This originated from USA but most of it is fully applicable to India too.
At first, I thought this was just funny.....you too will realise the awful truth in it as you go on...
At first, I thought this was just funny.....you too will realise the awful truth in it as you go on...
Do read it all the way till the end...
The Tax Poem
Tax his land,
Tax his bed,
Tax the table
At which he's fed.
Tax his bed,
Tax the table
At which he's fed.
Tax his tractor,
Tax his mule,
Teach him taxes
Are the rule.
Tax his mule,
Teach him taxes
Are the rule.
Tax his work,
Tax his pay,
He works for peanuts
Anyway!
Tax his cow,
Tax his goat,
Tax his pants,
Tax his coat.
Tax his ties,
Tax his shirt,
Tax his work,
Tax his dirt.
Tax his pay,
He works for peanuts
Anyway!
Tax his cow,
Tax his goat,
Tax his pants,
Tax his coat.
Tax his ties,
Tax his shirt,
Tax his work,
Tax his dirt.
Tax his tobacco,
Tax his drink,
Tax him if he
Tries to think.
Tax his drink,
Tax him if he
Tries to think.
Tax his cigars,
Tax his beers,
If he cries
Tax his tears.
Tax his beers,
If he cries
Tax his tears.
Tax his car,
Tax his gas,
Find other ways
To tax his ass.
Tax his gas,
Find other ways
To tax his ass.
Tax all he has
Then let him know
That you won't be done
Till he has no dough.
Then let him know
That you won't be done
Till he has no dough.
When he screams and hollers;
Then tax him some more,
Tax him till
He's good and sore.
Then tax him some more,
Tax him till
He's good and sore.
Then tax his coffin,
Tax his grave,
Tax the sod in
Which he's laid.
Tax his grave,
Tax the sod in
Which he's laid.
Put these words
Upon his tomb,
'Taxes drove me
to my doom...'
Upon his tomb,
'Taxes drove me
to my doom...'
When he's gone,
Do not relax,
Its time to apply
The inheritance tax.
Do not relax,
Its time to apply
The inheritance tax.
Few Other Taxes Include:
Accounts Receivable Tax
Airline surcharge tax
Airline Fuel Tax
Airport Maintenance Tax
Building Permit Tax
Cigarette Tax
Corporate Income Tax
Death Tax
Dog License Tax
Driving Permit Tax
Excise Taxes
Federal Income Tax
Federal Unemployment (UI)
Fishing License Tax
Food License Tax
Petrol Tax (too much per litre)
Gross Receipts Tax
Health Tax
Hunting License Tax
Hydro Tax
Inheritance Tax
Interest Tax
Liquor Tax
Luxury Taxes
Marriage License Tax
Medicare Tax
Mortgage Tax
Personal Income Tax
Property Tax
Poverty Tax
Prescription Drug Tax
Property Tax
Provincial Income Tax
Real Estate Tax
Recreational Vehicle Tax
Retail Sales Tax
Service Charge Tax
School Tax
Telephone Tax
Telephone, Provincial and Local Surcharge Taxes
Telephone Minimum Usage Surcharge Tax
Vehicle License Registration Tax
Vehicle Sales Tax
Water Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax
Airline surcharge tax
Airline Fuel Tax
Airport Maintenance Tax
Building Permit Tax
Cigarette Tax
Corporate Income Tax
Death Tax
Dog License Tax
Driving Permit Tax
Excise Taxes
Federal Income Tax
Federal Unemployment (UI)
Fishing License Tax
Food License Tax
Petrol Tax (too much per litre)
Gross Receipts Tax
Health Tax
Hunting License Tax
Hydro Tax
Inheritance Tax
Interest Tax
Liquor Tax
Luxury Taxes
Marriage License Tax
Medicare Tax
Mortgage Tax
Personal Income Tax
Property Tax
Poverty Tax
Prescription Drug Tax
Property Tax
Provincial Income Tax
Real Estate Tax
Recreational Vehicle Tax
Retail Sales Tax
Service Charge Tax
School Tax
Telephone Tax
Telephone, Provincial and Local Surcharge Taxes
Telephone Minimum Usage Surcharge Tax
Vehicle License Registration Tax
Vehicle Sales Tax
Water Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax
STILL THINK THIS IS FUNNY?
Not one of these taxes existed 100 years ago, and our nation was one of the most prosperous in the world.
We had absolutely no national debt, had a large middleclass, and Mom stayed home to raise the kids.
What in the hell happened? Can you spell 'politicians? '
I hope this goes around INDIA at least 100 times!!
YOU can help it get there.
GO AHEAD - - - be an INDIAN !!!!!!!!!!
SEND IT AROUND EVERYWHERE for a change
When one door of happiness closes, another opens;
But often we look so long at the closed door that we do not see the one that has been opened for us.
Helen Keller
IT/ILT : Payment received by foreign company from Indian franchisee for international marketing activities is not "royalty" under Article 12(4) of DTAA even if its on the basis of % of gross revenue. In order to cover any amount within the purview of "royalties" as per Article 12 (4) of the DTAA, it is imperative that the payment must be a consideration for use or right to use any copyright of the literary artistic work etc. or any patent, trademark etc. (collectively referred to as the 'defined property'). Payment can be made as a consideration for the use or right to use of the defined property only when such property is in existence at the time of use. If a property does not pre-exist or is likely to come into existence because of the given payment, the same cannot qualify as 'royalties' because it would, in such circumstances, lack the condition of 'use or right to use'. Even if we accept that the contribution made by AHL towards the international marketing activities led to the brand building, still it would be a payment for the creation or swelling of the brand and not for the use of such brand, which could qualify to be characterized as 'royalties'
Facts
• Assessee-foreign company(Marriot) entered into a Franchise agreement with Franchisee-hotel in India (AHL) to establish and operate MRHS International Hotel.
• Preamble of the Franchise agreement stated that the Franchisee desires certain sales and marketing publicity and promotion services to be performed outside India in support of the operation of the hotel and Marriott (the assessee) desires to perform such services.
• It further provides that the Franchisee has agreed to enter into an International Sales and Marketing Agreement with Marriott in order to participate in internationally recognized hotel system for the purposes of attracting foreign guests to the hotel.
• Clause 3.2 of the agreement provided that AHL would pay the assessee 1.5% of its gross revenue on quarterly basis to the assessee for 'International Marketing Activities', which are in the nature of purchase of advertising space in magazines, newspapers and similar printed media etc., direct advertising, marketing, promotional, public relations and sales campaigns etc, designated by Marriot.
• AO brought this amount to tax as "royalty" under Article 12(4) India-Netherlands DTAA.
• CIT(A) allowed the appeal holding the amounts to be reimbursements. Aggrieved by CIT(A) order, instant appeal filed by Revenue to ITAT.
Held
• A perfunctory look at the definition of term 'royalties' as per the para 4 of the Article 12 of the DTAA makes it palpable that it represents payment received as a consideration 'for the use of or the right to use' any copyright of literary, artistic or scientific work including cinematograph films, patent, trade mark or design etc.
• The crucial words used in para 4 of the Article 12 of the DTAA are, the 'consideration for the use of or right to use …..'.
• It therefore, becomes vivid that in order to cover any amount within the purview of "royalties" as per Article 12 (4) of the DTAA, it is imperative that the payment must be a consideration for use or right to use any copyright of the literary artistic work etc. or any patent, trademark etc. (collectively referred to as the 'defined property').
• Payment can be made as a consideration for the use or right to use of the defined property only when such property is in existence at the time of use.
• If a property does not pre-exist or is likely to come into existence because of the given payment, the same cannot qualify as 'royalties' because it would, in such circumstances, lack the condition of 'use or right to use'.
• In other words, the term 'royalties' as per article 12(4) contemplates a consideration for the use of or right to use of the defined property which is already in existence and the payment is agreed for its use or right to use.
• If the payment made is of such a nature which helps in the creation of the defined property, that cannot fall within the ambit of Article 12(4) of the DTAA.
• Even if we accept that the contribution made by AHL towards the international marketing activities led to the brand building, still it would be a payment for the creation or swelling of the brand and not for the use of such brand, which could qualify to be characterized as 'royalties'.
• Viewed from any angle, it is abundantly clear that the amount in question cannot be held as 'royalties' falling within the ambit of Article 12(4) of the DTAA. Thus the AO's action in treating this amount as royalties is set aside.
• It is evident that there is an out and out contribution for marketing expenses at a fixed rate on quarterly basis, which was determined in the year 2000.
• Such contribution at 1.5 per cent of the gross revenue for each quarter is not any actual reimbursement of expenses on itemized basis.
• The actual expenses to be incurred by the assessee may be more or less than the said fixed rate of contribution. In such a situation, there is every possibility of the assessee having some mark up on the costs incurred by it on advertisement. Or alternatively, it may be the other way around also.
• No material has been placed on record to demonstrate that the actual expenses incurred by the assessee were equal to the amount received.
• Ld. CIT(A) was not justified in deleting the addition by holding that it represented 'reimbursement of expenses'.
• Matter remanded to AO to decide whether amounts taxable as Business Profits under Article 7 of DTAA.
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[2013] 35 taxmann.com 400 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'L'
Deputy Director of Income-tax (IT) - 4(1)
v.
Marriott International Licensing Company BV
R.S. SYAL, ACCOUNTANT MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
IT APPEAL NO. 416 (MUM.) OF 2008
[ASSESSMENT YEAR 2004-05]
[ASSESSMENT YEAR 2004-05]
JULY 17, 2013
Ms. Neeraja Pradhan for the Appellant. K.K. Ved for the Respondent.
ORDER
R.S. Syal, Accountant Member - This appeal by the Revenue arises out of the order passed by the CIT(A) on 24.10.2007 in relation to the A.Y. 2004-05.
2. The only effective ground raised in this appeal is as under:-
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A)erred in holding that the payments made under Article 3.1 of the Franchise Agreement and the International sales & Marketing Agreement (ISMA) with M/s Ansal Hotels Limited(AHL) is "Royalty" and the payments made under Article 3.2 of the said agreement is purely reimbursement of expenses on sales promotion and marketing and hence the payments made as per Articles 3.2 and 3.3 is not "Royalty" and not taxable in India."
3. Briefly stated the facts of the case are that the assessee is a company incorporated in and tax resident of Netherlands. Return of income was filed declaring total income of Rs. 43,98,410/- accompanied, inter alia, by exhibit 'A'. Note no.4 of this Exhibit read as under:-
"MILC has entered into International Sales and Marketing Agreement with AHL for providing marketing services outside India. During the year under consideration, AHL has paid marketing fees of Rs. 90,06,525/- on which taxes of Rs. 9,41,264/- have been deducted. MILC has adopted a position that these amounts are not taxable in India and accordingly has claimed a refund of taxes withheld".
4. The assessee was called upon to explain as to why the amount received from Ansal Hotels Ltd. (AHL) for providing marking services outside India should not be taxed in India as per the Double Taxation Avoidance Agreement between India and Netherlands (hereinafter called 'the DTAA') and also under the Income-tax Act 1961 (Act). The assessee submitted that the amount was received for undertaking to perform the advertisement and marketing activities viz., Purchase of advertisement space in magazines, newspaper and other similar media ; advertisement on radio, television and other electronic media; advertising in printing and publication of pamphlets, brochures, directories, etc; advertising, marketing, sales promotional activities; public relations, revenue management and sales campaigns; Development of marketing products, retention of advertising agencies, marketing consultants and other professionals to assist in the aforesaid activities. It was claimed that the amount was received for the performance of marketing activities outside India and hence was not chargeable to tax in India. The Assessing Officer observed that the assessee entered into Franchise agreement with AHL for carrying on hotel business under the name and style of 'Marriott' in India. The receipt of marketing fees of Rs. 90,06,525/- was on account of administering various services viz., providing advertising space in magazines, newspapers and other printing media, slots on radio, television and other electronic media etc. to AHL outside India in order to attract foreign guests. It was also noticed that the marketing and business promotion expenditure was aimed not only for the benefit of the Indian Hotel, but also the Marriot Group as a whole. Since, assessee did not furnish any documentary evidence such as copies of reimbursement of bills of invoices etc. to show the actual nature of services rendered by the assessee, the Assessing Officer held that there was no evidence that the expenditure incurred by the assessee had any link with the money received from AHL. The AO held that the assessee's contention in this regard about the same being "Reimbursement of expenses" was not capable of acceptance. He took note of certain clauses of the Sales and Marketing Agreement dated 26.09.2000 (hereinafter also called 'the Agreement') between assessee and AHL for reaching the conclusion that AHL used the confidential information, know-how of the challenging scenario relating to the market/Industry. He considered Article 12(4) of the DTAA to hold that the entire payment of Rs.90.06 lacs received by the assessee was towards 'Royalty' for the use of brand 'Marriott'/brand preference/brand awareness. As the expenditure incurred by the assessee in international advertising was for building the brand, the AO held the amount to be in the nature of royalty income in terms of Article 12(4) of the DTAA.
