List of Employees | 83-86 |
6. | List of Licenses and Permissions (Export Registrations) | 126 |
7. | Various Products - Enlarged product range and customer base | 108-120 |
8. | Name License | 45 |
9. | Manufacturing know how, specifications and test methods, manufacturing and packaging instructions, master formulae, validations reports, stability data, analytical methods and any other documents necessary to manufacture, control and release the products | 36-37 |
17. The assessee also appointed the Chartered Accountant to provide Valuation Report in order to work out the fair market value of certain brands acquired by the assessee as part of the BPA. As per the Valuation Report the purchase consideration totaling Rs.49.26 crores was allocated to the brands and the tangible assets i.e. cost of building, plant & machinery, furniture and fixtures, vehicles and net current assets. The balance purchase consideration of Rs.12.74 crores was shown under the head 'goodwill'. The case of the assessee was that that the said balance consideration represents the value attributable to the intangible assets detailed in clause 2.2 and also as per the Schedule to the BPA and was recorded as goodwill in the books of account for the year under consideration. The Assessing Officer had allowed the depreciation both on the brands and also on the other tangible assets totaling Rs.49.26 crores. However, the depreciation on goodwill claimed by the assessee was disallowed following the ratio laid down by the Hon'ble Bombay High Court in M/s Techno Shares & Stocks [323 ITR 69 Bom)] = (2009-TIOL-495-HC-MUM-IT).
18. Before the CIT (Appeals) the decision of the Hon'ble Supreme Court in the case of M/s Techno Shares & Stocks (supra) was also referred to but the CIT (Appeals) rejected the same observing that section 32(1 )(ii) of the Act had restrictive application and depreciation was not allowable on the goodwill simpliciter. The second objection of the authorities below in not allowing the depreciation on goodwill was the said non-allowance made by the tax auditors in the accounts prepared by them.
19. The issue arising before us is whether the assessee is entitled to the claim of depreciation on the said acquisition of intangible assets in line with the acquisition of business of Animal Health Care and Diagnostics Business divisions of Ranbaxy and/or also whether the assessee is entitled to the claim of depreciation on the amount booked under the head goodwill simpliciter.
20. Under the amended provisions of section 32 of the Act w.e.f. 1.4.1999, ambit of depreciation has been enlarged to cover both the tangible and intangible assets. The depreciation on buildings, machinery plant of furniture being tangible assets was being allowed subject to satisfaction of the conditions laid down under section 32 of the Act i.e. the assets should be owned wholly or partly by the assessee and used for the purpose of business or profession of the assessee. The rate of depreciation for such assets was provided in Schedule attached to the Income Tax Act. However, after the amendment by the Finance (No.2) Act, 1998, w.e.f. 1.4.1999 the depreciation is also to be allowed on intangible assets i.e. know-how, patent and copyrights, trademarks, licences or franchises or any other business or commercial rights of similar nature. The Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra) applied the principle of ejusdem generic to interpret the expression "business or commercial rights of similar nature" referred to in section 32(1)(ii) of the Act and held that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. The Hon'ble Court further held that in the circumstances, the nature of business or commercial rights could be of the same genus in which all the aforesaid six assets fall and thus intangible assets i.e. business claims; business information; business records;, contracts; employees; and know-how, were held to be assets which are invaluable and result in carrying on the business of the assessee, without any interruption and are comparable to a licence or akin to a licence which is one of the items falling in section 32(1)(ii) of the Act.
21. The Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra) vide para 13 and 14 had held as under:
"13. In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression "business or commercial rights of similar nature" specified in Section 32(1)(ii) of the Act, it is seen that such rights need not answer the description of "knowhow, patents, trademarks, licenses or franchises" but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in Section 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature", it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible, assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares and Stocks Ltd.(supra) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a "license" or "akin to a license" which is one of the items falling in Section 32(1)(ii) of the Act.14. In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in Section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that Section."
22. Similar view has been laid down by the Hon'ble Bombay High Court in CIT-II Vs. M/s Birla Global Asset Finance Co. Ltd., Income Tax Appeal No.6835 of 2010 - date of decision 16.10.2012 and it was held that intangible assets like business and commercial brand equity were goodwill on which depreciation was allowable.
23. The Mumbai Bench of the Tribunal in M/s India Capital Markets P. Ltd. Vs. DCIT, Mumbai in ITA No.2948/Mum/2010 = (2012-TIOL-793-ITAT-MUM) vide order dated 12.12.2012 held as under:
"19. The I.T.A.T. Mumbai "G" Bench in the case of DCIT vs. Weizman Forex Ltd. in ITA.No.3571/Mum/2011 = (2012-TIOL-281-ITAT-MUM) observed that the definition of the asset which is a subject matter of the transfer consists of all contract, licenses, franchaise, distribution net work, customer lists, marketing strategies and software and when the intangible asset being commercial/business rights diminished in value or physical wear and tear is not an essential condition for admissibility for depreciation, if the asset is used as a business tool for earning income."
24. The above said ratio was referred to by Mumbai Bench of the Tribunal in M/s India Capital Markets P. Ltd. Vs. DCIT (supra) wherein the purchase of clientele business by the assessee from M/s AFC was held to be right which could be used as a tool to carry on the business and the consideration paid for which was held eligible for depreciation.
25. As pointed out in paras hereinabove the assessee in addition to building, plant & machinery, furniture, fixtures, vehicles and net current assets alongwith brands valued at Rs.49.26 crores had also acquired the under-mentioned assets:
S.No. | Details of Intangible Assets acquired | Paper Book Reference Page Numbers |
1. | Stockist Agreements | 51-75 |
2. | Distribution Agreements | 76-79 |
3. | Lease Agreements | 81 |
4. | Distribution and Marketing Agreements | 82 |
5. | List of Employees | 83-86 |
6. | List of Licenses and Permissions (Export Registrations) | 126 |
7. | Various Products - Enlarged product range and customer base | 108-120 |
8. | Name License | 45 |
9. | Manufacturing know how, specifications and test methods, manufacturing and packaging instructions, master formulae, validations reports, stability data, analytical methods and any other documents necessary to manufacture, control and release the products | 36-37 |
26. The perusal of the Schedules to BPA comprising of the above said list of Stockist Agreements, Distribution Agreements, Lease Agreements and also Distribution and Marketing Agreements, alongwith List of Licenses and Permissions and List of various Products, the name license and also the manufacturing know-how etc., alongwith List of employees are assets, which are invaluable and instrumental in carrying on the business of Animal Health Care and Diagnostics Business divisions acquired by the assessee from M/s Ranbaxy Laboratories Ltd. as per BPA. The acquisition of the above said items is bundle of rights acquired by the assessee for which lump sum price was fixed and no break up in the value of price was determined either by the assessee or by the auditors but the same constituted bundle of rights akin to a licence or comparable to a license to carry on the business of Animal Health Care and Diagnostics Business divisions which was being carried on by the seller i.e. M/s Ranbaxy Laboratories Ltd. The above said assets acquired by the assessee were the "business or commercial rights or licence acquired" in order to carry on new business acquired by the assessee including list of employees and also various licences owned by Ranbaxy Laboratories Ltd. In line with the ratio laid down by the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra), we are of the view that the consideration of Rs.12.74 crores paid by the assessee was for acquisition of the intangible assets on which the assessee is entitled to the claim of depreciation under section 32(1)(ii) of the Act.
27. The second aspect of the issue is that the assessee had booked the said consideration of Rs.12.62 crores as goodwill in its books of account. In this regard also the assessee is entitled to the claim of depreciation on the goodwill as the Hon'ble Supreme Court in CIT Vs. SNIFS Securities Ltd. (supra) held that the goodwill by itself was an intangible asset under Explanation 3(b) to section 32(1) of the Act and is eligible for deduction. The relevant portion of the ratio laid down by the Hon'ble Supreme Court is as under:
"The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ['Act', for short] We quote hereinbelow Explanation 3 to Section 32(1) of the Act:"Explanation 3 - For the purposes of this sub-section, the expressions 'assets' and 'block of assets' shall mean-la] tangible assets, being buildings, machinery, plant or Furniture;[b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature."Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.A reading of the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).In the circumstances, we are of the view that Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act"
28. In view of the ratio laid down by the Hon'ble Supreme Court in CIT Vs. SNIFS Securities Ltd. (supra), it is held that the goodwill simpliciter was eligible for depreciation and the assessee having paid consideration of Rs.12.74 crores for acquisition of the said goodwill and having accounted for the same in its books of account as goodwill, was entitled to the claim of depreciation. We accordingly direct the Assessing Officer to allow the claim of the assessee vis-Ã -vis the claim of depreciation on goodwill of Rs.12.74 crores.
29. The objection of the Assessing Officer in not allowing the said claim as pointed out by the learned D.R. for the Revenue in his written submissions, was that the assessee was enlarging the scope of goodwill without any basis. We find no merit in the above said observation of both the Assessing Officer and the CIT (Appeals) and the pleadings of the learned D.R. for the Revenue in view of the ratio laid down by the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra). The second plea of the learned D.R. for the Revenue was that the assessee was wholly owned subsidy of the seller company and perusal of paras of the BPA reflects that the payment of the purchase price by the assessee would make it entitle to all rights, titles and interest of the seller in the allied business. We find no merit in the plea of the learned D.R. for the Revenue in this regard. The assessee having paid composite amount for acquisition of complete allied business of Ranbaxy Laboratories Ltd. and auditors having allocated the value to the tangible assets, the brands and balance to goodwill, establish the case of the assessee that it had paid the consideration for acquisition of the enlisted assets i.e. the list of stockists, distribution and marketing agreements, lease agreements, list of employees, various licences and manufacturing know-how of the allied business and the assessee was entitled to claim of depreciation on value of such assets under section 32(1 )(ii) of the Act. The next stand of the learned D.R. for the Revenue that goodwill was covered in the agreement and is described as part of the agreement establishes the case of the assessee that it had contributed part of the consideration for acquisition of the goodwill of the business being run by the seller and once such contribution has been so made, the assessee is entitled to the claim of depreciation on such goodwill as held by the Hon'ble Supreme Court in CIT Vs. SNIFS Securities Ltd. (supra). Similarly other arguments raised by the learned D.R. for the Revenue that residual concession, various rights, licences, approvals, etc. was not correct, does not stand in view of our decision in paras hereinabove in turn following the ratio laid down by the Hon'ble Delhi in Areva T and D India Ltd. Vs. DCIT (supra).
