Invisible capital – Cost Accounting SME segment – Part 4
In continuation to my previous articles on Invisible capital: For Cost Accountants in Practice – PART 3 its being found that many cost accountants are inclined to come and join practicing. I find that many cost accountants have come up with the question and that there is not much growth or prospects in the profession in term of practicing. Well today's article is related to all those doubts in mind where we struggling to find the avenues of practicing. The challenge is not with the profession but with the limited vision of the profession prevailing among all of us. We commit mistakes in the initial process and we cry foul on the whole profession.
In practicing its being found that we often start with the idea of starting alone. This is one of the biggest mistakes of starting practicing segment. When we start alone we have the limitation of limited idea followed with limited networks and resources. It better to start the practicing with multiple founders who coming together would create wide options for networking, business opportunities and more over multiple source of ideas to grow the practicing. I often heard that cost accountants don't find much opportunity in practicing; well the problem is in the attitude of looking towards the segment of practicing areas. For example you plan to get into the business of valuations and merger & acquisition segment. Now for this if you start alone just imagine that how much you have to run and how much time would be required to get business from various segments. You need to build networking with Banks, Private equity fund providers, venture capitalist etc. On the other side you have to focus on clients from whom you can get these works of valuations and merger & acquisitions. Moreover you need extreme speed to match up with all the segments to grow the business. The more you delay in reaching out to any one of these, you lose the business opportunity. This is why one needs to form the practicing platform with multiple members. Now when you start the practicing business do remember to take one senior member as guide or as master just like we required teacher to qualify Cost Accountancy/ examination. This teacher or guide would help you to avoid the death traps and block the loopholes in the process of running and execution of the business deals. You need to develop and acquire knowledge on management science and business strategies since these are the key drivers of the today's business. Only Cost Audit and Cost Accounting would not be the only viable source of income for the profession. Just think about the MBA's who develop consulting business and how much they charge fees from the clients for the strategic management advices. Now being an cost accountants having an in-depth domain knowledge of cost and various angles of business operation cant develop a successful practicing business.
We hear that we need technology, vision a strong team etc to build a successful cost accountancy practicing. Well above all these us need first and foremost important thing is a paying customer. Yes unless you get a paying customer neither you nor your team mates would be motivated to move ahead and come again on the next day in your office. Hence you should choose the area of your practicing filed where you can get paying customer and also you can dominate. Your practicing should be focused towards customer centric road map. Before you take up the decision of getting into practicing you need to extreme hard work to identify and understanding customer through primary market research rather than following the experience and achievements of others. Remember you are living in the world of 2014 and you need to explore opportunities so that you can move ahead. Don't try to collect the stories of failures and negative attitude. Remember for every venture or profession attitude is the key factor and driving force behind success.
While starting practicing we need to design and develop a client profile. Client profile here means what type of client you need or you are focusing to start your practicing profession. Based upon this you should decide about the area of your profession you want to choose. I find in my research that traditional cost accounting areas are no longer viable mainly due to changing dynamics of business and technology. We need to get into strategic management areas where advisory business model of practicing which is the key demand of the time. A small statistic would make it very clear to understand the client profile you need to choose while opting for practicing. In India, there are 47 million SMEs who employ about 100 million people and contribute more than 8 percent of India's GDP. Well another prominent barometer to find the growth of the SME business segment is that today 1.5 million SMBs export their products or services outside India which is a sign of the sector's rapid evolution.
Now tell me how many cost accountants focuses towards SME segment. SME needs extensive cost management strategies as well as various type of support in strategic management terms to keep and grow their business in the long term. Recently the Union Government will create a separate Ministry for promoting entrepreneurship and skill development. Indian SME space today is largely dominated by micro scale businesses, contributing 95 per cent of the SME landscape, followed by small scale businesses contributing 4.8 per cent and the rest 0.2 per cent by medium scale businesses. Further note that out of the 4.88 crore SMEs around 55 per cent are located in urban areas while the rest 45 per cent constitutes to the rural regions. It's not about only restricting yourself to cost audit and cost accounting areas, but to extend into the field of management science and develop innovative business models along with this growing SME segment which would give a new direction and path of revenue making for your new practicing ventures. You need attitude change to develop your practicing.
Moving ahead when planning to start your practicing you needs to calculate how much cost it takes to acquire a client. The lengthier the process of client acquisition and more cost get involved your profitability of the firms would be negligible. Hence the key to this way is that before you starts you'r practicing do research on type of segment you want to choose and how you plan to move ahead with the practicing. I will term this entire calculation as Innovation Accounting. More over your business principles, values and ethics should be of such higher standards that you get business referrals as well as networking referrals to grow your practices. This is why I have been giving emphasis on high level of visions. Remember when every practicing firms develops high level of ethics and value proposition individually then collectively the professional values also increases. In my next article I will discuss about the process and steps of profitable client acquisitions for getting a practicing firms to be successful.
Also Read-
Indraneel Sen GuptaGlobal Macro Economic Researcher and Business Strategist
Master of Economics, MBA in International Management, ICWAI (Final)
neel19414@gmail.com
House Property Income – Increase Interest Limit to 3 Lakh, Allow deduction for unrealised rent and Lease Rent
In Its Pre-budget Memorandum on Direct Taxes Apex Accounting Institute ICAI has suggested that deduction in respect of interest on housing loan in case of self occupied property should be increased from Rs. 1.5 Lakhs to Rs. 3 Lakhs. ICAI further suggested that Assessee should be allowed deduction equal to 30% from unrealised rent and ground rent shall be allowed as separate deduction while computing income under the head "Income from House property".
Interest on borrowed Capital :
Keeping in mind the prices of the house properties and also the rate of interest on housing loan, it is felt that the deduction under section 24(b) in respect of Interest on borrowed capital for self-occupied property is very less.
Therefore, it is suggested that the deduction in respect of interest on housing loan in case of self occupied property should be increased from Rs. 1.5 Lakhs to Rs. 3 Lakhs.
Deduction u/s 24(a) of the Income-tax Act, 1961:
a) Section 25B provides that the arrears of rent received after allowing a deduction of 30% will be taxable as Income from House
property. Further, section 25AA also provides for taxation of unrealised rent subsequently charged to income-tax. Even though the nature of income being charged to tax in both cases is similar, the deduction of 30% is not allowed in case of unrealised rent subsequently received. It may be noted that had the rent been realised earlier in normal course deduction of 30% would have been allowed under section 24(a). This discrimination seems to be inadvertent omission and thus needs rectification.
property. Further, section 25AA also provides for taxation of unrealised rent subsequently charged to income-tax. Even though the nature of income being charged to tax in both cases is similar, the deduction of 30% is not allowed in case of unrealised rent subsequently received. It may be noted that had the rent been realised earlier in normal course deduction of 30% would have been allowed under section 24(a). This discrimination seems to be inadvertent omission and thus needs rectification.
Section 25AA be suitably amended to provide that unrealised rent subsequently realised shall after deducting a sum equal to thirty percent of such amount shall be deemed to be income chargeable under the head "Income from House property"
b) Huge lease rent is generally paid if the land is taken on lease and the building is constructed by the assessee. However, section 24 of the Income-tax Act, 1961 does not provide any deduction from income from house property for an amount so paid by the assessee.
Considering the cost involved in payment of lease rents, it suggested that ground rent shall be allowed as separate deduction while computing income under the head "Income from House property".
Source- Pre-Budget Memorandum 2014 on direct taxes by Institute of Chartered Accountants of India.
HYDERABAD, JUNE 30, 2014: THE issue before the Bench is - Whether when the original assessment was completed after a scrutiny, the AO has the powers to resort to re-assessment on the basis of Lokayukta's and Newspaper Reports on alleged suppression of sales. And the answer favours the Revenue.
Facts of the case
Assessee, a public sector undertaking, is engaged in the business of mineral exploration and extraction. Assessee filed its returns for the impugned assessment years and the assessment was completed originally under section 143(3). Subsequently, on the basis of information obtained through news papers followed by the report of Lokayukta of Karnataka received/obtained by the A.O. and also enquiries made in this regard from the Director's of the Company, assessment was reopened under section 147 of the Act by issuing notice under section 148 and reassessment was completed. During the course of assessment proceedings the AO alleged that the assessee has under invoiced its sale price of export which export were made to Japan and Korea and on the basis of the lokayukta report the AO made addition to the returned income of the assessee- CIT(A) affirmed the addition discarding the submissions of the assessee- Matter reached to the ITAT wherein the assessee challagned the action of the under section 147 and also the merits of the case by pointing out that while making the addition the AO has overlooked the fact that the assessee had never exported the goods directly rather through MMTC and the long term contracts with the foreign buyers were entered into by MMTC and approved by the Govt of India hence no addition can be made merely on the basis of Lokayukta report which is a mere opinion and formed on wrong premise in as much while preparing the report the Lokayukta has taken spot price of the goods prevailed in china and the assessee had in fact exported the goods to Japan and Korea under long term contractual supplies.