5. In the first appeal, the ld. CIT(A) noticed that the amount of Rs. 90.06 lacs was on account of payment received under clauses 3.1 to 3.3 of the Agreement. The first part of the amount, being the receipt under clause 3.1 of the Agreement was held to be royalty and the second part of the amount under clauses 3.2 and 3.3 was held to be towards 'Reimbursement of expenses' on sales promotions and marketing and hence not chargeable to tax in India. The Revenue is in appeal against the direction of the ld. CIT(A) in relation to the payment made under clauses 3.2 and 3.3 of the Agreement treating it as 'Reimbursement of expenses' and not 'Royalty'. The ld AR fairly conceded that the impugned order in directing to tax the receipt under clause 3.1 of the Agreement as 'Royalty' has been accepted by the assessee. We are, therefore, required to adjudicate upon the nature of receipt under clauses 3.2 and 3.3 of the Agreement.
6. We have heard the rival submissions and perused the relevant material on record. As we have been called upon to determine the correct nature of the receipt under clauses 3.2 and 3.3 of the Agreement, it would be in the fitness of things to go through the relevant clauses of the Agreement dated 26.09.2000, a copy of which has placed on record. Preamble of the Agreement provides that the Franchisee (Ansal Hotels Ltd.) is the owner of the hotel and desires to establish and operate an MHRS International Hotel between Marriott and Franchisee. The Franchisee desires certain sales and marketing publicity and promotion services to be performed outside India in support of the operation of the hotel and Marriott (the assessee) desires to perform such services. It further provides that the Franchisee has agreed to enter into an International Sales and Marketing Agreement with Marriott in order to participate in internationally recognized hotel system for the purposes of attracting foreign guests to the hotel.
7. The bone of contention is the payment received by the assessee in lieu of clauses 3.2 and 3.3 of the Agreement, which read as under:-
"3.2 International Marketing Payment; Payments for Other Marketing Programs
| A. | Franchisee shall reimburse in U.S. Dollars to Marriott, or as otherwise directed by Marriott, with respect to each Quarterly Period an "International Marketing Payment'" which as of the Effective Date shall be one and one-half percent(1.5%) of Gross Revenues for each. Quarterly Period during the term of this Agreement beginning on the Opening Date, as a contribution to the International Marketing Fund. All amounts received by Marriot under this Section 3.2A shall be used to pay for International Marketing Activities outside of India. | |
| B. | In addition to the International Marketing Payment, Franchisee shall reimburse in U.S. Dollars to Marriott, or as otherwise directed by Marriott, the Hotel's share, as determined by Marriott, of the costs of every additional advertising, marketing, promotional or public relations program or activity outside of India in which Franchisee is required to participate pursuant to Sections 4.1 and 4.5 A or in which Franchisee elects to participate pursuant to Section 4.5 B. At the request of Franchisee, Marriott shall provide necessary supporting invoices, bills, debit notes, etc. evidencing such costs. | |
| 3.3 Special Advertising Costs | ||
| To compensate Marriott for the provision of special services related to international advertising and potential liabilities arising therefrom and to participation of the Hotel as part of the group of MHRS International Hotels, Franchisee shall reimburse Marriott for the Hotel's allocable share of all costs and expenses incurred by Marriott and its Affiliates in providing such special services which shall be charged to all participating MHRS International Hotels on a fair and reasonable basis, with payments to be made for each calendar year as provided in Section 3.4. The basis on which the costs and expenses of such special services are charged may change from time to time as reasonably determined by Marriott." |
8. Total receipt of Rs. 90.06 lacs comprises of two components, viz., Marketing Fee of Rs. 51.46 lacs (towards clause 3.1 of the Agreement) and International Marketing Fee of Rs. 38.59 lacs (towards clauses 3.2 and 3.3 of the Agreement). The ld. AR submitted that the assessee has accepted the decision of the ld. CIT(A) qua the Marketing Fee of Rs. 51.46 lacs as having been held as 'Royalty'. The Revenue is in appeal against the other amount of Rs. 38.59 lacs towards clause 3.2 and 3.3 of the Agreement as having been held as 'Reimbursement of expenses' and thus thwarting taxation on it.
9. Before embarking upon the taxability or otherwise of the amount of Rs. 38.59 lacs, it is sine qua non to understand the correct nature of this amount. Both the sides are in agreement that this sum was received towards clauses 3.2 and 3.3, reproduced above, of the Agreement. A cursory look at the clause 3.2 divulges that AHL made contribution at the rate of 1.5% of the Gross revenues for each quarter towards "International Marketing Fund". The term "International Marketing Fund" has been defined as per clause 1 of the Agreement as under : -
"International Marketing Fund" means the fund administered by Marriot and the other Marriott Companies for 'International Marketing Activities' which is used to pay all costs associated with developing, preparing, producing, directing administering, researching, conducting, and disseminating International Marketing Activities."
10. The expression "International Marketing Activities" as employed in the definition of the expression "International Marketing Fund" has been defined in clause 1 of the Agreement, as under:
"International Marketing Activities" means advertising, marketing, promotional, public relations and sales campaigns, materials, programs, seminars and other activities for MHRS International Hotels and other hotels designated by Marriott. Not all International Marketing Activities will include all MHRS International Hotels. Programs described in section 4.5 are not include in International Marketing Activities. International Marketing Activities shall include the following: purchase of advertising space in magazines, newspapers, and similar printed media; purchase of advertising on radio, television and other electronic media: printing and publication of pamphlets, brochures, the Directory, other directories, and other materials; advertising marketing, promotional, public relations, revenue management and sales campaigns designed to increase sales or public awareness of the System of MHRS International Hotels; market research, customer surveys and guest satisfaction audits; the development of marketing products; the retention of advertising agencies, marketing consultants, and other professionals to assist in the development and implementation of any of the foregoing; the advertising, marketing, promotional and sales activities of the Marriott Companies' marketing and sales offices throughout the world; and any other advertising, marketing, promotional, public relations, sales or related activities and materials deemed appropriated by Marriott."
11. A conjoint reading of the definitions of the expressions 'International Marketing Activities' and 'International Marketing Fund' along with clause 3.2 of the Agreement makes it manifest that AHL agreed to contribute at the rate of 1.5% of its gross revenue on quarterly basis to the assessee for 'International Marketing Activities', which are in the nature of purchase of advertising space in magazines, newspapers and similar printed media etc., direct advertising, marketing, promotional, public relations and sales campaigns etc, designated by Marriot.
12. In the backdrop of such circumstances the primary question which arises for our consideration is as to whether the contribution of 1.5% made by AHL can be characterized as 'Royalties' under Article 12 of the DTAA. Para 4 of the Article 12 defines 'royalties' as under: -
"The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematography films, any patent, trade mark, design or model, plan, secret formula or process or for information concerning industrial, commercial or scientific experience."
13. A perfunctory look at the definition of term 'royalties' as per the para 4 of the Article 12 of the DTAA makes it palpable that it represents payment received as a consideration 'for the use of or the right to use' any copyright of literary, artistic or scientific work including cinematograph films, patent, trade mark or design etc. The crucial words used in para 4 of the Article 12 of the DTAA are, the 'consideration for the use of or right to use …..'. It therefore, becomes vivid that in order to cover any amount within the purview of "royalties" as per Article 12 (4) of the DTAA, it is imperative that the payment must be a consideration for use or right to use any copyright of the literary artistic work etc. or any patent, trademark etc. (collectively referred to as the 'defined property'). Payment can be made as a consideration for the use or right to use of the defined property only when such property is in existence at the time of use. If a property does not pre-exist or is likely to come into existence because of the given payment, the same cannot qualify as 'royalties' because it would, in such circumstances, lack the condition of 'use or right to use'. In other words, the term 'royalties' as per article 12(4) contemplates a consideration for the use of or right to use of the defined property which is already in existence and the payment is agreed for its use or right to use. If the payment made is of such a nature which helps in the creation of the defined property, that cannot fall within the ambit of Article 12(4) of the DTAA.
14. Reverting to the contents of clauses 3.2 and 3.3 of the Agreement, it is manifest that AHL made contribution at the rate of 1.5% towards 'International Marketing Activities', which, in turn, means purchase of advertisement space in magazines, newspaper and other similar media ; advertisement on radio, television and etc. and other activities of the advertising and marketing nature. The Revenue authorities have accepted the Agreement as bona fide without doubting its correctness in any manner. When admittedly contribution at the rate of 1.5% by AHL to the assessee, amounting to Rs. 38.59 lacs, is towards marketing activities, we fail to see as to how it can be characterized as 'royalties' falling within the ambit of Article 12 of the DTAA. The ld. DR referred to para 5 of the Agreement to bolster her submission of the amount being in the nature of royalty. It is beyond our comprehension as to how this para advances her case. It talks of 'Confidential information' and provides that the Franchisee shall not during the term of this Agreement or thereafter copy, duplicate, record or reproduce etc. the confidential information to any person without the assessee's consent. There is no consideration for maintaining such confidential information. The amount with which we are presently concerned is undisputedly contribution for international marketing activities, which is in the nature of advertisement and marketing etc. This amount cannot be tagged with any other clause of the Agreement when it has been stated to be for international marketing activities. It is further noticed that the AO also tried to link this amount with "brand Marriott/brand preference/brand awareness". In other words, he canvassed a view that with such payment AHL facilitated in building and strengthening the brand 'Marriott'. We have noticed above that the term 'royalties' as per Article 12 of the DTAA can always be a consideration for the use or right to use of any defined existing property. It cannot be for the creation of the defined property. Even if we accept that the contribution made by AHL towards the international marketing activities led to the brand building, still it would be a payment for the creation or swelling of the brand and not for the use of such brand, which could qualify to be characterized as 'royalties'. Viewed from any angle, it is abundantly clear that the amount in question relatable to clauses 3.2 and 3.3 of the Agreement cannot be held as 'royalties' falling within the ambit of Article 12(4) of the DTAA. Thus the AO's action in treating this amount as royalties is set aside.
15. Now we espouse the view taken by the ld. CIT(A) in holding that the amount is a pure reimbursement of expenses and hence not chargeable to taxable. There can be no quarrel over the proposition that if some amount is incurred as an expense which is reimbursed by someone, such a receipt will not be chargeable to tax. The logic is simple that if Rs. X have been incurred as business expense and the same amount of Rs. X is recovered, then the net outflow is zero, neither warranting any deduction for expense nor leading to the generation of any income. In such a case, the occasion of receipt of reimbursement of expenses cannot attract any taxability. But if against the actually incurring of expense amounting to Rs. X, the reimbursement is Rs. X+Y, then it would mean that the reimbursement is with mark up. Such reimbursement cannot be equated with the actual reimbursement of expenses not attracting any taxation. In order to claim any reimbursement of expense as immune from taxation, the burden of proof is always on the assessee to establish beyond a shadow of doubt that there is no profit element in such reimbursement.
16. Reverting to clause 3.2 of the Agreement, it is noticed that AHL agreed to contribute @ 1.5% of its gross revenue for each quarter towards the international marketing activities. Thus, it is evident that there is an out and out contribution for marketing expenses at a fixed rate on quarterly basis, which was determined in the year 2000. Such contribution at 1.5% of the gross revenue for each quarter is not any actual reimbursement of expenses on itemized basis. The actual expenses to be incurred by the assessee may be more or less than the said fixed rate of contribution. In such a situation, there is every possibility of the assessee having some mark up on the costs incurred by it on advertisement. Or alternatively, it may be the other way around also. No material has been placed on record to demonstrate that the actual expenses incurred by the assessee were equal to the amount received. In our considered opinion, the ld. CIT(A) was not justified in deleting the addition by holding that it represented 'reimbursement of expenses', which does not appear to be correct in the light of our above discussion.
17. When the CIT(A) reverses assessment order on a point and the Revenue prefers appeals, it becomes the duty of the tribunal to vet the view point of the first appellate authority. The rule is that the allowing or dismissing of the Revenue's appeal by the tribunal has the direct effect of judging the correctness or otherwise of the CIT(A)'s opinion, which indirectly and automatically results in evaluating and examining the AO's opinion. If the conclusion of the CIT(A) is echoed, it means that the AO was incorrect on that point. Per contra, where the view of the first appellate authority is overturned, it means that the AO was correct on that issue. But this rule is not without exception. In a given case, where the view of the CIT(A) is overturned, there may not be automatic approval of the AO's opinion. If the view of the CIT(A) is held to be not sustainable but at the same time, the view of the AO is also found to be incorrect, then the tribunal cannot act as a mute spectator leaving the parties remedyless. It has to step in to lay down the correct position. The position presently prevailing before us is somewhat akin to that.
18. We have noticed that the view taken by the ld. CIT(A) in the present case about the deletion of addition on account of 'reimbursement of expenses' is not sustainable and further the view point of the AO about the amount being in the nature of 'royalties' as also equally not acceptable. If we leave the position as it is, there will be quandary about the taxability or otherwise of the amount in question. In such a situation, it becomes paramount to decide the correct nature of the amount and its taxability or otherwise.