30. The last objection of the authorities below and learned D.R. for the Revenue was that the Tax Auditors had denied benefit of depreciation on goodwill booked in the Balance Sheet. It is an established rule that the treatment of an entry in the books of account does not establish its allowability in the hands of the assessee. It is the nature of the expenditure which determines allowability of the expenditure in the hands of the assessee. The opinion of the auditors is not determinative of the correct position of law and while allowing the claim in the hands of the assessee, the authorities have to independently examine its allowability under the provisions of the Act and also as per the relevant judicial precedents. In view thereof, we direct the Assessing Officer to allow the claim of the assessee vis-Ã -vis depreciation with regard to claim of depreciation on intangible assets booked as goodwill in the books of account valued at Rs.12.74 crores. The grounds of appeal raised by the assessee in ITA No.293/Chd/2012 are thus allowed.
ITA No.294/Chd/2012:: Asst. Year
30. The facts of the case in ITA No.294/Chd/2012 are similar to the facts in ITA No.293/Chd/2012. The assessee during the year under consideration had claimed depreciation on goodwill represented by various intangible assets amounting to Rs.3,34,82,355/-. The assessee during the year under consideration had claimed the said depreciation on intangible assets on account of following acquisitions:
a) Purchase of entire Animal Health Care and Diagnostics Business divisions of Ranbaxy Laboratories Limited ("Ranbaxy Acquisition")b) Purchase of the entire Biomed division of Wipro Limited comprising of Diagnostics, Medical systems and life sciences business ("Wipro Acquisition")c) Purchase of the entire medical diagnostic business of Godrej Industries Limited ("Godrej Acquisition")
32. The assessee has tabulated value of intangible assets under all the above acquisition and corresponding depreciation claimed during the year, in its written submissions and the same are as under:
Particulars | Financial year of acquisition | Value of Intangible Assets acquired (Rs.in crores) | Depreciation claimed (Amount in Rs) |
Ranbaxy Acquisition | 2005-06 | 12.74 | 33,482,355 |
Wipro Acquisition | 2007-08 | 3.788 | |
Godrej Acquisition | 2007-078 | 2.486 |
33. The first item of claim of depreciation was in respect of BPA entered into with M/s Ranbaxy Laboratories Ltd. for purchase of entire Animal Health Care and Diagnostics Business divisions of Ranbaxy. We have dealt with the issue of allowability of depreciation on goodwill booked by the assessee in the preceding year in the paras hereinabove and following our decision in the paras hereinabove, we direct the Assessing Officer to allow the claim in entirety in relation to depreciation on goodwill of acquisition of allied business of Ranbaxy Laboratories Ltd.
34. During the year under consideration the assessee entered into Business Acquisition Agreement (hereinafter referred as 'BAA') with M/s Wipro Ltd. and purchased the entire biomed division of Wipro Ltd. comprising of Diagnoostices, Medical systems and life sciences business (hereinafter referred to as "the Allied Business"). Clause 2.2 of the BAA details the assets, rights, titles, etc of M/s Wipro Ltd. that were conveyed to the assessee in consideration for the purchase price as a going concern on a slump sale basis. The relevant extract of clause 2.2 is as under:
"2.2 The Seller shall according to the provisions of this Agreement on the Closing Date, as part of the Specified Business, transfer all rights, title and interest of the Seller in the Specified Business, together with the said Movable Assets, Current Assets, Assumed Liabilities, sake Employees, said Contracts, goodwill, consumables and all other rights and privileges in relation thereto to the Purchaser."
35. The allied business of M/s Wipro Ltd. was purchased by the assessee for a consideration of Rs. 13.297 crores. The list of trademarks, contracts and licenses, employees, insurance policies etc that were acquired by the assessee as part of the BAA are detailed in schedules to the BAA, placed at pages 54 to 65 of the Paper Book. The valuer allocated Rs.13.297 crores to Fixed Assets, Debtors, Inventory, Liabilities. The remaining purchase consideration of Rs.3.788 crores, represents the value attributable to the intangible assets detailed in clause 2.2 are tabulated below and the same was recorded as goodwill in the books of account of the assessee:
S.No. | Details of Intangible Assets acquired | Paper Book Reference Page Numbers |
1 | Details of trade marks | 54 |
2. | List of Contracts | 55 |
3. | Details of Licenses | 56 |
4. | List of employees | 58 |
5. | Details of Insurance Policies | 65 |
36. The third acquisition by the assessee during the year was by way of BAA with M/s Godrej Industries Ltd. The assessee purchased the entire medical diagnostic business of Godrej (hereinafter referred to as "the Allied Business"). As a part of the BAA, all the assets, liabilities, employees, contracts, consumables and all other rights and privileges, etc related to the Allied Business division were transferred by M/s Godrej Industries Ltd. for a consideration of Rs.6 crores. Clause 2.1 of the BAA details the assets, rights, titles etc. that were conveyed to the assessee as a going concern on a slump sale basis. The relevant extract of clause 2.1 reads as under:
"2.1 Subject to the provisions of this Agreement, on the Closing Date, the Seller shall sell,transfer, convey and deliver to the Purchaser and the Purchaser shall purchase, acquire and accept from the Seller, all rights, title and interest of the Seller in and to the Specified Business, as a going concern on a slump sale basis.The term 'Specified Business' has been defined in the BAA to mean and include the Current Assets, Transferred Liabilities, Specified Employees, said Contracts, goodwill, consumables and all other rights and privileges in relation to the Medical Diagnostic Business of the Seller
37. The Allied Business was purchased by the assessee for total consideration of Rs. 6 crores. The list of contracts and import licenses, employees etc. that were acquired as part of the BAA have been detailed in the schedules to the BAA, placed at pages 131 to 133 of the paper book. The valuer allocated Rs.3.450 crores to Debtors, Inventory, Liabilities. The remaining purchase consideration of Rs.2.486 crores, represented the value attributable to the intangible assets detailed in clause 2.2 and tabulated below was recorded as goodwill in the books of account of the assessee:
S.No. | Details of Intangible Assets acquired | Paper Book Reference Page Numbers |
1. | List of Contracts | 131 |
2. | Details of Import Licenses | 132 |
3. | List of employees | 133 |
38. The assessee claimed depreciation on the intangible assets acquired under the above said BAA and the same was disallowed by the Assessing Officer and the CIT (Appeals). We find that the facts of acquisition of allied business of M/s Wipro Ltd. and M/s Godrej Industries Ltd. are identical to the facts of acquisition of allied business of Ranbaxy Laboratories Ltd. In line with our decision in ITA No/293/Chd/2012 and the facts being identical our decision in ITA No.293/Chd/2012 would apply mutatis mutandis to the facts in ITA No.294/Chd/2012. We have already directed the Assessing Officer to allow depreciation on goodwill of allied business of Ranbaxy Laboratories Ltd. The ground No.2 raised by the assessee in this regard is thus allowed.
39. The ground No.3 raised by the assessee is against the addition of Rs.2.25 crores on account of compensation received towards cancellation of share purchase agreement.
40. The brief facts as referred to by the learned A.R. for the assessee in the written submissions are as under:
"Ambalal Sarabhai Enterprises Ltd, Mautik Exim Ltd, Haryana Containers Ltd, Mr. Kartikeya V. Sarabhai (referred to as Sellers") and Cadila Healthcare Limited ("Cadila") jointly incorporated a company under the name called Sarabhai Zydus Animal Health Limited ("Zydus") under a shareholder's agreement dated January 29, 2000. Both Sellers and Cadila had 50:50 equity participation in Zydus. Both the shareholders executed an agreement in the year 2000 which refrained either of them from selling their shares to a third party, without first making the offer to the other shareholder. Both the shareholders thus enjoyed the Right of First Refusal ("ROFR").The Sellers had pledged its 50 percent shares held in Zydus to Cadila and availed loan of Rs. 21,71,68,263 under a facility agreement dated August 11, 2006 and interest payable to Cadila for the period up to March 10, 2007 was Rs 31,000,000. Under the facility agreement, if Sellers failed to repay the loan along with the interest by March 10, 2007, Cadila would take over the shares of Zydus.Therefore, the sellers approached the Appellant to sell the shares of Zydus for a value ofRs 72.5 Crores. The Appellant entered into a Share Purchase Agreement ("SPA") dated March 10, 2007 (Refer pages 181 - 203 of the paper book) and deposited an amount of Rs 24,81,68,263 with Sellers as Earnest Money Deposit ("EMD"). With the EMD, the sellers repaid the loan taken from Cadila and also executed the blank transfer form for transfer of shares held in Zydus in favour of the Appellant and kept the same with the escrow agent.Under the terms of SPA, Sellers had to get the consent of Cadila to give up their ROFR to enable the Sellers to sell the shares of Zydus to the Appellant within 5 months from the date of execution of the SPA. If Sellers failed to do so, as per clause 7.6. (Hi) of the SPA (please refer page 194 of the paper book), the SPA stood terminated and the Sellers had to return the EMD along with interest at the rate of 14 percent per annum on EMD on pro-rata basis and also a penalty at the rate either 5 percent of EMD or 25 percent annualized return on EMD on pro rata basis,whichever is higher, as per clause 7.7(i) of the SPA (please refer page no 195 of the paper
book).Further, the Appellant and the Sellers entered into a Supplemental Agreement to the SPA on the same day March 10, 2007 (please refer page nos. 204 to 209 of the paper book), wherein the Sellers agreed to convince Cadila to sell the balance 50 percent of shares of Zydus held by Cadila to the Appellant. The Supplementary Agreement was entered into by the Appellant to acquire 100 percent equity of Zydus. As a part of the Supplemental Agreement, the Appellant deposited another Rs 15 Crores with the escrow agent.However, on May 10, 2007, (please refer page nos. 210 and 211 of the paper book) the
Appellant received a letter from the Sellers stating that Cadila in fact had exercised its rights under ROFR to purchase the shares of Zydus from Sellers. Accordingly, the Sellers requested the Appellant to terminate the SPA and also agreed to repay the EMD of Rs 24,81,68,263 with interest at 14 percent per annum amounting to Rs 5,901,645 (net of taxes) and penalty at the rate of 5 percent of the EMD amounting to Rs 12,408,413.However, the Appellant demanded a compensation for termination of the SPA from the Sellers for a sum of Rs 2,25,91,587 and it was mutually settled between the Sellers and the Appellant through a Supplementary Agreement dated May 22, 2007.
| Sl. No | Particulars of payment | Amount |
1 | Repayment of earnest deposit amount under the SPA | 248,168,263 |
2 | Interest for 63 days | 5,996,833 |
Less: TDS | 1,345,689 | |
Net interest payable | 4,651,144 | |
3 | Payment of penalty as per the SPA | 12,408,413 |
4 | Compensation for Termination of SPA | 22,591,587 |
Aggregate amount payable | 287,819,407 |
The learned AO disallowed the claim of compensation as capital receipt and the Hon'ble CIT(A) has upheld the same on the following grounds:• No compensation was agreed to be paid by Sellers under the SPA;• The compensation was not paid for termination for the agreement but as a compromise
and settlement;• The statutory auditors of the Appellant has treated it as revenue receipt;
The transaction of acquisition of shares of Zydus was in the normal course of its. business; andThere was no impact in the profit earning apparatus of the Appellant due to termination of the SPA.
