IT: Where entire issue pertaining to disallowance of expenditure under section 14A was scrutinized by Assessing Officer during original assessment proceedings, reopening of assessment to make disallowance of such expenditure on basis of formula provided in rule 8D would amount to change of opinion
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[2013] 35 taxmann.com 539 (Gujarat)
HIGH COURT OF GUJARAT
Reckitt Benckiser Healthcare India Ltd.
v.
Assistant Commissioner of Income-tax (OCD), Circle -5*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 3049 OF 2013
APRIL 29, 2013
Section 147, read with sections 14A and 37(1), of the Income-tax Act, 1961 and rule 8D of the Income-tax Rules, 1962 - Income escaping assessment - Non-disclosure of primary facts [To make disallowance under section 14A] - Assessment year 2007-08 - Assessing Officer issued on assessee a notice under section 148 seeking to reopen its assessment framed under section 143(3) - Impugned notice had been issued within a period of four years from end of relevant assessment year - Reasons recorded by Assessing Officer were to effect that (i) assessee had claimed expenditure of Rs. 86.17 lakhs related to SAP implementation charges as revenue expenditure, whereas such expenditure was capital in nature, and (ii) assessee who had earned tax free dividend income should have been subjected to disallowance of proportionate expenditure under section 14A for earning such income on basis of formula provided in rule 8D - Whether when expenditure of Rs. 86.17 lakhs itself was never claimed by assessee by way of revenue expenditure, question of disallowing such an expenditure on such basis requiring of reopening of assessment would not arise - Held, yes - Whether since entire issue pertaining to disallowance of expenditure under section 14A was scrutinized by Assessing Officer during original assessment proceedings, reopening of assessment to make disallowance of such expenditure on basis of formula provided in rule 8D would amount to change of opinion - Held, yes - Whether, therefore, impugned notice was liable to be quashed - Held, yes [Paras 8, 14 & 15][In favour of assessee]
FACTS
| ■ | For the assessment year 2007-08, the Assessing Officer framed the original assessment of the assessee under section 143(3) on 17-3-2009. Subsequently he issued on the assessee a notice under section 148 on 22-3-2012 seeking to reopen the aforesaid assessment. He also rejected the objections raised by the assessee. | |
| ■ | On writ petition : |
HELD
| ■ | The impugned notice has been issued within a period of four years from the end of relevant assessment year. From the reasons recorded, it emerges that there were two grounds on which the Assessing Officer based his notice for reopening. First was that the assessee had claimed expenditure of Rs. 86.17 lakhs related to SAP implementation charges as revenue expenditure. In the opinion of the Assessing Officer, such expenditure was capital in nature. In this respect, the case of the assessee from the outset has been that it never claimed such expenditure by way of revenue expenditure. In fact, it had treated such expenditure as 'Capital work in progress'. [Para 3] | |
| ■ | From the above, it emerges that insofar as the first ground is concerned, the assessee has all throughout been contending that the expenditure was not claimed as revenue expenditure and the question of disallowing it as such would not arise. If the Assessing Officer had any doubt about such statement, he could have easily verified the correct facts from the return filed and other accompanying documents brought on record during the assessment proceedings. He simply could not have brushed aside such a contention on the ground that such aspect was not examined by him. [Para 7] | |
| ■ | When the expenditure itself was never claimed by way of revenue expenditure, the question of disallowing such an expenditure on such basis requiring of reopening of assessment would not arise. [Para 8] | |
| ■ | The second ground recorded by the Assessing Officer pertains to disallowance of proportionate expenditure for earning the tax free income. In the opinion of the Assessing Officer, the assessee who had earned tax free dividend income should have been subjected to disallowance of proportionate expenditure for earning such income on the basis of the formula provided in rule 8D. [Para 9] | |
| ■ | Under a communication dated 23-1-2009, the assessee with respect to such expenditure conveyed to the Assessing Officer its stand. Such issue cropped up once again when the assessee under its communication dated 27-1-2009 wrote to the Assessing Officer that there was no question of disallowance of any expenditure under section 14A. Once again under its communication dated 16-3-2009, the assessee conveyed to the Assessing Officer that since it had furnished the bank statement showing the nexus of the investment for the availability of the funds, the question of applicability of rule 8D also did not arise. In the final order of assessment the Assessing Officer dealt with this issue and held that an amount of Rs. 21 lakhs was disallowed from salary expenses and other expenses attributable to investment made in shares and securities, from which dividend was earned and claimed as exempt, and the same was added to the total income of the assessee. [Paras 10, 11, 12 & 13] | |
| ■ | From the above sequence of events, it clearly emerges that the question of disallowance of expenditure or part thereof under section 14A for earning exempt income was very much alive before the Assessing Officer during the original assessment proceedings. In fact, the entire issue was scrutinized by the Assessing Officer during the original assessment proceedings. It is only upon consideration of the said aspect, he has made disallowance to the limited extent of Rs. 21 lakhs. [Para 14] | |
| ■ | Even within a period of four years such assessment cannot be reopened. Any permission to the Assessing Officer to do so would amount to permitting change of opinion. Under the circumstances, the impugned notice dated 22-3-2012 was liable to be quashed. [Para 15] |
S.N. Soparkar and B.S. Soparkar for the Petitioner. Ms. Paurami B. Sheth for the Respondent.
ORDER
Akil Kureshi, J. - Heard learned counsel for the parties for final disposal of the petition.
2. The petitioner has challenged a notice dated March 22, 2012, issued by the respondent-Assistant Commissioner of Income-Tax under Section 148 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). The petition arises in the following background :
2.1 The petitioner is a company registered under the Companies Act, 1965. For the assessment year 2007-08, the petitioner filed its return of income on October 28, 2007, declaring a total income of Rs.57.52 crores (rounded off). Such return was taken in scrutiny by the Assessing Officer. He framed assessment under Section 143(3) of the Act on March 17, 2009. It is this scrutiny assessment which the respondent intended to reopen for which impugned notice has been issued.
2.2 At the request of the petitioner, the respondent supplied the reasons recorded for issuing the notice. Such reasons read as under :
"On verification of the details filed during the assessment proceedings, it is noticed from the grouping of expenses that the assessee had debited to P&L A/c an amount of Rs. 86,17,002/-under the head of administrative expenses being SAP implementation charges in A/c No.3AS05. ft is an expense of capital nature and should not have been allowed as Revenue expenditure. This requires to be disallowed. The software implementation charges are capital in nature and it will be capitalized along with SAP software shown for Rs.25,01,462/-. It will be entitled to depreciation as per prescribed rate. Thus, the amount of Rs.86,17,002/- requires to be disallowed.
The disallowance has been made u/s 14A of the Act to the extent of Rs.2,11,316/-, as per para 6 of the assessment order. The disallowance u/s 14A cannot be made on adhoc basis but accordingly to the provisions of section 14A read with Rule 8D of I.T Rules, 1962. The CBDT Notification No.45/2008 dated 24-03-2008 should be considered while making disallowance u/s 14A of the Act. In this case, assessee derived income from dividend amounting to Rs. 1,45,30,317/- from the investment shown of Rs.74,33,49,881/-. The disallowance u/s 14A would be as under :
(I) Interest which is not directly attributable to any income
= where
A = Interest other than interest directly relating to income which does not form part of total income : Rs.2,12,69,284/-
B = Average value of investment, income of which does not form part of total income: Rs. (25,09,57,810 + 3,02,07,369) / 2 = Rs.14,05,82,589/-
C = Average of total assets in Balance Sheet : Rs. (191,84,66,092 + 126,69,84,501) / 2 = Rs.159,27,25,296/-
Now disallowance would be
| A x B : | Rs.2,12,69,284/- x Rs.14,05,82,589/- | ||
| C | Rs.159,27,25,296/- | ||
| = Rs.18,77,342 |
Further 0.5% of average value of investment, income of which does not form part of total
| = 0.5% x Rs.25,09,57,810/- | = Rs. 12,54,789/- | |
| Total… | = Rs.31,32,131/- | |
| Less: Already disallowed by AO | Rs. 2,11,316/- | |
| Requires to be disallowed | Rs.29,20,815/- |
Thus, there is total under assessment of income of Rs.34,46,800/- [being capital expenditure towards SAP after allowing depreciation @ 60% thereon (86,17,002 less 60% Rs.51,7 0,202)] + Rs.29,20,815/- = Rs.63,67,615/-, which has resulted in short levy of tax.
Accordingly, I am satisfied that the income chargeable to tax has escaped assessment and hence it is a fit case for re-opening the assessment within the meaning of Section 147 of the Act."
2.3 Armed with the reasons, the petitioner raised detailed objections under a communication dated October 11, 2012. Such objections were, however, rejected by the respondent by an order dated March 08, 2013. Hence, this petition.
3. At the outset we may record that the impugned notice has been issued within a period of four years from the end of relevant assessment year. From the reasons recorded, it emerges that there were two grounds on which the respondent based his notice for reopening. First was that the assessee, according to the respondent, claimed expenditure of Rs.86.17 lac (rounded off) related to SAP implementation charges. In his opinion, such expenditure was capital in nature. The assessee wrongly claimed the same as revenue expenditure.
In this respect, the case of the petitioner from the outset has been that the petitioner never claimed such expenditure by way of revenue expenditure. In fact, the petitioner had treated such expenditure as 'Capital Work in Progress'. In the objections that the petitioner raised also this aspect was highlighted. It was contended as under :
"1. Expenses related to SAP implementation charges amounting to Rs.86,17,002
1.1 In the subject reassessment notice, it has been alleged that the assessee has debited an amount of Rs. 86,17,002 under the head administrative expenses being SAP implementation charges and the same being in the nature of capital expenditure is required to be capitalized and not allowed as revenue expenditure.
1.2 In this regard, RBHIL wishes to submit that during the year ended 31 March 2007, RBHIL had capitalized the amount of Rs.86,17,002 in its books under the head "Capital Work in Progress". The assessee had not claimed the same as revenue expenditure.
1.3 Since the assessee has not claimed the SAP implementation charges as revenue expenditure or depreciation thereon during the year under consideration, RBHIL submits that there is no escapement of income.
1.4 Further, RBHIL wishes to submit that SAP implementation charges were initially grouped under the head administrative expenses but while finalizing the financial statements, the said charges were capitalised under the head "Capital Work in Progress" and not booked under the head administrative expenses. A copy of audited financial statements alongwith the schedule of administrative charges and break-up of the capital work in progress are collectively enclosed as Annexure-2".
4. Such objection was rejected by the Assessing Officer in his order dated March 08, 2013 in following terms :
"3. The assessee raised objections to re-opening assessment vide its letter dated 11-10-2012. The assessee has essentially contested the re-opening of assessment proceedings objecting to the reasons recorded. With regards to the first reason, the assessee has stated that it had capitalized the amount of Rs.86,17,002/- in its books and had not claimed it as revenue expenditure. However, the assessee has itself accepted in its reply that initially it had claimed the entire expense of Rs. 8,6,17,002/-as Administrative expense which was debited to P & L Account and only later capitalized the same as CWIP during finalization of accounts. The assessee has not given any proof that while computing its returned income it had correctly treated the said expenditure. This issue was not examined during assessment during assessment proceedings and hence, there is every reason to believe that income has escaped assessment as per u/s 147."
5. In the petition also, the clear stand of the petitioner has been that such expenditure of Rs.86.17 lac was never treated as revenue expenditure. Such stand comes out from the following portion of paragraph 3.2 :
"3.2 .. .. .. It is submitted that one of the grounds on the basis of which the reopening of assessment is sought to be done is that the SAP implementation charges of Rs.86,17,002/- are debited P&L A/c under the head of administrative expenditure even though it is an expense of capital nature. The said ground is factually incorrect because the petitioner herein has never treated SAP implementation charges as revenue expenditure in its financial statement. On the contrary the SAP implementation of Rs.86,17,002/-are shown as Capital Work in progress in the Financial Statements of the petitioner herein. The said fact becomes apparent from the audited accounts of the petitioner herein. Hence the ground for the reopening is factually incorrect and the impugned notice deserves to be quashed and set aside on this short count."
6. Even while issuing notice to the respondent on March 18, 2013, we had recorded the submission of the learned counsel for the petitioner that the petitioner had not claimed such expenditure as revenue expenditure.
7. From the above, it emerges that insofar as the first ground is concerned, the petitioner's case all throughout has been that the amount in question was never treated as revenue expenditure. Such ground, thus, lacks validity. Such contention raised in the objections raised by the petitioner was dismissed by the Assessing Officer merely observing that the assessee had not given any proof that while computing its return, it had correctly treated the said expenditure. We are afraid that on such basis the reopening would not be permissible. The petitioner has all throughout been contending that the expenditure was not claimed as revenue expenditure and the question of disallowing it as such would not arise. If the Assessing Officer had any doubt about such statement, he could have easily verified the correct facts from the return filed and other accompanying documents brought on record during the assessment proceedings. She simply could not have, in our opinion, brushed aside such a contention on the ground that such aspect was not examined by the Assessing Officer.
8. In addition to the above, we also perused the documents produced by the petitioner before us. Such documents include the return filed with the accompanying documents. One such document happens to be the schedule of administrative expenses at Annexure-II, which includes the said sum of Rs.86.17 lac as a part of 'Capital Work in Progress'. In face of such material on record, we have no hesitation in coming to the conclusion that the first ground is factually incorrect. When the expenditure itself was never claimed by way of revenue expenditure, the question of disallowing such an expenditure on such basis requiring of reopening of assessment would not arise.
9. This brings us to second ground recorded by the Assessing Officer, which pertains to disallowance of proportionate expenditure for earning the tax free income. We may recall that in the opinion of the Assessing Officer, the petitioner who had earned tax free dividend income should have been subjected to disallowance of proportionate expenditure for earning such income on the basis of the formula provided in Rule 8D of the Income-tax Rules, 1962. The petitioner opposes such reason mainly on two grounds. Firstly that during the original assessment, this claim was examined at length and in the assessment order through a speaking order, part disallowance was made. Such issue cannot be a part of reopening proceedings. Secondly that Rule 8D would not be applicable with retrospective effect and, therefore, cannot be applied to assessment year 2007- 08. On the other hand, the Revenue's contention is that the Assessing Officer made part disallowance completely ignoring the provision of Rule 8D and, therefore, the reopening of the assessment was necessary.