19. It is pertinent to note that the amount of Rs. 38.59 lacs has been received by the assessee from its business franchisee which is in the nature of a revenue receipt. It has no semblance of capital receipt. Obviously such amount, in the absence of any concrete evidence to show as equal to the amount spent, needs to be treated as a receipt in the nature of 'Business profits' covered under Article 7 of the DTAA. Para 1 of this Article clearly provides that the profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise of one State carries on business in other State through a permanent establishment situated therein, then the profits of the enterprises may be taxed in the other State but only so much of them as are attributable to that permanent establishment. The assessee before us is a tax resident of Netherlands. Its business profits are otherwise chargeable to tax in Netherlands. However, the taxability will be attracted in India if assessee carries on business in India through a permanent establishment situated in India. Such taxability will be restricted to the profits of the permanent establishment subject to the other provisions of the DTAA.
20. The Assessing Officer, in the absence of any further details of actual expenses coming up from the side of the assessee, treated the entire amount as 'royalties' covered under Article 12 of the DTAA and straightway included it in the assessee's total income. So, he had no occasion to consider the taxability of the amount in terms of Article 7 read with Article 5 of the DTAA. As we have set aside the view taken by the Assessing Officer about the treatment of this amount as 'royalties' under article 12 and also that of the ld. CIT(A) in treating the amount as 'Reimbursement of expenses', the natural corollary which follows in the present circumstances is that the taxability of this amount is required to be determined in terms of Article 7. We, therefore, set-aside the impugned order and remit the matter to the file of the AO for considering the facts on the touchstone of Article 7 of the DTAA.
21. In the result the appeal is allowed for statistical purposes.
IT: Expenditure incurred for interior decoration on leased premises, for purpose of setting up a new business is capital in nature
IT: Charity given for non-business purposes is not allowable as business expenditure
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[2013] 35 taxmann.com 181 (Cochin - Trib.)
IN THE ITAT COCHIN BENCH
P.A. Jose
v.
Assistant Commissioner of Income-tax, Circle-1, Kottayam*
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT APPEAL NOS. 233 & 282 (COCH.) OF 2010
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
JUNE 7, 2013
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Repairs] - Assessment year 2007-08 - Whether expenditure incurred for interior decoration and other works on leased premises for first time for purpose of setting up of business, is not in course of profit earning process, but is in course of establishing a new capital asset/profit earning apparatus - Held, yes - Whether, therefore, expenditure incurred by assessee for interior decoration of premises taken on lease, for purpose of setting up a new showroom was capital in nature - Held, yes [Paras 7 & 8] [In favour of revenue]
II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Contributions] - Assessment year 2007-08 - Whether contribution made to temples, churches and educational institutions, in nature of charity, not incurred for business purposes or for welfare of employees, is not allowable as business expenditure - Held, yes [Para 16] [In favour of revenue]
FACTS-I
| ■ | The assessee took a new premises on lease and incurred expenditure for setting up a new showroom. The lease period was for 15 years and interior work was carried out on the said building. The assessee claimed expenditure incurred on interior work, repair and replacement as revenue expenditure. | |
| ■ | However, the revenue disallowed the claim on ground that the expenditure incurred by the assessee was not for any business activity or for the purpose of earning profit, but was for the purpose of expanding the profit making apparatus which in turn would expand the capital base of the assessee. Therefore, held that the expenditure was to be treated as capital in nature. | |
| ■ | On the other hand assessee contended that the building belonged to the third party and it had no right of ownership over the premises. Also, the interior work carried out in the building belonging to third person could not be treated as capital expenditure. |
HELD-I
| ■ | It is not in dispute that the assessee took the premises on lease. The lease period is 15 years with an option to extend the same for further period. The intention of the assessee in taking the premises on lease is to set up a new showroom in the lease premises. After taking the premises on lease, the assessee incurred the expenditure in interior decoration like false ceiling, racks, change of flooring, etc. The question arises for consideration is when the assessee incurred the expenditure on the leased premises for the first time to set up the showroom, whether it has to be treated as capital expenditure or revenue expenditure. It is well settled principles of law that any expenditure incurred in the course of business for the purpose of earning profit has to be treated as revenue expenditure. However, if the expenditure was incurred for the purpose of acquisition of a capital asset, the same has to be treated as capital in nature. [Para 7] | |
| ■ | It is now to examine whether the expenditure incurred by the assessee for the purpose of establishing a new showroom is in the course of earning profit/ in the course of business or it is an expenditure for establishment of a capital asset. Setting up of a new showroom is an expansion of the existing business. It increases the capital base of the assessee for doing the business. In other words, the establishment of a new showroom expands the profit making apparatus of the assessee. As a result of this expenditure, a new showroom which is a capital asset came into existence. Though the building belongs to third party, the assessee had the benefit of doing business in the new showroom by using the same as capital asset. It is to be remembered that lease is also a transaction in the immovable property. Though the entire title on the property is not transferred during the course of lease, an interest in the property was transferred in favour of the assessee during the lease period. The assessee would be in physical possession of the property on payment of the agreed amount as lease rent. Therefore, it is opined that the expenditure incurred by the assessee resulted in expansion of the capital base of the assessee. In other words, it resulted in expansion of the profit making apparatus. Therefore, the expenditure incurred by the assessee for interior decoration and other works on the leased premises for the first time for the purpose of setting up of business is not in the course of profit earning process, but in the course of establishing a new capital asset/profit earning apparatus. Therefore, the expenditure incurred by the assessee has to be treated as capital in nature. [Para 8] |
CASE REVIEW-I
VeeraRaghavan v. CIT [1967] 64 ITR 63 (Ker.) (para 11) followed.
CASES REFERRED TO
CIT v. Madras Auto Service (P.) Ltd. [1998] 223 ITR 468/99 Taxman 575 (SC) (para 4), CIT v. Premier Cotton Spg. Mills Ltd. [1997] 223 ITR 440/93 Taxman 702 (Ker.) (para 5), Dy. CIT v. Chaya Lakshmi Creations (P.) Ltd. [2010] 40 SOT 513 (Hyd.) (para 5), Senapathy Synams Insulations (P.) Ltd. v. CIT [2001] 248 ITR 656/117 Taxman 216 (Kar.) (para 6) Modi Spinning & Weaving Mills. Co. Ltd. v. CIT [1993] 200 ITR 544 (Delhi) (para 6), Delhi Cloth & General Mills. Co. Ltd. v. Addl. CIT [1986] 160 ITR 857/26 Taxman 281 (Delhi) (para 6), M.N. Dastur & Co. Ltd. v. Dy. CIT [1997] 62 ITD 113 (Bang.) (para 6), ITO v. Pritam Juice [2010] 124 ITD 237 (Mum.) (para 6), Empire Jute Co. Ltd. v. CIT[1980] 124 ITR 1/[1980] 3 Taxman 69 (SC) (para 9), Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL) (para 10),Veeraraghavan v. CIT [1967] 64 ITR 63 (Ker.) (para 11), CIT v. V.I., Baby & Co. [2002] 254 ITR 248/123 Taman 894 (Ker.) (para 18), CIT v.South India Corpn. Agencies Ltd. [2007] 290 ITR 217/164 Taxman 249 (Mad.) (para 19), CIT v. Sambandham Spinning Mills Ltd. [2008] 298 ITR 306 (Mad.) (para 19), CIT v. India Carbon Ltd. [2001] 247 ITR 510/118 Taxman 207 (Gau.) (para 19) and S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) (para 19).
R. Krishna Iyer for the Appellant. Smt. Susan George Varghese for the Respondent.
ORDER
N.R.S. Ganesan, Judicial Member - The assessee and the revenue filed the appeals against the order of the CIT(A)-IV, Kochi dated 18-02-2010 for the assessment year 2007-08. Therefore, we heard both the appeals together and dispose of the same by this common order.
2. Let us first take the assessee's appeal in ITA No.233/Coch/2010.
3. The first issue arises for consideration in the assessee's appeal is disallowance of Rs. 15,04,000.
4. Shri R Krishna Iyer, the ld. representative for the assessee submitted that the assessee has taken on lease new premises and incurred the expenditure for setting up a new branch. According to the ld. representative, the lease period is 15 years. The interior work was carried out on the building. According to the ld. representative, the building belongs to third party and the assessee has no right of ownership over the premises. The interior work carried out by the assessee in a building belonging to third person cannot be treated as capital expenditure. According to the ld. representative, the expenditure incurred by the assessee is required for the business of the assessee. The ld. representative further submitted that the interior work carried out by the assessee is part and parcel of the structure of the building which belongs to somebody else. The ld. representative further submitted that the interior work cannot be detached from the super structure and it has no value. The ld. representative placed his reliance on the judgment of the Apex Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468/99 Taxman 575. Referring to Explanation 1 to section 32(1) of the Income-tax Act, 1961, the ld. representative submitted that "current repairs" shall not include any expenditure in the nature of capital.
5. The ld. representative for the assessee further submitted that the interior work, repair, replacement in the showroom needs to be carried out from time to time. The work carried out by the assessee will last only for 2 to 3 years. Referring to the judgment of the Kerala High Court in CIT v. Premier Cotton Spg. Mills Ltd. [1997] 223 ITR 440/93 Taxman 702, the ld. representative submitted that unless an asset was brought into existence by incurring the expenditure it cannot be said that the assessee acquired an enduring advantage for the business. The ld. representative has also placed reliance on the decision of the Hyderabad Bench of this Tribunal in the case of Dy. CIT v. Chaya Lakshmi Creations (P.) Ltd. [2010] 40 SOT 513.
6. On the contrary, Smt. Susan George Varghese, the ld. DR submitted that admittedly, the assessee took the premises on lease and incurred expenditure for making it fit for establishing a new showroom. This expenditure, according to the ld. DR, expands the capital base of the assessee. The ld. DR further pointed out that this is not an expenditure incurred in the course of business activity for the purpose of earning profit, but for the purpose of expanding the profit making apparatus which will, in turn, expand the capital base of the assessee. Therefore, according to the ld. DR, the expenditure incurred by the assessee is for the purpose of creating a capital asset by establishing a new showroom. Once the expenditure was incurred for the first time to establish and set up a showroom, according to the ld. DR, the expenditure has to be treated as capital in nature. The ld. DR placed her reliance on the judgment of the Karnataka High Court in the case of Senapathy Synams Insulations (P.) Ltd. v. CIT [2001] 248 ITR 656/117 Taxman 216. The ld. DR has also placed reliance on the judgment of the Delhi High Court in Modi Spinning & Weaving Mills. Co. Ltd. v. CIT [1993] 200 ITR 544and Delhi Cloth & General Mills. Co. Ltd. v. Addl. CIT [1986] 160 ITR 857/26 Taxman 281 (Delhi). The ld. DR further relied upon the decision of the Bangalore Bench of this Tribunal in M.N. Dastur & Co. Ltd. v. Dy. CIT [1997] 62 ITD 113 and Mumbai Bench of this Tribunal in the case of ITOv. Pritam Juice [2010] 124 ITD 237.
7. We have considered the rival submissions on either side and also perused the material available on record. It is not in dispute that the assessee took the premises on lease. The lease period is 15 years with an option to extend the same for further period. The intention of the assessee in taking the premises on lease is to set up a new showroom in the lease premises. After taking the premises on lease, the assessee incurred the expenditure in interior decoration like false ceiling, racks, change of flooring, etc. The question arises for consideration is when the assessee incurred the expenditure on the leased premises for the first time to set up the showroom, whether it has to be treated as capital expenditure or revenue expenditure? It is well settled principles of law that any expenditure incurred in the course of business for the purpose of earning profit has to be treated as revenue expenditure. However, if the expenditure was incurred for the purpose of acquisition of a capital asset, the same has to be treated as capital in nature.
8. Let us now examine whether the expenditure incurred by the assessee for the purpose of establishing a new showroom is in the course of earning profit / in the course of business or it is an expenditure for establishment of a capital asset. Setting up of a new showroom is an expansion of the existing business. It increases the capital base of the assessee for doing the business. In other words, the establishment of a new showroom expands the profit making apparatus of the assessee. As a result of this expenditure, a new showroom which is a capital asset came into existence. Though the building belongs to third party, the assessee had the benefit of doing business in the new showroom by using the same as capital asset. It is to be remembered that lease is also a transaction in the immovable property. Though the entire title on the property is not transferred during the course of lease, an interest in the property was transferred in favour of the assessee during the lease period. The assessee would be in physical possession of the property on payment of the agreed amount as lease rent. Therefore, this Tribunal is of the considered opinion that the expenditure incurred by the assessee resulted in expansion of the capital base of the assessee. In other words, it resulted in expansion of the profit making apparatus. Therefore, the expenditure incurred by the assessee for interior decoration and other works on the leased premises for the first time for the purpose of setting up of business is not in the course of profit earning process, but in the course of establishing a new capital asset / profit earning apparatus. Therefore, the expenditure incurred by the assessee has to be treated as capital in nature.