After hearing the parties the ITAT held that,
++ before reopening the assessment, A.O. has in fact got the reports from the newspapers and then A.O. also mentioned in the assessment order the steps taken for obtaining the information from Lokayukta, various enquiries caused including statements recorded from the Officers involved in export of iron ore before reopening assessment. As already pointed out by the CIT(A), proceedings for A.Y. 2009-10 were also pending at that point of time. Therefore, we are of the opinion that A.O. has prima facie belief to reopen the assessment under section 147. At the stage of reopening the assessment, it is not necessary to examine the quantum of escapement. What is required to be verified is whether there is any belief for coming to a decision whether income has escaped assessment. On the basis of the information available in the form of newspaper reports and also report of Lokayukta, we are of the opinion that there is prima facie belief for reopening the assessment;
++ the issue in this appeal is whether A.O. is correct in making the addition on the so-called suppression of sales. We are not convinced with the action of the A.O. First of all, the comparison between spot price of China in which assessee hardly indulges in any transaction with that of long term contracts with companies in Japan and Korea on five year agreement, which was duly approved by the Government of India is not appropriate. Moreover, assessee is not involved directly in exports of goods. Power to export was given to MMTC, through which assessee channels its exports. As admitted by the Directors and as stated by the company, there were negotiations with the foreign buyers and generally for five year contract period with quantum and prices are bench marked on international prices and decided accordingly;
After hearing the parties the ITAT held that,
++ before reopening the assessment, A.O. has in fact got the reports from the newspapers and then A.O. also mentioned in the assessment order the steps taken for obtaining the information from Lokayukta, various enquiries caused including statements recorded from the Officers involved in export of iron ore before reopening assessment. As already pointed out by the CIT(A), proceedings for A.Y. 2009-10 were also pending at that point of time. Therefore, we are of the opinion that A.O. has prima facie belief to reopen the assessment under section 147. At the stage of reopening the assessment, it is not necessary to examine the quantum of escapement. What is required to be verified is whether there is any belief for coming to a decision whether income has escaped assessment. On the basis of the information available in the form of newspaper reports and also report of Lokayukta, we are of the opinion that there is prima facie belief for reopening the assessment;
++ the issue in this appeal is whether A.O. is correct in making the addition on the so-called suppression of sales. We are not convinced with the action of the A.O. First of all, the comparison between spot price of China in which assessee hardly indulges in any transaction with that of long term contracts with companies in Japan and Korea on five year agreement, which was duly approved by the Government of India is not appropriate. Moreover, assessee is not involved directly in exports of goods. Power to export was given to MMTC, through which assessee channels its exports. As admitted by the Directors and as stated by the company, there were negotiations with the foreign buyers and generally for five year contract period with quantum and prices are bench marked on international prices and decided accordingly;
++ assessee always entered into long term contracts through MMTC and honoured those contracts at the price negotiated. A.O. also acknowledges the receipt of the communication from the Under Secretary, Government of India of the various Cabinet notes and the approval of prices including the agreements entered by the parties. These cannot be brushed aside;
++ assessee's case is much better than the above case as the facts in that case are that assessee entered into agreement with a private company whereas this assessee has entered into long term contract with foreign buyers which were duly negotiated and finally approved by Government of India. We, therefore, find no reason to confirm the addition of the above amount, as the assessee company had furnished all the details required by the A.O. and assessee has accounted for all the amounts it received. There is no iota of information that assessee or any agent received any amount over and above the amounts accounted in the books of accounts. Moreover, I.T. Act does not permit making additions on hypothetical income particularly, as suppression of sales when there is no evidence at all. Additions cannot be made on presumptions and hypothesis.
Sec. 10(23AAA): Only income from investment is taxable and not whole investment made in violation of sec. 11(5)
June 30, 2014[2014] 45 taxmann.com 436 (Karnataka)
IT: Where Employees Welfare Fund was approved by Commissioner, only income portion from investment made in violation of section 11(5) and not whole of investment, would be liable to tax
Regards
IT: Where assessee had in scrutiny assessment disclosed facts that
sales were made exclusive of excise duty/Modvat credit balance lying
with excise department and excluded such amount from computation of
income, initiation of reassessment after expiry of 4 years on ground
that income escaped assessment was not proper
■■■
[2014] 45 taxmann.com 474 (Gujarat)
HIGH COURT OF GUJARAT
Ferromatik Milacron India Ltd.
v.
Income Tax Officer, Ward -4(3)*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 17700 OF 2003
NOVEMBER 26, 2012
Section 28(i), read with section 147, of the Income-tax Act, 1961 -
Business income - Chargeable as (Reassessment) - Assessment year
1997-98 - Assessee-company filed its return of income which was taken
in scrutiny and Assessing Officer made scrutiny assessment under
section 143(3) - Assessment was sought to be reopened beyond a period
of 4 years as Assessing Officer was of view that sales were exclusive
of excise duty/Modvat credit balance available with excise department
which was required to be added to total income as other income -
However, in its return assessee had already disclosed sales and had
also disclosed that there were certain loans and advances, one of
which was balance lying with Excise Authorities and this pertained to
Modvat Credit - Thus, assessee had made necessary disclosure and
excluded such amount from computation of income - Therefore, relevant
material was available during scrutiny assessment - Assessing Officer
had also not alleged any failure of assessee to disclose truly and
fully all material facts - Whether reopening was not sustainable -
Held, yes [Paras 12 to 15][In favour of assessee]
FACTS
■ The petitioner assessee-company filed its return of income which
was taken in scrutiny and the Assessing Officer made scrutiny
assessment under section 143(3).
■ The assessment was sought to be reopened beyond a period of 4 years.
■ While Assessing Officer supplied reasons for reopening the
assessment, he recorded that sales were excluding element of sales tax
and excise duty recovered from customers. In Balance sheet showing
loans and advances amount of Rs. 84.58 lakh were lying with excise
authority, but there was no specific mention regarding inclusion/
exclusion of excise duty paid on raw materials purchased and consumed.
He concluded that as sales were exclusive of excise duty MODVAT credit
balance available with excise department amount of Rs. 84.58 lakh was
required to be added to total income as other income.
■ The assessee raised its objections in which it specifically
contended that there was no omission on its part to disclose truly and
fully all material facts and the ground on which the Assessing Officer
formed belief that income chargeable to tax had escaped assessment,
was not valid.
■ Hence, the present petition filed by the assessee challenging the
very notice for reopening the assessment.
HELD
■ In the instant case, reopening is sought to be done beyond the
period of 4 years from the end of the relevant assessment year. In
that view of the matter, additional requirement flowing from the
proviso to section 147, namely, that the income chargeable to tax has
escaped assessment for the failure of the assessee to disclose truly
and fully all material facts necessary for the assessment must be
satisfied. In the instant case, for the reasons recorded, the
Assessing Officer did not even allege that any income chargeable to
tax had escaped assessment for the reasons noted above. Even
otherwise, the revenue cannot contend that there was any failure on
the part of the assessee to disclose truly and fully all material
facts.[Para 12]
■ In the return the assessee had disclosed sales (including Sales
Tax and Excise Duty) of Rs.15.46 crore. The assessee had also
disclosed that there are certain loans and advances, one of which was
of Rs.84.58 lakh pertaining to balance lying with the Excise
Authorities. Such balance, it is a common ground, pertains to MODVAT
Credit. Thus the assessee had made necessary disclosure and had
excluded such amount from the computation of income. The material
which the Assessing Officer relied in the reasons recorded, emanates
from the record itself. On one hand looking to the return filed by the
assessee in which above noted details were supplied and on the other
hand, reading the reasons recorded there was no doubt that this is not
a case where revenue can contend that income chargeable to tax had
escaped assessment for any failure on the part of the assessee to
disclose truly and fully all material facts.[Para 13]
■ Additionally, the assessee's specific averment in the objections
that there was no failure on its part to disclose truly and fully all
material facts and its further assertion to the same facts in the
petition have met with the rather general and vague response from the
revenue. While disposing of the objections, respondent has not, at any
place, specifically dealt with this issue. In reply filed in response
to the petition also, this aspect has not been dwelt upon. All that
the Assessing Officer had to say was that the notice was issued after
following the statutory requirement including of taking prior approval
of the higher authority. This was not what the assessee was knocking
at. Its contention was that beyond 4 years scrutiny assessment could
not have been reopened in absence of any failure on the part of the
assessee to disclose material facts.[Para 14]
■ In the result, impugned notice was quashed.[Para 15]
CASES REFERRED TO
CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275/130 Taxman
179 (SC) (para 6).
Manish J. Shah and J.P. Shah for the Petitioner. M.R. Bhatt and Mrs.
Mauna M. Bhatt for the Respondent.
JUDGMENT
Akil Kureshi, J. - Petitioner has challenged the notice dated
24.9.2002 issued by the respondent Assessing Officer under Section 148
of the Income-tax Act, 1961 ( "the Act" for short).
2. The petition arises in following factual background:-
2.1 The petitioner is a Company registered under the Companies Act and
is regularly assessed to tax. For the assessment year 1997-98, the
petitioner filed its return of income declaring loss of Rs.4.30 lakhs
(rounded off). Such return was taken in scrutiny for which the
Assessing Officer issued notice under Section 143(2) of the Act on
1.7.1998. Scrutiny assessment under Section 143(3) of the Act was
framed on 5.1.2000.
3. It is this scrutiny assessment that the respondent Assessing
Officer desired to reopen for which the impugned notice dated
24.9.2002 came to be issued. The assessee was granted 30 days time for
filing return in response to such notice.
4. Having received such notice, the petitioner under its communication
dated 31.12.2002, demanded the reasons recorded by the Assessing
Officer for reopening the assessment.
5. The Assessing Officer supplied such reasons which read as under:—
"On verification of the case records, it is noticed that as per profit
and loss for the A.Y.1997-98, sales at Rs. 15,46,74,556/- and sales
are excluding element of sales tax and excise duty recovered from
customers. As per Schedule H to Balance sheet showing loans and
advances amount to Rs.84,58,244/- was lying with excise authority, but
there is no specific mention regarding inclusion/ exclusion of excise
duty paid on raw materials purchased and consumed. As the sales are
exclusive of excise duty MODVAT credit balance available with excise
department amounting to Rs.84,58,249/- was required to be added to
total income as other income. By not doing so, I have reasons to
believe that income to the tune of Rs. 84,58,249/- has escaped
assessment during the year.
Notice u/s 148 is therefore issued after obtaining satisfaction of CIT
Ahmedabad-II, Ahmedabad."
6. Having received the reasons recorded by the Assessing Officer for
reopening the assessment, the petitioner raised its detailed
objections under communication dated 24.11.2003. In such objections,
the petitioner specifically contended that there as no omission on the
part of the petitioner to disclose truly and fully all material facts.
The petitioner also contended that the ground on which the Assessing
Officer formed belief that income chargeable to tax has escaped
assessment, is not valid in view of the decision of the Supreme Court
in the case of CIT v. Indo Nippon Chemicals Co. Ltd [2003] 261 ITR
275/130 Taxman 179.
7. Since such objections were not disposed of for sometime, the
petitioner filed the present petition challenging the very notice for
reopening the assessment. Along with reply that the respondent filed
in this petition, respondent produced order dated 24.12.2003 by which
he had rejected the petitioner's objections to the reopening. From the
sequence of events noted above, it clearly emerges that the
assessment, which was previously framed after scrutiny is sought to be
reopened beyond a period of 4 years from the end of the relevant
assessment year. In that view of the matter, counsel for the
petitioner vehemently contended that the notice itself is invalid
since this is not a case where the petitioner can be stated to have
failed to disclose truly and fully all material facts. Drawing our
attention to the reasons recorded, counsel elaborated that even in
such reasons, the Assessing Officer has not alleged any such failure
or omission on the part of the petitioner.