41. The submissions of the learned A.R. for the assessee in this regard were as under:
• At the outset the Appellant submits that the SPA entered into between the Sellers and the Appellant relates to an acquisition of a company and the Appellant is engaged in the business of diagnostic, laboratory solutions, chemical research and veterinary care and was not undertaking the business of trading in shares. Therefore, the acquisition of the business of Zydus would have resulted in a new profit earning apparatus (i.e. new source of income) for the Appellant and cannot be regarded as a normal activity carried on in the normal course of the business of the Appellant. Further, the agreement between the Appellant and the Sellers were not trading contracts for generation of revenue profits, but they were only designed to bring into an apparatus for an income yielding source.• Your goodselves may note the fact that the compensation paid by the Sellers under mutual settlement for termination of SPA is an undisputed fact and both are unrelated parties. Therefore, the fact that the compensation was not mentioned in the original SPA would not be a relevant factor for determining the nature of the receipt under the Act. It was not the case of the revenue that the parties have camouflaged the interest as compensation for termination of the SPA. In fact, the compensation has been paid in addition to interest and penalty, which were offered to tax.• In addition, it may be noted that both the learned AO and the Hon'ble CIT(A) have failed to appreciate that the failure on the part of the Sellers to convince Cadila from exercising their ROFR rights and also to sell the balance 50 percent of the shares in Zydus resulted in termination of the SPA. Therefore, the sellers have agreed to pay compensation for not fulfilling their obligation undertaken under the SPA, which resulted in termination of the SPA.• Since the compensation is on account of termination of an agreement which if honored, would have resulted in an income earning apparatus coming into being. The inability of the Sellers to honor the terms of the agreement led to the termination of the SPA and consequently resulted in sterilization of a profit earning source for the Appellant. Consequently, the Appellant treated the compensation on account of termination of the SPA as a capital receipt. In this connection, the Appellant wishes to rely on the following judicial pronouncements wherein it has been held by various courts that the compensation for sterilization of the profit earning source, not in the ordinary course of business is a capital receipt.
42. The learned A.R. for the assessee placed reliance on the following decisions:
1) CIT Vs. Saurashtra Cement Ltd (2010) [325 ITR 422 (SC)] = (2010-TIOL-49-SC-IT)2) CIT Vs. Kashmiri Mal Vasudev (1059) [39 ITR 150 (P&H)]3) DCIT Vs. Sak Industries (P) Ltd.(2005)[1 SOT 798 (ITAT Delhi)]4) Oberoi Hotel Pvt. Ltd. Vs. CIT [236 ITR 903 (SC)]
43. The learned D.R. for the Revenue in the written submissions made the following submissions:
"The ground of appeal No. 3 is in regard to the addition made by the A.O. of Rs. 2.25 crores on account of compensation received towards cancellation of Share Purchase Agreement which has been appropriately upheld by the Ld. CIT(A). Briefly the facts of the issue are that the assessee entered into an agreement with Ambalal Sarabhai Enterprises Limited, Murtik Exim Limited, Haryana Containers Limited and Mr. Kartikeya V. Sarabhai (Collectively called as "VENDORS") for purchase of 50 % stake of the Vendors in the company "Sarabhai Zydus Animal Health Limited", New Delhi. The RFCL and the Vendors had entered into an agreement dated 10.03.07 whereby the vendors, also referred to as sellers were required to sell their 50% stake in the company Sarabhai Zydus Animal Health Limited to RFCL as agreed upon under the SPA agreement.During the course of assessment proceedings the AO observed from the Escrow and the original SPA and the supplemental agreement that if the transaction entered into between the parties did not materialize than the vendors will repay not only the earnest deposit amount but also the interest there on along with some penalty and compensation for termination of such agreement. Since the vendors realized that they will not be in position to implement the terms and conditions of the agreement as agreed to, they informed the assessee i.e. RFCL about the same and went on to pay the sums of money consisting of Compensation amount, Interest and Penalty totaling Rs.3.96 crores. Out of this Rs.3.96 crores the assessee claimed Rs.2.25 crores as capital receipt being the compensation amount received for the breach or cancellation of the share purchase agreement. This raised the question as to whether it was a revenue receipt that ought to be taxed or is a capital receipt as claimed by the assessee. The assessee claimed it to be a capital receipt on the basis that it was received for a branch of a contract or cancellation of the agreement. From the perusal of both the supplementary agreement and the original SPA it was concluded by the AO that there was no breach of contract or cancellation of any contract as claimed by the assessee. Rather the parties themselves compromised and calculated the amount of consideration to be paid as full and final payment by taking recourse to the supplementary agreement. The AO give specific reasoning for the additions made in this regard.a) While perusing the detail of compensation received and tabled at page 37 of the assessment order the AO observed that it was neither a breach nor a cancellation, rather it's a compromise or settlement arrangement vide which one party has paid the desired consideration, as shown above, as agreed to between the two parties since they could not work upon the original terms and conditions. And whatever monetary benefits were derived by the company in addition to earnest deposit amount was its income and was rightly credited to the profit and loss account by the statutory auditors and there after rightly commented upon by the tax auditor also.b) The AO further observed that the target company was also in the similar business is the assessee and by acquiring a 50% stake the assessee would have expanded its business. It was decision taken by the assessee keeping in view the revenue it would generate from it and not as a shareholder buying shares of the company for earning dividend or as capital appreciation.c) The AO further mentioned in the assessment order that compensation so received for termination of agreement for buying 50 % stake, even the tax auditors in reply to question no.l3(e) of their tax audit report have given their expert opinion that there was no such capital receipt which was credited to profit and loss account.d) The AO further observed that both the auditors the one who conducted the audit under same statute i.e. the companies act and the others who conducted tax audit had the same opinion with respect to the revenue recognition in respect of compensation received by the company on account of termination of contract. Moreover, the original share purchase agreement made no mention of the compensation for an amount of rs.2.25 Cr to be given to M/s RFCL. This compensation was given only after a supplementary share purchase agreement signed between M/s RFCL and the vendors on May 22, 2007 in this regard. It is, thus, quite clear that this claim of compensation treating it as a capital receipt is nothing but on after thought to avoid payment of taxes on such income as the effect was given only at the time of filing of the return of income and that too in the computation.e) The AO reached a firm conclusion that it was a pure business deal arising out of the business necessity of the assessee and hence whatever additional monetary benefits accrued to the assessee were revenue in nature and has no connection whatsoever with capital receipts, since the buying of 50% stake was a business venture only.f) In fact the AO went to the extent of stating that (Para 51 assessment order) without prejudice to the departmental stand contained in the assessment order even if the receipt so received by the assessee is termed as compensation, still in real sense its true nature shall continue to be of revenue. This was on account of the reason that the receipt was received by the assessee by investing some money with the vendors form whom he was going to acquire the shares. It was against such investment, when the agreement did not mature, that it received interest, penalty and compensation. The assessee by offering the interest and penalty so received against investment of earnest money deposited with the vendors for taxation has himself admitted that the same are revenue in nature.10. The Ld. CIT(A) has appropriately upheld the findings oftheAO while giving specific reasoning for the same (Page 54, Para 6.13 of the Ld.CIT(A) order).i) The Statutory Auditors as well as the Tax Auditors of the assessee have treated the said receipt as a revenue receipt.ii) The assessee entered into the agreement with the seller fully knowing that the Other Shareholder could exercise its right of purchase and could thus prevent the successful closure of the agreement.iii) The assessee made a calculated business move by entering into the agreement,iv) The terms and conditions of the termination of the agreement were absolute and one sided, completely in favour of the assessee. This situation was exploited by the assessee to the hilt.v) There was no clause regarding compensation in the original SPA for the obvious reason that the termination was to be due to the operation of an external factor which both the parties to the agreement knew before hand. Hence the compensation negotiated by the assessee prior to exercising its right of termination and setting the seller free for discharging its obligations vis-a-vis the Other Shareholder was clearly in the nature of a windfall.vi) The assessee has offered part of the receipts pertaining to the termination of the agreement for taxation as revenue receipts.vii) The agreement had speculative overtones and was with a view to expanding the business further. Its termination accordingly did not cause any harm to the ongoing business of the assessee or to any of its vital capital resources.viii) The book entries made by the assessee in the books of account were correctly made showing the entire receipts as income.It is humbly prayed that the order of the Ld.CIT(A) may kindly be confirmed in view of the facts mention the above same may be confirmed while dismissing this ground of appeal raised by the assessee."
44. We have heard the rival contentions and perused the record. The facts relating to the issue are that Ambalal Sarabhai Enterprises Ltd, Mautik Exim Ltd, Haryana Containers Ltd, Mr. Kartikeya V. Sarabhai (referred to as Sellers") and Cadila Healthcare Limited ("Cadila") jointly incorporated a company under the name called Sarabhai Zydus Animal Health Limited ("Zydus") under a shareholder's agreement dated January 29, 2000. Both the parties had 50:50 equity participation in Zydus. As per agreement between the two parties, it refrained either of them from selling their shares to a third party without first making the offer to the other shareholder. The sellers had pledged its shareholdings in Zydus to Cadila and had availed loan of Rs.21.71 crores under the agreement dated 11.8.2006. As per the agreement, interest payable for the period up to 10.3.2007 was Rs.3.10 crores. As per the terms of the agreement if the sellers failed to pay loan alongwith interest to Cadila by 10.3.2007, the shares of the sellers in Zydus were to be taken over by Cadila. The sellers approached the assessee to sell the shares of Zydus for total consideration of Rs.72.5 crores and Share Purchase Agreement dated 10.3.2007 was entered between the parties. The assessee deposited sum of Rs.24.81 crores with the sellers as earnest money from which the sellers repaid the loan taken from Cadila and also executed the blank transfer form in favour of the assessee for transfer of his shareholdings in Zydus and the same was kept with the escrow agent. The sellers had to get the consent from Cadila for them to give up their right of first refusal within five months from the date of execution of the agreement. As per clause 7.6 of the agreement, in case of the failure of the sellers to obtain said permission, the agreement stood terminated and the sellers had to return the earnest money alongwith interest @ 14% per annum on pro-rata basis and also pay penalty as per clause 7.7(i) of the Act. Another supplemental agreement to the Share Purchase Agreement was entered between the assessee and the sellers on 10.3.2007 itself, copy of which is placed at pages 204 to 209 of the Paper Book. Under the said agreement the sellers agreed to convince Cadila to sell its shareholdings of 50% of shares of Zydus to the assessee. The objective of the said supplemental agreement was to acquire 100% equity of Zydus and consequently the assessee deposited another Rs.15 crores with the escrow agent.