9. We have carefully gone through the decision of the Hyderabad Bench of this Tribunal in the case of Chaya Lakshmi Creations (P.) Ltd. (supra). The assessee has taken five cinema theatres in a theatre complex on lease from Satyam Sayi Corporation for exhibition of feature films. After taking the premises on lease, the assessee carried on the business of exhibition of films. During the lease period the assessee incurred expenditure on repair of theatre complex such as change of floor tiles, false ceiling, landscaping, chairs, earth filling works, under ground sump repairing, drainage and cable works, wall paper fixing, dust opening, carpentry, plumbing works, false ceiling repair, seat repair, pest control, house keeping material, theatre cleaning, charges on bandobust and fixing of chairs, repairing of compound wall, water roofing of ceiling, interior painting, payment to temporary staff, maintenance of generator and other office equipments, etc. The assessing officer disallowed the claim of the assessee on the ground that the major renovation and modernization of the theatre complex was done. Referring to Explanation 1 to section 32(1) of the Act, the assessing officer found that the assessee has incurred capital expenditure and accordingly allowed depreciation at 10%. However, the CIT(A) found that the assessee has incurred the expenditure for the purpose of maintaining the cinema theatre in the course of its business activity, therefore, it is a revenue expenditure. On appeal by the revenue, the Hyderabad Bench of this Tribunal examined the scope of Explanation 1 to section 32(1) which was introduced by Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 with effect from 01-04-1988 and the legislative history of introduction of Explanation 1 to section 32(1) and found that the position of law as it remained after introduction of section 32(1A) with effect from 01-04-1971 continued to be the same in respect of revenue expenditure incurred by the assessee on the premises taken on lease. The Hyderabad Bench of this Tribunal further found that whenever the assessee incurred the expenditure in the process of earning of profit while carrying on the business in the leased premises, the expenditure has to be treated as revenue expenditure and neither section 32(1A) or Explanation 1 to section 32 would come in the way of allowing the same as revenue expenditure. However, in case, the assessee incurred the expenditure which is of a capital nature, then, the assessee has the benefit of claiming depreciation on such capital expenditure in relation to renovation, extension or improvement with effect from 01-04-1971 u/s 32(1A) and under the Explanation 1 to Sec.32 w.e.f. 1.4.1988. The Hyderabad Bench of this Tribunal placed its reliance on the judgment of the Apex Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/[1980] 3 Taxman 69. In the case before the Hyderabad Bench of this Tribunal, the expenditure was incurred in the course of running the cinema theatre. The Tribunal found that as a result of the expenditure incurred by the assessee, the cinema theatre remains a cinema theatre and the seating capacity did not increase. The Tribunal found that the assessee might have carried on the business in a profitable manner. Therefore, the assessee has not obtained any advantage in the capital field. However, in the case before us, the business was not commenced in the new premises. In the case before us, the asset was not an existing asset; nor was the expenditure incurred for maintenance of the existing asset. Rather, it was for the purpose of establishing a new asset. Therefore, the expenditure incurred for the first time in the lease premises for the purpose of establishing a new showroom has to be treated as capital expenditure. Hence, the decision of the Hyderabad Bench of this Tribunal in the case of Chaya Lakshmi Creations (P.) Ltd.(supra) may not be of any assistance to the assessee. The matter would have been entirely different had the assessee incurred similar kind of expenditure after establishing the new showroom and running the business for 2 - 3 years. Since it is an initial expenditure for establishing a showroom, this Tribunal is of the considered opinion that the decision of the Hyderabad Bench of this Tribunal in the case of Chaya Lakshmi Creations (P.) Ltd. may not be of any assistance to the assessee.
10. We have also carefully gone through the judgment of the Kerala High Court in the case of Premier Cotton Spg. Mills Ltd. (supra). In the case before the Kerala High Court, the assessee company formulated a scheme for providing houses to its employees. The land belonging to third parties was divided into plots and allotted to the employees. The assessee company made arrangements for laying road, construction of water tanks, pump sets, drainage, digging well and such other work in the land after allotment to the employees who had constructed a building in the lands allotted to them. The assessee claimed the expenditure for laying the roads, digging well, construction of water tanks and pumps, drainage, etc. as revenue expenditure. The Kerala High Court found that the expenditure incurred by the assessee is for the benefit of the employees, who purchased the properties and constructed building thereon. The land does not belong to the assessee. It did not bring into existence an enduring advantage to the assessee. The expenditure was in the nature of staff welfare expenditure. The Kerala High court further found that the expenditure was incurred for the purpose of business; therefore, it was deductible as business expenditure u/s 37 of the Act. In this case before us, it is not for the welfare of the employees; but for the purpose of establishing a new showroom. In fact, the Kerala High Court extracted the observations made by House of Lords in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL), which is as under:
"When an expenditure is made …. With a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."
This Tribunal is of the opinion that this observation of the House of Lords as approved by the Kerala High Court is applicable to the facts of this case. The expenditure incurred by the assessee, in fact, brought into existence a new showroom which is an advantage of enduring benefit to the trade carried on by the assessee. Therefore, this judgment of the Kerala High Court, in fact, supports the case of the revenue.
11. We further find that the Kerala High Court had an occasion to consider an identical situation in the case of Veeraraghavan v. CIT [1967] 64 ITR 63 (Ker.) had an occasion to consider an identical issue. In the case before the Kerala High Court, the assessee incurred the expenditure for reclaiming a piece of land for which licence was granted to install a petrol pump by Burmah Shell Oil Distributing Company. The Kerala High Court found that the expenditure incurred by the assessee for filling up the ditches and raising the land and of constructing a wall are of capital in nature, therefore, it cannot be allowed as deduction. This Tribunal is of the considered opinion that this judgment of the Kerala High Court is squarely applicable to the facts of the case.
12. In view of the above, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed.
13. The next ground of appeal is with regard to disallowance of Rs. 1 lakh.
14. Shri R Krishna Iyer, the ld. representative for the assessee submitted that the assessee incurred an expenditure of Rs. 7,20,99,724 towards advertisement including payment made to temples, churches, clubs, educational institutions and trade unions, etc. According to the ld. representative, the assessee was allowed advertising space by the institutions, which received contribution from the assessee. According to the ld. representative, the expenditure was incurred for the purpose of business. Therefore, it is to be allowed.
15. We heard Smt. Vijayaprabha, the ld. DR also. According to the ld. DR, there is an element of charity in making contributions to temples, churches and educational institutions. Therefore, this cannot be considered as business expenditure.
16. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the written submission filed by the assessee. In the written submission, the assessee claims that the prime motive for contribution is charity. If it is a charity, it has to be claimed u/s 80G if the same is approved by the respective Commissioner of Income-tax. Here, the assessee is claiming business expenditure. It is not the case of the assessee that the expenditure was incurred in connection with the welfare of the employees. Moreover, the assessee has incurred Rs. 7,20,99,724 but the assessing officer has disallowed only Rs. 1 lakh. In the absence of claim of the assessee that the expenditure was incurred for business purpose or for welfare of the employees, this Tribunal is of the considered opinion that the contribution made by way of charity cannot be allowed u/s 37 of the Act as business expenditure. Therefore, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed.
17. Now coming to the revenue's appeal, the only issue arises for consideration is disallowance of interest.
18. Smt. Susan George Varghese, the ld. DR submitted that during the year under consideration the assessee has debited an amount of Rs. 7,14,80,735 towards interest and bank charges and interest on advance. Referring to the chart at page 8 of the assessment order, the ld. DR submitted that all advances are personal nature and there is no commercial expediency in such advances. According to the ld. DR, the interest bearing business funds have been transferred for personal use, therefore, the assessing officer disallowed proportionate interest on the borrowed funds. According to the ld. DR, the interest free advances are not given from the capital or current account of the proprietor. It was given from the business funds which were borrowed on interest. Placing reliance on the judgment of the Kerala High Court in the case of CIT v. V.I., Baby & Co. [2002] 254 ITR 248/123 Taxman 894 the ld. DR submitted that an assessee who is not having liquid cash cannot claim that it gave interest free advances to the partners and others and then borrow funds from bank for business. According to the ld. DR such borrowing will not be for business purpose but for supplementing the cash diverted by the assessee for non business purpose. The ld. DR further submitted that since the assessee is not the beneficiary of the loan borrowed, interest cannot be deducted from the business income.
19. On the contrary, Shri Krishna Iyer, the ld. representative for the assessee submitted that it is not correct to say that interest free advances are not given from capital or current account. Referring to the balance-sheet which was extracted on page 9 of the order of the CIT(A), the ld. representative submitted that out of the proprietor's capital of Rs. 27.49 crores, an amount of Rs. 14.18 crores was invested in the fixed asset. A secured loan of Rs. 44.53 crores was obtained from bank and financial institutions for purchase of gold. All the borrowed funds were used for purchase of jewellery which is stock in trade. Apart from secured loan, the balance-sheet discloses Rs. 7.64 crores of unsecured loan on which no interest was paid. According to the ld. representative, the interest free unsecured loan of Rs. 7.64 crores and the capital of Rs. 27.49 crores is available with the assessee. After taking into consideration all the investments in fixed assets to the extent of Rs. 14.18 crores, according to the ld. representative, the interest free funds available with the assessee was Rs. 20.74 crores. The interest free advances given to the relatives are only Rs. 12.14 crores which is far below the interest free funds available with the assessee. Therefore, according to the ld. representative, the borrowed funds from the banks and financial institutions are invested only in jewellery for business purpose and it is not diverted for any other purpose. According to the ld. representative, what was given to the relatives is only from the interest free funds which would be clear from the balance-sheet of the assessee. The ld. representative further submitted that interest free funds were borrowed especially for the purpose of purchase of stock in trade and in fact the borrowed funds were invested in the stock in trade. Therefore, there is no question of any disallowance. The ld. representative placed his reliance on the judgment of the Madras High Court in the case of CIT v. South India Corpn. (Agencies) Ltd. [2007] 290 ITR 217/164 Taxman 249 ; CIT v. Sambandham Spinning Mills Ltd. [2008] 298 ITR 306 (Mad.) ; andCIT v. India Carbon Ltd. [2001] 247 ITR 510/118 Taxman 207 (Gau.) ; and S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC). Further reliance was placed on the decisions of the various benches of this Tribunal.
20. Referring to the judgment of the Kerala High Court in the case of V.I. Baby & Co (supra), the ld. representative submitted that on scrutiny of the accounts there was huge debit balances in the capital account of the partners of the firm was found. The assessee did not have credit balance in the capital account of the partners in the case before the High Court. When there was a debit balance in the capital account of the partners, the High Court found that borrowed funds was only for business purposes, therefore, the diversion of funds made to the relatives and the partners are not for business purposes. In the case before this Tribunal, according to the ld. representative, the proprietor is having credit balance in the capital account even after taking into consideration the investment made in the fixed assets. Therefore, according to the ld. representative, this judgment of the Kerala High Court may not be applicable to the facts of the case.
21. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the judgment of the Kerala High Court in the case of V.I. Baby & Co (supra). In the case before the Kerala High Court, the assessee, a registered partnership firm was doing business in piece goods. The assessee firm borrowed funds and paid interest on its borrowings from bank. The assessee transferred sizeable amount to the personal account of its partners and also advanced amounts to relatives of the partners and sister concerns; however, no interest was charged on such advances. The assessing officer disallowed proportionate interest payment on such amounts so advanced. On appeal by the assessee, the Tribunal found that the disallowance was not proper because the partners and relatives used the funds for business purpose such as construction of shop building. On a reference to the High Court, the department contended that there was a huge debit balance in the accounts of the firm in the name of the partners, near relatives and sister concern. On these facts, the High Court found that an assessee with liquidity cannot claim that it can give interest free advances to the partners and others, then borrow funds from the bank on interest for business purposes. From the above judgment of the Kerala High Court, it is obvious that there was a negative balance in the capital account of the partners.
22. Let us now examine the case before us in the light of the balance-sheet extracted by the CIT(A) on page 9 of his order. As rightly submitted by the ld. representative for the assessee, the proprietor's capital is Rs. 27.49 crores and unsecured loan was Rs. 7.64 crores. Sundry creditors were to the extent of Rs. 4.10 crores. The total interest free funds available with the assessee including the sundry creditors and unsecured loan were Rs. 39.23 crores. Out of this, the assessee invested Rs. 14.18 crores on the furniture and fittings including building. Another sum of Rs. 0.21 crore was shown as investment. Therefore, the total investment is Rs. 14.39 crores in the fixed asset. The assessee is showing Rs. 21.38 crores as deposits. However, the nature of the deposits is not known from the materials available on record. Therefore, it is obvious that the total utilization of the capital may be to the extent of Rs. 35.77 crores including the deposit of Rs. 21.38 crores. Thus, the funds available with the assessee including the sundry creditors of Rs. 4.10 crores is Rs. 39.23 crores and the funds invested by the assessee is Rs. 35.77 crores. Therefore, it is not known how the assessee claims that Rs. 20.74 crores of interest free funds is available with it. The assessee claims that the entire borrowed funds to the extent of Rs. 76.06 crores was invested in the stock in trade. Even if we take the deposits of Rs. 21.38 crores as assessee's investment, the balance amount claimed by the assessee to the extent of Rs. 20.74 crores as interest free funds may not be available. Therefore, it is not known how the CIT(A) came to the conclusion that the loan of Rs. 12.14 crores was given to the relatives out of the available interest free fund of Rs. 20.74 crores. If the assessee demonstrates that sufficient capital funds are available, then there may not be any diversion of funds. However, it is for the assessee to demonstrate that sufficient capital funds were available in the books of account. Therefore, this Tribunal is of the considered opinion that the assessing officer has to examine the same with regard to the available funds in capital / current account of the proprietor and the nature of deposit to the extent of Rs. 21.38 crores. Accordingly, the orders of lower authorities are set aside and the issue of disallowance of interest on the borrowed fund is remitted back to the file of the assessing officer. The assessing officer shall examine the issue with regard to the availability of funds in capital / current account of the proprietor on the basis of the books of account and other documents and thereafter decide the same in accordance with law after giving reasonable opportunity to the assessee.