Counsel further contended that in any case even on merits, proposed
addition is not justified. Relying on the decision in the case of Indo
Nippon Chemicals Co. Ltd. (supra), Counsel contended that MODVAT
Credit lying with the Department cannot be treated as income of the
assessee.
8-9. Our attention was also drawn to the affidavit-in-reply filed by
the respondent Assessing Officer as also to the order dated 24.12.2003
by which he rejected the petitioner's objections. On the basis of such
documents counsel submitted that the Assessing Officer had not dealt
with the petitioner's twin objections that the petitioner had not
failed to disclose truly and fully all material facts and further that
by virtue of the decision of the Supreme Court in the case of Indo
Nippon Chemicals Co. Ltd. (supra), in any case, the basis of which the
reopening was based, lacked legal validity.
10. Counsel further contended that in any case even on merits,
proposed addition is not justified. Relying on the decision in the
case of Indo Nippon Chemicals Co. Ltd.(supra), Counsel contended that
MODVAT Credit lying with the Department cannot be treated as income of
the assessee.
11. Counsel for the Revenue opposed the objection contending that
proper reasons were recorded by the Assessing Officer. Objections
raised by the petitioner were dealt with and disposed of. At this
stage, sufficiency of reasons for reopening cannot be gone into.
12. Having thus heard learned counsel for the parties, we may remind
ourselves that in the present case, reopening is sought to be done
beyond the period of 4 years from the end of the relevant assessment
year. In that view of the matter, additional requirement flowing from
the proviso to Section 147 of the Act, namely, that the income
chargeable to tax has escaped assessment for the failure of the
assessee to disclose truly and fully all material facts necessary for
the assessment must be satisfied. In the present case, for the reasons
recorded, the Assessing Officer did not even allege that any income
chargeable to tax had escaped assessment for the reasons noted above.
Even otherwise, we do not see how the Revenue can contend that there
was any failure on the part of the assessee to disclose truly and
fully all material facts.
13. We have perused the return filed by the petitioner. In such
return, the petitioner had disclosed sales (including Sales Tax and
Excise Duty) of Rs. 15.46 crore (rounded off). The petitioner had also
disclosed at Schedule H that there are certain loans and advances, one
of which was of Rs.84.58 lakh pertaining to balance lying with the
Excise Authorities. Such balance, it is a common ground, pertains to
MODVAT Credit. Thus the petitioner had made necessary disclosure and
had excluded such amount from the computation of income. Even in the
reasons recorded, Assessing Officer has stated that" on verification
of the case records, it is noticed that...." Thus, the material which
the Assessing Officer relied in the reasons recorded, emanates from
the record itself. On one hand looking to the return filed by the
petitioner in which above-noted details were supplied and on the other
hand, reading the reasons recorded leaves us with in no manner of
doubt that this is not a case where Revenue can contend that income
chargeable to tax had escaped assessment for any failure on the part
of the assessee to disclose truly and fully all material facts.
14. Additionally, we also find that the petitioner's specific averment
in the objections that there was no failure on its part to disclose
truly and fully all material facts and its further assertion to the
same facts in the petition have met with the rather general and vague
response from the Revenue. While disposing of the objections,
respondent has not, at any place, specifically dealt with this issue.
In reply filed in response to the petition also, this aspect has not
been dwelt upon. All that the Assessing Officer had to say was that
the notice was issued after following the statutory requirement
including of taking prior approval of the higher authority. This, we
are afraid was not what the assessee was knocking at. Its contention
was that beyond 4 years scrutiny assessment could not have been
reopened in absence of any failure on the part of the assessee to
disclose material facts.
15. In the result, impugned notice dated 24.09.2002 is quashed. We
need not express any opinion on the validity of the reason itself
since on the very first premise, namely that of the jurisdiction of
the Assessing Officer to reopen the assessment, we hold in favour of
the petitioner.
Rule is made absolute accordingly. No costs.
sales were made exclusive of excise duty/Modvat credit balance lying
with excise department and excluded such amount from computation of
income, initiation of reassessment after expiry of 4 years on ground
that income escaped assessment was not proper
■■■
[2014] 45 taxmann.com 474 (Gujarat)
HIGH COURT OF GUJARAT
Ferromatik Milacron India Ltd.
v.
Income Tax Officer, Ward -4(3)*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 17700 OF 2003
NOVEMBER 26, 2012
Section 28(i), read with section 147, of the Income-tax Act, 1961 -
Business income - Chargeable as (Reassessment) - Assessment year
1997-98 - Assessee-company filed its return of income which was taken
in scrutiny and Assessing Officer made scrutiny assessment under
section 143(3) - Assessment was sought to be reopened beyond a period
of 4 years as Assessing Officer was of view that sales were exclusive
of excise duty/Modvat credit balance available with excise department
which was required to be added to total income as other income -
However, in its return assessee had already disclosed sales and had
also disclosed that there were certain loans and advances, one of
which was balance lying with Excise Authorities and this pertained to
Modvat Credit - Thus, assessee had made necessary disclosure and
excluded such amount from computation of income - Therefore, relevant
material was available during scrutiny assessment - Assessing Officer
had also not alleged any failure of assessee to disclose truly and
fully all material facts - Whether reopening was not sustainable -
Held, yes [Paras 12 to 15][In favour of assessee]
FACTS
■ The petitioner assessee-company filed its return of income which
was taken in scrutiny and the Assessing Officer made scrutiny
assessment under section 143(3).
■ The assessment was sought to be reopened beyond a period of 4 years.
■ While Assessing Officer supplied reasons for reopening the
assessment, he recorded that sales were excluding element of sales tax
and excise duty recovered from customers. In Balance sheet showing
loans and advances amount of Rs. 84.58 lakh were lying with excise
authority, but there was no specific mention regarding inclusion/
exclusion of excise duty paid on raw materials purchased and consumed.
He concluded that as sales were exclusive of excise duty MODVAT credit
balance available with excise department amount of Rs. 84.58 lakh was
required to be added to total income as other income.
■ The assessee raised its objections in which it specifically
contended that there was no omission on its part to disclose truly and
fully all material facts and the ground on which the Assessing Officer
formed belief that income chargeable to tax had escaped assessment,
was not valid.
■ Hence, the present petition filed by the assessee challenging the
very notice for reopening the assessment.
HELD
■ In the instant case, reopening is sought to be done beyond the
period of 4 years from the end of the relevant assessment year. In
that view of the matter, additional requirement flowing from the
proviso to section 147, namely, that the income chargeable to tax has
escaped assessment for the failure of the assessee to disclose truly
and fully all material facts necessary for the assessment must be
satisfied. In the instant case, for the reasons recorded, the
Assessing Officer did not even allege that any income chargeable to
tax had escaped assessment for the reasons noted above. Even
otherwise, the revenue cannot contend that there was any failure on
the part of the assessee to disclose truly and fully all material
facts.[Para 12]
■ In the return the assessee had disclosed sales (including Sales
Tax and Excise Duty) of Rs.15.46 crore. The assessee had also
disclosed that there are certain loans and advances, one of which was
of Rs.84.58 lakh pertaining to balance lying with the Excise
Authorities. Such balance, it is a common ground, pertains to MODVAT
Credit. Thus the assessee had made necessary disclosure and had
excluded such amount from the computation of income. The material
which the Assessing Officer relied in the reasons recorded, emanates
from the record itself. On one hand looking to the return filed by the
assessee in which above noted details were supplied and on the other
hand, reading the reasons recorded there was no doubt that this is not
a case where revenue can contend that income chargeable to tax had
escaped assessment for any failure on the part of the assessee to
disclose truly and fully all material facts.[Para 13]
■ Additionally, the assessee's specific averment in the objections
that there was no failure on its part to disclose truly and fully all
material facts and its further assertion to the same facts in the
petition have met with the rather general and vague response from the
revenue. While disposing of the objections, respondent has not, at any
place, specifically dealt with this issue. In reply filed in response
to the petition also, this aspect has not been dwelt upon. All that
the Assessing Officer had to say was that the notice was issued after
following the statutory requirement including of taking prior approval
of the higher authority. This was not what the assessee was knocking
at. Its contention was that beyond 4 years scrutiny assessment could
not have been reopened in absence of any failure on the part of the
assessee to disclose material facts.[Para 14]
■ In the result, impugned notice was quashed.[Para 15]
CASES REFERRED TO
CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275/130 Taxman
179 (SC) (para 6).
Manish J. Shah and J.P. Shah for the Petitioner. M.R. Bhatt and Mrs.
Mauna M. Bhatt for the Respondent.
JUDGMENT
Akil Kureshi, J. - Petitioner has challenged the notice dated
24.9.2002 issued by the respondent Assessing Officer under Section 148
of the Income-tax Act, 1961 ( "the Act" for short).
2. The petition arises in following factual background:-
2.1 The petitioner is a Company registered under the Companies Act and
is regularly assessed to tax. For the assessment year 1997-98, the
petitioner filed its return of income declaring loss of Rs.4.30 lakhs
(rounded off). Such return was taken in scrutiny for which the
Assessing Officer issued notice under Section 143(2) of the Act on
1.7.1998. Scrutiny assessment under Section 143(3) of the Act was
framed on 5.1.2000.
3. It is this scrutiny assessment that the respondent Assessing
Officer desired to reopen for which the impugned notice dated
24.9.2002 came to be issued. The assessee was granted 30 days time for
filing return in response to such notice.
4. Having received such notice, the petitioner under its communication
dated 31.12.2002, demanded the reasons recorded by the Assessing
Officer for reopening the assessment.