10. We may examine such contentions on the basis of material on record. Under a communication dated January 23, 2009, the petitioner with respect to such expenditure conveyed to the Assessing Officer its stand as under :
"3. It is also inquired about as to why proportionate management expenses should not be disallowed u/s.14A in relation to earning of income which is exempt from tax i.e. dividend based on the decision of Chennai bench of ITAT in the case of Southern Petrochemicals Industries 93 TTJ 161.
In this connection, it may please be noted that the company is engaged in the business of manufacturing and marketing of pharmaceutical and other related products. The investments in mutual funds/ shares are made only to park surplus funds temporarily. The company is not in the business of trading in mutual fund or shares. The investments are made through the investment agents mainly into liquid/ debt funds. The redemption/ sale is directly credited to the bank account through ECS facility.
Thus, no managerial person is actively involved in the investment activities. The investment in the mutual fund particularly in liquid and debt funds does not require any active involvement or it is not a strategic decision. Therefore, the top management is not involved in such short term investments since they are mainly made through the investment agents. Further, no other expenses are incurred in connection with the investment.
The decision of the Southern Petrochemicals Industries is not applicable on the facts of the assessee since the investment activities of Southern Petrochemicals Industries were strategic decisions and in which top management was involved in such activities. In the present case, there are no strategic investments and therefore top management is not involved for investments in mutual funds/ shares. The Chennai Bench in para 6 of the order has restore the matter to the A.O. with a direction to verify the quantum of deduction claim by the assessee in earlier years u/s.57 and make the prorate adjustment on the basis of fresh investments and inflation. Whereas in the case of the assessee company, it may also be noted that in the earlier years, the company has not claimed any expenses against the dividend income u/s.57. The copy of statement of Income for A.Y. 2003-2004, during which dividend income was taxable, is enclosed to show that no expenditure was claimed u/s.57 from the dividend income. There was no dividend income during A.Y. 1997-98 or earlier years. Therefore, the decision of the Southern Petrochemicals is not applicable on the facts of the assessee company. Therefore, there is no question of disallowance of any expenditure."
11. Such issue cropped up once again when the assessee under its communication dated January 27, 2009 wrote to the Assessing Officer as under :
"2. In the course of hearing, you have inquired about the application of Sec.14A in respect of investments made in shares and mutual fund having regard to the judgment of Ahmedabad bench of ITAT in the case of Harish Krishkant Bhatt 85 TTJ 872.%
In this connection, it may please be noted that the above referred decision the assessee paid interest for the purpose of purchasing the shares and the same was disallowed u/s.14A by the AO, which was confirmed by the ITAT The Hon'ble Tribunal held as under :
'dividend income being exempt u/s. 10(33), the interest on capital borrowed for acquisition of relevant shares cannot be allowed as deduction by operation of Sec.14A.'
From the above, it may please be seen that after the insertion of Sec.14A, interest paid by the assessee for investments, the income from which is not taxable, the expenditure is not allowable as deduction. In the above referred case, the interest was paid for acquisition of shares and was not allowed by operation of Sec.14A.
In the present case, the company has invested in the shares of Addlife Medical Institute Ltd. and mutual fund out of the surplus from the current year plus redemption on mutual fund and deposit received back by the company. The company has furnished the relevant bank statement for showing the nexus of the investment to prove that the investments to prove that the investments are made out of interest free funds. Thus, the company has not incurred any interest expenditure for the purpose of making investments.
Therefore, the above referred judgment of the ITAT is not applicable to the facts of the assessee's case.
In view of above and our earlier submission, there is no question of disallowance of any expenditure u/s.14A."
12. Once again under its communication dated March 16, 2009, the petitioner-assessee conveyed to the respondent as under :
"1. In the course of hearing you have inquired about applicability of Rule 8D with reference to provisions of section 14A which has been inserted w.e.f 24th March, 2008 in respect of expenditure incurred for earning income which do not form part of total income.
In this connection it may please be noted that the Rule 8D is applicable if the assessing officer "having regard to the accounts of the assessee" is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income as provided in section 14A(2).
In other words if having regards to the accounts of of the assessee company, the expenditure incurred to earn the income which does not form part of the total income is not available, than only the Rule 8D can be applied.
In the present case the assessee company has submitted the bank statements showing the nexus of the investment made from the owned funds by letter dated 23 & 27-01-2009. From the same it may please be seen that all investments in shares of Needwise Advertising Pvt. Ltd. and Mutual Funds are made out of owned funds and therefore there is no question of disallowance of any interest expenses. Further there is a sufficient cash flow from the operations available with the company as can be seen from the cash flow statement.
Since the assessee company has furnished the bank statement showing the nexus of the investment for the availability of the funds, the question of applicability of Rule 8D also does not arise.
As regards indirect general expenses, it may please be noted that all investments are made in debt mutual funds which are normally risk free investments and therefore, there is no involvement of the top management in such investment activity. Accordingly, the following general expenses can be attributed for the purpose of such investment activities."
13. In the final order of assessment that the respondent passed, he dealt with this issue as under :
"6. DISALLOWANCE U/S.14A
During the year under consideration, the assessee has shown dividend income of Rs. 1,45,30,317/- from the investments shown by it at Rs.74,23,49,881/-. Since the dividend earned are exempt from taxation, during the course of assessment proceedings, the assessee company was asked to explain as to why the proportionate disallowance of expenses attributable to earning such tax-free income should not be made. In response to the show cause, the assessee company vide its submission dated 16-03-2009 has contended that all the investments made in the shares of Need wide Advertising Pvt. Ltd. and Mutual Funds are made out of owned funds and therefore, there is no question of disallowance of any interest expenses. The assessee, however, worked out the following general expenses, which are attributable to the above investments made.
| Salary Expenses | : Rs.1,21,316/- | |
| Other expenses | : Rs. 90,000/- | |
| Total | : Rs.2,11,316/- |
Thus an amount of Rs.2,11,316/- is disallowed from salary expenses and other expenses attributable to investment made in shares and securities, from which dividend is earned and claimed as exempt, and the same is added to the total income of the assessee company."
14. From the above sequence of events, it clearly emerges that the question of disallowance of expenditure or part thereof under Section 14A of the Act for earning exempt income was very much alive before the Assessing Officer during the original assessment proceedings. In fact, such question was examined from various angles. The petitioner contended that no disallowance was called for. The petitioner through series of letters asserted its stand. In fact, in one such letter dated March 16, 2009, the petitioner pointedly addressed the issue of disallowance under Rule 8D. In the present case, we are not judging the validity of the petitioner's contention. What is important for our purpose is that the entire issue was scrutinised by the Assessing Officer during the original assessment proceedings. It is only upon consideration of the said aspect, he has made disallowance to the limited extent of Rs.2,11,316/-.
15. In our opinion, even within a period of four years such assessment cannot be reopened. Any permission to the Assessing Officer to do so would amount to permitting change of opinion. If the Department was of the opinion that the disallowance was not fitting the legal position, other remedy was available. Surely, to correct the assessment order passed after a detailed examination by the Assessing Officer, the succeeding Assessing Officer cannot resort to the proceedings of reopening. This is precisely what has been done in the present case. Under the circumstances, the impugned notice dated March 22, 2012 is quashed.
The petition is disposed of accordingly.
IT: Where entire issue pertaining to disallowance of expenditure under section 14A was scrutinized by Assessing Officer during original assessment proceedings, reopening of assessment to make disallowance of such expenditure on basis of formula provided in rule 8D would amount to change of opinion
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[2013] 35 taxmann.com 539 (Gujarat)
HIGH COURT OF GUJARAT
Reckitt Benckiser Healthcare India Ltd.
v.
Assistant Commissioner of Income-tax (OCD), Circle -5*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 3049 OF 2013
APRIL 29, 2013
Section 147, read with sections 14A and 37(1), of the Income-tax Act, 1961 and rule 8D of the Income-tax Rules, 1962 - Income escaping assessment - Non-disclosure of primary facts [To make disallowance under section 14A] - Assessment year 2007-08 - Assessing Officer issued on assessee a notice under section 148 seeking to reopen its assessment framed under section 143(3) - Impugned notice had been issued within a period of four years from end of relevant assessment year - Reasons recorded by Assessing Officer were to effect that (i) assessee had claimed expenditure of Rs. 86.17 lakhs related to SAP implementation charges as revenue expenditure, whereas such expenditure was capital in nature, and (ii) assessee who had earned tax free dividend income should have been subjected to disallowance of proportionate expenditure under section 14A for earning such income on basis of formula provided in rule 8D - Whether when expenditure of Rs. 86.17 lakhs itself was never claimed by assessee by way of revenue expenditure, question of disallowing such an expenditure on such basis requiring of reopening of assessment would not arise - Held, yes - Whether since entire issue pertaining to disallowance of expenditure under section 14A was scrutinized by Assessing Officer during original assessment proceedings, reopening of assessment to make disallowance of such expenditure on basis of formula provided in rule 8D would amount to change of opinion - Held, yes - Whether, therefore, impugned notice was liable to be quashed - Held, yes [Paras 8, 14 & 15][In favour of assessee]
FACTS
| ■ | For the assessment year 2007-08, the Assessing Officer framed the original assessment of the assessee under section 143(3) on 17-3-2009. Subsequently he issued on the assessee a notice under section 148 on 22-3-2012 seeking to reopen the aforesaid assessment. He also rejected the objections raised by the assessee. | |
| ■ | On writ petition : |
HELD
| ■ | The impugned notice has been issued within a period of four years from the end of relevant assessment year. From the reasons recorded, it emerges that there were two grounds on which the Assessing Officer based his notice for reopening. First was that the assessee had claimed expenditure of Rs. 86.17 lakhs related to SAP implementation charges as revenue expenditure. In the opinion of the Assessing Officer, such expenditure was capital in nature. In this respect, the case of the assessee from the outset has been that it never claimed such expenditure by way of revenue expenditure. In fact, it had treated such expenditure as 'Capital work in progress'. [Para 3] | |
| ■ | From the above, it emerges that insofar as the first ground is concerned, the assessee has all throughout been contending that the expenditure was not claimed as revenue expenditure and the question of disallowing it as such would not arise. If the Assessing Officer had any doubt about such statement, he could have easily verified the correct facts from the return filed and other accompanying documents brought on record during the assessment proceedings. He simply could not have brushed aside such a contention on the ground that such aspect was not examined by him. [Para 7] | |
| ■ | When the expenditure itself was never claimed by way of revenue expenditure, the question of disallowing such an expenditure on such basis requiring of reopening of assessment would not arise. [Para 8] | |
| ■ | The second ground recorded by the Assessing Officer pertains to disallowance of proportionate expenditure for earning the tax free income. In the opinion of the Assessing Officer, the assessee who had earned tax free dividend income should have been subjected to disallowance of proportionate expenditure for earning such income on the basis of the formula provided in rule 8D. [Para 9] | |
| ■ | Under a communication dated 23-1-2009, the assessee with respect to such expenditure conveyed to the Assessing Officer its stand. Such issue cropped up once again when the assessee under its communication dated 27-1-2009 wrote to the Assessing Officer that there was no question of disallowance of any expenditure under section 14A. Once again under its communication dated 16-3-2009, the assessee conveyed to the Assessing Officer that since it had furnished the bank statement showing the nexus of the investment for the availability of the funds, the question of applicability of rule 8D also did not arise. In the final order of assessment the Assessing Officer dealt with this issue and held that an amount of Rs. 21 lakhs was disallowed from salary expenses and other expenses attributable to investment made in shares and securities, from which dividend was earned and claimed as exempt, and the same was added to the total income of the assessee. [Paras 10, 11, 12 & 13] | |
| ■ | From the above sequence of events, it clearly emerges that the question of disallowance of expenditure or part thereof under section 14A for earning exempt income was very much alive before the Assessing Officer during the original assessment proceedings. In fact, the entire issue was scrutinized by the Assessing Officer during the original assessment proceedings. It is only upon consideration of the said aspect, he has made disallowance to the limited extent of Rs. 21 lakhs. [Para 14] | |
| ■ | Even within a period of four years such assessment cannot be reopened. Any permission to the Assessing Officer to do so would amount to permitting change of opinion. Under the circumstances, the impugned notice dated 22-3-2012 was liable to be quashed. [Para 15] |
S.N. Soparkar and B.S. Soparkar for the Petitioner. Ms. Paurami B. Sheth for the Respondent.
ORDER
Akil Kureshi, J. - Heard learned counsel for the parties for final disposal of the petition.
2. The petitioner has challenged a notice dated March 22, 2012, issued by the respondent-Assistant Commissioner of Income-Tax under Section 148 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). The petition arises in the following background :
2.1 The petitioner is a company registered under the Companies Act, 1965. For the assessment year 2007-08, the petitioner filed its return of income on October 28, 2007, declaring a total income of Rs.57.52 crores (rounded off). Such return was taken in scrutiny by the Assessing Officer. He framed assessment under Section 143(3) of the Act on March 17, 2009. It is this scrutiny assessment which the respondent intended to reopen for which impugned notice has been issued.
2.2 At the request of the petitioner, the respondent supplied the reasons recorded for issuing the notice. Such reasons read as under :
"On verification of the details filed during the assessment proceedings, it is noticed from the grouping of expenses that the assessee had debited to P&L A/c an amount of Rs. 86,17,002/-under the head of administrative expenses being SAP implementation charges in A/c No.3AS05. ft is an expense of capital nature and should not have been allowed as Revenue expenditure. This requires to be disallowed. The software implementation charges are capital in nature and it will be capitalized along with SAP software shown for Rs.25,01,462/-. It will be entitled to depreciation as per prescribed rate. Thus, the amount of Rs.86,17,002/- requires to be disallowed.