23. In the result, appeal of the assessee is dismissed and the appeal of the revenue is allowed for statistical purpose.
ESHAIT: Where assessee did not produce various details of expenditure incurred by it on various activities undertaken to achieve its objects before any revenue authorities, exemption under section 11 was rightly denied to assessee
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[2013] 35 taxmann.com 161 (Amritsar - Trib.)
IN THE ITAT AMRITSAR BENCH
Assistant Commissioner of Income-tax
v.
Amritsar Improvement Trust*
H.S. SIDHU, JUDICIAL MEMBER
AND B.P. JAIN, ACCOUNTANT MEMBER
AND B.P. JAIN, ACCOUNTANT MEMBER
IT APPEAL NOS. 476 & 477 (ASR.) OF 2011
[ASSESSMENT YEARS 2006-07 & 2007-08]
[ASSESSMENT YEARS 2006-07 & 2007-08]
JANUARY 15, 2013
Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under [Application of income] - Assessment years 2006-07 and 2008-09 - Whether grant of registration under section 12AA does not mean that Assessing Officer is barred from examining details of various activities/work undertaken by trust to achieve its object - Held, yes - Assessee-trust claimed exemption under section 11 - Whether since assessee did not produce various details of expenditure incurred by it on various activities undertaken to achieve its objects before any revenue authorities in spite of various opportunities provided for same, Assessing Officer rightly denied exemption under section 11 to assessee - Held, yes [Para 13.5] [In favour of revenue]
FACTS
| ■ | The assessee-trust registered under section 12AA claimed exemption under section 11. | |
| ■ | The Assessing Officer asked the assessee to file complete details of activity undertaken by it to achieve the objectives of the trust along with details of amount spent on each activity. The assessee did not submit any additional details. The Assessing Officer concluded that various development activities undertaken by the assessee were confined to the area covered under the scheme floated by the Improvement Trust but practically nothing had been done to achieve other activities required for exemption under section 11. Accordingly, the exemption under section 11 was denied to the assessee and income was brought to tax as income from business. | |
| ■ | The Commissioner (Appeals) however allowed the appeal of the assessee. | |
| ■ | On second appeal: |
HELD
| ■ | When the registration is granted, it does not mean that the Assessing Officer is barred from examining the details of various activities/work undertaken by the trust to achieve the object of the assessee-trust. The Assessing Officer is within his power to call complete details of income and expenditure of the assessee whether these have been spent on the activities to achieve the objects of the trust or not. [Para 13.3] | |
| ■ | The assessee-trust has not proved its case for seeking exemption under section 11 by producing various details of expenditure incurred by the assessee-trust on various activities undertaken to achieve its objects before any Revenue authorities, not even before the Tribunal in spite of asking to the counsel for the assessee-trust. | |
| ■ | Therefore, the first appellate authority has wrongly deleted the additions in dispute by passing the impugned orders which deserves to be cancelled. The impugned orders passed by the Commissioner (Appeals) is cancelled and the orders of the Assessing Officer is upheld by holding that the activities done by the assessee-trust does not qualify for exemption under section 11 and the same has rightly been brought to tax as income from business. [Para 13.5] |
CASE REVIEW
Punjab Urban Planning & Development Authority v. CIT [2006] 156 Taxman 37 (Chd.) (Mag.) (para 13.4) followed.
CASES REFERRED TO
CIT v. Improvement Trust [2009] 308 ITR 361 (Punj & Har.) (para 3), Jyoti Prabha Society v. CIT [2003] 87 ITD 126 (Delhi) (para 5), Punjab Urban Planning & Development Authority v. CIT [2006] 156 Taxman 37 (Chd.) (Mag.) (para 6), Improvement trust v. Asstt. CIT [CWP. No. 10265 of 2009, dated 20-7-2009] (para 8) and Ahmedabad Rana Caste Association v. CIT [1971] 82 ITR 704 (SC) (para 12).
R.L. Chhanalia for the Appellant. J.P. Bhatia for the Respondent.
ORDER
1. The Revenue has filed these two appeals against two different orders of CIT(A), Amritsar, each dt. 20th June, 2011 for the asst. yrs. 2006-07 and 2008-09 respectively. The issues involved in both the appeals are almost common, therefore, these are being disposed of by this consolidated order for the sake of convenience.
2. The grounds raised by the Revenue in ITA No. 477/Asr/2011 are reproduced hereunder for the sake of convenience which are almost similar in ITA No. 476/Asr/2011 :
| "1. | On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 5,38,12,792 made by the AO by treating the surplus income into business income. | |
| 2. | On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the disallowance of Rs. 20,78,020 debited to income and expenditure account by the AO, since the employees' PF were kept in the shape of Bank FDRs/Saving accounts and as such the assessee have not fulfilled the conditions laid down for the entitlement of deduction. | |
| 3. | On the facts and in the circumstances of the case whether the learned CIT(A) undertaking by the Improvement Trust, Amritsar qualify for exemption under s. 11 of the Act when the facilities provided by the trust is beneficial only to a handful of people who purchased properties from trust. | |
| 4. | On the facts and in the circumstances of the case, whether the learned CIT(A) was correct in deleting the addition of Rs. 5,39,12,792 as the objects of the assessee though claimed to be charitable but actually are of purely commercial nature where profit motive is involved. | |
| 5. | The appellant craves leave to amend or add any or more grounds of appeal at the time of hearing of appeal." |
3. The brief facts of the case are that the assessee filed its return declaring Nil income on 31st March, 2008 which is accompanied by audit report in Form 10B along with its annexure. The same was processed under s. 143(1) of the Act by the AO on 9th March. 2009. The AO had taken up the case of the assessee for scrutiny by issuing notice under s. 143(2) of the IT Act, 1961 (hereinafter called the 'Act') on 8th Sept., 2008, which was served upon the assessee on 12th Sept., 2008. Later on, the case of the assessee was transferred and the concerned AO issued a notice under s. 142(1) on 28th Oct., 2009 which was served upon the assessee on 5th Nov., 2009. In response to the same, authorised representative of the assessee appeared and filed some details. After perusing the reply filed by the assessee along with some details, as well as discussion with the Authorised Representative of the assessee, the AO specifically asked the assessee to furnish complete details of various activities/work undertaken by the trust to achieve the objectives of the trust in the prescribed manner, which he has supplied to the assessee's counsel. In response to the same, the assessee replied vide letter dt. 10th Nov., 2009 and stated that the details of various activities undertaken by the assessee during the year under review has already been incorporated in Annex. 11. The AO perused the same and again asked the assessee that the information supplied by the assessee is not supplied in the proper format and the AO again asked the assessee to file information in a proper format as given by him. The assessment proceedings were adjourned many times and the AO perused the requisite information supplied by the assessee and found that most of the development activities has been carried out by the Improvement Trust in the area covered by its own scheme. The old area has been left untouched. He has also pointed out to the assessee's counsel that the objectives of the trust, are not confined to developing new housing/commercial projects but also includes development of old city for practically nothing has been done. The AO also stated to the assessee that in the earlier year, the registration under s. 12AA has been denied to the assessee for the reason that the assessee-trust has failed to fulfil the objectives for which addition (sic-assessee) is created. The assessee has given reply that in the earlier year, the Tribunal, Amritsar Bench, has allowed the registration to the assessee and assessee has also relied upon the case laws in the case of CIT v. Improvement Trust [2009] 308 ITR 361 wherein the Hon'ble Punjab & Haryana High Court has upheld the registration of the Improvement Trust, Moga.
4. The AO considered all the replies of the assessee and stated that the assessee is simply harping on one issue that though registration under s. 12AA of the Act was refused to the assessee by the CIT-II, Amritsar, the order of the CIT-II, Amritsar was reversed by the Tribunal, Amritsar Bench, vide order dt. 22nd Feb., 2008 and the miscellaneous application filed by the Department has also been rejected vide order dt. 21st May, 2009 and the assessee relied upon the case law of Improvement Trust, Moga, in which the Hon'ble Punjab & Haryana High Court vide its order dt. 31st Oct., 2008 has upheld the registration of the Improvement Trust, Moga.
5. After considering the reply as well as the decision relied upon by the assessee, the AO stated that allowing of registration to the assessee does not mean that he got impunity (sic-immunity) from fulfilling the requirement of s. 11 or 12 as the case may be. It is the duty of the AO that during assessment proceedings, he can obtain details of various receipts and expenditure and verify whether the same has been utilized for achieving the aims and objectives for which trust is created. The AO relied upon the decision of the Tribunal, Delhi Bench, in the case of Jyoti prabha Society v. CIT [2003] 87 ITD 126in which the Tribunal Delhi Bench has held that at the time of processing the application seeking registration the CIT was not expected to go in detail and prima facie the assessee was able to make out a case for registration. Even if registration is granted that will not be precluding the AO to examine in detail the very object of the assessee and to give the finding in assessment proceedings as to assessee had complied with the requirement of s. 11 or not. At the most registration certificate, if granted, will make out a prima facie case in favour of the assessee that its activities are charitable but that will not be obstacle in the way of the AO at the time when assessment proceedings are to be taken up and to decide as to whether assessee is entitled for benefits of ss. 11 or 12, as the case may be. That will be the second stage. But at this stage the objects and activities of the assessee make out a case for granting registration. The AO held that the Tribunal, Delhi Bench has reversed the order of the learned CIT(A) and granted registration under s. 12A by relying upon various decisions rendered by the High Courts. He held that it is the duty of the AO to obtain various details of expenditure incurred by the assessee-trust on the various activities undertaken to achieve the objectives of the trust. The various Improvement Trusts were created as per provision of Punjab Town Act, 1922.
6. After detailed discussions with the learned counsel for the assessee as well as after perusing the evidence filed by the assessee, the AO held that in spite of various opportunities given to the assessee for furnishing details of various activities along with the detail of expenses incurred, as undertaken by assessee trust to achieve the objectives for which it is created, the assessee has not filed the same. Whatever the assessee has filed shows that various development activities undertaken by it are confined to the area covered under the scheme floated by the Improvement Trust. But practically nothing has been done to achieve other objectives required for exemption under s. 11 of the Act. The AO also relied upon the order of the Tribunal, Chandigarh Bench in the case of Punjab Urban Planning & Development Authority v. CIT [2006] 156 Taxman 37 (Mag.) and stated that the facts of the assessee's case are not better than PUDX, rather facilities provided by the f assessee are no match to the facilities provided by PUDA. The benefit of a few development scheme launched by the Improvement Trust, Amritsar, benefited only a handful of people who purchased properties from trust and the assessee-trust did little for the benefit of the public at large of Amritsar City. Therefore, income of the assessee arising from various activities does not qualify for exemption under s. 11 of the Act and the same is brought to tax as income from business as per provisions of the Act and added to the returned income of the assessee (the sum) of Rs. 5,39,12,792.
7. Secondly, the AO also asked the assessee to file explanation regarding Provident Fund showed payable in the balance-sheet. In reply, the assessee stated it is holding Provident Fund money in the shape of FDRs and savings accounts, as per provisions of s. 36(1 )(iv) of the Act. But the AO held that the assessee has deposited Employees Provident Fund in banks FDRs/Saving accounts and the assessee is not entitled for deduction under s. 36(l)(iv) of the Act because the assessee did not fulfil the conditions laid down for the entitlement of the deduction of payment of provident fund. Therefore, a sum of Rs. 20,78,026 debited to the income and expenditure account and disallowed the same by adding to the returned income of the assessee while completing assessment under s. 143(3) of the Act on 1st Dec., 2009.
8. Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A), who vide impugned order dt. 20th June, 2011 allowed the appeal of the assessee mainly holding that the asscssee-trust is an Improvement Trust constituted under the provisions of Punjab Town Improvement Trust (Act), 1922 and the principal objects of the trust is to bring out improvement in the town by providing streets, housing facilities, or making provision for drinking water etc. for the benefit of general public within its local limits and the activities are charitable in nature in view of s. 2(15) of the Act and the same was entitled to registration under s. 12AA of the Act in Improvement Trust (supra). He relied upon the decisions of the Improvement Trust (supra) andImprovement Trust v. Asstt. CIT [CWP No. 10265 of 2009] vide its orders dt. 3lst Oct., 2008 and 20th July, 2009 respectively that the activities of the trusts are charitable in nature. Finally, the learned CIT(A) held that CIT-II. Amritsar has refused registration to the assessee-trust and the order of the learned CTT-II has been reversed by the Tribunal. Amritsar Bench vide their order dt. 22nd Feb., 2008 and allowed registration to the assessee. Therefore, the activities of the trust are charitable in nature and the assessee is entitled for exemption under s. 11 of the Act.