45. On 10.5.2007 the assessee was intimated by the seller that Cadila had exercised its rights to purchase shares of Zydus and thus the agreement between the parties was terminated and the sellers repaid earnest money of Rs.24.82 crores alongwith interest of 14% per annum and penalty @ 5%. The assessee had offered both the interest and the penalty as part of its income. The supplemental agreement executed between the parties was also terminated and the assessee demanded compensation for termination of the same and compensation of Rs.2.25 crores was awarded to the assessee. The said compensation was claimed as a capital receipt which was brought to tax by the Assessing Officer and CIT (Appeals). The contention of the assessee in this regard was that the agreement entered into by the assessee was for acquisition of the company and not for trading in shares of the said company. The acquisition of the business of Zydus was the intention of the assessee in order to start a new profit earning venture i.e. new source of income. The compensation received by the assessee was pursuant to a mutual agreement between the parties under which the sellers had failed to fulfill their obligation in the first instance and hence it was claimed to a capital receipt. On the other hand, the case of the Revenue in this regard was that the original agreement and supplemental agreement itself provide that in case the transaction did not materialize than the vendors will repay not only the earnest deposit amount but also the interest there on along with some penalty and compensation for termination of such agreement. Consequently, the compensation amount received for breach or cancellation of the agreement was held to be a revenue receipt as there was no breach of contract or cancellation of any contract as the parties compromised and calculated the amount to be paid as full and final payment. The next objection of the Assessing Officer was that the target company was in the same line of business as the assessee and by acquiring the said shares it would have expanded its business. Even the auditors in their Audit Report had given an opinion that there were no capital receipts which was credited to the Profit & Loss Account. The deal between the parties being pure business deal, the additional monetary benefits accruing to the assessee were revenue in nature as the assessee had entered into a business venture for acquisition of 50% stake n the business.
46. The Hon'ble Supreme Court in CIT Vs. Saurashtra Cement Ltd. (supra) had addressed the issue of receipts being capital or revenue and vide Para1 11 to 13 had held as under:
"The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van Den Berghs Ltd. v. Clark (1935) 3 I.T.R. (Eng. Cas.) 17. That however, is not to say that the question is one of fact, for, as observed in Davies. (H.M. Inspector of Taxes) v. Shell Company of China Ltd. (1952) 22 I.T.R. (Suppl.) 1 "these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts."
47. The Hon'ble Supreme Court further in Oberoi Hotel Pvt. Ltd. Vs. CIT (supra) had addressed similar issue of acquisition of a hotel, which was being operated, managed and run by the assessee. As per the terms of the agreement the assessee operated the hotel belonging to others for initial period of 10 years, and thereafter. Further the assessee therein had a right to exercise the option to purchase the hotel in case the hotel desired to transfer the same during the currency of the agreement. However, the assessee was not successful in acquiring the said asset and at the termination of the agreement, compensation was paid to the assessee for giving up its rights. The issue before the Hon'ble Apex Court was whether the said receipt was business receipt of the assessee.
The Hon'ble Supreme Court held as under:
"The question whether the receipt is capital or revenue is to be determined by drawing a conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. This court in the case of Karam Chand Thapar and Bros. P. Ltd. v. CIT [1971] 80 ITR 167, discussed and held that in CIT v. Chari and Chari Ltd. [1965] 57 ITR 400 (SC), it was held that ordinarily compensation for loss of an office or agency is regarded as a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in a case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. Thereafter the court held that it was difficult to lay down a precise principle of universal application but various workable rules have been evolved for guidance.Applying the aforesaid test laid down by this court in the present case, in our view, the Tribunal was right in arriving at a conclusion that it was a capital receipt. The reason is that as provided in article XVIII of the first agreement the assessee was having an option or right or lien, if the owner desired to transfer the hotel or lease all or part of the hotel to any other person, the same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a supplementary agreement which was executed in September, 1975, between the receiver and the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise, and in its return, agreed consideration was as stated above in clause X. On the basis of the said agreement, the assessee has received the amount in question. The amount was received because the assessee had given up its right to purchase and/or to operate the property. Further it is loss of source of income to the assessee and that right is determined for consideration. Obviously, therefore, it is a capital receipt and not a revenue receipt."
48. The Hon'ble Supreme Court relied on the judgment in the case of Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC), wherein the court has held as under (page 270) :
"Whether, a particular receipt is capital or income from business, has frequently engaged the attention of the courts. It may be broadly stated that what is received for loss of capital is a capital receipt : what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction.After analysing a number of cases, the court observed that the following satisfactory measure of consistency in the principle is disclosed (page 282):"Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt."
The Hon'ble Supreme Court thus held as under:
"The aforesaid principle is relied upon in the case of Karam Chand Thapar and Bros. [1971] 80 ITR 167 (SC). Considering the aforesaid principles laid down as per article XVIII of the principal agreement, the amount received by the assessee is for the consideration for giving up his right to purchase and/or to operate the property or for getting it on lease before it is transferred or let out to other persons. It is not for settlement of rights under a trading contract, but the injury is inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement has resulted in loss of source of the assessee's income."
49. In the facts of the present case before us, the assessee had entered into first agreement on 10.3.2007 for acquisition of 50% shares belonging to the sellers, who in turn had hypothecated their shares to Cadila. As per terms of the said agreement in case there was cancellation of the agreement, the assessee was entitled to refund of the earnest money alongwith interest and penalty as stipulated in the terms of the agreement. Admittedly the said agreement between the parties was cancelled. The assessee received amount i.e. on account of refund of earnest money, interest and penalty and the assessee offered interest and penalty for tax which is an admitted position. However, the assessee also entered into supplemental agreement with the sellers for purchase of the shareholdings of Cadila in Zydus in order to acquire 100% shareholdings of Zydus. As per the covenant of the supplemental agreement dated 10.3.2007 placed at pages 204 to 209 of the Paper Book, which was agreed upon as under:
1. The Vendors hereby undertake that in the event the Other Shareholder does not exercise its Right of First Refusal, the Vendors shall procure that, within 30 days from the Closing Date, the Other Shareholder shall also sell the shares held by it in the Company, i.e. 2,70,00,000 (Two Crores Seventy Lakhs only}equity shares of face value of Rs. 10- each, constituting 50% of the balance issued, subscribed and paid up equity share capital of the Company, to the Purchaser at a price which is at least equal to the to the Purchase Price and if the price is higher then the Purchase Price then at the sole discretion of the Purchaser.2. It is hereby agreed that in respect of the undertaking given by the Vendors as specified in Para 1 above, contemporaneously with the transfer of the Shares, in the manner specified in Article 7 of the SPA, the Purchaser will make payment of the entire Purchase Price to the Vendors, less the Earnest Deposit Amount and an amount equivalent to Rs. 15,00,00,0007 - (Rs. Fifteen Crores Only), which shall be kept in escrow with the Escrow Agent and will be released in the manner specified in Para3(i) and 3(ii) below.3(i). In the event the Vendors are successful in procuring the Other Shareholder to sell their 2,70,00,000 (Two Crores Seventy Lakhs only) equity shares efface value of Rs. 16- each, constituting 50% of the issued, subscribed and paid up equity share capital of the Company, to the Purchaser, within 5 months from date of execution of this Supplemental Agreement, then the Rs. 7,50,00,000/- (Rs. Seven Crores and Fifty Lakhs Only) kept in escrow with the Escrow Agent in the manner specified in Article 2 above will be released to the Vendors by the Escrow Agent upon successful completion of the transfer of such shares owned by the Other Shareholders to the Purchaser.(ii) In the event the Vendors are not successful in procuring the Other Shareholder to sell their 2,70,00,000 (Two Crores Seventy Lakhs only) equity shares of face value of Rs. 10/- each, constituting 50% of the issued, subscribed and paid up equity share capital of the Company, to the Purchaser, within 5 months from date of execution of this Supplemental Agreement, then the Rs. 7,50,00,000/- (Rs. Seven Crores and Fifty Lakhs Only) kept in escrow with the Escrow Agent in the manner specified in Article 2 above will be released to the Purchaser by the Escrow Agent immediately at the expiry of the said 30-day period from the Closing Date.4. It is hereby further agreed that for successful completion of the transaction contemplated under the SPA, the Escrow Agent within 1 day of Closing release to the Purchaser the Rs. 7,50,00.000/- (Rs. Seven Crores and Fifty Lakhs Only) kept in escrow with the Escrow Agent in the manner specified in Article 2 above, as success fee payable by the Vendors to the Purchaser. The applicable TDS and any other withholding taxes shall be deducted and deposited by the Escrow Agent on behalf of the Vendors.5. In consideration of the Purchaser depositing the Earnest Money Deposit under the SPA, Ambalal Sarabhai Enterprises Limited (one of the Vendors under the SPA) does hereby agree to simultaneously herewith pledge in favour of the Purchaser (in a form acceptable to the Purchaser), by way of security, 11,00,000 shares of face value of Rs. 10/- held by Ambalal Sarabhai Enterprises Limited in ORG Informatics Limited, a company listed on the Bombay Stock Exchange, which shares, as on the date of this Supplemental Agreement, constitute 6.6% of the issued, subscribed and paid up equity share capital of the said company,6. All terms and conditions set out in the SPA shall remain unchanged and shall continue to be in force in the manner stipulated thereto.7. This Supplemental Agreement shall come into effect on the date of execution hereof.8. This Agreement may be entered into in two or more counterparts each of which, when executed and delivered, shall be an original, but all the counterparts shall together constitute one and the same instrument
50. The conduct of the party reflects that the assessee was exploring the possibility of acquiring the control of the company, Zydus as a going concern by taking over the shareholding of the company from the two independent shareholders of the said company. The assessee in the course of carrying on its business explored the possibility of expanding its business and merely because the assessee failed in its venture, does not establish the case of the assessee that it had received the compensation for injury inflicted on any of its capital asset. There is no loss of source of business of the assessee as the intention of the assessee was to venture into a new/allied line of business, which had not started. Thus, the consideration received by way of settlement between the parties was a revenue receipt in the hands of the assessee.