The disallowance has been made u/s 14A of the Act to the extent of Rs.2,11,316/-, as per para 6 of the assessment order. The disallowance u/s 14A cannot be made on adhoc basis but accordingly to the provisions of section 14A read with Rule 8D of I.T Rules, 1962. The CBDT Notification No.45/2008 dated 24-03-2008 should be considered while making disallowance u/s 14A of the Act. In this case, assessee derived income from dividend amounting to Rs. 1,45,30,317/- from the investment shown of Rs.74,33,49,881/-. The disallowance u/s 14A would be as under :
(I) Interest which is not directly attributable to any income
= where
A = Interest other than interest directly relating to income which does not form part of total income : Rs.2,12,69,284/-
B = Average value of investment, income of which does not form part of total income: Rs. (25,09,57,810 + 3,02,07,369) / 2 = Rs.14,05,82,589/-
C = Average of total assets in Balance Sheet : Rs. (191,84,66,092 + 126,69,84,501) / 2 = Rs.159,27,25,296/-
Now disallowance would be
| A x B : | Rs.2,12,69,284/- x Rs.14,05,82,589/- | ||
| C | Rs.159,27,25,296/- | ||
| = Rs.18,77,342 |
Further 0.5% of average value of investment, income of which does not form part of total
| = 0.5% x Rs.25,09,57,810/- | = Rs. 12,54,789/- | |
| Total… | = Rs.31,32,131/- | |
| Less: Already disallowed by AO | Rs. 2,11,316/- | |
| Requires to be disallowed | Rs.29,20,815/- |
Thus, there is total under assessment of income of Rs.34,46,800/- [being capital expenditure towards SAP after allowing depreciation @ 60% thereon (86,17,002 less 60% Rs.51,7 0,202)] + Rs.29,20,815/- = Rs.63,67,615/-, which has resulted in short levy of tax.
Accordingly, I am satisfied that the income chargeable to tax has escaped assessment and hence it is a fit case for re-opening the assessment within the meaning of Section 147 of the Act."
2.3 Armed with the reasons, the petitioner raised detailed objections under a communication dated October 11, 2012. Such objections were, however, rejected by the respondent by an order dated March 08, 2013. Hence, this petition.
3. At the outset we may record that the impugned notice has been issued within a period of four years from the end of relevant assessment year. From the reasons recorded, it emerges that there were two grounds on which the respondent based his notice for reopening. First was that the assessee, according to the respondent, claimed expenditure of Rs.86.17 lac (rounded off) related to SAP implementation charges. In his opinion, such expenditure was capital in nature. The assessee wrongly claimed the same as revenue expenditure.
In this respect, the case of the petitioner from the outset has been that the petitioner never claimed such expenditure by way of revenue expenditure. In fact, the petitioner had treated such expenditure as 'Capital Work in Progress'. In the objections that the petitioner raised also this aspect was highlighted. It was contended as under :
"1. Expenses related to SAP implementation charges amounting to Rs.86,17,002
1.1 In the subject reassessment notice, it has been alleged that the assessee has debited an amount of Rs. 86,17,002 under the head administrative expenses being SAP implementation charges and the same being in the nature of capital expenditure is required to be capitalized and not allowed as revenue expenditure.
1.2 In this regard, RBHIL wishes to submit that during the year ended 31 March 2007, RBHIL had capitalized the amount of Rs.86,17,002 in its books under the head "Capital Work in Progress". The assessee had not claimed the same as revenue expenditure.
1.3 Since the assessee has not claimed the SAP implementation charges as revenue expenditure or depreciation thereon during the year under consideration, RBHIL submits that there is no escapement of income.
1.4 Further, RBHIL wishes to submit that SAP implementation charges were initially grouped under the head administrative expenses but while finalizing the financial statements, the said charges were capitalised under the head "Capital Work in Progress" and not booked under the head administrative expenses. A copy of audited financial statements alongwith the schedule of administrative charges and break-up of the capital work in progress are collectively enclosed as Annexure-2".
4. Such objection was rejected by the Assessing Officer in his order dated March 08, 2013 in following terms :
"3. The assessee raised objections to re-opening assessment vide its letter dated 11-10-2012. The assessee has essentially contested the re-opening of assessment proceedings objecting to the reasons recorded. With regards to the first reason, the assessee has stated that it had capitalized the amount of Rs.86,17,002/- in its books and had not claimed it as revenue expenditure. However, the assessee has itself accepted in its reply that initially it had claimed the entire expense of Rs. 8,6,17,002/-as Administrative expense which was debited to P & L Account and only later capitalized the same as CWIP during finalization of accounts. The assessee has not given any proof that while computing its returned income it had correctly treated the said expenditure. This issue was not examined during assessment during assessment proceedings and hence, there is every reason to believe that income has escaped assessment as per u/s 147."
5. In the petition also, the clear stand of the petitioner has been that such expenditure of Rs.86.17 lac was never treated as revenue expenditure. Such stand comes out from the following portion of paragraph 3.2 :
"3.2 .. .. .. It is submitted that one of the grounds on the basis of which the reopening of assessment is sought to be done is that the SAP implementation charges of Rs.86,17,002/- are debited P&L A/c under the head of administrative expenditure even though it is an expense of capital nature. The said ground is factually incorrect because the petitioner herein has never treated SAP implementation charges as revenue expenditure in its financial statement. On the contrary the SAP implementation of Rs.86,17,002/-are shown as Capital Work in progress in the Financial Statements of the petitioner herein. The said fact becomes apparent from the audited accounts of the petitioner herein. Hence the ground for the reopening is factually incorrect and the impugned notice deserves to be quashed and set aside on this short count."
6. Even while issuing notice to the respondent on March 18, 2013, we had recorded the submission of the learned counsel for the petitioner that the petitioner had not claimed such expenditure as revenue expenditure.
7. From the above, it emerges that insofar as the first ground is concerned, the petitioner's case all throughout has been that the amount in question was never treated as revenue expenditure. Such ground, thus, lacks validity. Such contention raised in the objections raised by the petitioner was dismissed by the Assessing Officer merely observing that the assessee had not given any proof that while computing its return, it had correctly treated the said expenditure. We are afraid that on such basis the reopening would not be permissible. The petitioner has all throughout been contending that the expenditure was not claimed as revenue expenditure and the question of disallowing it as such would not arise. If the Assessing Officer had any doubt about such statement, he could have easily verified the correct facts from the return filed and other accompanying documents brought on record during the assessment proceedings. She simply could not have, in our opinion, brushed aside such a contention on the ground that such aspect was not examined by the Assessing Officer.
8. In addition to the above, we also perused the documents produced by the petitioner before us. Such documents include the return filed with the accompanying documents. One such document happens to be the schedule of administrative expenses at Annexure-II, which includes the said sum of Rs.86.17 lac as a part of 'Capital Work in Progress'. In face of such material on record, we have no hesitation in coming to the conclusion that the first ground is factually incorrect. When the expenditure itself was never claimed by way of revenue expenditure, the question of disallowing such an expenditure on such basis requiring of reopening of assessment would not arise.
9. This brings us to second ground recorded by the Assessing Officer, which pertains to disallowance of proportionate expenditure for earning the tax free income. We may recall that in the opinion of the Assessing Officer, the petitioner who had earned tax free dividend income should have been subjected to disallowance of proportionate expenditure for earning such income on the basis of the formula provided in Rule 8D of the Income-tax Rules, 1962. The petitioner opposes such reason mainly on two grounds. Firstly that during the original assessment, this claim was examined at length and in the assessment order through a speaking order, part disallowance was made. Such issue cannot be a part of reopening proceedings. Secondly that Rule 8D would not be applicable with retrospective effect and, therefore, cannot be applied to assessment year 2007- 08. On the other hand, the Revenue's contention is that the Assessing Officer made part disallowance completely ignoring the provision of Rule 8D and, therefore, the reopening of the assessment was necessary.
10. We may examine such contentions on the basis of material on record. Under a communication dated January 23, 2009, the petitioner with respect to such expenditure conveyed to the Assessing Officer its stand as under :
"3. It is also inquired about as to why proportionate management expenses should not be disallowed u/s.14A in relation to earning of income which is exempt from tax i.e. dividend based on the decision of Chennai bench of ITAT in the case of Southern Petrochemicals Industries 93 TTJ 161.
In this connection, it may please be noted that the company is engaged in the business of manufacturing and marketing of pharmaceutical and other related products. The investments in mutual funds/ shares are made only to park surplus funds temporarily. The company is not in the business of trading in mutual fund or shares. The investments are made through the investment agents mainly into liquid/ debt funds. The redemption/ sale is directly credited to the bank account through ECS facility.
Thus, no managerial person is actively involved in the investment activities. The investment in the mutual fund particularly in liquid and debt funds does not require any active involvement or it is not a strategic decision. Therefore, the top management is not involved in such short term investments since they are mainly made through the investment agents. Further, no other expenses are incurred in connection with the investment.
The decision of the Southern Petrochemicals Industries is not applicable on the facts of the assessee since the investment activities of Southern Petrochemicals Industries were strategic decisions and in which top management was involved in such activities. In the present case, there are no strategic investments and therefore top management is not involved for investments in mutual funds/ shares. The Chennai Bench in para 6 of the order has restore the matter to the A.O. with a direction to verify the quantum of deduction claim by the assessee in earlier years u/s.57 and make the prorate adjustment on the basis of fresh investments and inflation. Whereas in the case of the assessee company, it may also be noted that in the earlier years, the company has not claimed any expenses against the dividend income u/s.57. The copy of statement of Income for A.Y. 2003-2004, during which dividend income was taxable, is enclosed to show that no expenditure was claimed u/s.57 from the dividend income. There was no dividend income during A.Y. 1997-98 or earlier years. Therefore, the decision of the Southern Petrochemicals is not applicable on the facts of the assessee company. Therefore, there is no question of disallowance of any expenditure."
11. Such issue cropped up once again when the assessee under its communication dated January 27, 2009 wrote to the Assessing Officer as under :
"2. In the course of hearing, you have inquired about the application of Sec.14A in respect of investments made in shares and mutual fund having regard to the judgment of Ahmedabad bench of ITAT in the case of Harish Krishkant Bhatt 85 TTJ 872.%
In this connection, it may please be noted that the above referred decision the assessee paid interest for the purpose of purchasing the shares and the same was disallowed u/s.14A by the AO, which was confirmed by the ITAT The Hon'ble Tribunal held as under :
'dividend income being exempt u/s. 10(33), the interest on capital borrowed for acquisition of relevant shares cannot be allowed as deduction by operation of Sec.14A.'
From the above, it may please be seen that after the insertion of Sec.14A, interest paid by the assessee for investments, the income from which is not taxable, the expenditure is not allowable as deduction. In the above referred case, the interest was paid for acquisition of shares and was not allowed by operation of Sec.14A.
In the present case, the company has invested in the shares of Addlife Medical Institute Ltd. and mutual fund out of the surplus from the current year plus redemption on mutual fund and deposit received back by the company. The company has furnished the relevant bank statement for showing the nexus of the investment to prove that the investments to prove that the investments are made out of interest free funds. Thus, the company has not incurred any interest expenditure for the purpose of making investments.
Therefore, the above referred judgment of the ITAT is not applicable to the facts of the assessee's case.
In view of above and our earlier submission, there is no question of disallowance of any expenditure u/s.14A."
12. Once again under its communication dated March 16, 2009, the petitioner-assessee conveyed to the respondent as under :
"1. In the course of hearing you have inquired about applicability of Rule 8D with reference to provisions of section 14A which has been inserted w.e.f 24th March, 2008 in respect of expenditure incurred for earning income which do not form part of total income.
In this connection it may please be noted that the Rule 8D is applicable if the assessing officer "having regard to the accounts of the assessee" is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income as provided in section 14A(2).
In other words if having regards to the accounts of of the assessee company, the expenditure incurred to earn the income which does not form part of the total income is not available, than only the Rule 8D can be applied.
In the present case the assessee company has submitted the bank statements showing the nexus of the investment made from the owned funds by letter dated 23 & 27-01-2009. From the same it may please be seen that all investments in shares of Needwise Advertising Pvt. Ltd. and Mutual Funds are made out of owned funds and therefore there is no question of disallowance of any interest expenses. Further there is a sufficient cash flow from the operations available with the company as can be seen from the cash flow statement.
Since the assessee company has furnished the bank statement showing the nexus of the investment for the availability of the funds, the question of applicability of Rule 8D also does not arise.
As regards indirect general expenses, it may please be noted that all investments are made in debt mutual funds which are normally risk free investments and therefore, there is no involvement of the top management in such investment activity. Accordingly, the following general expenses can be attributed for the purpose of such investment activities."
13. In the final order of assessment that the respondent passed, he dealt with this issue as under :
"6. DISALLOWANCE U/S.14A
During the year under consideration, the assessee has shown dividend income of Rs. 1,45,30,317/- from the investments shown by it at Rs.74,23,49,881/-. Since the dividend earned are exempt from taxation, during the course of assessment proceedings, the assessee company was asked to explain as to why the proportionate disallowance of expenses attributable to earning such tax-free income should not be made. In response to the show cause, the assessee company vide its submission dated 16-03-2009 has contended that all the investments made in the shares of Need wide Advertising Pvt. Ltd. and Mutual Funds are made out of owned funds and therefore, there is no question of disallowance of any interest expenses. The assessee, however, worked out the following general expenses, which are attributable to the above investments made.
| Salary Expenses | : Rs.1,21,316/- | |
| Other expenses | : Rs. 90,000/- | |
| Total | : Rs.2,11,316/- |
Thus an amount of Rs.2,11,316/- is disallowed from salary expenses and other expenses attributable to investment made in shares and securities, from which dividend is earned and claimed as exempt, and the same is added to the total income of the assessee company."
14. From the above sequence of events, it clearly emerges that the question of disallowance of expenditure or part thereof under Section 14A of the Act for earning exempt income was very much alive before the Assessing Officer during the original assessment proceedings. In fact, such question was examined from various angles. The petitioner contended that no disallowance was called for. The petitioner through series of letters asserted its stand. In fact, in one such letter dated March 16, 2009, the petitioner pointedly addressed the issue of disallowance under Rule 8D. In the present case, we are not judging the validity of the petitioner's contention. What is important for our purpose is that the entire issue was scrutinised by the Assessing Officer during the original assessment proceedings. It is only upon consideration of the said aspect, he has made disallowance to the limited extent of Rs.2,11,316/-.
15. In our opinion, even within a period of four years such assessment cannot be reopened. Any permission to the Assessing Officer to do so would amount to permitting change of opinion. If the Department was of the opinion that the disallowance was not fitting the legal position, other remedy was available. Surely, to correct the assessment order passed after a detailed examination by the Assessing Officer, the succeeding Assessing Officer cannot resort to the proceedings of reopening. This is precisely what has been done in the present case. Under the circumstances, the impugned notice dated March 22, 2012 is quashed.