9. As regards disallowing the claim on account of Employees Provident Fund of Rs. 20,78,026, the learned CIT(A) held that the status of the assessee has been declared as trust and registration under s. 12AA by virtue of finding of the Tribunal, Amritsar Bench has been granted and the assessee-trust has utilized the entire income towards its main object as well as the assessee had deposited provident fund amounting to Rs. 20,78,026. Even after considering this amount, there remains still deficit of Rs. 23,57,98,414. Therefore, the AO is not justified in considering assessee's book version and after taking into account the income applied towards its one of the main objects of acquisition of assets and depositing its employees' provident fund and enforceable by the employees under the Provident Fund Act, instead of yielding any surplus, it results into huge deficit and there remains no part of taxable surplus and the question of creating any demand does not arise and he deleted the addition in dispute by passing the impugned order.
10. Now, the Revenue has filed the present appeal against the impugned orders passed by the learned CIT(A).
11. The learned Departmental Representative relied upon the orders passed by the AO and stated that in spite of various opportunities given to the assessee by the AO to furnish complete details of various activities/work undertaken by the assessee-trust to achieve the objects of the trust. But the assessee trust failed to supply the details to the AO. Therefore, the AO has rightly made the addition in dispute by disallowing exemption under s. 11 of the Act. He further stated that the case of the assessee is fully covered by the decision of the Tribunal, Chandigarh Bench-B, Chandigarh, in the case ofPunjab Urban Planning & Development Authority (supra). He requested that the appeals filed by the Revenue may be allowed and the impugned orders passed by the learned C1T(A) may be cancelled and the orders of the AO may be upheld.
12. The learned counsel for the assessee controverted the arguments advanced by the learned counsel and stated that the case of assessee is fully covered in favour of the assessee by the decision of the Hon'ble Punjab & Haryana High Court, passed in CWP No. 10265 of 2009 in the case ofImprovement Trust (supra) in which the Hon'ble High Court held that the Improvement Trust Moga was carrying on activities of general welfare covered by the expression "any other object of general public utility" used in s. 2(15) of the Act. He further stated that the learned CIT(A) has also followed the order of the Jurisdictional High Court and allowed the appeal of the assessee by giving the exemption as claimed by the assessee-trust. He has also argued that the AO has referred the case of the assessee for special audit under s. 142(2A) of the Act and the auditor has submitted his report on 23rd June, 2009 in which he has observed that the consequence of the order of the Tribunal, Amritsar Bench, the provisions of ss. 11 to 13 of the Act become applicable for the asst. yr. 2006-07 to the trust by treating it as a charitable institution. Lastly, he stated that the assessee-trust is created as per provisions of Punjab Town Act, 1922 and there are many objects which are to be achieved by the assessee- trust. Those are of charitable nature. In support of his arguments, he has relied upon the decision of the Hon'ble Supreme Court in the case of Ahmedabad Rang Caste Association v. CIT[1971] 82 1TR 704 and has also given the copy of the order of the Jurisdictional High Court, dt. 20th July, 2009 passed in CWP No. 10265 of 2009 in the case of Improvement Trust (supra).
13. We have heard both the parties and perused the records available with us along with citations cited by both the parties as well as mentioned in orders passed by the Revenue Authorities. The assessee has filed its return of income for the asst. yr. 2006-07 along with audit report in Form 10B. But the AO found that the audit report attached by the assessee with its return was not based on accepted norms/principle of accountancy and it was not possible for him to draw the correct results from the details filed by the assessee. The case of the assessee was referred for special audit with the prior approval of the CIT-II and M/s Padam Bahl & Co. Amritsar appointed as auditors and M/s Padam Bahl & Co. submitted the audit report on 23rd June, 2009 which was supplied to the assessee vide letter dt. 13th July, 2009 along with notice under s. 142(1) of the Act, asking the assessee to give its comments on the audit report, if any on the date of hearing. The AO asked the assessee to file complete details of activity undertaken by it to achieve the objectives of the trust along with details of amount spent on each activity and the case was fixed for 20th July, 2009. On 20th July, 2009, nobody attended the proceedings and the case was fixed vide notice under s. 142(1) of the Act on 21st July, 2009 or 28th July, 2009. On the date of hearing Shri Sanjay Kapoor, CA sought time to file the reply and the case was adjourned to 12th Aug., 2009 vide letter dt. 3rd Aug., 2009 and hearing was preponed to 11th Aug., 2009 and the assessee was specifically told that no further adjournment will be allowed. On 11th Aug., 2009, assessee filed its reply in which the assessee has stated that registration to Amritsar Improvement Trust was refused by the CIT-II vide his letter dt. 21st Sept., 2006, which was reversed by the Tribunal Amritsar Bench, vide its order dt. 22nd Feb., 2008. Further, the miscellaneous application filed by the Department against this order was also rejected by the Tribunal, Amritsar Bench, vide order dt. 21st May, 2009. The assessee further stated in its reply that as per special audit report dt. 22nd June, 2009, the consequences of the order of the Tribunal, Amritsar Bench is that the provisions of s. 11 to s. 13 become applicable in the case of the assessee. The assessee further sought adjournment to file more details and the case was adjourned to 18th Aug., 2009. On 18th Aug., 2009 accountant of the assessee appeared and again filed similar reply with regard to addition and citing case law of Hon'ble Jurisdictional High Court in the case of Improvement Trust (supra) but did not file any detail as required by the AO. After going through the reply as well as some case laws cited by the AO held that in spite of various opportunities given to the assessee for filing the details and those expenses which were incurred for achieving the objects for which the trust was formed. But the assessee could not furnish any such details as the assessment was going to be barred by time limitation. He finally adjourned the case for 18th Aug., 2009 for filing the details by the assessee. In response to the same, the assessee did not file any details as required by the AO and the AO has held that the assessee is simply harping on one issue that though the registration under s. 12A was refused to the assessee by the CIT-II, the order of CIT-II, Amritsar was reversed by the Tribunal. Amritsar Bench vide its order dt. 22nd Feb., 2008 and the miscellaneous application filed by the Department has also been rejected vide dt. 21st May, 2009 and stated that some case laws relating to Improvement Trust Moga in which the Hon'ble Jurisdictional High Court has upheld the registration of the Improvement Trust Moga. The AO has also held that merely allowing registration to the assessee does not mean that the assessee got impunity (sic-immunity) from fulfilling the requirements of ss. 11 and 12 as the case may be. It is the duty of the AO that during assessment proceedings he should obtain details of various receipts and expenditure and verify whether the same has been utilized for achieving aims and objectives for which the trust is created. The AO has completed assessment by refusing exemption, claimed by the assessee under s. 11 of the Act, by passing assessment order stating that some details furnished by the assessee pertaining to the expenditure incurred in respect of various residential/commercial schemes floated by the assessec-trust from time to time and perusal of the activities undertaken by the Improvement Trust Amritsar reveals that except for acquiring land and developing the same into residential/commercial projects like any other private builder have done little for achieving the aims and objectives for which it is created. The AO with the help of the decision of the Tribunal, Chandigarh "B' Bench in the case of Punjab Urban Planning & Development Authority (supra) has denied the exemption as claimed by the assessee and lastly held that the income of the assessee arising from the various activities does not qualify for exemption under s. 11 of the Act and the same is brought to tax as income from business, as per provision of IT Act, 1961.
13.1 The learned first appellate authority, on appeal filed by the assessee-trust has allowed the exemption as claimed by the assessee by relying upon the decision, passed in the case of Improvement Trust (supra) by the Hon'ble jurisdictional High Court. The learned first appellate authority has held that keeping in view the statistics of income and expenditure incorporated in the assessment order under appeal, it is seen that the AO has been under mistaken and misconception that the assessee has not applied 85 per cent of its receipts and income towards its aims and objectives. Therefore, the assessee-trust has fulfilled the conditions laid down in ss. 11 and 12 by applying revenue receipts as per its audit report. Therefore, the addition in dispute deserves to be deleted and he deleted the addition in dispute by allowing the appeal of the assessee.
13.2 After carefully perusing the impugned orders, we are of the view that the learned first appellate authority has not even asked from the assessee-trust to satisfy the requirements of the AO i.e. to furnish complete details of the activities undertaken by the assessee-trust to achieve the objectives of the trust along with details of the amount spent on each activity. The learned first appellate authority has merely mentioned 7-8 figures from the special audit report and stated that the assessee has applied more than 85 per cent of the gross receipts towards aims and objectives. The learned first appellate authority has taken the help from the order of the Tribunal, Amritsar Bench, in which CIT-II. Amritsar, has rejected the registration under s. 12AA of the Act on 21st Sept., 2006, which was reversed by the Tribunal, Amritsar Bench on 22nd Feb., 2008. Secondly, the learned CIT(A) has taken the help of the decision dt. 31st Oct., 2008 passed by Jurisdictional High Court in the case of Improvement Trust (supra) wherein their Lordships upheld the registration of the Improvement Trust Moga and allowed the exemption as claimed by the assessee. For the sake of convenience, the relevant portion of the impugned order passed by the learned first appellate authority is reproduced as under :
"8. Grounds No. 2 and 34 pertains to the appellant's grievance over its status having been taken/adopted as local authority as against it being a trust from its very name and nomenclature. The learned Authorised Representative for the appellant has explained that the appellant is an Improvement Trust constituted under the provisions of the Punjab Town Improvement Trust Act, 1922 and the principal object of the trust is to bring out improvement in the two by providing streets, housing facilities or making provision for drinking water etc. for the benefit of general public within its local limits. The learned Authorised Representative of the appellant has by placing heavy reliance on the jurisdictional Hon'ble Punjab & Haryana High Court's decisions in the case of Improvement Trust, Moga and Improvement Trust, Faridkot vide its order dt. 31st Oct., 2008 and 20th July, 2009 respectively that activities of Improvement Trusts are of charitable nature and are covered by the expression any other object of general public utility as mentioned in s. 2(15) of the IT Act, 1961 and the same was entitled to registration under s. 12AA of the IT Act, 1961 reported in CIT v.Improvement Trust Moga (2008) 15 DTR (P&H) 217 : (2009) 308 ITR 361 (P&H) and by impliedly deriving support for the above cited identical judgments of the jurisdictional Hon'ble Punjab & Haryana High Court, it is strongly pleaded that the appellant, Improvement Trust, Amritsar, being involved in the objects of the general public utility envisaged under s. 2(15) of the Act is mutatis mutandis entitled to registration under s. 12AA. Further, as per given facts, the orders dt. 21st Sept., 2006 of the learned CIT-II, Amritsar refusing registration under s. 12AA did not find favour with the jurisdictional Hon'ble Tribunal, Amritsar, who vide their orders dt. 22nd Feb., 2008 have allowed registration to the appellant and further the Department's Misc. application stands rejected vide their subsequent orders dt. 21st May, 2009. The learned Authorised Representative for the appellant has further placed heavy reliance on the judgments of the jurisdictional Hon'ble Punjab & Haryana High Court in the cases of CIT v. Market Committee (2010) 45 DTR (P&H) 381 : (2011) 238 CTR (P&H) 103 : (2011) 330 ITR 16 (P&H) and in the case ofCIT v. Tinny Educational Society.
8.1 Thus, both on Acts and on law, the appellant is deemed to be entitled for registration under s, 12AA of the Act, as far as the instant appeal for the asst. yr. 2006-07 is concerned, the learned AO is directed to adopt appellant's status as that of a trust.