5. The Assessing Officer supplied such reasons which read as under:—
"On verification of the case records, it is noticed that as per profit
and loss for the A.Y.1997-98, sales at Rs. 15,46,74,556/- and sales
are excluding element of sales tax and excise duty recovered from
customers. As per Schedule H to Balance sheet showing loans and
advances amount to Rs.84,58,244/- was lying with excise authority, but
there is no specific mention regarding inclusion/ exclusion of excise
duty paid on raw materials purchased and consumed. As the sales are
exclusive of excise duty MODVAT credit balance available with excise
department amounting to Rs.84,58,249/- was required to be added to
total income as other income. By not doing so, I have reasons to
believe that income to the tune of Rs. 84,58,249/- has escaped
assessment during the year.
Notice u/s 148 is therefore issued after obtaining satisfaction of CIT
Ahmedabad-II, Ahmedabad."
6. Having received the reasons recorded by the Assessing Officer for
reopening the assessment, the petitioner raised its detailed
objections under communication dated 24.11.2003. In such objections,
the petitioner specifically contended that there as no omission on the
part of the petitioner to disclose truly and fully all material facts.
The petitioner also contended that the ground on which the Assessing
Officer formed belief that income chargeable to tax has escaped
assessment, is not valid in view of the decision of the Supreme Court
in the case of CIT v. Indo Nippon Chemicals Co. Ltd [2003] 261 ITR
275/130 Taxman 179.
7. Since such objections were not disposed of for sometime, the
petitioner filed the present petition challenging the very notice for
reopening the assessment. Along with reply that the respondent filed
in this petition, respondent produced order dated 24.12.2003 by which
he had rejected the petitioner's objections to the reopening. From the
sequence of events noted above, it clearly emerges that the
assessment, which was previously framed after scrutiny is sought to be
reopened beyond a period of 4 years from the end of the relevant
assessment year. In that view of the matter, counsel for the
petitioner vehemently contended that the notice itself is invalid
since this is not a case where the petitioner can be stated to have
failed to disclose truly and fully all material facts. Drawing our
attention to the reasons recorded, counsel elaborated that even in
such reasons, the Assessing Officer has not alleged any such failure
or omission on the part of the petitioner.
Counsel further contended that in any case even on merits, proposed
addition is not justified. Relying on the decision in the case of Indo
Nippon Chemicals Co. Ltd. (supra), Counsel contended that MODVAT
Credit lying with the Department cannot be treated as income of the
assessee.
8-9. Our attention was also drawn to the affidavit-in-reply filed by
the respondent Assessing Officer as also to the order dated 24.12.2003
by which he rejected the petitioner's objections. On the basis of such
documents counsel submitted that the Assessing Officer had not dealt
with the petitioner's twin objections that the petitioner had not
failed to disclose truly and fully all material facts and further that
by virtue of the decision of the Supreme Court in the case of Indo
Nippon Chemicals Co. Ltd. (supra), in any case, the basis of which the
reopening was based, lacked legal validity.
10. Counsel further contended that in any case even on merits,
proposed addition is not justified. Relying on the decision in the
case of Indo Nippon Chemicals Co. Ltd.(supra), Counsel contended that
MODVAT Credit lying with the Department cannot be treated as income of
the assessee.
11. Counsel for the Revenue opposed the objection contending that
proper reasons were recorded by the Assessing Officer. Objections
raised by the petitioner were dealt with and disposed of. At this
stage, sufficiency of reasons for reopening cannot be gone into.
12. Having thus heard learned counsel for the parties, we may remind
ourselves that in the present case, reopening is sought to be done
beyond the period of 4 years from the end of the relevant assessment
year. In that view of the matter, additional requirement flowing from
the proviso to Section 147 of the Act, namely, that the income
chargeable to tax has escaped assessment for the failure of the
assessee to disclose truly and fully all material facts necessary for
the assessment must be satisfied. In the present case, for the reasons
recorded, the Assessing Officer did not even allege that any income
chargeable to tax had escaped assessment for the reasons noted above.
Even otherwise, we do not see how the Revenue can contend that there
was any failure on the part of the assessee to disclose truly and
fully all material facts.
13. We have perused the return filed by the petitioner. In such
return, the petitioner had disclosed sales (including Sales Tax and
Excise Duty) of Rs. 15.46 crore (rounded off). The petitioner had also
disclosed at Schedule H that there are certain loans and advances, one
of which was of Rs.84.58 lakh pertaining to balance lying with the
Excise Authorities. Such balance, it is a common ground, pertains to
MODVAT Credit. Thus the petitioner had made necessary disclosure and
had excluded such amount from the computation of income. Even in the
reasons recorded, Assessing Officer has stated that" on verification
of the case records, it is noticed that...." Thus, the material which
the Assessing Officer relied in the reasons recorded, emanates from
the record itself. On one hand looking to the return filed by the
petitioner in which above-noted details were supplied and on the other
hand, reading the reasons recorded leaves us with in no manner of
doubt that this is not a case where Revenue can contend that income
chargeable to tax had escaped assessment for any failure on the part
of the assessee to disclose truly and fully all material facts.
14. Additionally, we also find that the petitioner's specific averment
in the objections that there was no failure on its part to disclose
truly and fully all material facts and its further assertion to the
same facts in the petition have met with the rather general and vague
response from the Revenue. While disposing of the objections,
respondent has not, at any place, specifically dealt with this issue.
In reply filed in response to the petition also, this aspect has not
been dwelt upon. All that the Assessing Officer had to say was that
the notice was issued after following the statutory requirement
including of taking prior approval of the higher authority. This, we
are afraid was not what the assessee was knocking at. Its contention
was that beyond 4 years scrutiny assessment could not have been
reopened in absence of any failure on the part of the assessee to
disclose material facts.
15. In the result, impugned notice dated 24.09.2002 is quashed. We
need not express any opinion on the validity of the reason itself
since on the very first premise, namely that of the jurisdiction of
the Assessing Officer to reopen the assessment, we hold in favour of
the petitioner.
Rule is made absolute accordingly. No costs.
2014 (6) TMI 802 - ITAT AHMEDABAD - Income Tax
Manjudevi S. Fatehpuria. Prop. of Anurag Fabrics Versus The Income-tax Officer
Additional deprecation - whether embroidery work earned on embroidery
machines is manufacturing activity or not - installation of embroidery
machines – Held that:- Since the issue has been decided by Hon'ble
ITAT Ahmedabad Bench in several cases in favour of the assessee
including the decision, no interference is required - Decision in the
case of ITO vs. Aswani Industries [2014 (6) TMI 560 - ITAT AHMEDABAD]
followed - Revenue has not brought any contrary binding decision in
its support of the facts - assessee is eligible for additional
depreciation – Decided in favour of Assessee.
Manjudevi S. Fatehpuria. Prop. of Anurag Fabrics Versus The Income-tax Officer
Additional deprecation - whether embroidery work earned on embroidery
machines is manufacturing activity or not - installation of embroidery
machines – Held that:- Since the issue has been decided by Hon'ble
ITAT Ahmedabad Bench in several cases in favour of the assessee
including the decision, no interference is required - Decision in the
case of ITO vs. Aswani Industries [2014 (6) TMI 560 - ITAT AHMEDABAD]
followed - Revenue has not brought any contrary binding decision in
its support of the facts - assessee is eligible for additional
depreciation – Decided in favour of Assessee.
IT : Reassessment notice was bad in law where it was based upon
allowance of excessive deduction under section 80-IB but facts
revealed that claim for deduction under section 80-IB was allowed in
original assessment after consideration
■■■
[2014] 45 taxmann.com 451 (Bombay)
HIGH COURT OF BOMBAY
Lalitha Chem Industries (P.) Ltd.
v.
Deputy Commissioner of Income-tax - 9 (2)*
MOHIT S. SHAH, CJ.
M. S. SANKLECHA, J.
WRIT PETITION (L) NO. 2741 OF 2013
NOVEMBER 27, 2013
Section 80-IB, read with section 147, of the Income-tax Act, 1961 -
Deductions - Profits and gains from industrial undertakings other than
infrastructure development undertakings (Reassessment) - Assessment
year 2006-07 - Assessee, engaged in business of manufacturing of
chemicals, had two manufacturing units-one at Tarapur and another at
Silvasa - Assessee claimed deduction under section 80-IB in respect of
its Silvasa unit - Said claim had been examined and reduced by
Assessing Officer in assessment - Thereafter, assessment was sought to
be re-opened on ground that assessee had suppressed expenses incurred
in respect of Silvasa unit by debiting expenses to its Tarapur unit
which had resulted in increasing profit of Silvasa unit and, thus,
assessee had enjoyed excessive deduction under section 80-IB - Whether
since assessee had in its profit and loss account had allocated
various common expenses between Silvasa unit and Tarapur unit and
issue of allocation of expenditure was very much available before
Assessing Officer while examining quantum of deduction under section
80-IB in original assessment, initiation of reassessment was bad in
law - Held, yes [Paras 14 and 17] [In favour of assessee]
FACTS
■ The assessee was engaged in the business of manufacturing of
chemicals, etc. It had two manufacturing units-one at Tarapur and
another at Silvasa.
■ During the course of the original assessment proceedings, the
assessee had claimed benefit of deduction under section 80-IB in
respect of its Silvasa Unit. This claim for deduction under section
80-IB had been duly examined and reduced in assessment and allowed
accordingly.
■ Thereafter, the Assessing Officer noticed that the assessee had
suppressed expenses incurred in respect of Silvasa Unit by debiting
its Tarapur Unit and did not disclose this diversion of expenses
during the course of the assessment proceedings. This diversion had
resulted in increasing profit to Silvasa Unit so as to enable
enjoyment of the benefit of excessive deduction under section 80-IB.
■ The assessment was sought to be re-opened by issuing the notice
under section 148 beyond a period of 4 years from the end of the
relevant assessment year.
■ The assessee challenged said re-opening contending that the notice
for re-opening the assessment was without jurisdiction as there had
been no failure on its part to disclose fully and truly all material
facts necessary for assessment, and the entire claim of the assessee
for deduction under section 80-IB was examined by the Assessing
Officer in detail during the assessment proceedings.