The petition is disposed of accordingly.
IT : Where Tribunal deleted penalty based on finding that excess claim was due to bona fide and inadvertent mistake of assessee, no further interference was required
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[2013] 35 taxmann.com 529 (Bombay)
HIGH COURT OF BOMBAY
Commissioner of Income-tax - I, Mumbai
v.
Somany Evergree Knits Ltd.*
J.P. DEVADHAR AND M.S. SANKLECHA, JJ.
IT APPEAL NO. 1332 OF 2011
MARCH 21, 2013
Section 271(1)(c), read with sections 32 and 37(1), of the Income-tax Act, 1961 - Penalty - For concealment of income [Wrong claim, effect of] - Assessment year 2003-04 - Assessee-company had wrongly claimed excess depreciation and loss on sale of machine as revenue expenditure in return - During assessment proceedings, assessee itself pointed out mistake, which was claimed to be bonafide and inadvertent - Assessing Officer levied penalty under section 271(1)(c) for concealment of income, which was upheld by Commissioner (Appeals) - Tribunal deleted penalty, holding that excess claim was on account of bonafide mistake and time to file revised return for correction of mistake had expired - Whether, as order of Tribunal to delete penalty was based on finding of fact, no further interference was required - Held, yes [Paras 2 & 3] [In favour of assessee]
Vimal Gupta and Ms. Padma Divakar for the Appellant. Nikhil Rajani for the Respondent.
ORDER
1. In this appeal by the revenue for the assessment year 2003-04, following questions of law have been raised for our consideration :-
| "A. | Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the penalty levied by the assessing officer u/s.271(1)(c) of the Income Tax Act even though the assessee had accepted in assessment proceedings that it had filed inaccurate particulars of income by claiming excess depreciation amounting to Rs.32,51,161/- in its return of income ? | |
| B. | Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the penalty levied by the assessing officer u/s.271(1)(c) of the Income Tax Act even though the assessee had accepted in assessment proceedings that it had filed inaccurate particulars of income by wrongly claiming loss on sale of garment unit amount into Rs. 21,68,597/- as a revenue deduction in its return of income ?" |
2. Regarding question A:
| (i) | The respondent-assessee had in its return of income claimed depreciation at Rs.1.70 crores. During the assessment proceedings, the respondent-assessee realised that it had wrongly claimed Rs.1.70 crores of depreciation instead of Rs.1.05 crores. This excess claim for depreciation had happened due to a mistake in calculation i.e. Instead of reducing the amount the amount of Rs.32.51 lakhs from Rs.1.38 crores, the amount of Rs.32.51 lakhs was added to Rs.1.38 lakhs resulting in claim for depreciation at Rs.1.70 crores. The Assessing Officer did not accept that it was a mistake and levied penalty under Section 271(1)(c) of the Income Tax Act, 1961 (the Act). | |
| (ii) | The CIT(A) upheld the order of the Assessing Officer. On further appeal, the Tribunal held that excess depreciation originally claimed was on account of bonafide and inadvertent mistake on the part of the respondent-assessee. In any case, during the course of the assessment proceedings, the assessee realised its mistake and pointed out the same. The Tribunal held that mistake should not be visited with penalty. | |
| (iii) | The grievance of the revenue is that the mistake ought to have been rectified by filing a revised return of income. The Tribunal held that the time to file a revised return had expired. In any event, it is not disputed that it was a bonafide mistake on the part of the respondent-assessee. In that view of the matter, imposition of penalty was not warranted. | |
| (iv) | Since the order of the Tribunal on the above issue is based on a finding of fact, we see no reason to entertain question A. |
3. Regarding question B:
| (i) | The respondent-assessee had during the assessment year sold its garment manufacturing machine and claimed a loss of Rs.21.68 lakhs thereon as a revenue expenditure in its return of income. In the course of the assessment proceedings, the respondent -assessee realised its mistake and withdrew the above loss shown as revenue expenditure in its profit and loss account and in the consequent return of income. The Assessing Officer accepted the above withdrawal and completed the assessment. However, he imposed penalty under Section 271(1)(c) of the Act. | |
| (ii) | In appeal, the CIT(A) upheld the order of the Assessing Officer. On further appeal, the Tribunal by the impugned order records a finding that in the profit and loss account filed along with the return of income, the respondent-assessee has clearly described the loss as the loss on sale of its garment unit assets. This loss was added to the net loss in the computation of the total income. Thus, there was complete disclosure. The Tribunal further records that the above loss was claimed by the respondent-assessee as a revenue expenditure as the Chartered Accountant did not advice them correctly as to the legal position. However, during the assessment proceedings, the mistake was noticed and corrected by the respondent-assessee. On the above facts, the Tribunal concluded the claim for deduction made by the respondent-assessee was on account of a bonafide mistake and in such circumstances, the levying of penalty was not justified. | |
| (iii) | The grievance of the revenue is that penalty is justified in view of the fact that the respondent-assessee had not filed a revised return of income. However, the Tribunal noted that the time to file revised return had expired. In any event, even the revenue does not dispute that it was a bonafide mistake on the part of the respondent-assessee. In the above view, imposition of penalty upon the respondent-assessee is not warranted. | |
| (iv) | Since the decision of the Tribunal is based on finding of fact, we see no reason to entertain question B. dated 6th |
4. Accordingly, the appeal is dismissed with no order as to costs.
ST: Where service tax was wrongly paid on exported services under protest and invoices showed that assessee had not collected any service tax from foreign clients, assessee was entitled for refund of entire Service Tax paid.
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[2013] 35 taxmann.com 622 (Chennai - CESTAT)
CESTAT, CHENNAI BENCH
Alstom Projects India Ltd.
v.
Commissioner of Customs, Central Excise & Service Tax, Coimbatore*
ASHOK JINDAL, JUDICIAL MEMBER
FINAL ORDER NO. 782 OF 2012
APPEAL NO. ST/ 12 OF 2012
APPEAL NO. ST/ 12 OF 2012
JULY 12, 2012
I. Section 65(19) of the Finance Act, 1994 read with Rule 3 of the Export of Services Rules, 2005 - Business Auxiliary Services - Assessee provided service to foreign clients and received commission as remuneration for such services in convertible foreign exchange - Department sought levy of service tax on ground that assessee provided such services in India although service recipient was located outside India, therefore, they were required to pay Service Tax under reverse charge mechanism - Pending proceedings, assessee paid service tax under protest - HELD : Assessee was not required to pay Service Tax as activity undertaken by them qualified as export of service [Paras 1 and 7] [In favour of assessee]
II. Section 86 of the Finance Act, 1994 read with section 35D of the Central Excise Act, 1944 and 129C of Customs Act, 1962 - Appellate Tribunal - Procedure in Appeal - Assessee filed a refund claim seeking refund of service tax consequent to Commissioner (Appeals) order holding that services were not liable to service tax - Department objected that appeal was not maintainable before Single Member Bench, as it involved issue of taxability of services and, accordingly, matter must be transferred to Division Bench - HELD : Issue involved was whether assessee was entitled to refund claim or not; issue of taxability had already been decided - Therefore, appeal was maintainable before Single Member Bench, as there was no issue of valuation or classification or taxability [Para 4] [In favour of assessee]
III. Section 83, read with section 73A of the Finance Act, 1994 and section 11B of the Central Excise Act, 1944 - Application of certain provisions of Excise Act - Refund - Doctrine of Unjust Enrichment - Assessee had paid service tax, under protest, on services exported by it - On favourable order of Commissioner (Appeals), assessee filed claim for refund along with invoices issued to their clients indicating that no service tax was charged - Assessee had claimed that though they were not liable to pay service tax, however, if they are made liable to pay service tax, sums received should be treated as cum-tax - Department argued that since assessee had admitted that sum received was cum-tax, such sum was payable to Department as per section 73A - HELD : Since Service Tax was paid under protest and invoices showed that assessee had not collected any service tax from foreign clients, assessee was entitled for refund of entire Service Tax paid - Assessee's alternate plea to treat amounts as cum-tax was valid only if services provided were liable to service tax, which was not the case - Since issue of taxability had already been decided in favour of assessee, alternative plea did not survive, more so, for deciding refund claim - Revenue's plea that assessee was liable to pay sum as per section 73A(2) of Finance Act, 1994, was not sustainable as assessee had not collected any Service Tax and was also are not required to pay Service Tax - Hence, refund was allowed to assessee [Para 7] [In favour of assessee]
EDITOR'S NOTE
| 1. | Issue of taxability : Assessee had provided services to foreign client and the demand was raised making assessee liable under reverse charge, which applies only to service recipients. At the same time, the Department admitted that service recipients were foreign clients. If this is the case, who was the service provider ? The demand was itself misconceived and it is strange that assessee paid service tax under protest ! | |
| 2. | Section 73A of Finance Act, 1994 v. Section 11B of Central Excise Act, 1944 : Doctrine of unjust enrichment is made inapplicable in case of exports, as per section 11B of the Central Excise Act, 1944. This legal position, though not considered, was applied. So far as section 73A is concerned, it applies when a person collects any sum in name of service tax, which could not have been done by a person claiming all through that he is not liable to pay service tax. But, an interesting issue could be : 'whether section 73A can be pressed into service to deny a refund in case of collection of service tax from a foreign client, when section 11B of the Central Excise Act, 1944 itself denies applicability of doctrine of unjust enrichment in case of exports'. | |
| 3. | Export rebate : Even if sum received is regarded as cum-tax or assessee is held to have collected tax from foreign clients, he is liable to pay the sum, but, at the same time, is eligible for claiming rebate of the said tax. Therefore, the entire exercise was tax neutral, as central excise law, itself, provides for rebate of tax paid and, obviously collected from foreign clients, on export of goods. | |
| 4. | Alternative plea : Alternative plea comes into existence when main plea is rejected, which was not the case herein. Hence, this judgment, rightly, lays down the treatment of alternative pleas. |
Srinivasan for the Appellant. Parmod Kumar for the Respondent.
ORDER
1. The appellant has filed this appeal against the impugned order wherein the refund claim of Rs. 4,24,763/- has been disallowed by the lower authorities.
2. The facts of the case are that the appellants (herein) provided service to their foreign clients and received commission as remuneration for the service rendered to their foreign clients in convertible foreign exchange to the tune of Rs. 46,17,120/-. The Revenue is of the view that as the appellant is provided these services in India although the service recipient is located outside India, therefore, they are required to pay Service Tax under the reverse charge mechanism. Therefore, proceedings were initiated against the appellant and the appellants paid a sum of Rs. 4,76,754/- as Service Tax under protest. The same was confirmed in the adjudication order. The appellant preferred an appeal before the Commissioner (Appeals) who held that the appellant is not required to pay the Service Tax as the activity undertaken by them qualifies under the export of Service Tax Rules. Consequent to the said order, the appellant filed refund claim before the adjudicating authority who held that the amount of refund is to be treated as cum-service tax and therefore he gave the benefit of cum-service tax. Though sanctioned the appellant's refund claim, but the adjudicating authority retained a sum of Rs. 4,24,763/- as the same may be value of the Service Tax recovered by the appellant from their foreign clients as by giving the benefit of cum-service tax. The said order was challenged before the Commissioner (Appeals) who also confirmed the adjudication order. Hence the appellant filed appeal before this Tribunal.
3. The learned DR raised objection that this appeal is not maintainable as the issue of taxability of Service Tax. Therefore, the matter be transferred to Division Bench.
4. As discussed above, the facts before me are only whether the appellant is entitled to refund claim or not? The issue of taxability of service has already been decided. Therefore, the appeal is maintainable before the Single Member Bench as there is no issue of valuation or classification or Service Tax involved.
5. Appearing on behalf of the appellant, the learned Consultant submitted that in this case they have paid Service Tax of Rs. 4,76,754/- under protest and also produced invoices issue to their clients which indicates the amount of commission received by them. Before the lower authorities, while considering, whether they are liable to pay Service Tax or not, it was the prayer that they are not liable to pay Service Tax but in alternate without prejudice, it was also submitted that it is held that they are liable to pay Service Tax then the amount of service provided be treated as cum-service tax.
6. The Id. DR submits that as per Section 73A(2) of the Finance Act, 1994 if any person who has collected any amount, it is not required to be collected, from any other person, in any manner as representing Service Tax, such person shall forthwith pay the amount so collected to the credit of the Central Government. Therefore, as they have admitted that the amount of Service Tax be treated as cum-tax, therefore they are not entitled to the refund claim.
7. Heard both sides. Considering the submissions made by both sides, it is a case where the investigating agency find that the appellants are liable to pay Service Tax under the category Business Auxiliary Service under the reverse charges mechanism, therefore the appellant paid the Service Tax under protest. When the Service Tax has been paid under protest and as per invoice raised by the appellant shows that no Service Tax has been collected from their foreign clients, the appellant is entitled for refund of entire Service Tax paid by them under protest. Further, in this case, taxability of the Service Tax has already been decided. I find that 't is the alternate plea taken by the appellant before the lower authorities at the time of deciding the issue of taxability of service that if at all the appellant is liable to pay Service Tax the same shall be treated as cum-service tax. The issue taxability of Service Tax have been settled in favour of the appellant holding the appellant is not required to pay Service Tax. Therefore, considering the alternate plea taken at the time of issue taxability of service has no relation while considering refund claim. The invoices produced before me clearly show that the appellant has not collected any Service Tax. Therefore, the arguments advanced by he ld. DR that as per Section 73A(2) of the Finance Act, 1994 that when the tax has been collected by the assessee, the same is to be deposited with the Treasury is not sustainable as the appellant has not collected any Service Tax and also are not required to pay Service Tax.
8. With this observation, I hold that the appellant are entitled for refund of Rs. 4,76,754/- which was paid under protest, therefore I do not find any merit in the impugned order and the same is set aside. Appeal is allowed with consequential relief.