51. The learned A.R. for the assessee placed reliance on the decision of Delhi Bench of the Tribunal in DCIT Vs. Sak Industries (P) Ltd. (supra) wherein it has held as under:
34. On the facts and in the circumstances of the case, enumerated by us in the former paragraphs, we find that the dispute between the parties was settled by turn of events without there being any authoritative adjudication and judicial pronouncement over the respective claims of the parties. In such circumstances, we are of the view that both the learned Assessing Officer as well as the learned CIT(A) erred in their assumptions one way or the other. The Assessing Officer has proceeded on the footing that there was a breach of trust agreement and the assessee received damages while the learned CIT(A) has proceeded on the basis that there was no obligation on Fried Krupp Essen and therefore what the assessee received was neither a compensation nor a damage but a fortuitous receipt which was purely discretionary in nature and not chargeable to tax as income. As we have already pointed out there has not been any authoritative adjudication and therefore the respective position taken by the learned Assessing Officer and the learned CIT(A) have to be treated as mere guesswork. After all, neither the learned Assessing Officer nor the learned CIT(A) had the access to evidence/material the assessee-company on the one hand and Fried Krupp Essen on the other would have relied upon if the matter had gone into a full blown litigation. They also did not have the occasion to hear the arguments of both sides at full length.35. We are of the view that in a situation like this, it is the terms of Settlement Agreement which should be decisive. It is no doubt true that there was a dispute and both sides took up their respective positions. According to Fried Krupp Essen, there was no change because Krupp Widia GmbH continued to hold Meturit AG as before and Meturit AG continued to hold its shares in Widia (India) Ltd. According to the assessee, it was substance of the matter, which was required to be seen. If Krupp Widia GmbH was to be owned by any other entity, the effect was that the shares of Widia (India) Ltd. would beneficially be transferred to that entity. Hence with the transfer in the ownership of Krupp Widia GmbH there was, in substance, a transfer in the ownership of "A" series shares of Widia (India) Ltd. as well. This dispute was ultimately amicably settled by Settlement Agreement and the assessee received the sum of DM 10.5 million. We are strengthened in taking this view by the judgment of Hon'ble Bombay High Court in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 5941. In that case there was an agreement of sale, entered into between one Anandji Haridas and the assessee Tata Services Ltd. for certain consideration. Out of the agreed consideration, a sum of Rs. 90,000 had been paid as earnest money. Later on, certain dispute arose between the parties and the matter was settled on Tata Services Ltd. receiving a sum of Rs. 5,90,000 and transferring and assigning its rights under the agreement in favour of a third party M/s. Advani and Batra. On these facts the Hon'ble Bombay High Court in their judgment in Tata Services Ltd. 's case (supra) :"It is no doubt true that at one stage Anandji Haridas wanted to treat the transaction as cancelled, a position which was not accepted by the assessee. The assessee, however, had throughout been insisting that the agreement of sale is a subsisting agreement and that it would be constrained to file a suit for specific performance of that agreement for sale. What-ever may have been the controversy between Anandji Haridas and the assessee prior to 23rd September, 1963, when the assessee executed the receipt for Rs. 5,90,000, the position on that day was not only that the original agreement of sale between the assessee and Anandji Haridas was to be treated as subsisting but also that the tripartite agreement between the assessee, Anandji Haridas and M/s. Advani and Batra that the money paid by the assessee to Anandji Haridas was to be returned by M/s. Advani and Batra and an additional sum of Rs. 5,00,000 was also to be paid to the assessee by M/s. Advani and Batra was given effect to."36. Even otherwise it is well-settled legal position that in order to find out whether a receipt is a capital or revenue receipt, one has to see it in the hands of the receiver and in order to find out whether an expenditure is a capital or revenue expenditure, one has to see what it is in the hand of the payer. In the case of CIT v. Kamal Behari Lal Singh [1971] 82 ITR 460, the Hon'ble Supreme Court have stated the legal position in the following words :"It is now well-settled that, in order to find out whether a receipt is a capital or revenue receipt, one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. In other words, the nature of receipt is determined entirely by its character in the hands of the receiver and the source from which the payment is made has no bearing on the question. Where an amount is paid which, so far as the payer is concerned, is paid wholly or partly out of the capital, and the receiver receives it as income on his part, the entire receipt is taxable in the hands of the receiver. Therefore, the fact that the amount sought to be taxed in these appeals was capital gains in the hands of the company is not a relevant circumstance. What we have to see is what it was in the hands of the assessee."37. Similar observations have been made in various other judgments, some of which are as mentioned below:"The principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound. Whether the payment is or is not in the nature of capital expenditure depends or may depend upon the character of the business of the payer and upon other factors related thereto - Anglo Persian Oil Co. (India) Ltd. v. CIT [1933] 1 ITR 129 (Cal.);If a receipt is capital receipt in hands of recipient, it does not necessarily follow that expenditure is capital expenditure in hand of payer. Whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors - Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) = (2002-TIOL-238-SC-IT) ;There may easily be cases where, although in the hands of the vendor a particular receipt may be capital receipt, yet qua the purchaser it may be a revenue expenditure - CIT v. Kolhia Hirdagarh Co. Ltd. [1949] 17 ITR 545 (Bom.)."38. A perusal of the Settlement Agreement dated 20th December, 1994, between Fried Krupp Essen, Krupp Widia GmbH, Meturit AG, the assessee-company and the group of persons represented by Mr. Autar Krishna, it is seen that the settlement was of the dispute arising between the assessee-company and Fried Krupp Essen because the assessee-company had alleged that Fried Krupp had breached the Promotion Agreement by the proposed sale by Fried Krupp of all quotas of Krupp Widia (including all of the capital stock/quotas of Meturit). On fried Krupp Essen agreeing to pay to the assessee-company a sum of DM 10.5 million, the assessee-company agreed and consented to the transfer by Fried Krupp Essen, termination of Promotion Agreement of 1963, full and final settlement of all claims, demands, causes of action, arising under or in connection with the Promotion Agreement or in breach thereof. In other words, the assessee-company received DM 10.5 million in satisfaction of its claims against Fried Krupp Essen, Krupp widia GmbH and Meturit AG. We, therefore, hold that whatever may have been the legal position prior to 20th December, 1994, as on 20th December, 1994, the assessee-company received the sum of DM 10.5 million in lieu of surrender of its rights and claims against the parties above-mentioned in terms of Promotion agreement. In substance, the assessee-company gave up its right of first purchase of shares held by Meturit AG in Widia (India) Ltd. on account of perceived/alleged violation or Promotion Agreement in view of the transfer of ownership of Krupp Widia GmbH. In our considered opinion, the taxability or otherwise of DM 10.5 million in the hands of the assessee-company is to be viewed and determined on this basis. We, therefore, hold that the learned CIT(A) erred in arriving at the finding that the money received by the assessee-company was a fortuitous receipt."
52. The Tribunal further held as under:
"42. We have already held with reference to Settlement Agreement dated 20th December, 1994, that whatever may be the conflicting stands of the parties and the legal position prior to 20th December, 1994, the sum of DM 10.5 million received by the assessee, has to be viewed as the amount received in lieu of surrender of his rights and claims against Fried Krupp Essen; Krupp Widia GmbH and Meturit AG. In other words, the amount received by the assessee was in the nature of compensation for loss of the assessee's perceived/alleged rights. It is now well-settled legal position in this regard that if compensation is received for loss/detriment to the amounts of profits, the same would constitute revenue receipt, but if the compensation is received for loss/detriment to profit-making structure, such receipt would not be on the revenue account and constitute capital receipt in the hands of the recipient. In determining whether compensation is a capital or trading receipt, the relevant rule has been formulated by Lord Diplock L., in the following words :". . . Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income-tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation" - London & Thames Haven Oil Wharves Ltd. v. Inspector of Taxes 70 ITR 460 (CA)43. In the case of Travancore Rubber & Tea Co. Ltd. (supra), the Hon'ble Supreme Court have held that the logic of the principle is that the assessee's right to recover the compensation is to place the assessee in the same position as if the breach had not taken place. There is plethora of judgments where it has been held that the compensation received for extinction or sterilization, whether total or in part of a profit earning source, must be construed as capital receipt. Reference in this respect is invited to the judgments in Hari Kailash & Co. v. CIT [1952] 22 ITR 195 (All.); CIT v. Manilal Rayaram Mehta [1956] 30 ITR 53 (Bom.); Chunduri Venkata Reddi v. CIT [1959] 35 ITR 87 (AP); Associated Oil Mills Ltd. v. CIT [1960] 40 ITR 118 (Mad.), P.L.M. Firm v. CIT [1968] 68 ITR 856 (Mad.); Bombay Burmah Trading Corpn. Ltd. v. CIT [1971] 81 ITR 777 (Bom.); J.R. Kimtee & Sons v. CIT [1978] 115 ITR 190 (AP); CIT v. Bombay Burmah Trading Corpn. Ltd. [1986] 161 ITR 3861 (SC); CIT v. Barium Chemicals Ltd. [1987] 168 ITR 1642 (AP); and CIT v. Seshasayee Bros. (P.) Ltd. [1999] 239 ITR 4713 (Mad.). For applying this test to the facts of the case before us, we find that the right, the assessee contested all along, was the right to purchase shares held by Meturit AG of Widia (India) Ltd., in the event of the proposed sale of Krupp Widia GmbH from Fried Krupp Essen to an outsider going through. This right was given up by the assessee on receipt of DM 10.5 million. In the case of the assessee before us if the assessee had succeeded to exercise its supposed right to purchase shareholding of Meturit AG in Widia (India) Ltd. that in itself would not have given rise to any income in the hands of the assessee but only created an income earning source in the hands of the assessee. It is important to bear in mind that the assessee was supposed to purchase these shares at the price mutually agreed upon. Hence compensation received by the assessee for surrender of its right cannot be viewed other than compensation received in lieu of a profit making source.44. In the case of CIT v. Tushar Commercial Co. Ltd. [1998] 230 ITR 918 (Cal.) the Hon'ble High Court have held that right to subscribe to shares is a capital asset in the hands of an assessee other than a dealer in shares. In the case of CIT v. Hiralal Manilal Modi [1981] 131 ITR 421 4 (Guj.), the assessee entered into in 1956 an agreement of sale and paid the earnest money of Rs. 50,000 for purchase of certain plots of land. On the suit for specific performance filed by the assessee, the vendors compromised the matter and agreed to pay certain additional amounts. On these facts, Hon'ble High Court held that the receipt was "not by way of income but by way of damages for the loss of a good bargain which the assessee had to forgo because the vendors were not prepared to execute the deed of conveyance". On these facts, the Hon'ble High Court held that the Tribunal was justified in not treating it as income of the assessee.45. In our opinion, the judgment of Hon'ble Supreme Court in the case of Oberoi Hotel (P.) Ltd. v. CIT [1999] 236 ITR 903 squarely applies on the facts of the case of the assessee. In that case Oberoi Hotel Pvt. Ltd. was operating, managing and administering many hotels belonging to others for a fee at several places, such as, Cairo, Colombo, Kathmandu, Singapore, etc. In terms of an agreement dated November 2, 1970, the assessee-company agreed to operate the hotel known as Hotel Oberoi Imperial, Singapore, for which the company was to receive a certain fee called management fee. The agreement was to run for an initial period of ten years and the assessee had the option to ask for renewal of the said agreement for two further periods of ten years each by mutual agreement. In the event of the sale of hotel, the assessee had the first right to purchase. Thereafter on September 14, 1995 a supplementary agreement was executed between the assessee and the receiver who had been appointed for the property. The right to exercise its option of purchasing the hotel in case its owners desired to transfer the same, during the currency of the agreement, was given up by the assessee.It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation, requiring the purchaser thereof to enter into any agreement with Oberoi Hotel Pvt. Ltd., for the purpose of operating and managing the hotel. On the basis of such agreement, the assessee received the amount of Rs. 29,47,500 and claimed that it was a capital receipt. The Assessing Officer rejected the claim but the CIT(A) and the Tribunal upheld it. The High Court arrived at the conclusion that it was a revenue receipt, assessable to income-tax as business income for the assessment year 1979-80. On appeal to the Supreme Court, the decision of the High Court was reversed. After considering the earlier judgments of Supreme Court viz., CIT v. Chari & Chari Ltd. [1965] 57 ITR 400; CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148; the Hon'ble Supreme Court applied the earlier judgment of the Court in the case of Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261. The Hon'ble Court also found support from the judgment in the case of Karam Chand Thapar & Bros. (P.) Ltd. v. CIT [1971] 80 ITR 167 (SC). Considering the principle elicited from the judgments, the Hon'ble Supreme Court held that the amount received by Oberoi Hotel Pvt. Ltd., was for the consideration for giving up their right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons. The Hon'ble Supreme Court held:"It is not for settlement of rights under a trading contract, but the injury is inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement has resulted in loss of source of the assessee's income.In this view of the matter, the order passed by the High Court is set aside and the appeal is allowed. The question is answered in favour of the assessee and against the Revenue by holding that receipt in the hands of the assessee was capital receipt."45.1 We find the facts of the case of the assessee before us on stronger footing. In the case before us the first right of purchase was acquired by the assessee by way of Promotion Agreement and Articles of Association of Widia (India) Ltd. even before the commencement of business by Widia (India) Ltd. Hence by no stretch of logic the receipt can be viewed as receipt of the business carried on by the assessee."