HELD
■ Issue as regards tangible material to re-open assessment
■ As the assessment sought to be reopened is beyond the expiry of
four years from the end of the relevant assessment year, i.e.,
2006-07, two conditions precedent have to be satisfied. Firstly, the
Assessing officer issuing the notice for reassessment must have reason
to believe that income chargeable to tax has escaped assessment on the
basis of tangible material and secondly, there must be a failure to
disclose truly and fully all facts necessary for assessment when the
original assessment proceedings took place. [Para 13]
■ So far as the first precondition for reopening is concerned,
reasons as disclosed rely upon the same tangible material which was
and/or ought to have been a subject-matter of examination before
determining the deduction available under section 80-IB and passing
the assessment order. The material which forms the basis of reason to
believe is the allocation of expenditure between the two units leading
to higher deduction under section 80-IB in respect of the assessee's
Silvasa Unit. During the assessment proceedings, the Assessing Officer
has examined the claim for deduction under section 80-IB and for that
purpose he had called upon the assessee to filed details of expenses
claimed in its profit and loss account. This allocation of expenditure
between the two units was very much present before the Assessing
Officer while considering the claim for deduction under section 80-IB
with regard to Silvasa Unit. The Assessing Officer at that point of
time appears to have been satisfied with the allocation of expenditure
made by the assessee between the two units and did not reduce the
claim by increasing the expenditure attributable to Silvasa Unit. The
contention of the revenue that this aspect of the matter has not in
terms been dealt with and/or examined in the assessment order is not
acceptable. While considering the claim of the quantum of deduction
available under section 80-IB the passing on of expenditure to the
other unit while allocating common expenditure is too obvious an
aspect to have not been examined by the Assessing officer particularly
when he is considering the quantum of deduction available under
section 80-IB to one of the units. Therefore, one must necessarily
proceed on the basis that while examining the quantum of deduction to
be allowed under section 80-IB, the issue of allocation of expenditure
for that purpose would necessarily have been examined. Thus, there was
no tangible material to lead to a reason to believe that income had
escaped assessment but it was only change of opinion on part of
Assessing Officer on material available, thus, and it cannot be a
subject matter of reassessment. [Para 14]
■ Issue as regards failure to disclose material facts
■ So far as the second precondition for reopening of assessment
beyond the period of four years from the end of the relevant
assessment year is concerned, viz., failure to disclose fully and
truly all materials facts necessary for assessment is concerned, there
is no dispute that the assessee had in its accounts, viz., profit and
loss accounts allocated various common expenses between the non
section 80-IB unit and section 80-IB unit. This was also subject to
examination in determining the deduction available under section 80-IB
to Silvasa Unit. However, the objection of the revenue is that to
qualify as full and true disclosure the assessee was obliged to
disclose/point out to the Assessing officer that the common expenses
allocated by them between the Silvasa Unit and the Tarapur Unit can
also be differently allocated. This is rather strange as there is no
dispute that these expenses as allocated had been disclosed. However,
the reasons allege that the expenses had to be allocated in a
different ratio. The alternative methods/manner of allocation of
expenses is not for the assessee to disclose. This is beyond the realm
of disclosure of material facts necessary for assessment by the
assessee. Therefore, there has been disclosure of material facts truly
and fully for the purposes of assessment on the part of the
petitioner. [Para 15]
■ Thus the assessee had disclosed fully and truly all material facts
necessary for assessment. Even if it is assumed that the expenses were
not allocated appropriately between the non 80-IB unit and 80-IB unit
as contended by the revenue, yet the same was accepted by him while
considering the deduction under section 80-IB. To permit the present
proceedings for reassessment would be to permit the reopening
proceedings on account of change of opinion. If reassessment is
allowed, on the basis of said change of opinion, it would amount to
review which is not permissible under the law. [Para 17]
■ In view of the above, the notice dated 28-3-2013 under section 148
seeking to re-open the assessment for the assessment year 2006-07 as
well as the order dated 1-8-2013 rejecting the assessee's objections
to the re-opening of the assessment are bad in law. [Para 18]
CASE REVIEW
Honda Siel Power Products Ltd. v. Dy. CIT [2012] 340 ITR 53/[2011] 197
Taxman 415/10 taxmann.com 2 (Delhi) (para 16) distinguished.
CASES REFERRED TO
Honda Siel Power Products Ltd. v. Dy. CIT [2012] 340 ITR 53/[2011] 197
Taxman 415/10 taxmann.com 2 (Delhi) (para 10), CIT v. Kelvinator India
Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 11) and Calcutta
Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) (para 11).
Ms. Aasifa Khan for the Petitioner. Tejveer Singh for the Respondent.
JUDGMENT
M. S. Sanklecha, J. - Rule returnable forthwith. At the request of
learned Counsel for the parties, the petition is taken up for final
disposal.
2. By this Petition under Article 226 of the Constitution of India,
the petitioner challenges:—
(a) Notice dated 28 March 2013 issued by respondent No.1 -
(Assessing Officer) under Section 148 of the Income Tax Act, 1961 (the
Act) by which the assessment for the Assessment Years 2006-07 is
sought to be re-opened; and
(b) Order dated 1 August 2013 passed by the Assessing Officer
disposing the objections raised by the petitioner to the grounds for
re-opening of the assessment for Assessment Year 2006-07.
3. The petitioner is engaged in the business of manufacturing of
chemicals etc. It has two manufacturing units-one at Tarapur and
another at Silvasa. During the Assessment Year 2006-07, the petitioner
unit at Silvasa was entitled to the benefit of deduction under Section
80IB of the Act.
4. On 23 November 2006, the petitioner filed its return of income for
Assessment Year 2006-07 declaring its total income at Rs.1.23 Crores.
In its return, the petitioner had also claimed a deduction of Rs.31.99
lakhs under Section 80IB of the Act in respect of its Silvasa Unit.
5. The Assessing Officer took up the petitioner's case for scrutiny
assessment and on 29 August 2008 passed an Assessment Order under
Section 143(3) of the Act for the Assessment Year 2006-07. The
aforesaid order of Assessment dated 29 August 2008 reduced the claim
for deduction under Section 80IB of the Act from Rs.31.99 lakhs to
Rs.27.67 lakhs. Besides determining the total income of the petitioner
at Rs.1.27 Crores.
6. On 28 March 2013, the Assessing Officer issued a notice under
Section 148 of the Act to the petitioner seeking to re-open the
assessment for the Assessment Year 2006-07. This was on the ground
that he has reason to believe that the income chargeable to tax had
escaped assessment under Section 147 of the Act. On receipt of the
notice, the petitioner sought the reasons recorded by the Assessing
Officer for re- opening the assessment for the Assessment Year 2006-07
under Section 148 of the Act. Consequent to the above, the Assessing
Officer on 4 April 2013 furnished the reasons for re-opening of the
assessment for the Assessment Year 2006-07 which reads as under:—
"The assessee company is engaged in the business of manufacturing of
chemicals, metalic chemicals, metalic sterates, fatty acids, PVC
Stabilizers and Placticizers etc. It is having two manufacturing units
one each at Tarapur and Silvasa. In respect of manufacturing unit at
Silvasa, the assessee has claimed deduction u/s. 80IB of the I. T.
Act. In both the units the assessee was engaged in the production of
the identical items viz. PVC stabilizer and metallic sterates,
plasticizers, fatty acids, waxes and others. Both units consume same
raw material and manufacture same outputs. However, in respect of
Tarapur unit the assessee company had debited conversion charges of
Rs.3393254/- where as in r/o Silvasa Unit no such expenditure was
debited. All other expenditure (manufacturing) were more or less in
the said proportion of the turnover of both the units. As such,
conversion charges of both the units were debited in Tarapur unit
only. Proportionate expenses of silvasa unit would be Rs.1945004/-.
Similarly in respect of Administrative, selling and other expenditures
Tarapur unit with turnover of Rs.29.76 crore has been charged with
Rs.24976318/- whereas Silvasa unit (with turnover of Rs.30.61 crore)
had been charged with only Rs.12991615/-. Moreover, Director's
Remuneration of Rs.8400000/- has been charged on Tarapur Unit.
However, during Assessment Year 2005-06, only Rs.840,000/- paid to the
Directors of the Company. Thus there was 10 fold increase in the
directors remuneration during the A Y 2006-07. It would not be out of
place to mention here that even the Tarapur unit enjoyed the status of
80IB unit till A Y 2005-06. So the assessee company suppressed
expenses of 80IB unit by debiting excess expenses to non 80IB unit.
Expenses allowable to Silvasa Unit would be Rs.21763121/- and to
Tarapur unit Rs.16204812/-.
Thus profit of Tarapur unit would be more by Rs.10716510/- and profit
of Silvasa unit i.e. 80IB unit would be less by Rs.10716510/-. This
would render Silvasa unit not eligible for 80IB deduction during the
year as there would be no profit available for deduction. Therefore
,deduction of Rs.2767813/- allowed to the assessee company was
irregular. This has resulted in the under assessment of Rs.2767813/-.
In view of the above facts, I have reason to believe that income of
Rs.27,67,813/- chargeable to tax has escaped assessment by reason of
failure on the part of assessee to disclose fully and truly all
material facts with the meaning of Section 147 of the IT Act, 1961."
7. On 8 July 2013, the petitioner filed its letter dated 28 June 2013
objecting to the re-opening of the assessment for Assessment Year
2006-07. In particular, the petitioner pointed out that the re-opening
is sought to be done beyond the period of 4 years from the end of the
Assessment Year 2006-07. Thus, the notice for re-opening the
assessment is without jurisdiction as there has been no failure on its
part to disclose fully and truly all material facts necessary for
assessment for the Assessment Year 2006-07. In particular, the
petitioner pointed out that the entire claim of the petitioner for
deduction under Section 80IB of the Act was examined by the Assessing
Officer in detail during the assessment proceedings resulting in the
claim being reduced from Rs.31.99 lakhs to Rs.27.67 lakhs. Besides,
there is no tangible material indicated that would result in the
Assessing Officer having reason to believe that income for the
Assessment Year 2006-07 had escaped assessment. In view of the above,
it was requested that the notice dated 28 March 2013 issued under
Section 148 of the Act be withdrawn.
8. On 1st August 2013, the Assessing Officer rejected the petitioner's
objection dated 28th June 2013 to the reasons for re-opening the
assessment for the Assessment Year 2006-07. The Assessing Officer held
that there was a failure on the part of the petitioner to disclose
fully and truly all material facts necessary for assessment of
Assessment Year 2006-07. Further, it held that merely because the case
of the petitioner was accepted as correct in the original assessment,
would not preclude the re-opening of the assessment subsequently.