VINEET IT : Where issue of inclusion of Cenvat Credit in closing stock was thoroughly scrutinized during assessment, reopening of assessment on same issue after expiry of four years, without failure of assessee to disclose all material facts, was not sustainable
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[2013] 35 taxmann.com 528 (Gujarat)
HIGH COURT OF GUJARAT
Himson Textile Engineering Industries (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Circle - 1*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 2214 OF 2013
APRIL 9, 2013
Section 147, read with section 145, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [To revalue closing stock] - Assessment year 2006-07 - Whether, where issue of inclusion of Cenvat credit in closing stock was thoroughly scrutinized by Assessing Officer during assessment and also by Commissioner (Appeals), reopening of assessment on same issue after expiry of four years from end of relevant assessment year, without failure on part of assessee to disclose all material facts necessary for assessment, was not sustainable - Held, yes - Whether, therefore, notice for reopening of assessment and reassessment order were to be quashed - Held, yes [Paras 10 and 12] [In favour of assessee]
FACTS
| ■ | The Assessing Officer, during scrutiny assessment under section 143(3), considered the issue of inclusion of Cenvat Credit for valuation of closing stock, and passed assessment order. The order was challenged before the Commissioner (Appeals) which was concluded in favour of assessee. | |
| ■ | While appeal on such order was still pending before the Tribunal, the Assessing Officer issued notice for reopening of assessment, after expiry of four years from end of relevant assessment year, on issue of inclusion of Cenvat credit in closing stock and also completed reassessment thereunder. | |
| ■ | Instant petition is filed by assessee challenging the validity of notice for reopening and order of assessment. |
HELD
| ■ | The notice of reopening issued by the Assessing Officer is beyond the period of four years from the date of relevant assessment year, as the assessment year was 2006-07 and the impugned notice was dated 22-3-2012. Therefore, the first and foremost requirement of law needed to be brought on record by the Revenue was that the petitioner had failed to disclose truly and fully material facts necessary for assessment. Not an iota of material is brought forthwith to indicate such non-disclosure or non-revelation on the part of the assessee and therefore, on that count alone, impugned notice cannot be sustained. Such notice has been issued as is evident, from the record of original assessment only. It is worth noting that this issue had been thoroughly scrutinized while finalizing assessment on scrutiny. | |
| ■ | This was also challenged before Commissioner (Appeals) and Commissioner (Appeals) vide its order examined the said issue in detail and concluded in favour of the assessee and consequently set aside the order of the initiation of penalty as well. [Para 9] | |
| ■ | This order is pending before the Tribunal for determination and, therefore, it cannot be opined conclusively on merit. Suffice to note from this petition that nothing has come on record to indicate that on the part of the assessee, there is any failure to disclose all the material facts fully and finally for the purpose of assessment. | |
| ■ | When the very issue whether assessee was required to include of Cenvat Credit to purposes, of and all taxes, dues, cess etc. for the valuation of closing stock, was thoroughly scrutinized by the Assessing Officer, and the Commissioner (Appeals) also found such inclusion for the assessment year 2005-06, without opining on correctness of such findings on the part of both the authorities, it can be unhesitantly concluded that this attempt on the part of the Assessing Officer to reconsider the very issue beyond the period of four years without any failure on part of the petitioner to disclose all the material facts completely, would not allow this Court to sustain such action. [Para 10] | |
| ■ | During the pendency of this petition, in absence of any prohibitory order, the Assessing Officer completed the reassessment and passed his final order. [Para 11] | |
| ■ | In light of the discussion above, on Revenue failing to satisfy the legality of its action under challenge, the petition for quashing the notice of reopening and consequentially the order of reassessment passed by the Assessing Officer is allowed. [Para 12] | |
| ■ | Petition stands disposed of accordingly with no order as to costs. [Para 13] |
R.K. Patel for the Petitioner. Sudhir M. Mehta for the Respondent.
ORDER
Ms. Sonia Gokani, J. - The petitioner has challenged in this petition notice of reopening issued under section 148 of the Income Tax Act, 1961 seeking following prayers :
| "(A) | Issue a writ of certiorari and/or a writ of mandamus and/or any other writ direction or order to quash and set aside the impugned notice dated 22.3.2012 under section 148 of the Income-tax Act, 1961 annexed hereto at Annexure E along with preliminary order dated 18.2.2013 annexed hereto at Annexure-Q for proceeding and completing reassessment proceedings and further, quash and set aside reassessment order, if any, passed u/s.143(3) r.w.s. 147 of the Income Tax Act, 1961? | |
| (B) | Pending admission, hearing and disposal of this petition, ad-interim relief be granted and the respondent be ordered to restrain from enforcing compliance of the impugned notice dated 22.3.2012 at Annexure-E and/or taking any other steps in this regard including framing of reassessment order or implementation of Preliminary order dated 18.2.2013 at Annexure-Q. Further, reassessment order, if any, already framed after rejection of objections be stayed. | |
| (C) | Pending admission, hearing and till final disposal of this petition, stay the implementation/operation of the notice and orders to restrain the respondent from taking any further proceedings pursuant to the impugned notices at Annexure-E including stay of operation of Preliminary order at Annexure-Q and Reassessment order, if any, framed thereafter. | |
| (D) | Award the cost of this petition. | |
| (E) | Grant such other and further reliefs as this Hon'ble Court deems fit." |
2. The brief facts are as follows:
The petitioner company for the assessment year 2006-2007 filed the return of claim along with necessary annexures. The Assessing Officer on scrutiny, framed assessment under section 143(3) of the Act vide its order dated 26.12.2008. One of the issues during such scrutiny in the original assessment was processing of section 145A for valuation.
3. The assessee had also preferred appeal before the Commissioner(Appeals) which also had included the issue in question and such order of the Commissioner(Appeals) favoured the assessee. It appears that the Assessing Officer issued notice under section 148 on 22.3.2012.
4. On request, the reasons recorded for such reopening were communicated on dated 30.4.2012 to the petitioner assessee. It would be apt to reproduce these reasons :
"The assessee company followed mercantile system of accounting purchases, sales and closing stock were accounted net of excise duty (exclusive method) As per Annexure I CA's report in Form 3CD, the details of CENVAT credit availed and utilized by the company during the previous year relevant to A.Y. 2005-06 were shown. It was seen from the Annexure that the assessee had unutilized CENVAT credit of Rs 16238050 lakhs which was reflected in the Balance Sheet as on 31.3.2005 as Loans & Advances.
Since the 'Assessee' followed exclusive method of accounting, the unutilized CENVAT credit was required to be considered for adjustment u/s.145A and the income was arrived at without including the unutilized CENVAT credit. Non observance of provision of section 145A of the Act, resulted in under assessment of income of Rs.16238050."
5. Objection to such reopening proceedings had been submitted by the petitioner vide its communication dated 16.5.2012. It was contended that reopening is on the premise that the assessee followed exclusive method of accounting which is not in consonance with Section 145A and therefore, CENVAT component in closing stock remained to be shown in the return of income and, therefore, there is concealment of income to the tune of Rs. 1.62 crores. It was also pointed out in such communication that the entire issue had been thoroughly scrutinised by the Assessing Officer and the assessee had fully and truly disclosed all material facts required for the assessment at the time of original assessment and on the basis thereof the Assessing Officer also added opening CENVAT to the returned income. Therefore, on expiry of period of four years from the end of relevant assessment year, the case cannot be reopened. However, such objections were not been sustained and the Assessing Officer on disposing of these objections of the petitioner, proceeded to reassess.
6. We have heard learned counsels Shri R.K. Patel with Shri Bhargav Karia for the petitioner. It is strenuously argued before us that no notice under section 148 could be sustained when there is a complete disclosure on part of the petitioner assessee. This being a notice of reopening beyond a period of four years from the end of relevant assessment year, being assessment year 2006-2007, reopening would end on assessment year 2010-2011. Impugned notice issued on 4.5.212, the same requires to be quashed. Learned counsel has also taken us through various documents to emphasize that the issue pertaining to adoption of method not being in consonance with section 145A was already processed thoroughly at the time of scrutiny and therefore, in absence of anything to indicate that any material particulars had not been disclosed fully and truly, these proceedings need quashment.
7. As against that, learned counsel Shri Sudhir Mehta appearing for the Department has heavily relied upon some of the contentions raised in the affidavit-in-reply. He argued before us that the assessee had unutilised CENVAT credit to the tune of Rs.1,62,38,050/- and the same was reflected in the balance sheet of 31.3.2005 as loans and advances. The assessee followed exclusive method of accounting. Unutilised CENVAT credit was required to be considered for adjustment under section 145A and the claim was arrived at by the petitioner without including such unutilised CENVAT credit. Therefore, it is urged that the reopening is justifiable and such notice on part of the Assessing Officer is not the change of opinion. He further contended that it is a question of law which cannot be prevented to be examined by the Assessing Officer and the petitioner assessee had ample opportunity to take all contentions before the Assessing Officer while he determined reassessment.
8. Upon thus hearing both the sides and on examination of documents and materials presented before us, at the outset, it is needed to be recorded that notice of reopening issued by the Assessing Officer is beyond the period of four years from the date of relevant assessment year, as the assessment year is 2006-2007 and the impugned notice is dated 22.3.2012. Therefore, the first and foremost requirement of law needed to be brought on record by the Revenue was that the petitioner had failed to disclose truly and fully material facts necessary for assessment. Not an iota of material is brought forthwith to indicate such non disclosure or non revelation on the part of the petitioner and therefore, on that count alone, notice impugned cannot be sustained. Although in such circumstances, touching the merits may not be required at all and yet the issue raised is if examined, it pertains to unutilised CENVAT credit required to be considered for adjustment under section 145A and not having been considered and the income arrived at is without including the unutilised CENVAT credit essentially harping on the non observance of Section 145A, resulting into under-assessment of the income to the tune of Rs.1.62 crores. Such notice has been issued as is evident, from the record of original assessment only. It is worth noting that this issue has been thoroughly scrutinised while finalising assessment on scrutiny on 26.12.2008. It would be relevant to reproduce some of the findings of the Assessing Officer:
"As already explained, the provisions of section 145A were introduced by the Finance(No.2) Act, 1998 with a view to end the litigation which existed prior to that. In order to ensure that the values of the opening stock and closing stock reflect the correct value an amendment was made to provide that such values shall be determined only after considering the element of tax, duty, cess or fee paid in relation thereto. In fact, the Legislature proposed to introduce section 145A right from the assessment year 1986-87. The aforesaid provision in a way seeks to recognize and make it compulsory to value the stock in an inclusive method as against the prevailing practice of valuing the same by exclusive method. When the said retrospective amends was objected very strongly by the taxpayer, the amendment was made prospective in nature and was made applicable from the assessment year 1999-2000. As a result of this amendment, the purchases and sales as well as inventory shall always include the element of tax, duty, cess or fee paid. Therefore, in the year when the provisions are implemented for the first time, there is bound to be an impact in that year, where as in the subsequent year whatever valuation is put to the closing stock will surface as opening stock and thereby a debit to that year's profit and loss account. Only the method of valuation of the closing stock gets switched over from exclusive method to inclusive method. If the assessee is allowed to adjust the opening stock of the year in question then it would amount to distortion of the value of the closing stock of the earlier year. Unless such addition is made in the earlier year the debit to this year's profit and loss account by means of addition to the opening stock will reduce the taxable income and will only result in not applying the provisions of section 145A in the year in question.
The provisions, in my view, as introduced will have only to take into consideration the element of the tax, duty, cess or fee paid in the sales, purchases and inventory. It will not have an impact on the closing stock carried forward because what can be debited to this year's profit and loss account is the closing stock of the earlier year will have to be necessarily the opening stock of this year. The change in the method of valuation of the closing stock as a result of section 145A has an overriding effect on section 145 relating to method of accounting itself. In other words, notwithstanding what is contained in section 145, the provisions of section 1454A shall prevail. The sum and substance of that intent can only be achieved by making an addition to the value of the closing stock by its element of tax, duty, cess or fee, etc. and not by altering the opening stock. Whenever the assessee changed their method of accounting from one recognized method to another recognized method, there is bound to be tax effect in the year of change. On the same analogy, when the Legislature has imposed a new system of valuing the closing stock, it is bound to have an impact in that year.
In view of the above, an addition of Rs. 13326815/- is made u/s.145A to the total income of the assessee."
9. As has been noted earlier, this was also challenged before CIT(Appeals) and CIT(Appeals) vide its order dated 13.3.2009 examined the said issue in detail and concluded in favour of the petitioner assessee and consequently set aside the order of the initiation of penalty as well. Profitable, it would be to reproduce these observations :
"5.2 I have considered the submission made by the appellant and observation of the AO. From the tax audit report for A.Y.2005-06 which is on record of the debt, it is clear that assessee has included excise duty of Rs. 1,33,26,815/- in the closing stock as part of the adjustment and hence the same has to be allowed in the opening stock of A.Y. 2006-07. As per the settled position of accounts and law the issue regarding excise duty in the opening stock is clearly decided by the Hon'ble ITAT Mumbai in the case of West Coast Paper Mills Ltd. (102 ITR 19) wherein the Hon'ble ITAT has stated as under :-
| "** | ** | **" |
5.3 In view of the above it is clear that the requirement of Section 145A is that the assessee must include tax duties, cess, etc for valuing the closing stock. The assessee can follow the exclusive method for the book purposes but for the purpose of tax audit report and disallowance u/s.43B it is necessary that the assessee must show the effect of Section 145A by following the inclusive method i.e. by including all tax, duties, cess etc. in the closing stock. The assessee has to necessarily follow the closing stock of last year as opening stock of the current year. Therefore, if the assessee has included the tax, duties, cess etc in the closing stock of A.Y. 2005-06 then he can claim it in the opening stock of A.Y.2006-07. From the tax audit report of A.Y.2005-06, it is clear that this amount has been including in the closing stock and hence it will be available in the opening stock for A.Y.2006-07. Hence the addition of Rs. 1,33,26,815/- is wrong and is, therefore, deleted. This ground of appeal is allowed."
10. This order of-course is pending before the Income Tax Appellate Tribunal ("the Tribunal" for short) for determination and, therefore, we do not intend to opine conclusively on merit. Suffice to note from this petition that nothing has come on record to indicate that on the part of the assessee, there is any failure to disclose all the material facts fully and finally for the purpose of assessment.
When the very issue of Cenvat Credit to be excluded for the book purposes, but for the purpose of tax audit, the assessee is required to include all taxes, dues, cess etc. for the valuation of closing stock, is thoroughly scrutinised by the Assessing Officer and when CIT(Appeals) also found such inclusion for the assessment year 2005-2006, without opining on correctness of such findings on the part of both the authorities, it can be unhesitantly concluded that this attempt on the part of the Assessing Officer to reconsider the very issue beyond the period of four years without any failure on part of the petitioner to disclose all the material facts completely, would not allow this Court to sustain such action.