53. We find the said reliance by the assessee to be misplaced as in the facts before the Delhi Bench of the Tribunal in DCIT Vs. Sak Industries (P) Ltd. (supra), the assessee was part of the shareholding company and the company was in existence since 1965. Later on one of the major shareholder together with its subsidiaries decided to dispose off their ownership and the assessee being the one of the major shareholder opposed the said disposal and as per the negotiation between the parties compensation received by the assessee therein was held to be capital in nature. However, in the facts of the present case as pointed out, there was no loss of source of business income in the hands of the assessee as the assessee was only exploring the possibility of taking over the business of a concern in which it had no interest. The compensation received for failure of such decision being taken in the course of carrying on its normal line of business was rightly held to be taxable receipt in the hands of the assessee. We are in conformity with the observations of the CIT (Appeals) in para 6.13 and upholding the order of CIT (Appeals) we dismiss ground No.3 raised by the assessee.
54. In the result, the appeal of the assessee in ITA No.293 is allowed and the appeal in ITA No.294/Chd/2012 is partly allowed.
(Order Pronounced in the Open Court on 2.4.2013.)
IT : Finance Act, 2013 inserted Explanation 2 to section 132B with effect from 1-6-2013 to clarify that existing liability shall not include advance tax liability so that cash seized during search can't be adjusted towards advance tax liability and can be adjusted only towards liability arising from completed assessments. Since legislature has by express words made Explanation 2 operative prospectively from 1-6-2013, no retrospective effect can be give to it so as to make it applicable to search carried out on 8-2-2007
Facts
• Assessee's premises searched on 8-2-2007.
• By letter dated 13-3-2007 assessee applied for adjustment of cash seized towards advance tax liability.
• Assessee's request declined and interest under sections 234B and 234C was charged by AO.
• Assessee's appeal rejected by CIT(A). Aggrieved assessee filed the instant appeal against CIT(A) order.
Held
• Ld. D.R. relied on the amendment made to section 132B vide Finance Act, 2013.
• The said amendment by way of new Explanation 2 to section 132B is made applicable with effect from 1-6-2013.
• Explanation 2 provides that "For the removal of doubts it is hereby declared that the "existing liability" does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII.'.
• In Taxmann's publication "Interpretation of Statutes" 2nd Edition by Shri D.P. Mittal at page 807 it has been stated as under:- "The effect to be given to an explanatory amendment depends upon several factors, including its language. When the legislature has made the explanation operative prospectively by words expressed therein, its operation shall have to be confined to the future date. The same reasoning governs the case when Parliament limits the retrospectivity of the Explanation with effect from a particular date. In such a situation, giving future retrospectivity to the Explanation would be hijacking the intention of the Legislature into an impermissible area- CIT v. Rajasthan Mercantile Co. Ltd. [1995] 211 ITR 400 (Delhi). Thus, there is no doubt that ordinarily, a statute, and particularly when the same has been made applicable with effect from a particular date, should be construed prospectively and not retrospectively".
• Explanation 2 to section 132B can't be applied in the instant case as it is made applicable with effect from 1-6-2013. Therefore, AO directed to give credit of cash seized towards advanced tax as applied for by assessee.
• Appeal allowed.
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[2013] 34 taxmann.com 307 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'C'
Kanishka Prints (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Central Circle - 2, Surat
MUKUL KR. SHRAWAT, JUDICIAL MEMBER
AND ANIL CHATURVEDI, ACCOUNTANT MEMBER
AND ANIL CHATURVEDI, ACCOUNTANT MEMBER
IT APPEAL NO. 2698 (AHD.) OF 2011
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
JUNE 21, 2013
Mehul Shah for the Appellant. D.K. Singh for the Respondent.
ORDER
Anil Chaturvedi, Accountant Member - This appeal is filed by the Assessee against the order of CIT(A)-II, Ahmedabad dated 19.08.2011 for assessment year 2007-08.
2. The facts as culled out from the order of lower authorities are as under.
3. In this case a search and seizure action was conducted on 8.2.2007 wherein documents and loose papers were found and seized and the statement was also recorded u/s 132(4) and the Assessee disclosed unaccounted income of Rs 1,50,00,000/. Thereafter Assessee filed return of income on 24.9.2007 declaring total income of Rs Nil after the adjustment of carry forward depreciation. Assessment was framed u/s 143(3) vide order dated 30.6.2008 and the total income was determined at Rs Nil and Book profit u/s 115JB was determined at Rs 1,52,12,920/-.
4. During the course of search proceedings, cash of Rs 43 lacs was seized. Assessee vide his letter dated 13.3.2007 submitted that out of the total cash seized, Rs 10 lacs be treated towards payment of advance tax in the case of assessee and similarly balance of Rs.33 lacs be treated towards payment of advance tax in case of family members/group companies.
5. AO passed rectification order u/s 154 on 12.2.2009 for the reason that while working out the tax liability pursuant to order passed u/s 143(3), Assessee was granted credit of Rs 10 lacs (being the seized cash). According to the AO "this was not permissible unless and until it is adjusted". He accordingly disallowed the credit for Rs 10 lacs. Against the aforesaid order passed by Assessing Officer, Assessee filed application dated 26.3.2010 u/s 154 wherein inter alia it was submitted that the amount of Rs 10 lacs be treated as tax paid from the date on which the application has been made for adjustment against the advance tax liability and no interest u/s 234B and 234C be levied. The contention of the Assessee was not found acceptable to the AO. He vide order dated 19.10.2010 rejected the application of Assessee by holding as under:-
5. From the plain reading of the provisions of section 132B of the Act quoted above it can be construed that the seized amounts not being voluntary payment cannot be adjusted against the advance tax payable and are to adjusted against the existing demands and the demands raised after the completion of the assessments and the under section 153A and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of the assessment under Chapter XIV-B for the block period. In the instant case the demand is in respect of the assessment of the year relevant to the previous year in which search is initiated. Therefore, there is no ambiguity as regards to application/adjustment of seized cash against the demand raised on completion of assessment and charging of interest under section 234B & 234C is concerned.
6. In view of the above, the adjustment of seized cash made against the demand raised after assessment is perfectly in order and the demand raised comprising of the interest under section 234B & 234C of the Act as per provisions of section are legally correct and does not required any modification as there is no mistake apparent from records.
7. The assessee has also relied upon the decisions in the case of M/s Kesar Kimam Karyalaya [2005] 278 ITR 596 (Del) stating that the ratio of the decision is squarely applicable in the case of the assessee. Also, reliance is placed on the decision in the case of the Sudhakar M Shetty v.ACIT [2008] 10 DTR (Mumbai)(Trib) 173 stating that in this case the facts are similar and the court has held that the department has to adjust the seized amount towards advance tax, etc. from the date when it was seized. However, this respect, here it is relevant to mention that the Hon'ble MP High Court, in the case of Shri Ramjilal Jaoannath v. ACIT [2000] 241 ITR 758 (MP), has held that the amount seized under section 132 cannot be dealt with unless an order is made by the ITO either under section 132(5) or the money is applied or appropriated in accordance with section 132B. Therefore, the petitioner's submission that the amount could be adjusted towards the existing liability of the advance tax that the petitioners submission that the assessee were not liable to pay interest under section 234B or 234C also could not be accepted and the amount/assets seized could not be appropriated towards the advance tax and the assessee could not escape his liability either under 234B or 234C. Irrespective of the seizure of the amount, the assessee was obliged to pay the advance tax in accordance with law and if he had not paid the advance tax in accordance with the provisions of the Act, he could not avoid the liability either under section 234B or section 234C.
8. Considering the above facts of the case and the conflicting decisions given by the Hon'ble courts in favour and against the assessee as enumerated above, the request made by the assessee for rectification cannot be entertained as the mistake cannot be termed as mistake apparent from records and therefore, stands rejected".