9. Ms. Aasifa Khan, learned Counsel appearing for the petitioner in
support of the petitioner submits :—
(a) The notice dated 28 March 2008 under Section 148 of the Act
seeking to re-open the assessment for Assessment Year 2006-07 is
without jurisdiction. This is so because the reasons furnished do not
indicate any tangible material to have reason to believe that income
chargeable to tax has escaped assessment. Besides, as in this case the
assessment being sought to be re-opened is beyond a period of four
years from the end of the Assessment Year, the reasons for reopening
do not indicate any failure on the part of the petitioner to truly and
fully disclose all material facts necessary for assessment. Both the
aforesaid conditions precedent are not satisfied in this case
resulting in the proceedings for reopening being without jurisdiction;
(b) The entire basis for re-opening of the assessment for Assessment
Year 2006-07 is that the claim for deduction under Section 80IB of the
Act made by the petitioner in respect of its Silvasa Unit was not
justified. This for the reason as stated in the grounds for reopening
is that expenses incurred in the operation of the Silvasa Unit were
debited to the Tarapur Unit without indicating any tangible material
in support of the same. Thus this is mere change of opinion and would
not warrant re-opening of assessment for Assessment Year 2006-07;
(c) During the original Assessment Proceedings, the claim of the
petitioner in respect of deduction under Section 80IB of the Act was
examined and in that context, the expenses and income of the Silvasa
Unit was also examined leading to reduction of claim for deduction
under Section 80IB of the Act from Rs.31.99 lakhs to Rs.27.67 lakhs;
and
(d) There was no failure on the part of the petitioner to disclose
fully and truly all expenses incurred by them in running its two Units
and the allocation of expenses between them.
10. As against the above, Mr. Tejveer Singh, learned Counsel appearing
for the revenue in support of the impugned notice and order urges the
following :—
(a) There was failure on the part of the petitioner to fully and
truly disclose all material facts during the course of Assessment
proceedings for the Assessment Year 2006-07 leading to the Assessment
order dated 28th August 2008. In particular, he submits that the
petitioner had suppressed expenses incurred in respect of 80IB Unit
i.e. Silvasa Unit by debiting its non 80IB unit i.e. Tarapur Unit and
failed to disclose this diversion of expenses during the course of the
assessment proceedings;
(b) This non-debiting of expenses to the Silvasa Unit had resulted
in increasing profit to the Silvasa Unit so as to enable enjoyment of
the benefit of deduction under Section 80IB of the Act. Thus resulting
in claiming excessive relief under Section 80IB of the Act and the
same is in terms of Explanation 2 to Section 147 of the Act deemed to
be a case where income chargeable to tax has escaped assessment;
(c) On an identical issue, the Delhi High Court in Honda Siel Power
Products Ltd. v. Dy. CIT [2012] 340 ITR 53/[2011] 197 Taxman 415/10
taxmann.com 2 has held in case of assessment sought to be reopened
after the end of four years from the end of the relevant assessment
year that there was a failure to disclose fully and truly all material
facts when the petitioner failed to disclose the proportionate
expenses relating to tax free income. This expenditure was included in
the expenditure incurred in earning taxable income and thus reducing
the taxable profits. This decision in Honda Siel Power Products Ltd.
(supra) would apply to the present facts; and
(d) The claim of the petitioner that the allocation of the
expenditure between non 80IB unit and 80IB unit was appropriate/ just
could be considered during the course of re-assessment proceedings. At
this stage, the Court should not interdict the re-opening proceedings,
by quashing the impugned orders.
11. It is a settled position in law that under the Act, the Assessing
Officer has power to re-assess but has no power to review an
assessment as settled by the Apex Court in the matter of CIT v.
Kelvinator India Ltd. [2010] 320 ITR 561/187 Taxman 312. The power of
re-assessment could only be exercised if certain pre-conditions are
satisfied. The primary conditions being that the Assessing Officer
must have reason to believe that income chargeable to tax has escaped
assessment. This reason to believe must be based upon some tangible
material i.e. it cannot be a mere ipsi dixit of the Assessing Officer.
A different view on tangible material available earlier would be a
change of opinion and not amount to reason to believe that income
chargeable to tax has escaped assessment. Besides, one more additional
requirement to be satisfied where assessment sought to be re-opened is
beyond the period of 4 years from the end of the relevant years, is
that there must be a failure on the part of the assessee to truly and
fully disclose all material facts necessary for assessment. Further,
the obligation of an assessee is only to disclose fully and truly all
material facts necessary for assessment. It is not the job of the
assessee to disclose the legal inferences to de drawn from those facts
as held by the Apex Court in Calcutta Discount Co. Ltd. v. ITO [1961]
41 ITR 191. At the stage of issuing of a notice to reopen the only
question to be considered is whether there is relevant material to
form the reasonable belief that income has escaped assessment and not
whether the material is sufficient to prove beyond doubt that income
has in fact escaped assessment.
12. We shall now consider the rival submissions keeping in mind the
settled legal position as mentioned hereinabove. The admitted /
undisputed position between the parties is:
(a) the assessment sought to be re-opened by the impugned notice
dated 28 March 2013 is beyond a period of 4 years from the end of the
relevant Assessment Year i.e. Assessment Year 2006-07;
(b) during the course of the original Assessment Proceedings the
petitioner had claimed benefit of deduction under Section 80IB of the
Act in respect of its Silvasa Unit. This claim for deduction under
Section 80IB of the Act had been examined and reduced from Rs.31.99
lakhs to Rs.27.67 lakhs;
(c) the petitioner had in its accounts viz. profit and loss accounts
allocated various common expenses between the non 80IB unit and 80IB
unit and this was a vital ingredient in determining the deduction
available under Section 80IB of the Act to the Silvasa Unit; and
(d) according to the revenue income chargeable to tax has escaped
assessment in view of excessive relief having been granted in respect
of deduction under Section 80IB of the Act (as noted in the impugned
order 1st August 2013)
13. As the assessment sought to be reopened is beyond the expiry of
four years from the end of the relevant assessment year i.e. 2006-07,
two conditions precedent have to be satisfied. Firstly, the Assessing
officer issuing the notice for reassessment must have reason to
believe that income chargeable to tax has escaped assessment on the
basis of tangible material and secondly there must be a failure to
disclose truly and fully all facts necessary for assessment when the
original assessment proceedings took place.
14. So far as the first precondition for reopening is concerned, we
find that reasons as disclosed rely upon the same tangible material
which was and/or ought to have been a subject matter of examination
before determining the deduction available under Section 80IB of the
Act and passing the Assessment order. The material which forms the
basis of reason to believe is the allocation of expenditure between
the two units leading to higher deduction under Section 80IB of the
Act in respect of the petitioner's Silvasa Unit. We find that during
the Assessment proceedings the Assessing Officer has examined the
claim for deduction under Section 80IB of the Act and for that purpose
had called upon the petitioner to file details of expenses claimed in
its profit and loss account. This allocation of expenditure between
the two units was very much present before the Assessing Officer while
considering the claim for deduction under Section 80IB of the Act with
regard to Silvasa Unit. The Assessing Officer at that point of time
appears to have been satisfied that the allocation of expenditure made
by the petitioner between the two units and did not reduce the claim
by increasing the expenditure attributable to Silvassa Unit. The
contention of the revenue that this aspect of the matter has not in
terms been dealt with and/or examined in the Assessment order is not
acceptable. We find that while considering the claim of the quantum of
deduction available under Section 80IB of the Act the passing on of
expenditure to the other unit while allocating common expenditure is
too obvious an aspect to have not been examined by the Assessing
officer particularly when he is considering the quantum of deduction
available under Section 80IB to one of the units i.e. Silvasa Unit.
Therefore one must necessarily proceed on the basis that while
examining the quantum of deduction to be allowed under Section 80IB of
the Act (which admittedly the assessment order does consider) the
issue of allocation of expenditure for that purposes would necessarily
have been examined. Therefore there is no tangible material to lead to
a reason to believe that income has escaped assessment but only change
of opinion on the part of the Assessing Officer on the material
available, thus cannot be a subject matter of reassessment.
15. So far as the second precondition for reopening of assessment
beyond the period of four years from the end of the relevant
assessment year is concerned viz. failure to disclose fully and truly
all materials facts necessary for assessment is concerned there is no
dispute that the petitioner had in its accounts viz. profit and loss
accounts allocated various common expenses between the non 80IB unit
and 80IB unit. This was also subject to examination in determining the
deduction available under Section 80IB of the Act to the Silvasa Unit.
However the objection of Mr. Tejveer Singh on behalf of the revenue is
that to qualify as full and true disclosure the petitioner was obliged
to disclose/point out to the Assessing officer that the common
expenses allocated by them between the Silvasa Unit and the Tarapur
Unit can also be differently allocated. We find this rather strange as
there is no dispute that these expenses as allocated had been
disclosed. However the reasons allege that the expenses had to be
allocated in a different ratio. The alternative methods/manner of
allocation of expenses is not for the assessee to disclose. This is
beyond the realm of disclosure of material facts necessary for
assessment by the assessee. Therefore we find that there has been
disclosure of material facts truly and fully for the purposes of
assessment on the part of the petitioner.
16. The reliance by the revenue upon the decision of Delhi High Court
in Honda Siel Power Products Ltd. (supra) is misplaced. In the above
case the revenue sought to reopen an assessment beyond the end of four
years from the end of the relevant Assessment year 2000-2001 on the
ground of failure to fully and truly disclose all material facts
during the original assessment proceedings. In its return of income as
originally filed no details with regard to proportionate expenses
relatable to tax free and other income were furnished and deduction of
all expenses from taxable income was claimed. The case of the
petitioner therein was that there was no obligation when the return
was filed in 2000 to disclose the proportionate expenses relating to
tax free income as Section 14-A of the Act was not in the statute.