11. As is indicated to us, during the pendency of this petition, in absence of any prohibitory order, the Assessing Officer has already completed the reassessment and passed his final order on 28.2.2013.
12. In light of the discussion here-in-above, on Revenue failing to satisfy us on the legality of its action under challenge, we allow this petition quashing the notice of reopening dated 22.3.2012 and consequentially the order of reassessment dated 28.2.2013 passed by the Assessing Officer.
13. Petition stands disposed of accordingly with no order as to costs.
IT: Credit amount outstanding for several years cannot be held as cessation of trading liability on ground that assessee could not prove genuineness of transaction, where assessee had acknowledged its liability successively over several years
■■■
[2013] 35 taxmann.com 540 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income-tax, Delhi - II
v.
Jain Exports (P.) Ltd.*
BADAR DURREZ AHMED AND VIBHU BAKHRU, JJ.
IT APPEAL NO. 235 OF 2013†
MAY 24, 2013
Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability [Cessation of liability] - Assessment year 2008-09 - During scrutiny, Assessing Officer added amounts shown as credit balances of creditors, outstanding for several years under section 41(1) - Commissioner (Appeals) confirmed addition only in respect of creditor 'E' as assessee could not prove genuineness of transaction, but deleted addition in respect of other creditors - Whether, as per section 41(1), cessation of liability may occur either by reason of it becoming unenforceable in law by creditor coupled with debtor's intention not to honour his liability, or by a contract between parties or by discharge of debt - Held, yes - Whether, establishment of genuineness of transaction was required in year when liability had arisen and addition could not be made on such ground, treating it as cessation of trading liability, when assessee had acknowledged its liability successively over several years - Held, yes [Para 22] [In favour of assessee]
FACTS
| ■ | The assessee-company declared nil taxable income which was accepted under section 143(1). During scrutiny assessment, the Assessing Officer noticed that balances of creditors had been outstanding since several years. Balance confirmation was received only from one creditor. Therefore, he added the balance amount as income of the assessee under section 41(1). | |
| ■ | On appeal before the Commissioner (Appeals) the assessee claimed that an amount was also receivable from one of the creditors 'E', which was liable to be adjusted against the amount payable. The assessee claimed that the amounts payable to 'E' were on account of certain bank guarantees furnished by 'E' on behalf of assessee-company to Customs authorities. The Commissioner (Appeals) deleted the addition in respect of other creditors holding that there was no cessation of liability as assessee had continued to reflect liabilities against those creditors. However, he confirmed the addition in respect of 'E' as the assessee had not been able to produce any evidence with regard to the bank guarantees given by 'E'. | |
| ■ | On assessee's appeal, the Tribunal deleted the addition made by the Commissioner (Appeals). | |
| ■ | On revenue's appeal: |
HELD
| ■ | The stand taken on behalf of the revenue has not been consistent. The Assessing Officer, inter alia, added a sum being the aggregate of the amounts shown as payable to various sundry creditors, as income under section 41(1). Whilst the Assessing Officer held that the liabilities due to the sundry creditors had ceased, the genuineness of the initial transaction on account of which the amounts were payable to various creditors was not made an issue. The only issue raised by the Assessing Officer was that since the outstanding balances had remained static in the books of the assessee for several years, there was no possibility of any claim being made by the creditors and the amount of liabilities outstanding were liable to be added as income of the assessee. [Para 10] | |
| ■ | The Tribunal came to the conclusion, and rightly so, that the books of the assessee had been examined in the past and it would not be correct to accept a part of the account relating to the party and rejecting another part of the account. Whereas, the part of the account relating to dealings with 'E', which resulted in the amount being receivable from 'E', was accepted by the Commissioner (Appeals), the amount payable to the same entity was rejected. Accordingly, the Tribunal deleted the addition confirmed by the Commissioner (Appeals). [Para 12] | |
| ■ | The genuineness of the transaction entered into by the assessee in 1984-85 with 'E' is not being assailed before this Court and the only controversy sought to be raised is whether there has been cessation of liability owed by the assessee to 'E'. However, that question doesn't arise in the present case since the decision of the Commissioner (Appeals), that there is no cessation of liability in cases where the debt has been acknowledged by the assessee-company, has already been accepted by the revenue. However, as the question whether there is any cessation of liability in the relevant previous year warranting an addition in terms of section 41(1) has been urged on behalf of the revenue, it is considered appropriate to examine the same. [Para 13] | |
| ■ | It is seen that Explanation 1 to section 41(1), which was inserted, with effect from 1-4-1997 is not applicable, as the assessee has not written of the liability to pay 'E' in its books of account. [Para 15] | |
| ■ | The Supreme Court in the case of CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713 held that section 41(1) contemplates obtaining by the assessee an amount either in cash or any other manner or any benefit by way of cessation or remission of liability. In order to come within the sweep of section 41(1) it is necessary that the benefit derived by an assessee results from cessation or remission of a trading liability. [Para 16] | |
| ■ | The only issue that needs to be considered is whether the liability towards 'E' has ceased on account of efflux of time. The Supreme Court in the case of Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay AIR 1958 SC 328 clearly held that even in cases where the remedy of a creditor is barred by limitation, the debt itself is not extinguished but merely becomes unenforceable. [Paras 17 & 18] | |
| ■ | As held by the Bombay High Court, in the case of J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34, cessation of liability may occur either by the reason of the liability becoming unenforceable in law by the creditor coupled with debtor declaring his intention not to honour his liability, or by a contract between parties or by discharge of the debt. In the present case, the assessee is acknowledging the debt payable to 'E' and there is no material to indicate that the parties have contracted to extinguish the liability. Thus, it cannot be concluded that the debt owed by the assessee to 'E' stood extinguished. [Para 20] | |
| ■ | Although, enforcement of a debt being barred by limitation does not ipso facto lead to the conclusion that there is cessation or remission of liability, in the facts of the present case, it is also not possible to conclude that the debt has become unenforceable. It is well settled that reflecting an amount as outstanding in the balance sheet by a company amounts to the company acknowledging the debt for the purposes of section 18 of the Limitation Act, 1963 and, thus, the claim by 'E' can also not be considered as time barred as the period of limitation would stand extended. Even, otherwise, it cannot be stated that 'E' would be unable to claim a set off on account of the amount reflected as payable to it by the assessee. Admittedly, winding up proceedings against 'E' are pending and there is no certainity that any claim that may be made by the assessee with regard to the amounts receivable from 'E' would be paid without the liquidator claiming the credit for the amounts receivable from the assessee-company. It is well settled that in order to attract the provisions of section 41(1), there should have been an irrevocable cessation of liability without any possibility of the same being revived. The assessee-company having acknowledged its liability successively over the years would not be in a position to defend any claim that may be made on behalf of the liquidator for credit of the said amount reflected by the assessee as payable to 'E'. [Para 21] | |
| ■ | Admittedly, no credit entry has been made in the books of the assessee in the previous year relevant to the assessment year 2008-09. The outstanding balances reflected as payable to 'E' are the opening balances which are being carried forward for several years. The issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen. The department having accepted the balances outstanding over several years, it was not open for the Commissioner (Appeals) to confirm the addition on the ground that the assessee could not produce sufficient evidence to prove the genuineness of the transactions. [Para 22] | |
| ■ | The present appeal does not disclose any substantial question of law for our consideration and is, accordingly, dismissed. [Para 23] |
CASES REFERRED TO
CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713 (SC) (para 16), Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay AIR 1958 SC 328 (para 18) and J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34 (Bom.) (para 19).
Sanjeev Sabharwal for the Appellant.
JUDGMENT
Vibhu Bakhru, J. - This appeal is filed, on behalf of the revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), challenging the order dated 30.03.2012 passed by Income Tax Appellate Tribunal, setting aside the addition of sum of Rs. 1,53,48,850/- made by the Assessing Officer on account of purported cessation of liability.
2. The assessee is a company incorporated under the Companies Act, 1956. The assessee-company was engaged in the business of trading in agricultural commodities, however, the assessee did not conduct any business in the year 2007-2008 relevant to the assessment year 2008-2009. The assessee filed its return of income, on 25.09.2008, for the assessment year 2008-2009 showing a loss and declaring taxable income as nil. The return was initially accepted under Section 143(1) of the Act, however, subsequently, the return was selected for scrutiny. The Assessing Officer examined the balance sheet of the assessee company for the relevant period and noted that the balance sheet disclosed a sum of Rs. 1,57,54,011/- as sundry creditors. The said amount comprised the following outstanding credit balances:-
| S. No. | Name | Amount |
| 1. | M/s Elephanta Oil &Vanaspati Ltd. | Rs. 1,53,48,850/- |
| 2. | M/s Geo-chem Laboratories (P) Ltd | Rs. 41,231/- |
| 3. | M/s Jain House, Calcuttal | Rs. 30,210/- |
| 4. | M/s Ramji Lal Investments (P) Ltd. | Rs. 38,874/- |
| 5. | Sh.Sohan Lal Ghai | Rs. 2,94,846/- |
3. The credit balances against the aforementioned creditors have been outstanding since several years. In the case of M/s Elephanta Oil & Vanaspati Ltd., the amount of Rs. 1,53,48,850/- was outstanding in the books since 1984-1985. The Assessing Officer called upon the assessee to provide confirmations from the creditors regarding the balance outstanding to their credit. The assessee filed a balance confirmation fromM/s Ramji Lal Investments (P) Ltd. but could not provide confirmations from any of the other aforementioned creditors. The Assessing Officer also issued notices under section 133(6) of the Act to the creditors, for the purpose of verifying the credit balance outstanding against their names. The notice issued to M/s Elephanta Oil & Vanaspati Ltd., M/s Geo-chem Laboratories (P) Ltd., M/s Jain House, Calcutta and Sh. Sohan Lal Ghai were returned unserved.
4. The Assessing Officer accepted the amount of Rs. 38,874/- outstanding to the credit of M/s Ramji Lal Investments (P) Ltd., but held that the balance liabilities in respect of other sundry creditors, which were lying unclaimed since several years, were liable to be added back to the income of the assessee under Section 41(1) of the Act. The Assessing Officer was of the view that there was cessation of these liabilities as there was no possibility of the creditors claiming the same in the near future. Accordingly, the aggregate of the balances outstanding to the credit of the aforementioned four creditors (i.e. M/s Elephanta Oil & Vanaspati Ltd., M/s Geo-chem Laboratories (P) Ltd., M/s Jain House, Calcutta and Sh. Sohan Lal Ghai) amounting to sum of Rs. 1,57,15,137/- were added back to the income of the assessee.
5. Aggrieved by the assessment order dated 01.11.2010 passed by the Assessing Officer, the assessee preferred an appeal before the CIT (Appeals), inter alia, on the ground that there was no cessation of liabilities as the assessee continued to be liable for the amounts shown as outstanding against various creditors. In respect of the amount payable to M/s Elephanta Oil & Vanaspati Ltd., the assessee explained that M/s Elephanta Oil & Vanaspati Ltd. also owed a sum of Rs. 1,57,10,690.53/- to the assessee which was reflected as receivable in the balance sheet of the assessee-company and thus in net terms M/s Elephanta Oil & Vanaspati Ltd. owed the assessee-company a sum of Rs. 3,61,840.78. The amount payable to M/s Elephanta Oil & Vanaspati Ltd. was liable to be adjusted against the amount receivable from M/s Elephanta Oil & Vanaspati Ltd. and thus there could not be any cessation of liability towards the said creditor. The assessee-company also provided its final accounts for the years ended on 31.03.2009 and 31.03.2010 which indicated the balances outstanding to the various sundry creditors continued to be reflected in the balance sheets of the assessee-company for the subsequent years. It was, thus, contended by the assessee that, since the assessee continued to acknowledge the credit balances in the subsequent period also, there could be no cessation of its liability to pay the creditors.
6. It was also submitted on behalf of the assessee that the amounts payable to M/s Elephanta Oil & Vanaspati Ltd. were on account of certain bank guarantees which had been furnished by M/s Elephanta Oil & Vanaspati Ltd., on behalf of the assessee-company, to the customs authorities. The assessee also gave details of the bank guarantees that had been issued by the bank against certain imports that had been made by the assessee-company in the year 1984-85. M/s Elephanta Oil & Vanaspati Ltd. had become a sick company and had filed a reference before the Board of Industrial and Financial Reconstruction (BIFR). The BIFR was of the opinion that M/s Elephanta Oil & Vanaspati Ltd. be wound up and accordingly, winding up proceedings have been initiated in this Court and the official liquidator has been appointed as the provisional liquidator to take over possession of the books and accounts and other records of the M/s Elephanta Oil & Vanaspati Ltd.
7. The CIT (Appeals) deleted the addition made by the Assessing Officer with regard to the balance outstanding to the credit of M/s Geo-chem Laboratories (P) Ltd., M/s Jain House, Calcutta and Sh. Sohan Lal Ghai on the ground that the assessee had continued to reflect the liabilities against the names of these creditors in the subsequent period i.e. in the final accounts for the years ended on 31.03.2009 and 31.03.2010. The CIT (Appeals) held that as the assessee-company continued to reflect amounts payable to those creditors there was no cessation of liability and consequently, the provisions of Section 41(1) of the Act were inapplicable. However, in the case of M/s Elephanta Oil & Vanaspati Ltd., the CIT (Appeals) upheld the addition made by the Assessing Officer, not on the ground that there was cessation of liability, but on the basis that the assessee had failed to establish the genuineness of the liability towards M/s Elephanta Oil & Vanaspati Ltd. The decision of the CIT (Appeals) was, inter alia, based on the fact that the assessee had not been able to trace or produce any evidence with regard to the bank guarantees on account of which the liability to pay a sum of Rs. 1,53,48,850/- had arisen. The contention of the assessee that the transaction related back to the year 1984-1985 and had been accepted as genuine by the revenue through a series of scrutiny assessment made in the past, was not accepted. The plea of the assessee that, since the matter related to 1984-1985, the assessee could not produce the evidence of the initial transaction, was also not found to be acceptable by the CIT (Appeals).