6. Aggrieved by the aforesaid order of Assessing Officer, Assessee carried the matter before CIT(A). CIT(A) vide-order dated 19.8.2011 dismissed the appeal of the Assessee by holding as under:-
3 During the appellate proceedings the director of the company Shri Balesh Mehta attended and filed the written submissions. I have considered the submissions made by the appellant and considered the reasons for rejection of application under section 154. I have gone through the rectification-order under section 154 passed on 12-02-2009 and found that speaking order was passed by' the: assessing officer. The rectification order was passed with the application of mind and quoting the relevant provisions of the Act. There is no mistake apparent from the record in the order passed under section 154 on 12-02-2009. The appellant was requested to clarify whether any appeal was filed against the earlier order passed under section 154 or not. The appellant has not furnished any detail in this regard. Since there was no apparent mistake in the order passed under section 154 on 12.02.2009, the rectification-application dated 18-10-2010 was therefore, rightly rejected by passing speaking order on 19-10-2010.
7. Aggrieved by the order of CIT(A), the Assessee is now in appeal before us and has raised the following effective grounds.
| [1] | On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer in rejecting the rectification application u/s 154 and charging interest u/s 234B and 234C by treating amount of Rs. 10 lacs which has been adjusted against the cash seized as self assessment tax instead of advance tax. | |
| [2] | It is therefore prayed that the above interest charged by Assessing Officer u/s 234B and 234C and confirmed by Commissioner of Income Tax (Appeals) may please be deleted. |
8. Before us, the Ld. A.R. submitted that during the course of search at the residence of the director of the company on 8.2.2007 and from locker on 7.3.2007 total cash of Rs 43 lacs was found and seized and in this regard Assessee vide letter dated 12.3.2007 requested that out of the total cash seized, cash of Rs 10 lacs be adjusted as an advance tax against the tax liability of the assessee and the balance Rs.33 lacs be treated towards payment of advance tax in case of family members/group companies. He placed on record the copy of the aforesaid letter. He further submitted that in case of one of the group company, (Shreeji Prints) the amount was directed to be treated as payment of advance by the Hon. Tribunal and thus the issue is also covered in its favour by the decision of Ahmedabad tribunal in the case of its sister concern, M/s Shreeji Prints (P.) Ltd. (ITA No 359/A/2012). He also placed reliance on the decision of Mumbai Tribunal in the case of Sudhakar Shetty v. ACIT [2008] 10 DTR (Mum)(Trib) 173 and in the case ofCIT v. Kesr Kimam Karyalaya [2005] 278 ITR 596 (Del).
9. The Ld D.R. on the other hand submitted that Finance Act 2013 has inserted an Explanation to s. 132B according to which the existing liability does not include advance tax payable. He thus supported the order of AO and CIT(A).
10. We have heard the rival submissions and perused the material on record. It is an undisputed fact that during the course of search at the residence of directors on 8.2.2007 and locker on 7.3.2007 aggregate cash of Rs 43 lacs was seized. It is also an undisputed fact that Assessee vide his letter dated 13.3.2007 submitted that out of the cash seized, Rs 10 lacs be treated towards payment of advance tax in the case of assessee and similarly balance of Rs. 33 lacs be treated towards payment of advance tax in case of family members/group companies. It is also a fact that vide aforesaid letter, the Assessee had requested that cash of Rs 8 lacs be considered as advance tax in the case of Shreeji Prints P. Ltd. The co-ordinate Bench of Tribunal in the case of Shreeji Prints (ITA No 359/Ahd/2012 - order dated 20.4.2012) decided in favour of Assessee by holding as under:
It is evident from a bare reading of the aforesaid provisions that the existing liability under the Income-tax can be discharged from the assets or money seized. In the present case, the search operation was conducted on 22-9-2005 and the assessee filed return on 31-5-2006 declaring the seized money as income. In our opinion, if the assessee has declared income, during the year under consideration in that eventuality he is liable to pay advance tax as per law therefore the A.O. is required to find out whether such liability was existing on the date of seizure. If such liability is existing then he is empowered to apply/adjust the money seized in discharge of the existing liability even without any written representation from the assessee. Now coming to the fact of the present case, it is not disputed that the money seized from the premises of Shri Lalit Patel and same was subsequently declared in the return of income filed on 31-5-2006. Hence, it can very well be inferred from the return so filed that the respondent/assessee was required to pay advance tax on such income as mandated u/s.208 of the I. T. Act. Therefore, in view of the fact that there is no ambiguity in the provision so far application/adjustment of the seized money is concerned. Further, the judgments as relied upon by the Ld. D.R would not apply on the facts and circumstances of the present case since this is not a case where application u/s. 132(5) is made. Moreover, Section 132(5) is no more on statute book, even otherwise there is divergence in opinion between the Hon'ble High Court of Madhya Pradesh and Hon'ble Delhi High Court as fairly pointed by the Ld. D.R. The order of the ITAT Delhi Bench in ITA No.ll51/Del/2008 as relied by the Ld. D.R. is on different set of facts therefore, is not applicable on the facts of the present case. The issue whether the seized money should be applied towards advance tax liability of assessee and credit should be given credit there-from the date of seizure of money has been decided in favour of the assessee by the decision of ITAT Rajkot Bench in ITA No. 1172/RJT/2010 in the case of Shri Ram S. Sarda v. DCIT and the decision of ITAT Mumbai Bench in the case of Sudhakar M. Shetty v. ACIT in ITA No.4238 & 423 9/MUM/2007. Respectfully following the ratio laid therein we do not find any infirmity into the impugned order."
11. Before us, Ld. D.R. has relied on the amendment made to s. 132A vide Finance Bill of 2013, We find that the amendment has been made by insertion of Explanation and the Explanation has been made applicable with effect from 1st June, 2013,. For ready reference, the amendment made by Finance Bill 2013 and the memorandum is reproduced hereunder:-
12. The amendment made by Finance Bill 2013 reads as under:- Amendment of section 132B.
34. In section 132B of the Income–tax Act, the Explanation shall be numbered as explanation 1 thereof and after explanation 1 as so numbered the following explanation shall be inserted with effect from the 1st day of June, 2013, (emphasis supplied) namely:-
Explanation 2.—For the removal of doubts it is hereby declared that the "existing liability" does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII.'
The explanatory memorandum to the Finance Bill reads as under :-
The existing provisions contained in section 132B of the Income-tax Act, inter alia, provide that seized assets may be adjusted against any existing liability under the Income Tax Act. Wealth tax Act, the Expenditure-tax Act, the Gift-tax Act and the Interest tax Act and the amount of liability determined on completion of assessments pursuant to search, including penalty levied or interest payable and in respect of which such person is in default or deemed to be in default.
Various courts have taken a view that the term "existing liability" includes advance tax liability of the assessee, which is not in consonance with the intention of the legislature. The legislative intent behind this provision is to ensure the recovery of outstanding tax/interest/penalty and also to provide for recovery of taxes/ interest /penalty, which may arise subsequent to the assessment pursuant to search.
Accordingly, it is proposed to amend the aforesaid section so as to clarify that the existing liability does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII of the Act.
This amendment will take effect from 1st June, 2013. (emphasis supplied)
13. In Taxmann's publication "Interpretation of Statutes" 2nd Edition by Shri D.P. Mittal at page 807 it has been stated as under:- "The effect to be given to an explanatory amendment depends upon several factors, including its language. When the legislature has made the explanation operative prospectively by words expressed therein, its operation shall have to be confined to the future date. The same reasoning governs the case when Parliament limits the retrospectivity of the Explanation with effect from a particular date. In such a situation, giving future retrospectivity to the Explanation would be hijacking the intention of the Legislature into an impermissible area- CIT v. Rajasthan Mercantile Co. Ltd. [1995] 211 ITR 400 (Delhi). Thus, there is no doubt that ordinarily, a statute, and particularly when the same has been made applicable with effect from a particular date, should be construed prospectively and not retrospectively".
14. Thus considering the totality of the aforesaid, interpretation of applicability of explanation, and amendment made by Finance Bill 2013, facts and respectfully following the decision of the co-ordinate Bench, we are of the view that the amended Explanation cannot be applied in present case. We therefore allow the appeal of the Assessee and direct the AO to give credit of Rs 10 lacs as advance tax. Thus the appeal of the Assessee is allowed.
ST : Goods sold in course of providing interior designs services on which VAT had been paid are, prima facie, eligible for exemption under Notification No. 12/2003-ST
ST : Any contract is considered as works contract for VAT purposes deserves to be treated as works contract for levy of service tax and value of goods on which VAT had been paid cannot be charged to service tax
ST : Service tax cannot be demanded on "receivables" viz. amounts which have not actually been received
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[2013] 33 taxmann.com 608 (Bangalore - CESTAT)
CESTAT, BANGALORE BENCH
Nag Interiors (P.) Ltd.
v.
Commissioner of Central Excise, Bangalore*
P.G. CHACKO, JUDICIAL MEMBER
AND M. VEERAIYAN, TECHNICAL MEMBER
AND M. VEERAIYAN, TECHNICAL MEMBER
STAY ORDER NO. 907 OF 2012
APPLICATION NO. ST/STAY/1807 OF 2011
APPEAL NO. ST/2906 OF 2011
APPLICATION NO. ST/STAY/1807 OF 2011
APPEAL NO. ST/2906 OF 2011
MAY 9, 2012
I. Section 65(25b) of the Finance Act, 1994 - Commercial or Industrial Construction Services - Stay Order - Period from 16-6-2005 to 31-5-2007 - Assessee was undertaking execution of "interior designs" as designed by different architects - It was paying service tax thereon but claimed exemption under Notification No. 12/2003-ST in respect of bought-out items like wood laminates, pipes, electrical items, plumbing items and glass etc. - HELD : Assessee had paid VAT on value of goods element - Hence, prima facie, benefit of Notification No. 12/2003 was available in light of documents submitted by assessee which contained detailed specifications and value of material supplied/utilized while rendering services [Paras 4.3 & 5] [In favour of assessee]
II. Section 65(105)(zzzza) of the Finance Act, 1994 - Works Contract Services - Stay Order - Period from 1-6-2007 to 31-3-2010 - Assessee was undertaking execution of "interior designs" as designed by different architects - It was not paying service tax on value of goods involved on which VAT was paid - HELD : Any contract which is considered as works contract involving payment of VAT deserves to be treated as works contract for purposes of levy of service tax - Hence, prima facie, assessee was eligible for deduction of value of goods involved on which VAT had been paid [Paras 4.3 and 4.4] [In favour of assessee]
III. Rule 6 of the Service Tax Rules, 1994 - Payment of service tax - Stay Order - Period from 16-6-2005 to 31-3-2010 - Department confirmed demand treating amounts mentioned as "receivables" as service charges received by assessee - HELD : This was erroneous as service tax was liable to be paid on actual amounts received and not on amounts which may be receivable and not yet received - Hence, prima facie, demand to that extent was unsustainable [Para 4.2] [In favour of assessee]
Circulars and Notifications : Notification No. 12/2003-ST, dated 20-6-2003, Circular No. B-1/16/2007-TRU, dated 22-5-2007
CASES REFERRED TO
Aggarwal Colour Advance Photo System v. CCE [2011] 33 STT 33/13 taxmann.com 192 (New Delhi - CESTAT) (para 3).