However the court held that Section 14-A of the Act was brought on the
statute on 1 April 2001 w.e.f. 1962. Thus during the course of
assessment proceedings which culminated with an Assessment order on 30
November 2003, the petitioner therein was required to disclose the
facts during the Assessment Proceedings. Thus the court held there was
a failure to disclose material facts truly and fully leading to the
court not interfering with the notice for reopening under section 148
of the Act even when the same was beyond a period of four years from
the end of the relevant assessment year. Besides unlike in the case of
Honda Siel Power Products Ltd. (supra) where no disclosure of expenses
incurred in respect of tax free income was at all made, in this case
the petitioner had disclosed the allocation of expenditure between the
non 80IB unit and 80IB unit in its profit and loss accounts and would
obviously been subject of scrutiny while considering the claim for
deduction under Section 80IB of the Act.
17. Thus we are of the view that the petitioner had disclosed fully
and truly all material facts necessary for assessment. Even if it is
assumed that the expenses were not allocated appropriately between the
Tarapur Unit (non 80IB unit) and Silvasa unit (80IB unit) as contended
by the revenue, yet the same was accepted by him while considering the
deduction under Section 80IB of the Act. To permit the present
proceedings for reassessment would be to permit the reopening
proceedings on account of change of opinion. If re-assessment is
allowed, on the basis of said change of opinion, it would amount to
review which is not permissible under the law.
18. In view of the above, we are of the view that the notice dated 28
March 2013 under Section 148 of the Act, seeking to re-open the
assessment for the Assessment Year 2006-07 as well as the order dated
1 August 2013 rejecting the petitioner's objections to the re-opening
of the assessment are bad in law. Therefore, the impugned notice dated
28th March 2013 and order dated 1 August 2013 are quashed and set
aside.
19. Petition allowed. Rule made absolute in the above terms with no
order as to costs.
POOJA
*In favour of assessee.
allowance of excessive deduction under section 80-IB but facts
revealed that claim for deduction under section 80-IB was allowed in
original assessment after consideration
■■■
[2014] 45 taxmann.com 451 (Bombay)
HIGH COURT OF BOMBAY
Lalitha Chem Industries (P.) Ltd.
v.
Deputy Commissioner of Income-tax - 9 (2)*
MOHIT S. SHAH, CJ.
M. S. SANKLECHA, J.
WRIT PETITION (L) NO. 2741 OF 2013
NOVEMBER 27, 2013
Section 80-IB, read with section 147, of the Income-tax Act, 1961 -
Deductions - Profits and gains from industrial undertakings other than
infrastructure development undertakings (Reassessment) - Assessment
year 2006-07 - Assessee, engaged in business of manufacturing of
chemicals, had two manufacturing units-one at Tarapur and another at
Silvasa - Assessee claimed deduction under section 80-IB in respect of
its Silvasa unit - Said claim had been examined and reduced by
Assessing Officer in assessment - Thereafter, assessment was sought to
be re-opened on ground that assessee had suppressed expenses incurred
in respect of Silvasa unit by debiting expenses to its Tarapur unit
which had resulted in increasing profit of Silvasa unit and, thus,
assessee had enjoyed excessive deduction under section 80-IB - Whether
since assessee had in its profit and loss account had allocated
various common expenses between Silvasa unit and Tarapur unit and
issue of allocation of expenditure was very much available before
Assessing Officer while examining quantum of deduction under section
80-IB in original assessment, initiation of reassessment was bad in
law - Held, yes [Paras 14 and 17] [In favour of assessee]
FACTS
■ The assessee was engaged in the business of manufacturing of
chemicals, etc. It had two manufacturing units-one at Tarapur and
another at Silvasa.
■ During the course of the original assessment proceedings, the
assessee had claimed benefit of deduction under section 80-IB in
respect of its Silvasa Unit. This claim for deduction under section
80-IB had been duly examined and reduced in assessment and allowed
accordingly.
■ Thereafter, the Assessing Officer noticed that the assessee had
suppressed expenses incurred in respect of Silvasa Unit by debiting
its Tarapur Unit and did not disclose this diversion of expenses
during the course of the assessment proceedings. This diversion had
resulted in increasing profit to Silvasa Unit so as to enable
enjoyment of the benefit of excessive deduction under section 80-IB.
■ The assessment was sought to be re-opened by issuing the notice
under section 148 beyond a period of 4 years from the end of the
relevant assessment year.
■ The assessee challenged said re-opening contending that the notice
for re-opening the assessment was without jurisdiction as there had
been no failure on its part to disclose fully and truly all material
facts necessary for assessment, and the entire claim of the assessee
for deduction under section 80-IB was examined by the Assessing
Officer in detail during the assessment proceedings.
HELD
■ Issue as regards tangible material to re-open assessment
■ As the assessment sought to be reopened is beyond the expiry of
four years from the end of the relevant assessment year, i.e.,
2006-07, two conditions precedent have to be satisfied. Firstly, the
Assessing officer issuing the notice for reassessment must have reason
to believe that income chargeable to tax has escaped assessment on the
basis of tangible material and secondly, there must be a failure to
disclose truly and fully all facts necessary for assessment when the
original assessment proceedings took place. [Para 13]
■ So far as the first precondition for reopening is concerned,
reasons as disclosed rely upon the same tangible material which was
and/or ought to have been a subject-matter of examination before
determining the deduction available under section 80-IB and passing
the assessment order. The material which forms the basis of reason to
believe is the allocation of expenditure between the two units leading
to higher deduction under section 80-IB in respect of the assessee's
Silvasa Unit. During the assessment proceedings, the Assessing Officer
has examined the claim for deduction under section 80-IB and for that
purpose he had called upon the assessee to filed details of expenses
claimed in its profit and loss account. This allocation of expenditure
between the two units was very much present before the Assessing
Officer while considering the claim for deduction under section 80-IB
with regard to Silvasa Unit. The Assessing Officer at that point of
time appears to have been satisfied with the allocation of expenditure
made by the assessee between the two units and did not reduce the
claim by increasing the expenditure attributable to Silvasa Unit. The
contention of the revenue that this aspect of the matter has not in
terms been dealt with and/or examined in the assessment order is not
acceptable. While considering the claim of the quantum of deduction
available under section 80-IB the passing on of expenditure to the
other unit while allocating common expenditure is too obvious an
aspect to have not been examined by the Assessing officer particularly
when he is considering the quantum of deduction available under
section 80-IB to one of the units. Therefore, one must necessarily
proceed on the basis that while examining the quantum of deduction to
be allowed under section 80-IB, the issue of allocation of expenditure
for that purpose would necessarily have been examined. Thus, there was
no tangible material to lead to a reason to believe that income had
escaped assessment but it was only change of opinion on part of
Assessing Officer on material available, thus, and it cannot be a
subject matter of reassessment. [Para 14]
■ Issue as regards failure to disclose material facts
■ So far as the second precondition for reopening of assessment
beyond the period of four years from the end of the relevant
assessment year is concerned, viz., failure to disclose fully and
truly all materials facts necessary for assessment is concerned, there
is no dispute that the assessee had in its accounts, viz., profit and
loss accounts allocated various common expenses between the non
section 80-IB unit and section 80-IB unit. This was also subject to
examination in determining the deduction available under section 80-IB
to Silvasa Unit. However, the objection of the revenue is that to
qualify as full and true disclosure the assessee was obliged to
disclose/point out to the Assessing officer that the common expenses
allocated by them between the Silvasa Unit and the Tarapur Unit can
also be differently allocated. This is rather strange as there is no
dispute that these expenses as allocated had been disclosed. However,
the reasons allege that the expenses had to be allocated in a
different ratio. The alternative methods/manner of allocation of
expenses is not for the assessee to disclose. This is beyond the realm
of disclosure of material facts necessary for assessment by the
assessee. Therefore, there has been disclosure of material facts truly
and fully for the purposes of assessment on the part of the
petitioner. [Para 15]
■ Thus the assessee had disclosed fully and truly all material facts
necessary for assessment. Even if it is assumed that the expenses were
not allocated appropriately between the non 80-IB unit and 80-IB unit
as contended by the revenue, yet the same was accepted by him while
considering the deduction under section 80-IB. To permit the present
proceedings for reassessment would be to permit the reopening
proceedings on account of change of opinion. If reassessment is
allowed, on the basis of said change of opinion, it would amount to
review which is not permissible under the law. [Para 17]
■ In view of the above, the notice dated 28-3-2013 under section 148
seeking to re-open the assessment for the assessment year 2006-07 as
well as the order dated 1-8-2013 rejecting the assessee's objections
to the re-opening of the assessment are bad in law. [Para 18]
CASE REVIEW
Honda Siel Power Products Ltd. v. Dy. CIT [2012] 340 ITR 53/[2011] 197
Taxman 415/10 taxmann.com 2 (Delhi) (para 16) distinguished.
CASES REFERRED TO
Honda Siel Power Products Ltd. v. Dy. CIT [2012] 340 ITR 53/[2011] 197
Taxman 415/10 taxmann.com 2 (Delhi) (para 10), CIT v. Kelvinator India
Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 11) and Calcutta
Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) (para 11).
Ms. Aasifa Khan for the Petitioner. Tejveer Singh for the Respondent.
JUDGMENT
M. S. Sanklecha, J. - Rule returnable forthwith. At the request of
learned Counsel for the parties, the petition is taken up for final
disposal.
2. By this Petition under Article 226 of the Constitution of India,
the petitioner challenges:—
(a) Notice dated 28 March 2013 issued by respondent No.1 -
(Assessing Officer) under Section 148 of the Income Tax Act, 1961 (the
Act) by which the assessment for the Assessment Years 2006-07 is
sought to be re-opened; and
(b) Order dated 1 August 2013 passed by the Assessing Officer
disposing the objections raised by the petitioner to the grounds for
re-opening of the assessment for Assessment Year 2006-07.
3. The petitioner is engaged in the business of manufacturing of
chemicals etc. It has two manufacturing units-one at Tarapur and
another at Silvasa. During the Assessment Year 2006-07, the petitioner
unit at Silvasa was entitled to the benefit of deduction under Section
80IB of the Act.
4. On 23 November 2006, the petitioner filed its return of income for
Assessment Year 2006-07 declaring its total income at Rs.1.23 Crores.
In its return, the petitioner had also claimed a deduction of Rs.31.99
lakhs under Section 80IB of the Act in respect of its Silvasa Unit.