9. Vide ground Nos. I, 4 and 5, the appellant has strongly agitated on merits the AO's findings and taxing its entire receipts without considering its claim for exemptions under s. 11 of the Act. It has been stated for and on behalf of the appellant that though for the assessment year under consideration, the appellant's accounts were not subjected to special audit under s. 142(2A) but on the basis of special audit report for the immediately preceding asst. yr. 2006-07 wherein the Special Auditors expressedly opinion that the provisions of ss. 11 to 13 are applicable to the case of the appellant-trust treating it as a charitable Institution and by implication, the concept of "Income received" and "Income applied" shall have to be kept in mind and by doing so the appellant has worked out its deficit/surplus and filed its income tax return for the asst. yr. 2007-08 accordingly.
| Surplus as per Income & Expenditure Account | Rs. 5,39,12,792 | |||
| Less: | ||||
| (i) Income applied towards acquisition of fixed assets | Rs. 26,81,01,075 | |||
| (ii) Difference in value of stock | Rs. 2,16,10,131 | |||
| Total : | Rs. 28,97,11,206 | Rs. 28,97,11,206 | ||
| Deficit | ||||
| Rs. 32,57,98,414 |
On the contrary, the AO by observing that the appellant is not rendering services towards its aims and objects enshrined in ss. 22 and 23 of the Punjab Town Act, 1922 and also by adopting its status as that of a local authority has concluded since the appellant did little for the benefit of the public at large of Amritsar City even not better than PUDA, it has been held by the AO that income of the appellant arising from the various activities does not qualify for exemption under s. 11 of the Act and the same is brought to tax as its business income. By this way, the AO taxed the entire receipts of the appellant Rs. 5,39,12,792. Further, the AO disallowed the assessee's claim of its employees provident fund of Rs. 20,78,026 after considering the appellant's reply dt. 30th Nov., 2009 to the effect that it is setting apart such PF in the shape of FDR or saving bank accumulations and also applying the provisions of s. 36(1 )(iv) which speaks about any sum of PF paid by the assessee to its employees, provident fund of Rs. 20,78,026 after considering the appellant's reply dt. 30th Nov., 2009 to the effect that it is setting apart such PF in the shape of FDR or saving bank accumulations and also applying the provisions of s. 36(l)(iv) which speaks about any sum of PF paid by the assessee to its employees, on the ground that instead of paying PF to its employees, it I has set apart the PF in the shape of FDRs/SB accounts which means that it remained unpaid to its employees and the appellant did not fulfil the conditions laid down therefor but raised the claim by debiting it to its income & expenditure account and added back the unpaid PF to the appellant's income. As discussed in the immediately preceding para of this order, the appellant's status is required to be taken/adopted as that of a trust as it stands granted registration under s. 12AA by virtue of the findings of the final fact finding authority and jurisdictional Hon'ble Tribunal, Amritsar vide their orders dt. 22nd Feb., 2008/21st May, 2009 which is binding upon the Department and by respectfully following the same, the appellant-trust is deemed to have been granted registration under s. 12AA and thereafter provisions of ss. 11 to 13 comes into play. Now the only point on anvil is that whereas the AO is treating its entire income as taxable as not having been utilized towards its aims and objects, but on the other hand, the appellant's learned counsel has pleaded that after considering the income applied towards one of its main object of acquisition of fixed assets to the extent of Rs. 26,81,01,075 and further adding therein by way of adjustment claimed towards difference in its stock valuation amounting to Rs. 2,16,10,131, the total adjustable amount of Rs. 28,97,11,206 when adjusted from the surplus of Rs. 5,39,12,792, there remains deficit of Rs. 23,57,98,414. Further, it is urged that the appellant has deposited PF amounting to Rs. 20,78,026 and even after considering this amount, there remains still deficit of Rs. 23,78,76,440. Under these facts and circumstances of the case, I think that the AO is not justified in considering the appellant's book version and after taking into account the income applied towards its one of the main objects of acquisition of assets and depositing its employees' PF into FDR or SB accumulations tantamount to deemed payment of PF and enforceable by the employees under the PF Act, instead of yielding any surplus, it results into huge deficit of (-) Rs. 23,57,98,414. Since, there remains no part of taxable surplus, the question of creating any demand does not arise. Accordingly, the additions of Rs. 5,39,12,792 and of Rs. 20,78,036 towards allegedly unpaid PF are hereby deleted. This disposes of appellant's grounds of appeal No. 1, 4 and 5 in favour of the appellant."
13.3Keeping in view the aforesaid impugned order passed by the learned first appellate authority, we are of the considered view that the case laws relied upon by the learned first appellate authority arc relating to granting registration under s. 12AA of the Act and not relating to exemption provided under ss. 11 and 12 of the Act. Therefore, the case laws relied upon by the learned CIT(A) as well as the learned counsel for the assessee are not relevant and helpful on the issue in dispute. No doubt, at the time of processing the application for seeking registration, the learned CIT(A) was not expected to go in detail and prima facie, the assessee was not able to make out a case for registration.... When the registration is granted, it does not mean that the AO is barred from examining the details of various activities/work undertaken by the trust to achieve the object of the assessee-trust. The AO is within his power to call complete details of income and expenditure of the assessee whether these have been spent on the activities to achieve the objects of the trust or not. In spite of various opportunities given by the AO, the assessee, nor his Authorized Representative filed details as required by the AO. Even before us, the learned counsel for the assessee has not filed any details specifically asked by us. He has only filed copy of order dt. 20th July, 2009 passed by the jurisdictional High Court in the case of Improvement Trust (supra). We have perused the order passed by the Hon'ble jurisdictional High Court and found that the Hon'ble High Court has passed this order on the issue whether the assessee is entitled for registration under s. 12AA of the Act or not and not on the issue in dispute i.e. granting the exemption under s. 1 I of the Act. The Tribunal, Delhi C Bench, in the case of Jyoti Prabha Society (supra) has held as under :
"At the time of processing the application seeking registration the CIT was not expected to go in detail and prima facie the assessee was able to make out a case for registration. Even if registration is granted that will not be precluding the AO to examine in detail the very object of the assessee and to give the finding in assessment proceedings as to assessee had complied with the requirement of s. 11 or not. At the most registration certificate, if granted, will make out a prima facie case in favour of the assessee that its activities are charitable but that will not be obstacle in the way of the AO at the time when assessment proceedings are to be taken up and to decide as to whether assessee is entitled for benefits of s. 11 or 12, as the case may be. That will be the second stage. But at this stage the objects and activities of the assessee make out a case for granting registration. Accordingly, the order of the CIT is reversed and assessee is entitled for registration under s. 12A-Aggarwal Shiksha Samiti Trust v.CIT (1987) 66 CTR (Raj.) 95: (1987) 168 ITR 751 (Raj) and CIT v. Saraswati Poor Students Funds (1985) 46 CTR(Kar.) 107 : (1985) 150 ITR 142 (Kar.)."
13.4 The AO has rightly rejected the claim of the assessee by following the order of the Tribunal, Chandigarh B-Bench, in the case of Punjab Urban Planning & Development Authority (supra). The relevant contents of the same are reproduced as under :
"It is well known fact that in some of the situation, the provision of law are misused in the names of charities. If an expanded/broader latitude is extended to the word charity, then there are so many inspirations/Departments who will try to come under the umbrella of this provision to misuse the provision. Therefore, for the broad development of nation/society, a strict and positive vigil is required so that the provision can be saved from its misuse in any manner. No activity can be carried on efficiently, properly unless and until it is carried out on business principle but it does not mean that the provision is misused in any manner under the garb of charity and any institution to become richer and richer under the garb of the charity by making it non-tax payable organization. Charitable institution provides services for charitable purposes free of cost and not for gain. In the present scenario, similar activities are performed by the big colonizers/developers who are earning a huge profit if registration is granted then anybody will claim the exemption from the tax. If the account of the assessee are analysed it has turned into the profit making agency for which it is taking money if the institution of public importance like school, community centres are created/developed the assessee is charging the cost of it from the public at large the money is coming from coffer of the Government. It can be said that objects/activities of the assessee are more of commercialized nature and no charity is involved in it. At the same time, if these facilities are not provided, then nobody will purchase a plot. It can be said that it is a means of attracting the people so that maximum people may apply for the same and the hidden cost is already added, so no charity is involved. At best, the assessee can be said to be an authority created to help to achieve certain objects. It can be said that is the duty of the Government to create/develop all these facilities to public at large, which is being done through his agency in a particular area. At the same, the funds which are provided to the assessee by the Government is again a public money or generated from public itself. The objects of the assessee though claimed to be charitable, but actually are of purely commercial nature where profit motive is involved. It is a known fact that the assessee is acquiring a land at very low prices and selling the same land on very higher rates and is earning a profit therefrom. A new trend has also emerged that the assessee has started auctioning the plot by way of bidding at the market rate and sometime more than that and charging interest on belated payment. In such a situation, no charity is involved. Rather the assessee has converted itself into a big businessman. Similar development/infrastructure/facilities are also provided by private developers these days, then they will also claim the status of a charitable institution. The facilities which are provided to the plot holders are incidental to the commercial activity carried out by the assessee and if certain facilities like parts, community centre, school are provided, it is not only basic requirement, rather a tool of attracting the investors wherein the hidden cost of these facilities are already included. In the absence of these facilities, normally the purchaser may not invest and the prices may be less. In view of these facts, the assessee's activities not being of charitable nature, the application of registration under s. 12A has been rightly rejected by CIT.-Asstt. CIT v. Thanthi Trust (2001) 165 CTR (SC) 681 : (2001) 247 1TR 785 (SC) and Bihar State Forest Development v. CIT (1997) 224 ITR 757 (Pat) relied on; Addl.CIT v. Surat Silk Cloth Manufacturers Association (1979) 13 CTR (SC) 378 : (1980) 121 ITR 1 (SC), CIT v. Andhra Pradesh State Road Transport Corporation(1986) 52 CTR (SC) 75 : (1986) 159 ITR 1 (SC) and New Life in Christ Evangelistic Association (NLC) v. CIT (2001) 165 CTR (Mad) 446 : (2000) 246 ITR 532 (Mad.) distinguished."
13.5 After perusing the aforesaid order passed by the Co-ordinate Bench as well as orders passed by the Revenue authorities, especially the impugned orders, we are of the considered view that the learned first appellate authority has passed the impugned orders contrary to law and facts on record, which deserves to be cancelled. Keeping in view the facts and circumstances of the present case, we are of the view that the assessee-trust has not proved its case for seeking exemption under s. 11 of the Act by producing various details of expenditure incurred by the assessee-trust on various activities undertaken to achieve its objects before any Revenue authorities, not even before us in spite of asking to the learned counsel for the assessee-trust. Therefore, we held that the learned first appellate authority has wrongly deleted the additions in dispute by passing the impugned orders which deserves to be cancelled. We, therefore, cancel the impugned orders passed by the learned CIT(A) and upheld the orders of AO.by holding that the activities done by the assessee-trust does not qualify for exemption under s. 11 of the Act and the same has rightly been brought to tax as income from business by the AO as per provisions of the Act. Thus, both the appeals filed by the Revenue are allowed.
14. In the result, both the appeals filed by the Revenue are allowed.
USP* In favour of revenue.
The better option is to verify the case of the assessee. If he claimed it to be revenue expenditure , then as per Mumbai Special Bench Judgement in case of Mukund Ltd. 106 ITD 231, it is capital expenditure. So, check his normal return and take action accordingly.
ITO vs. Wadhwa & Associates Realtors (ITAT Mumbai)
S. 194-I TDS: Lease premium paid to MMRDA is not "rent"
The assessee executed a lease deed with MMRDA pursuant to which it obtained a plot of land at Bandra Kurla Complex on a long-term lease. The assessee paid MMRDA Rs. 950 crore as lease premium. The AO held that the said lease premium was in the nature of rent and that the assessee ought to have deducted TDS thereon u/s 194-I. He held the assessee to be in default and demanded tax of Rs. 314 crore. This was reversed by the CIT(A) on the ground that lease premium could not be equated with rent. On appeal by the Department to the Tribunal, HELD dismissing the appeal:
Payment under a lease may be classified under three categories (1) "premium" or "salami", (2) minimum royalty and (3) royalty per ton. Lease "premium" or "salami" is in the form of a lump sum non-recurring payment made by a prospective tenant to the landlord as consideration for grant of the lease. It is paid anterior to the constitution of relationship of landlord and tenant. It is not "rent" and has all the characteristics of a capital payment. On facts, the lease deed shows that the premium is not paid under a lease but is paid as a price for obtaining the lease, hence it precedes the grant of lease. Therefore, by no stretch of imagination can it be equated with rent which is paid periodically. The payment is also for FSI and additional built up area. This also cannot be equated with rent and so the assessee was under no obligation to deduct TDS u/s 194-I ( referred)
--
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
IT: Once claim was examined, scrutiny assessment was framed and AO came to conclusion, such an assessment could not have been subjected to process of reopening by succeeding AO
■■■
[2013] 35 taxmann.com 84 (Gujarat)
HIGH COURT OF GUJARAT
Siddhi Vinayak Transport
v.
Assistant Commissioner of Income-tax*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 1907 OF 2013
APRIL 22, 2013
Section 147, read with section 40(a)(ia), of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [To make disallowance under section 40(a)(ia)] - Whether when earlier Assessing Officer had framed scrutiny assessment and examined certain deductions thoroughly, thereafter, it is not open to latter Assessing Officer to re-open assessment on basis that earlier Assessing Officer had committed a legal error - Held, yes - Assessing Officer in scrutiny assessment found that assessee did not deduct TDS on labour payments - After considering assessee's explanation, he disallowed 20 per cent of said expenditure under section 40(a)(ia) - However, succeeding Assessing Officer sought to re-examine said issue on premise that entire expenditure had to be disallowed and Assessing Officer was not justified in limiting it to 20 per cent - Whether reassessment was not justified since succeeding Assessing Officer cannot doubt legality of a conclusion recorded by earlier Assessing Officer - Held, yes [Para 12] [In favour of assessee]
FACTS
| ■ | The assessee was a transport contractor. It did not deduct TDS on payment made on account of freight and labour. | |
| ■ | In scrutiny assessment, the Assessing Officer disallowed 20 per cent of said expenses under section 40(a)(ia). On appeal, the Commissioner (Appeals) deleted said disallowance and said decision was pending in appeal before Tribunal. | |
| ■ | Thereafter, the Assessing Officer initiated reassessment on ground that earlier Assessing Officer made an error in limiting such disallowance to 20 per cent as 100 per cent disallowance was called for. | |
| ■ | On appeal: |
HELD
| ■ | When the earlier Assessing Officer had framed scrutiny assessment and examined certain deductions thoroughly, it is thereafter simply not open to the latter Assessing Officer to re-open the assessment on the basis that the earlier Assessing Officer committed a legal error. Once the claim was examined, scrutiny assessment was framed and Assessing Officer came to the conclusion, such an assessment could not have been subjected to process of reopening. This is not to suggest that the revenue would be rendered without any remedy even in a case where the Assessing Officer committed a gross error in under-assessing income chargeable to tax. [Para 10] | |
| ■ | Section 263, of course, when the requirements laid down in the provisions are satisfied, empowers the Commissioner to take such an order in revision. However, the succeeding Assessing Officer cannot doubt the legality of a conclusion recorded by the earlier Assessing Officer in his assessment order, which was framed after scrutiny. [Para 11] | |
| ■ | It is not a case where the Assessing Officer, while framing original scrutiny assessment, did not examine the petitioner's claim of deduction. He was acutely conscious of such a claim and was also of the opinion that the entire claim was not required to be granted. He called for explanation of the assessee and after taking into consideration the explanation, made disallowance to the extent he was convinced to do. If, in the process, he made a legal error, the succeeding Assessing Officer cannot correct such an error, through the process of re-opening of the assessment. This is precisely, in the present case, what the respondent seeks to achieve. His reasons recorded clearly reflected such a state of affairs. He expresses his opinion that the disallowance which was limited to 20 per cent of the expenditure was not justified in law and the entire expenditure should have been disallowed. This cannot be the basis for re-opening of the assessment previously framed after scrutiny. [Para 12] | |
| ■ | In view of the above conclusion, the impugned notice was to be quashed. [Para 13] |
CASE REVIEW
Transwind Infrastructure (P.) Ltd. v. ITO [2013] 33 taxmann.com 404 (Guj.)[para 11] followed.