B.N. Gururaj for the Appellant. R.K. Singla for the Respondent.
ORDER
M. Veeraiyan, Technical Member - The application seeks waiver of pre-deposit of service tax amounting to Rs. 2,36,80,916/- relating to the period 16th June, 2005 to 31st March, 2010 along with interest and penalties imposed under various sections.
2.1 Learned advocate for the appellant submits that they were undertaking execution of "interior designs", as designed by different architects. They were executing the work after using bought-out items like wood laminates, pipes, electrical items, plumbing items and glass etc. They were paying service tax under the category of "Commercial and Industrial Construction" services with effect from 16-6-2005 up to 30-6-2007 and thereafter started paying under the category of works contract. A show-cause notice dated 7-9-2010 was issued proposing demand of service tax amounting to Rs. 2,36,80,916/- alleging that the appellants were not eligible for the benefit of Notification No. 12/2003-S.T., dated 20-6-2003 and that they were also not eligible for paying service tax under the category of works contract. Commissioner confirmed the demand along with interest and imposed penalties as mentioned above.
2.2 Learned advocate challenges the order of the Commissioner on the following grounds :
| (a) | During the relevant period, they have executed the orders worth about Rs. 20.29 crore. A part of these amounts was mentioned as due from sundry debtors but has not actually been received. | |
| (b) | They have utilized/supplied goods valued about Rs. 13.11 crore while rendering the services and they have paid VAT under different schemes as applicable in respect of such goods. | |
| (c) | The taxable value excluding the value of goods which was subject to VAT was only Rs. 2,95,64,113/- and the duty payable comes to Rs. 18,42,876/-, which they have paid. | |
| (d) | The denial of the benefit of exemption under Notification No. 12/2003 on the ground that no documents have been produced was not justified as the invoices raised on the service recipients clearly indicated the rate analysis of various items which were supplied/utilized while rendering the services and on that basis on the supply/sale of such items, VAT was paid. | |
| (e) | Denial of benefit under the works contract was not justified. The Commissioner has held that no option was exercised for paying service tax under the head Works Contract. The option under Works Contract would arise only when service tax was sought to be paid under the composite scheme and not for regular assessees. | |
| (f) | Referring to Board's Circular No. B-1/16/2007-TRU, dated 22-5-2007, he submits that any contracts which are treated as works contracts for purposes of levy of VAT/sales tax shall also be treated as works contract for purposes of levy of service tax. |
3. Learned Commissioner (A.R.) reiterated the findings and reasoning of the Commissioner. He relied on the decision of the Larger Bench of the Tribunal in the case of Aggarwal Colour Advance Photo System v. CCE [2011] 33 STT 33/13 taxmann.com 192 (New Delhi - CESTAT) and submitted that for the purpose of Notification No. 12/2003, only actual sales could be considered and not the deemed sales. He further submitted that Commissioner has denied the benefit as the appellants have failed to produce necessary documents indicating sale of the goods. For the purpose of paying service tax under works contract, the contract should involve supply of goods and rendering of services in a composite manner. Once the appellants exclude the value of the goods, they cannot seek assessment under works contract.
4.1 We have carefully considered the submissions from both sides and perused the records.
4.2 The Commissioner has confirmed the demand treating the amounts mentioned as "receivables" as service charges received by the appellant. This is erroneous as the service tax is liable to be paid on actual amounts received and not on amounts which may be receivable and not yet received.
4.3 Further, we find that the appellants have executed orders worth about Rs. 20 crore and they claim that value of goods involved in rendering of the said services is over Rs.13 crore. Commissioner has totally disallowed the claim for deduction of value of goods. In other words, he has taken the entire value of Rs.20 crore as value of services rendered. It is not disputed that the appellants have paid VAT on goods valued about Rs.13 crore.
4.4 As per Board's clarification dated 22-5-2007, any contract which is considered as works contract involving payment of VAT deserves to be treated as works contract for purposes of levy of service tax.
5. Further, for the period prior to 1-6-2007, the denial of benefit of Notification No. 12/2003 may not be justified in the light of documents submitted by the assessee which contained detailed specifications and value of the material supplied/utilized while rendering the services. Prima facie, the appellants were eligible for benefit of Notification No. 12/2003. Undisputedly, the appellants have paid service tax of Rs. 18,42,993/- which according to them was payable after availing the benefit of Notification No. 12/2003 and under works contract from 1-6-2007.
6. In view of the above, we hold that the appellant has made out a case for waiver of balance of dues as per the impugned order and, accordingly, we grant waiver of pre-deposit of balance of dues and stay recovery thereof till disposal of the appeal.
VINEET IT : Where Assessing Officer in order of penalty did not come to a clear finding regarding penalty being imposed on concealment of income or on furnishing inaccurate particulars of income, Tribunal was justified in setting aside impugned penalty order
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[2013] 34 taxmann.com 65 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax-I
v.
Jyoti Ltd.*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NOS. 341 & 342 OF 2013
APRIL 25, 2013
Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income [Satisfaction of Assessing Officer] - In course of assessments Assessing Officer disallowed assessee's claim of payment of commission - Such disallowance was made on ground that assessee could not even obtain confirmation from commission recipient - Assessing Officer also passed a penalty order under section 271(1)(c) - Tribunal set aside penalty order holding that, in order of penalty, Assessing Officer had not given a clear finding whether penalty was imposed on assessee for having concealed particulars of income or having furnished inaccurate particulars of income - Whether since Assessing Officer in order of penalty did not come to a clear finding regarding penalty being imposed on concealment of income or on furnishing inaccurate particulars of income, Tribunal was justified in setting aside impugned penalty order - Held, yes [Para 7] [In favour of assessee]
CASES REFERRED TO
CIT v. Manu Engineering Works [1980] 122 ITR 306 (Guj.) (para 8) and New Sorathia Engineering Co. v. CIT [2006] 282 ITR 642/155 Taxman 513 (Guj.) (para 8).
K.M. Parikh for the Appellant.
ORDER
Akil Kureshi, J. - For the purpose of this judgment since facts are common, we may notice facts arising in Tax Appeal No.342 of 2013.
2. Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 31.8.2012 raising following question for our consideration:-
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the penalty for concealment of income by holding that in the penalty order the Assessing Officer has not given a clear cut finding as to whether the assessee has concealed particulars of income or furnished inaccurate particulars of income?"
3. Issue pertains to penalty of Rs.11.31 lakhs imposed by the Assessing Officer against the respondent assessee under Section 271(1)(c) of the Income Tax Act, 1961 (" the Act" for short). In the original assessment, the Assessing Officer had disallowed the claim of Rs. 25.58 lakhs (rounded off) towards commission paid by the assessee. Such disallowance was made inter alia on the ground that the assessee could not even obtain confirmation from the commission recipient. There was nothing on record to suggest that such party was in a position to carry on the business on behalf of the assessee to earn commission of sizable amount of Rs. 24.58 lakhs. It was not known whether party was assessed to tax at all or not. Simultaneously, he also ordered issuance of notice for penalty under Section 271(1)(c) of the Act.
4. In the penalty proceedings the Assessing Officer imposed a penalty of Rs. 11.31 lakhs by his order dated 29.5.2006, which was 100% of the tax sought to be evaded. Such penalty was confirmed by CIT (Appeals). On further appeal, the Tribunal reversed the decision of the Revenue Authorities on the ground that the Assessing Officer had, in the order of penalty, not given a clear finding whether the penalty was imposed for the assessee having concealed the particulars of income or having furnished inaccurate particulars of the income. The Tribunal held and observed as under:
"8. In the case in hand also, the Assessing Officer, in the penalty order has not given a clear cut finding, as to whether the assessee has concealed particulars of income or furnished inaccurate particulars of income. In this case also, the Assessing Officer as well as the Ld CIT(A) has taken both the items in levying the penalty. Therefore, respectfully following the judgment of Hon'ble Gujarat High Court rendered in the case of New Sorathia Engineering v. CIT and CIT v. Manu Engineering (supra) and also decision of the Hon'ble Co-ordinate Benches rendered in the case ofGanapati Bhai M. Mistry Furnishers (P.) Ltd. v. ACIT in ITA No. 505/Ahd/2009 and in the case of Krishna Developers v. ITO in the ITA Nos.4447, 4448 and 4449/Ahd/2007, the appeal of the assessee is allowed and the Assessing Officer is directed to delete the penalty."
5. Counsel for the Revenue took us extensively through the orders of the original assessment as well as those passed by the Revenue authorities on penalty proceedings. He submitted that after the detailed inquiry, the Assessing Officer in the original assessment had come to the conclusion that the claim of commission payment was not genuine. During the penalty proceedings, the assessee could not bring any further material to dislodge such findings. He, therefore, submitted that the Tribunal ought not to have reversed the order of penalty.
6. We do not find any reason to interfere. The Assessing Officer in his penalty order noted as under:-
"In view of the above facts, it is clear that the assessee concealed income/furnished inaccurate particulars of income. I, therefore, consider it a fit case for levy of penalty under Section 271(1)(c)"
7. The Tribunal was thus correct in holding that the Assessing Officer in the order of penalty also did not come to a clear finding regarding penalty being imposed on concealment of income or on furnishing inaccurate particulars of income.
8. In view of the decisions of this Court in case of CIT v. Manu Engg. Works [1980] 122 ITR 306 and in case of New Sorathia Engineering Co. v.CIT [2006] 282 ITR 642/155 Taxman 513 (Guj.), ordinarily' we would have confirmed the decision of the Tribunal only on this ground. We, however, notice that the Appellate Commissioner did give clear finding in this respect. It may perhaps be open to the Revenue to contend in such a situation that the penalty can still be sustained. We need not enter into such a question because we find that even otherwise in the order in original of the assessment or in the penalty order, being the original order of assessment, the Assessing Officer had come to the conclusion that for want of supplying sufficient material by the assessee, the claim of commission cannot be accepted. He had not come to any definite finding that the claim was not genuine or totally bogus.
9. In that view of the matter, in the facts of the present case, keeping this question noted above open, these Tax Appeals are dismissed.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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