8. While, the decision of the, CIT (Appeals) was accepted by the revenue, the assessee preferred an appeal before the Income Tax Appellate Tribunal, inter alia, challenging the confirmation of addition of Rs. 1,53,48,850/- by the CIT (Appeals). The Tribunal accepted the contention of the assessee that a sum of Rs. 1,57,10,690.53 was owed by M/s Elephanta Oil & Vanaspati Ltd. to the assessee-company and thus, the net effect of the same would be that no amount would be payable by the assessee to M/s Elephanta Oil & Vanaspati Ltd. and a sum of Rs. 3,61,840.78 would be receivable after setting off the amount of Rs. 1,53,48,849/-which was standing to the credit of M/s Elephanta Oil & Vanaspati Ltd. The Tribunal was of the view that it was not correct to only accept the figure relating to the amount that was receivable by the assessee-company while rejecting the amount payable by the assessee-company to M/s Elephanta Oil & Vanaspati Ltd.
9. Aggrieved by the order passed by the Tribunal, the revenue has preferred the present appeal. It is contended before us on behalf of the revenue that there has been a cessation of liability of Rs. 1,53,48,849/- and the Tribunal has erred in setting aside the addition made on that account. It is further urged that the Tribunal was in error in taking note of the amount receivable from M/s Elephanta Oil & Vanaspati Ltd. while, considering the provisions of Section 41(1) of the Act. Whilst, it was conceded before us that the genuineness of the initial transaction was not in challenge, it was contended that the fact that the amount payable to M/s Elephanta Oil & Vanaspati Ltd. has been outstanding for 25 years indicated that the liability has ceased. It has been pleaded on behalf of the revenue that the following questions arise for our consideration:
| 1. | "Whether ITAT erred in setting aside an amount of Rs. 1,53,48,850.00 holding that there was no cession of liability?" | |
| 2. | "Whether while considering provisions of section 41(1) the net liability that after providing for receivables is to be considered or is relevant?" |
10. We are unable to appreciate the stand taken on behalf of the revenue, which has, apparently, not been consistent. The Assessing Officer, inter alia, added a sum of Rs. 1,57,15,137, being the aggregate of the amounts shown as payable to various sundry creditors, as income under Section 41(1) of the Act. Whilst the Assessing Officer held that the liabilities due to the sundry creditors had ceased, the genuineness of the initial transaction on account of which the amounts were payable to various creditors was not made an issue. The only issue raised by the Assessing Officer was that since the outstanding balances had remained static on the books of the assessee for several years (in the case of M/s Elephanta Oil & Vanaspati Ltd. for over 25 years), there was no possibility of any claim being made by the creditors and the amount of liabilities outstanding were liable to be added as income of the assessee.
11. The CIT (Appeals) did not accept the reasoning of the Assessing Officer and deleted the addition made by the Assessing Officer with respect to amounts reflected as payable to various sundry creditors on the ground that assessee-company continued to reflect the amounts payable even in the subsequent periods. The CIT (Appeals) held that there could be no cessation of liability as the assessee-company continued to acknowledge its debt towards the creditors. However, the CIT (Appeals) concluded that the amount outstanding to the credit of M/s Elephanta Oil & Vanaspati Ltd. was not genuine as the assessee could not produce any confirmation or evidence of the original transaction which was undertaken in 1984-1985. It is relevant for us to notice that the revenue did not prefer any appeal against the order of the CIT (Appeals), and thus, accepted his decision that there was no cessation of liability in cases where the assessee-company continued to acknowledge the amount owed by it to its creditors.
12. The question whether there had been any cessation of liability was thus not before the Tribunal as the Tribunal was only considering the correctness of the decision of the CIT (Appeals) wherein the transaction giving rise to the liability payable to M/s Elephanta Oil & Vanaspati Ltd. had been doubted. The Tribunal came to the conclusion, and rightly so, that the books of the assessee had been examined in the past and it would not be correct into accept a part of the account relating to a party and rejecting another part of the account. Whereas, the part of the account relating to dealings with M/s Elephanta Oil & Vanaspati Ltd. which resulted in the amount being receivable from M/s Elephanta Oil & Vanaspati Ltd. was accepted by the CIT (Appeals), the amount payable to the same entity was rejected. Accordingly, the Tribunal deleted the addition of Rs. 1,53,48,850/- confirmed by the CIT (Appeals).
13. The genuineness of the transaction entered into by the assessee in 1984-85 with M/s Elephanta Oils & Vanaspati Ltd. is not being assailed before us and the only controversy sought to be raised before us is whether there has been cessation of liability owed by the assessee to M/s Elephanta Oil & Vanaspati Ltd. In our view, that question doesn't arise in the present case since the decision of the CIT (Appeals) that there is no cession of liability in cases where the debt has been acknowledged by the assessee company has already been accepted by the revenue. However, as the question whether there is any cessation of liability in the relevant previous year warranting an addition in terms of Section 41(1) of the Act has been urged on behalf of the revenue, we consider it appropriate to examine the same.
14. Section 41(1) of the Act is relevant and is quoted below:-
"41. Profits chargeable to tax.—(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-
| (a) | the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or | |
| (b) | the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. |
Explanation 1. — For the purposes of this sub-section, the expression 'loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts."
15. Indisputably, Explanation 1 to section 41(1) of the Act, which was inserted, w.e.f 01.04.1997 is not applicable, as the assessee has not written off the liability to pay M/s Elephanta Oil & Vanaspati Ltd. in its books of account.
16. The Supreme Court in the case of CIT v. Sugauli Sugar Works (P). Ltd.: [1999] 236 ITR 518/102 Taxman 713 has held that section 41(1) contemplates obtaining by the assessee an amount either in cash or any other manner or any benefit by way of cessation or remission of liability. In order to come within the sweep of section 41(1) it is necessary that the benefit derived by an assessee results from cessation or remission of a trading liability. The relevant extract from the decision of the Supreme Court in the case of Sugauli Sugar Works (P.) Ltd.(supra) is quoted below:
"3. It will be seen that the following words in the section are important: 'the assessee has obtained, whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him'. Thus, the section contemplates obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for application of this section."
17. The only issue that needs to be considered is whether the liability towards M/s Elephanta Oil & Vanaspati Ltd. has ceased on account of efflux of time.
18. The Supreme Court in the case of 'Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay AIR 1958 SC 328 has clearly held that even in cases where the remedy of a creditor is barred by limitation the debt itself is not extinguished but merely becomes unenforceable. The Court observed as under:-
"The position then is that, under the law, a debt subsists notwithstanding that its recovery is barred by limitation....."
19. This view has also been taken by the Supreme Court in the case of Sugauli Sugar Works P. Ltd. (supra). In the said case, it was contended on behalf of the revenue that the liability has come to an end as the creditors in the said case had not taken any action to recover the amounts due to them for twenty years. The Supreme Court affirmed the decision of the Bombay High Court in the case of J.K. Chemicals Ltd. v. CIT: [1966] 62 ITR 34 wherein the words "cessation or remission" had been interpreted. The Supreme Court quoted the following passage from the judgment of the Bombay High Court in the said case of J.K. Chemicals Ltd. (supra): -
"The question to be considered is whether the transfer of these entries brings about a remission or cessation of its liability. The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt-the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability. We have already held in Kohinoor mills' case [1963] 49 ITR 578 (Bom) that the mere fact of the expiry of the period of limitation to enforce it, does not by itself constitute cessation of the liability. In the instant case, the liability being one relating to wages, salaries and bonus due by an employer to his employees in an industry, the provisions of the Industrial Disputes Act also are attracted and for the recovery of the dues from the employer, under section 33C(2) of the Industrial Disputes Act, no bar of limitation comes in the way of the employees."
After quoting the above passage, the Supreme Court held as under:-
"This judgment has been quoted by the High Court in the present case and followed. We have no hesitation to say that the reasoning is correct and we agree with the same."
20. In order to attract the provisions of Section 41(1) of the Act, it is necessary that there should have been a cessation or remission of liability. As held by the Bombay High Court, in the case of J.K. Chemicals Ltd. (supra), cessation of liability may occur either by the reason of the liability becoming unenforceable in law by the creditor coupled with debtor declaring his intention not to honour his liability, or by a contract between parties or by discharge of the debt. In the present case, the assessee is acknowledging the debt payable to M/s Elephanta Oil & Vanaspati Ltd. and there is no material to indicate that the parties have contracted to extinguish the liability. Thus, in our view it cannot be concluded that the debt owed by the assessee to M/s Elephanta Oils & Vanaspati Ltd. stood extinguished.
21. Although, enforcement of a debt being barred by limitation does not ipso facto lead to the conclusion that there is cessation or remission of liability, in the facts of the present case, it is also not possible to conclude that the debt has become unenforceable. It is well settled that reflecting an amount as outstanding in the balance sheet by a company amounts to the company acknowledging the debt for the purposes of Section 18 of the Limitation Act, 1963 and, thus, the claim by M/s Elephanta Oil & Vanaspati Ltd. can also not be considered as time barred as the period of limitation would stand extended. Even, otherwise, it cannot be stated that M/s Elephanta Oil & Vanaspati Ltd. would be unable to claim a set off on account of the amount reflected as payable to it by the assessee. Admittedly, winding up proceedings against M/s Elephanta Oil & Vanaspati Ltd. are pending and there is no certainty that any claim that may be made by the assessee with regard to the amounts receivable from M/s Elephanta Oil & Vanaspati Ltd. would be paid without the liquidator claiming the credit for the amounts receivable from the assessee company. It is well settled that in order to attract the provisions of Section 41(1)of the Act, there should have been an irrevocable cession of liability without any possibility of the same being revived. The assessee-company having acknowledged its liability successively over the years would not be in a position to defend any claim that may be made on behalf of the liquidator for credit of the said amount reflected by the assessee as payable to M/s Elephanta Oil & Vanaspati Ltd.
22. We may also add that, admittedly, no credit entry has been made in the books of the assessee in the previous year relevant to the assessment year 2008-2009. The outstanding balances reflected as payable to M/s Elephanta Oil & Vanaspati Ltd. are the opening balances which are being carried forward for several years. The issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen, that is, in the year 1984-1985. The department having accepted the balances outstanding over several years, it was not open for the CIT (Appeals) to confirm the addition of the amount of Rs. 1,53,48,850/- on the ground that the assessee could not produce sufficient evidence to prove the genuineness of the transactions which were undertaken in the year 1984-85.
23. The present appeal does not disclose any substantial question of law for our consideration and is, according, dismissed.
P. SEN2013-TIOL-619-HC-DEL-IT
IN THE HIGH COURT OF DELHI
W.P.(C) No. 7974/2012
SELECT VACATIONS PVT LTD
Vs
INCOME TAX OFFICER AND ANR
Sanjiv Khanna And Sanjeev Sachdeva, JJ
Dated : July 31, 2013
Appellant Rep. by : Mr. Ajay Vohra and Ms. Kavita Jha, Adv
Respondent Rep. by : Mr. N P Sahni, Sr. Standing Counsel.
Respondent Rep. by : Mr. N P Sahni, Sr. Standing Counsel.
Income Tax – Sections - 147, 148, 151 - keywords - reasons to believe, nexus - Whether reassessment provisions are wide, but not plenary – Whether when the AO in the first or original round of assessment was fully conscious and aware of the method of accounting followed by the assessee, cannot later raise a question that due to such accounting practice, there has been an under assessment of income – Whether reassessment proceedings are warranted when the AO in response to the said audit objection has informed that he has fully examined the difference in the value on which TDS was deducted and the income declared during the course of assessment proceedings and has stated there was no loss of revenue – Whether there should be a link and nexus between the reasons and the evidence/material available with the AO for initiation of re-assessment proceedings – Whether reopening of assessment can be sustained, when there is failure on the part of the AO to examine the original assessment record and ascertain the method of accounting adopted by the assessee
The assessee, M/s Select Vacations Pvt. Ltd is engaged in the business of tours and travels. It specialises in arranging tours, hotel bookings for individuals and groups for travel within and outside India. In the objections filed, the assessee had submitted that the income on tours was accounted after netting off directed expenses. The income declared consists of margin earned on services relating to tour arrangements i.e. after reducing from the billing, direct costs incurred like hotel, transport, guides etc. These costs were directly matched with the revenue earned and balance being the margin earned, was transferred to "income from tours accounts". This exercise was undertaken at the time of original assessment. The assessee had filed its return of income for the AY 2006-07 declaring loss of Rs.44,50,039. The return was taken up for scrutiny which revealed that the assessee has shown total income of Rs.52,36,040 whereas as per TDS certificates assessee's total income was Rs.1,11,65,657. In view of above the mistake resulted in underassessment of income of Rs. 59,29,617 involving tax effect of Rs.19,95,909. The AO recorded the reasons that this underassessment was due to th e escapement of income on account of failure on the part of the assessee to truly and fully disclose all the material facts necessary for assessment. Therefore, the AO issued notice u/s 148 for reopening of assessment. The assessee raised objections for reopening the assessment relying upon the decision of the Supreme Court in GKN Driveshafts India Ltd. vs. ITO. However, the AO initiated the reassessment proceedings.
Aggrieved, the assessee has filed this writ petition before the High Court.
The basic contention of the counsel of the assessee was the Revenue has disregarded the method of accountancy consistently followed by the assessee over so many years. Further, it was contended that the reopening of the assessment was based on a mere change in opinion and the assessee has made a full and true disclosure of the material facts.
The Departmental Representative contended that the AO had not examined the difference between the TDS certificates and the income or receipts declared by the assessee which was due to failure in disclosure by the assessee.