CASES REFERRED TO
Transwind Infrastructure (P.) Ltd. v. ITO [2013] 33 taxmann.com 404 (Guj.) (para 11).
Manish J. Shah for the Appellant. Sudhir M. Mehta for the Respondent.
ORDER
Akil Kureshi, J. - Heard learned counsel for the parties for final disposal of the petition.
2. Petitioner has challenged a notice dated 24.8.2012, as at AnnexureA to the petition, issued by the respondent-Assessing Officer under Section 148 of the Income Tax Act, 1961 (for short "the Act").
3. The petition arises in the following factual background:
3.1. The petitioner is a partnership firm. For the Assessment Year 2008-09 the petitioner filed its return of income on 26.09.2008 declaring total income of Rs.7,22,630/. Along with return, the petitioner also filed audited accounts, as statutorily required. Such return of the petitioner was taken in scrutiny by the Assessing Officer, who framed scrutiny assessment under Section 143(3) of the Act on 27.12.2010.
3.2. During such scrutiny assessment, Assessing Officer examined the requirement of tax deduction at source on a total labour charge payment of Rs.16.09 cores (rounded off), on which no tax was so deducted. Assessing Officer, after putting the petitioner to notice in the order of assessment, disallowed a sum of Rs.3.21 crores (rounded off), out of the abovenoted total labour payment charges.
3.3. The order of assessment was carried in appeal by the petitioner. One of the ground in such appeal was in respect of disallowance of said sum of Rs. 3.21 crores (rounded off). CIT (Appeals) passed the appellate order on 02.07.2012 and allowed the assessees objection to the disallowance of Rs. 3.21 crores (rounded off) made by the Assessing Officer. It is stated that such order of CIT (Appeals) is pending before the Tribunal, under an appeal filed by the Revenue.
3.4. On 24.08.2012 the respondent Assessing Officer issued a notice of reopening the assessment for the said Assessment Year 2008-09. At the request of the petitioner, he supplied the reasons recorded for issuing of such notice, which reads as under:
"Reasons for reopening of assessment u/s 147 of the Income-tax Act, 1961
In this case, the Assessee an Firm engaged in the business of Transportation had filed its return for A.Y.2008-09 on 26.09.2008 declaring income of Rs.7,22,630/. The case was completed in scrutiny manner under section 143(3) of the Act, on 27.12.2010 by determining taxable income of Rs.3,71,93,320/. On verification of the assessment records revealed that during the scrutiny assessment an amount of Rs.3,21,84,435/ was disallowed under Section 40(a)(ia). It was further noticed that in the scrutiny assessment disallowance of Rs.3,21,84,435/ made was 20% of Rs.16,09,22,175/ on account of freight payment. Under Section 40(a)(ia) whole expenditure was required to be disallowed for failure to deduct the tax at source whereas only 20% of the total expenditure on account of freight payment of Rs.16,09,22,175/ was made by the Assessing Officer on lump sum basis. Since, no provision for lump sum disallowance of expenditure under Section 40(a)(ia) of the Act, disallowance required to be made of Rs.16,09,22,175/ or the actual expenditure on which no tax was deducted through required to be deducted as per the provision of the Act.
Incorrect/short disallowance of expenditure Rs.12,87,37,740 (16,09,22,175 -3,21,84,435) on account of freight payment resulted in under assessment of income of Rs.12,87,37,740/ with consequent short levy of tax of Rs.5,81,98,082/ as shown below.
| Tax on Rs.12,87,37,740/ | Rs.3,86,21,322/ | |
| Surcharge @ 10% | Rs.38,62,132/ | |
| Education Cess/Secondary & Higher Ed. Cess @3% | Rs.12,74,503/ | |
| Total Tax | Rs.4,37,57,957/ | |
| Int. U/s.234B from 04/08 to 12/10 | Rs.1,44,40,125/ | |
| Total Tax & Interest | Rs.5,81,98,082/] |
In view of the above facts, I have reason to believe that Income has escaped assessment up to Rs.12,87,37,740/. Accordingly, assessment is reopened u/s 147 of the Income tax Act, 1961."
3.5. The petitioner thereupon, under its communication dated 24.01.2013, raised several objections to the reopening of assessment. Such objections were, however, rejected by the respondent, by an order dated 06.02. 2013. Hence, the petition.
4. Learned counsel for the petitioner raised following contentions in support of the prayers;
| (i) | That the entire issue of non-deduction of tax at source on the total labour payment charges of Rs.16.09 crores was examined by the Assessing Officer at length in the original order of assessment. He further stated that the extent to which he desired to disallow the expenditure is shown in the assessment order itself. In such order, he was of the opinion that 20% tax disallowance was justified. Thus, the Assessing Officer, having scrutinized the claim in the order of assessment, any attempt on behalf of the respondent to reopen of assessement on such basis, would be a mere change of opinion. | |
| (ii) | The counsel for the petitioner contended that the petitioner had, even to the limited extent of disallowance made by the Assessing Officer, carried the matter in Appeal. CIT (Appeals) had deleted the entire disallowance, after admitting additional evidence on record by virtue of third proviso to Section 147 of the Act and on the principle of merger, it would be wholly impermissible for the Assessing Officer to reexamine the entire issue when the CIT (Appeals) has already given his opinion. |
5. On the other hand, learned counsel Mr. Sudhir Mehta for the Department opposed the petition contending that since the petitioner did not produce necessary documents at the time of original assessment, the Assessing Officer made ad hoc disallowance. This, being not an order, notice for reopening came to be issued within a period of four years from the end of the relevant Assessment Year.
6. He further contended that before the CIT (Appeals), only the validity of disallowance made by the Assessing Officer was at issue in appeal filed by the assessee. Whether the entire expenditure could have been disallowed was never at issue before CIT (Appeals).
7. Having heard learned counsel for the parties and having perused documents on record, the following aspects mainly emerge;
| (a) | During the scrutiny assessment, the question of non-deduction of tax at source on labour payment charges of Rs.16.09 crores came up for consideration before the Assessing Officer. He, in fact, issued a notice to the assessee on 24.11.2010 and stated as under: | |
| "Complete details of expenses of Rs.16,37,42,549/, incurred on a/c of cartage, octroi and labour expenses is not filed till date. Further, partwise amount paid and TDS details is also not filed. You are requested to file all the details. It will be presumed that TDS is not properly deducted and amount of Rs.3,27,48,509/ being 20% will be disallowed u/s 40(a)(ia) of the IT Act" | ||
| In the final order of assessment, he devoted several pages to the petitioner's claim of deduction of labour payment charges. In paragraph 4 of the assessment order, he discussed the disallowance on account of non-deduction of TDS on cartage, labour and octroi expenses. In reply to the notice dated 24.11.2010, the assessee made averments as to why disallowance should not be made relying on provisions contained in Section 194 (c) of the Act. He, ultimately, rejected the assessee's contentions and concluded as under: | ||
| "In view of the above, contention of the assessee has no basis. However to be reasonable, 20% of the total payment i.e. Rs.16,09,22,175/ is disallowed u/s 40(a) (ia) of the IT Act. The disallowance comes to Rs.3,21,84,435." | ||
| (b) | It is this claim, which the Assessing Officer now seeks to reexamine by issuance of notice for reopening of the assessment. The reasons recorded by him clearly bring about this aspect. |
8. In the reason, he concluded that the Assessing Officer made disallowance at the rate of 20 per cent. However, the entire amount should have been disallowed and therefore, the disallowance of expenditure required to be made comes to Rs.12,87,33,740/ Therefore, he recorded that he had reason to believe that the income to the above extent chargeable to tax had escaped assessment.
9. It thus clearly emerges from the record that the Assessing Officer now wishes to re-examine the petitioner's claim of deduction on the premise that the earlier Assessing Officer made an error in limiting such allowance to 20% of the total expenditure. In his opinion, 100% disallowance was called for. To the extent that the Assessing Officer, in the scrutiny assessment, did not disallow 80% of the expenditure and limited the disallowance to 20%, had committed an error.
10. We are not examining the validity of the contention of the Assessing Officer, recorded in the form of reasons, for issuing the notice. We are limiting our observations to his assuming jurisdiction of re-opening of the assessment on such basis. When the earlier Assessing Officer had framed scrutiny assessment and examined certain deductions thoroughly, it was, thereafter, simply not open to the latter Assessing Officer to reopen the assessment on the basis that the earlier Assessing Officer committed a legal error. Once the claim was examined, scrutiny assessment was framed and Assessing Officer came to the conclusion with or without recording reasons in the assessment order, such an assessment could not have been subjected to the process of reopening. This is not to suggest that the Revenue would be rendered without any remedy even in a case where the Assessing Officer committed a gross error in underassessing income chargeable to tax.
11. Section 263 of the Act, of course, when the requirements laid down in the provisions are satisfied, empowers the Commissioner to take such an order in revision. However, the succeeding Assessing Officer cannot doubt the legality of a conclusion recorded by the earlier Assessing Officer in his assessment order, which was framed after scrutiny. In same what similar circumstance, we had in our judgment in case of Transwind Infrastructure (P.) Ltd. v. ITO [2013] 33 taxmann.com 404 (Guj.) made following observations :
10. From the above, it can be seen that the Assessing Officer was acutely conscious about the petitioner not having deducted tax on labour payment charges of Rs. 3.05 crores and the petitioner's contention that it was so done because provision for TDS was not applicable. He was not convinced by such explanation. He, however, for some strange reasons did not apply the provision of Section 40(a)(ia) of the Act instead made ad hoc disallowance of Rs. 25,60,000/ @ 8% of the total labour payment charges.
11.Whatever be the legality of such assessment, fact remains that, in the scrutiny assessment, the Assessing Officer had thoroughly and fully scrutinized the assessee's claim of deduction of labour expenditure. To the extent he was inclined to disallow the same, he did so. By no stretch of imagination it can be stated that the issue was not at large before the Assessing Officer in the original scrutiny assessment. Any reexamination of such a question at this stage would only amount to change of opinion. Remedy of reopening the assessment, therefore, was simply not available. In the decision of the Supreme Court in case of Commissioner of Income Tax Vs. Kelvinator of India Ltd. reported in [2010] 320 ITR 561 (SC) the Apex Court observed as under:
"On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, reopening could be done under above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a goby and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post 1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an inbuilt test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words "reason to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer."
12. If the Revenue was of the opinion that the Assessing Officer erroneously and to the prejudice of the interest of the Revenue allowed certain claim, in a given situation, it would have been open for the appropriate authority to exercise revisional powers. However, once the claim was fully examined, power of reopening was simply not available.
12. Such observations would apply in the present case also. We make it clear that it is not a case where the Assessing Officer, while framing original scrutiny assessment, did not examine the petitioner's claim of deduction. He was acutely conscious of such a claim and was also of the opinion that the entire claim was not required to be granted. He called for explanation of the assessee and after taking into consideration the explanation, made disallowance to the extent he was convinced to do. If, in the process, he made a legal error, the succeeding Assessing Officer cannot correct such an error, through the process of reopening of the assessment. This is precisely, in the present case, what the respondent seeks to achieve. His reasons recorded clearly reflect such a state of affairs. He expresses his opinion that the disallowance which was limited to 20% of the expenditure was not justified in law and the entire expenditure should have been disallowed. We are afraid, this cannot be the basis for reopening of the assessment previously framed after scrutiny.
13. In view of the above conclusion, we are inclined to quash the impugned notice dated 24.8.2012. The question whether on the additional ground of merger, as flowing through the proviso to section 147 of the Act, the notice is bad in law, we have not gone into in this case.
14. Subject to the above observations, the petition is allowed. The impugned notice dated 24.08.2012 is quashed.
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