Having heard the parties, the High Court held that,
+ a bare perusal of the said letter would indicate that the method of accounting adopted by the petitioner was that the direct costs were deducted from the billings and this was the standard method of accounting adopted by the petitioner and other tour operators. Thus, the Assessing Officer in the first or original round of assessment was fully conscious and aware of the method of accounting followed by the petitioner. This method of accounting has been accepted by Delhi High Court in CIT Vs. International Travel House Ltd.;
+ the reasons to believe recorded above clearly do not reflect any application of mind on the accounting practice adopted by the petitioner being a tour operator. It is obvious that the assessing officer ignored and was oblivious to said factum. If he had noticed the said position, the reasons to believe would not have recorded that there was difference in the payment/receipt mentioned in the TDS certificates and the amount of income disclosed by the assessee. We notice that audit objection or query was raised and the Assessing Officer in response to the said audit objection had informed that he had fully examined the said aspect i.e. difference in the value on which TDS was deducted and the income declared during the course of assessment proceedings and had stated there was no loss of revenue;
+ reassessment provisions are wide, but are not plenary. They are circumscribed and controlled by pre-conditions and must satisfy the prescribed statutory requirements. This is the reason why it is mandatory for the Assessing Officer to record "reasons to believe" in writing and state why and on what account or reason income chargeable to tax has escaped assessment. Sufficiency of reasons is not a matter which can be gone into by the court, but very existence of belief is a subject matter which can be examined and scrutinized by the Court. Reassessment notice can be quashed if the "belief" is not bona fide or is based on vague, irrelevant and nonspecific information. There should be a link and nexus between the reasons and the evidence/material available with the Assessing Officer for initiation of re-assessment proceedings. It should not be a mere pretence. The expression "reason to believe" means cause or justification of the Assessing Officer to believe that income has escaped assessment and does not mean that the Assessing Officer should have finally ascertained the said fact by legal evidence or reached a final conclusion, as this is determined and decided in the assessment order which is the final stage before the Assessing Officer;
+ looking at the aforesaid facts, the petitioner is entitled to succeed in the present case on all three counts. Firstly, there is failure on the part of the Assessing Officer to examine the original assessment record and ascertain the method of accounting adopted by the assessee and whether the quantum of receipts disclosed was correct as per the method of accounting and the amount reflected in the TDS certificates was examined by the Assessing Officer in the original assessment proceedings; secondly, it is a case of change of opinion because the method of accounting adopted by the assessee and the TDS certificates were examined by the first Assessing Officer; and thirdly the assessee had made full and true disclosure at the time of original proceedings about the method of accounting adopted by him and the quantum of receipts disclosed. The writ petition is accordingly allowed and the impugned notice dated 29th March, 2012 and the reassessment proceedings initiated thereby are quashed. If any assessment order has been passed, the same will be treated as null and void.
Assessee's writ petition allowed
Cases followed:
Delhi High Court in CIT Vs. International Travel House Ltd.
Le Passage to India Tours & Travels (P) Ltd. Vs. ACIT, W.P (C) 8685/2010
Commissioner of Income Tax vs. Kelvinator of India Ltd. (2010-TIOL-06-SC-IT )
JUDGEMENT
Per : Sanjiv Khanna, J :
1. The petitioner has impugned the re-assessment notice dated 29th March, 2012 issued under Section 148 of the Income Tax Act, 1961 (Act, for short). The notice relates to the assessment year 2006-07.
2. The reasons recorded by the Assessing Officer for issue of notice as postulated and required by Section 147 read with Section 151 of the Act read as under:-
"The assessment of M/s Select Vacations Pvt. Ltd. for the assessment year 2006-07 was completed after scrutiny in December 2008 determining a loss of Rs.44,28,400/-. Audit scrutiny revealed that the assessee has shown total income of Rs.52,36,040/- whereas as per TDS certificates assessee's total income is Rs.1,11,65,657/-. In view of above the mistake resulted in underassessment of income of Rs. 59,29,617/- involving tax effect of Rs.19,95,909/-.The escapement of income has been on account of failure on the part of the assessee to truly and fully disclose all the material facts necessary for assessment. Thus it is a fit case for initiation of proceedings u/s 148 of I.T. Act, 1961.Therefore, I have reason to believe that the income of Rs.59,29,617/- has escaped assessment within the meaning of Section 147 of the I.T. Act, 1961. In view of the above, as per provisions of section 151, it is requested to kindly accord approval for issuance of notice u/s 148 for AY 2006-07."
3. The petitioner after receipt of the reasons to believe had filed written objections to the initiation of the re-assessment proceedings in terms of the decision of the Supreme Court inGKN Driveshafts India Ltd. vs. ITO, (2003) 259 ITR 19 (SC) = (2002-TIOL-634-SC-IT). The said objections have been disposed of by the impugned order dated 14th November, 2012 recording:-
"The only objection to the reopening as narrated by you is that the assessment has been re-opened on the basis of mere change of opinion. In this regard it is stated that the assessment has been reopened on the basis of reasons to believe that the income as calculated as per the TDS certificates is much more than the returned income. It is therefore, not a change of opinion, but a strong ground to investigate as to why income as per TDS certificates has not been shown. As per the record this aspect was not checked at the time of assessment done in the case, therefore, on the basis of strong ground, the cases was reopened after taking prior approval of the concerned Commissioner of Income Tax as per the provisions of section 151.Reasons to believe can emanate from facts already on record. It the AO has issued notice u/s 154 & dropped it, still the proceedings u/s 147 can be initiated. This view has been upheld by the courts. WTO vs Aditya Narula (ITAT, Cal) 68 ITD 61 and Rama Boiled Modern Rice Mill Vs. ITO (ITAT, Hyd) 97 ITD 379."(emphasis supplied)
4. The contention of the petitioner before us is three-fold:-
(i) The reasons to believe do not show any nexus with escapement of income and ignores the method of accounting followed by the petitioner assessee year after year, which has been accepted and not adversely commented upon in the reasons to believe.(ii) It is a case of change of opinion as the entire receipts or incomings on which TDS was deducted, was examined during the course of the assessment proceedings. Reliance is placed upon letter dated 24th October, 2008, by which the assessee had furnished details of TDS certificates, bills raised by the petitioner and other details including invoices, credit taken to different accounts, etc.(iii) The assessee had made full and true disclosure of material facts. Explanation (1) is not applicable and nothing was to be inferred or deduced. Material facts as disclosed were clear and no decoding or decrypting was required. Nothing had to be inferred or gathered from the said facts.
5. Senior Standing Counsel appearing for the Revenue submits that the Assessing Officer had not examined the difference between the TDS certificates and the income or receipts declared by the assessee. TDS was deducted on amount of Rs. 1,11,65,657/-, whereas the receipt of income as declared was Rs. 52,36,040/-. No explanation was called from the assessee to ascertain and know the reason/cause for the difference. The assessee had failed to disclose income or receipt of Rs.59,29,617/-.
6. The petitioner is engaged in the business of tours and travels. It specialises in arranging tours, hotel bookings for individuals and groups for travel within and outside India. It also handles incentives, meetings and conferences. In the objections filed, the petitioner had submitted that the income on tours was accounted after netting off directed expenses relating thereto. In other words, the income taken to the profit and loss account was not the gross receipts but gross receipts minus direct costs paid/transferred to third parties. The income declared consists of margin earned on services relating to tour arrangements i.e. after reducing from the billing, direct costs incurred like hotel, transport, guides etc. These costs were directly matched with the revenue earned and balance being the margin earned, was transferred to "income from tours accounts". This exercise was undertaken at the time of original assessment.
7. For the assessment year 2006-07, the petitioner had filed its return of income on 29th November, 2006 declaring loss of Rs.44,50,039/-. The return was taken up for scrutiny and vide assessment order dated 5th February, 2008, the loss was computed at Rs. 44,28,400/-.
8. During the course of the assessment proceedings, queries were raised by the Assessing Officer on the method of accounting adopted by the petitioner. This is apparent from the reply given by the petitioner vide letter dated 24th October, 2008, wherein in response to query number 6, the petitioner had furnished the following details:-
"The certificates include certificates for TDS deducted by clients while making payment of bills raised by assessee company and certificate for TDS deducted by ticketing agents (suppliers) from whom the assessee company purchased tickets for its clients taking tours from the assessee company. Since the ticketing agents parts with the commission he earns, he deducts TDS on the commission passed on to the assessee. He adds the amount of TDS on the bill that he raises on the assessee company.The assessee company is engaged in the business of providing tours for its clients. A separate tour account is opened for each tour and the scheme of accounting entries is as follows:1. When invoice is raised on the client
Debit: Client A/c (with the amount of invoice)
Credit: Tour A/c (with the amount of invoice)2. When client makes payment after deducting TDS
Debit: Banck A/c (with amount received)
Debit: TDS (TDS deducted by client)
Credit: Client A/c (with the amount of invoice)3. When bill are received from suppliers like Hotels, Ticketing agents from whom services are taken for the client
Debit: Tour A/c (with the net cost of ticket)
Debit: TDS (With TDS deducted on commission part by the supplier and added to the bills)
Credit: Ticketing Agent (with the amount payable to the supplier i.e. net cost of the ticket plus TDS)4. After completion of the tour and after bills from all suppliers are received and debited to the Tour A/c, the balance in the tour a/c represents the profit earned on the particular tour. The accounting entry for the recognizing the profit on tour is as under:
Debit: Tour A/c (with the balance remaining in the tour a/c after all expenses for the tour have been accounted for)
Credit: Income from Tour services.Hence, it is not the amount of billing which is shown as income but the profit earned on the tours after deducting all direct costs. This is the standard accounting policy followed by all the tour companies."(emphasis supplied)
Thus, the system and method of accounting was explained. Reference was made to the TDS certificates received and they were collated with the "income" disclosed.
9. A bare perusal of the said letter would indicate that the method of accounting adopted by the petitioner was that the direct costs were deducted from the billings and this was the standard method of accounting adopted by the petitioner and other tour operators. Thus, the Assessing Officer in the first or original round of assessment was fully conscious and aware of the method of accounting followed by the petitioner. This method of accounting has been accepted by Delhi High Court in CIT Vs. International Travel House Ltd. (2010) 344 ITR 554 (Del) = (2010-TIOL-653-HC-DEL-IT).
10. The reasons to believe recorded above clearly do not reflect any application of mind on the accounting practice adopted by the petitioner being a tour operator. It is obvious that the assessing officer ignored and was oblivious to said factum. If he had noticed the said position, the reasons to believe would not have recorded that there was difference in the payment/receipt mentioned in the TDS certificates and the amount of income disclosed by the assessee. We notice that audit objection or query was raised and the Assessing Officer in response to the said audit objection had informed that he had fully examined the said aspect i.e. difference in the value on which TDS was deducted and the income declared during the course of assessment proceedings and had stated there was no loss of revenue. The said letter has been enclosed at page 25 of the rejoinder.
11. Reassessment provisions are wide, but are not plenary. They are circumscribed and controlled by pre-conditions and must satisfy the prescribed statutory requirements. This is the reason why it is mandatory for the Assessing Officer to record "reasons to believe" in writing and state why and on what account or reason income chargeable to tax has escaped assessment. Sufficiency of reasons is not a matter which can be gone into by the court, but very existence of belief is a subject matter which can be examined and scrutinized by the Court. Reassessment notice can be quashed if the "belief" is not bona fide or is based on vague, irrelevant and nonspecific information. There should be a link and nexus between the reasons and the evidence/material available with the Assessing Officer for initiation of re-assessment proceedings. It should not be a mere pretence. The expression "reason to believe" means cause or justification of the Assessing Officer to believe that income has escaped assessment and does not mean that the Assessing Officer should have finally ascertained the said fact by legal evidence or reached a final conclusion, as this is determined and decided in the assessment order which is the final stage before the Assessing Officer. {see Signature Hotels P. Ltd. Vs. Income-Tax Officer and Another, [2011] 338 ITR 51 (Delhi) = (2011-TIOL-471-HC-DEL-IT), which refers to ITO versus Lakhmani Mewal Das, [1976] 103 ITR 437 (SC) = (2002-TIOL-823-SC-IT), Ganga Saran and Sons Private Limited versus Income-Tax Officer-I, [1981] 130 ITR 1 (SC) and Phool Chand Bajrang Lal and Another versus Income-Tax Officer and Another, [1993] (203) ITR 456 (SC) = (2002-TIOL-794-SC-IT) and Income-Tax Officer, New Delhi, and Another versus Dwarka Dass and Brothers, [1981] 131 ITR 571 (Del)}.
12. Recently we had quashed reassessment notice issued in the case of Le Passage to India Tours & Travels (P) Ltd. Vs. ACIT, W.P (C) 8685/2010 decided on 9th March, 2011 recording as under:-
"13. The ground and reasoning for reopening quoted above relate to the very basic nature and character of the accounting method adopted by the petitioner. The petitioner has adopted a system of netting as their billing was inclusive of "direct costs" incurred which were paid to third parties. It is impossible to perceive and accept the contention of the Standing Counsel for the Revenue that the Assessing Officer during the course of the original assessment proceedings would have not reflected and considered the method of accounting adopted by the petitioner. This is not possible as the Assessing Officer at the very first instance was required to examine the said aspect. The method of accounting adopted by the petitioner was set out in clear terms and explained by the petitioner in their letter dated 31st October, 2008, which has been quoted above. The petitioner has stated that they have always and continue to follow the said method of accounting. This is not a case where explanation 1 to Section 147 is applicable. The question relates to the WPC 8685/2010 Page 12 of 13 very method and manner of accounting, which will be apparent and clear to any person when scrutiny of the return and accounts is undertaken. The reopening is, therefore, bad for want of jurisdictional pre-condition under Section 147 of the Act. It is a case of change of opinion and the ratio in the case of Kelvinator (supra) is applicable."
13. Here it will be appropriate to reproduce the observations of the Supreme Court inCommissioner of Income Tax vs. Kelvinator of India Ltd. (2010) 2 SCC 723 = (2010-TIOL-06-SC-IT):-
"5. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the 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 1-4-1989), they are given a go-by 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-1-4-1989, 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.6. 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.7. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the assessing officer. Hence, after 1-4-1989, the 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."
14. Looking at the aforesaid facts, the petitioner is entitled to succeed in the present case on all three counts. Firstly, there is failure on the part of the Assessing Officer to examine the original assessment record and ascertain the method of accounting adopted by the assessee and whether the quantum of receipts disclosed was correct as per the method of accounting and the amount reflected in the TDS certificates was examined by the Assessing Officer in the original assessment proceedings; secondly, it is a case of change of opinion because the method of accounting adopted by the assessee and the TDS certificates were examined by the first Assessing Officer; and thirdly the assessee had made full and true disclosure at the time of original proceedings about the method of accounting adopted by him and the quantum of receipts disclosed. The writ petition is accordingly allowed and the impugned notice dated 29th March, 2012 and the reassessment proceedings initiated thereby are quashed. If any assessment order has been passed, the same will be treated as null and void
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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