5. The Assessing Officer took up the petitioner's case for scrutiny
assessment and on 29 August 2008 passed an Assessment Order under
Section 143(3) of the Act for the Assessment Year 2006-07. The
aforesaid order of Assessment dated 29 August 2008 reduced the claim
for deduction under Section 80IB of the Act from Rs.31.99 lakhs to
Rs.27.67 lakhs. Besides determining the total income of the petitioner
at Rs.1.27 Crores.
6. On 28 March 2013, the Assessing Officer issued a notice under
Section 148 of the Act to the petitioner seeking to re-open the
assessment for the Assessment Year 2006-07. This was on the ground
that he has reason to believe that the income chargeable to tax had
escaped assessment under Section 147 of the Act. On receipt of the
notice, the petitioner sought the reasons recorded by the Assessing
Officer for re- opening the assessment for the Assessment Year 2006-07
under Section 148 of the Act. Consequent to the above, the Assessing
Officer on 4 April 2013 furnished the reasons for re-opening of the
assessment for the Assessment Year 2006-07 which reads as under:—
"The assessee company is engaged in the business of manufacturing of
chemicals, metalic chemicals, metalic sterates, fatty acids, PVC
Stabilizers and Placticizers etc. It is having two manufacturing units
one each at Tarapur and Silvasa. In respect of manufacturing unit at
Silvasa, the assessee has claimed deduction u/s. 80IB of the I. T.
Act. In both the units the assessee was engaged in the production of
the identical items viz. PVC stabilizer and metallic sterates,
plasticizers, fatty acids, waxes and others. Both units consume same
raw material and manufacture same outputs. However, in respect of
Tarapur unit the assessee company had debited conversion charges of
Rs.3393254/- where as in r/o Silvasa Unit no such expenditure was
debited. All other expenditure (manufacturing) were more or less in
the said proportion of the turnover of both the units. As such,
conversion charges of both the units were debited in Tarapur unit
only. Proportionate expenses of silvasa unit would be Rs.1945004/-.
Similarly in respect of Administrative, selling and other expenditures
Tarapur unit with turnover of Rs.29.76 crore has been charged with
Rs.24976318/- whereas Silvasa unit (with turnover of Rs.30.61 crore)
had been charged with only Rs.12991615/-. Moreover, Director's
Remuneration of Rs.8400000/- has been charged on Tarapur Unit.
However, during Assessment Year 2005-06, only Rs.840,000/- paid to the
Directors of the Company. Thus there was 10 fold increase in the
directors remuneration during the A Y 2006-07. It would not be out of
place to mention here that even the Tarapur unit enjoyed the status of
80IB unit till A Y 2005-06. So the assessee company suppressed
expenses of 80IB unit by debiting excess expenses to non 80IB unit.
Expenses allowable to Silvasa Unit would be Rs.21763121/- and to
Tarapur unit Rs.16204812/-.
Thus profit of Tarapur unit would be more by Rs.10716510/- and profit
of Silvasa unit i.e. 80IB unit would be less by Rs.10716510/-. This
would render Silvasa unit not eligible for 80IB deduction during the
year as there would be no profit available for deduction. Therefore
,deduction of Rs.2767813/- allowed to the assessee company was
irregular. This has resulted in the under assessment of Rs.2767813/-.
In view of the above facts, I have reason to believe that income of
Rs.27,67,813/- chargeable to tax has escaped assessment by reason of
failure on the part of assessee to disclose fully and truly all
material facts with the meaning of Section 147 of the IT Act, 1961."
7. On 8 July 2013, the petitioner filed its letter dated 28 June 2013
objecting to the re-opening of the assessment for Assessment Year
2006-07. In particular, the petitioner pointed out that the re-opening
is sought to be done beyond the period of 4 years from the end of the
Assessment Year 2006-07. Thus, the notice for re-opening the
assessment is without jurisdiction as there has been no failure on its
part to disclose fully and truly all material facts necessary for
assessment for the Assessment Year 2006-07. In particular, the
petitioner pointed out that the entire claim of the petitioner for
deduction under Section 80IB of the Act was examined by the Assessing
Officer in detail during the assessment proceedings resulting in the
claim being reduced from Rs.31.99 lakhs to Rs.27.67 lakhs. Besides,
there is no tangible material indicated that would result in the
Assessing Officer having reason to believe that income for the
Assessment Year 2006-07 had escaped assessment. In view of the above,
it was requested that the notice dated 28 March 2013 issued under
Section 148 of the Act be withdrawn.
8. On 1st August 2013, the Assessing Officer rejected the petitioner's
objection dated 28th June 2013 to the reasons for re-opening the
assessment for the Assessment Year 2006-07. The Assessing Officer held
that there was a failure on the part of the petitioner to disclose
fully and truly all material facts necessary for assessment of
Assessment Year 2006-07. Further, it held that merely because the case
of the petitioner was accepted as correct in the original assessment,
would not preclude the re-opening of the assessment subsequently.
9. Ms. Aasifa Khan, learned Counsel appearing for the petitioner in
support of the petitioner submits :—
(a) The notice dated 28 March 2008 under Section 148 of the Act
seeking to re-open the assessment for Assessment Year 2006-07 is
without jurisdiction. This is so because the reasons furnished do not
indicate any tangible material to have reason to believe that income
chargeable to tax has escaped assessment. Besides, as in this case the
assessment being sought to be re-opened is beyond a period of four
years from the end of the Assessment Year, the reasons for reopening
do not indicate any failure on the part of the petitioner to truly and
fully disclose all material facts necessary for assessment. Both the
aforesaid conditions precedent are not satisfied in this case
resulting in the proceedings for reopening being without jurisdiction;
(b) The entire basis for re-opening of the assessment for Assessment
Year 2006-07 is that the claim for deduction under Section 80IB of the
Act made by the petitioner in respect of its Silvasa Unit was not
justified. This for the reason as stated in the grounds for reopening
is that expenses incurred in the operation of the Silvasa Unit were
debited to the Tarapur Unit without indicating any tangible material
in support of the same. Thus this is mere change of opinion and would
not warrant re-opening of assessment for Assessment Year 2006-07;
(c) During the original Assessment Proceedings, the claim of the
petitioner in respect of deduction under Section 80IB of the Act was
examined and in that context, the expenses and income of the Silvasa
Unit was also examined leading to reduction of claim for deduction
under Section 80IB of the Act from Rs.31.99 lakhs to Rs.27.67 lakhs;
and
(d) There was no failure on the part of the petitioner to disclose
fully and truly all expenses incurred by them in running its two Units
and the allocation of expenses between them.
10. As against the above, Mr. Tejveer Singh, learned Counsel appearing
for the revenue in support of the impugned notice and order urges the
following :—
(a) There was failure on the part of the petitioner to fully and
truly disclose all material facts during the course of Assessment
proceedings for the Assessment Year 2006-07 leading to the Assessment
order dated 28th August 2008. In particular, he submits that the
petitioner had suppressed expenses incurred in respect of 80IB Unit
i.e. Silvasa Unit by debiting its non 80IB unit i.e. Tarapur Unit and
failed to disclose this diversion of expenses during the course of the
assessment proceedings;
(b) This non-debiting of expenses to the Silvasa Unit had resulted
in increasing profit to the Silvasa Unit so as to enable enjoyment of
the benefit of deduction under Section 80IB of the Act. Thus resulting
in claiming excessive relief under Section 80IB of the Act and the
same is in terms of Explanation 2 to Section 147 of the Act deemed to
be a case where income chargeable to tax has escaped assessment;
(c) On an identical issue, the Delhi High Court in Honda Siel Power
Products Ltd. v. Dy. CIT [2012] 340 ITR 53/[2011] 197 Taxman 415/10
taxmann.com 2 has held in case of assessment sought to be reopened
after the end of four years from the end of the relevant assessment
year that there was a failure to disclose fully and truly all material
facts when the petitioner failed to disclose the proportionate
expenses relating to tax free income. This expenditure was included in
the expenditure incurred in earning taxable income and thus reducing
the taxable profits. This decision in Honda Siel Power Products Ltd.
(supra) would apply to the present facts; and
(d) The claim of the petitioner that the allocation of the
expenditure between non 80IB unit and 80IB unit was appropriate/ just
could be considered during the course of re-assessment proceedings. At
this stage, the Court should not interdict the re-opening proceedings,
by quashing the impugned orders.
11. It is a settled position in law that under the Act, the Assessing
Officer has power to re-assess but has no power to review an
assessment as settled by the Apex Court in the matter of CIT v.
Kelvinator India Ltd. [2010] 320 ITR 561/187 Taxman 312. The power of
re-assessment could only be exercised if certain pre-conditions are
satisfied. The primary conditions being that the Assessing Officer
must have reason to believe that income chargeable to tax has escaped
assessment. This reason to believe must be based upon some tangible
material i.e. it cannot be a mere ipsi dixit of the Assessing Officer.
A different view on tangible material available earlier would be a
change of opinion and not amount to reason to believe that income
chargeable to tax has escaped assessment. Besides, one more additional
requirement to be satisfied where assessment sought to be re-opened is
beyond the period of 4 years from the end of the relevant years, is
that there must be a failure on the part of the assessee to truly and
fully disclose all material facts necessary for assessment. Further,
the obligation of an assessee is only to disclose fully and truly all
material facts necessary for assessment. It is not the job of the
assessee to disclose the legal inferences to de drawn from those facts
as held by the Apex Court in Calcutta Discount Co. Ltd. v. ITO [1961]
41 ITR 191. At the stage of issuing of a notice to reopen the only
question to be considered is whether there is relevant material to
form the reasonable belief that income has escaped assessment and not
whether the material is sufficient to prove beyond doubt that income
has in fact escaped assessment.
12. We shall now consider the rival submissions keeping in mind the
settled legal position as mentioned hereinabove. The admitted /
undisputed position between the parties is:
(a) the assessment sought to be re-opened by the impugned notice
dated 28 March 2013 is beyond a period of 4 years from the end of the
relevant Assessment Year i.e. Assessment Year 2006-07;
(b) during the course of the original Assessment Proceedings the
petitioner had claimed benefit of deduction under Section 80IB of the
Act in respect of its Silvasa Unit. This claim for deduction under
Section 80IB of the Act had been examined and reduced from Rs.31.99
lakhs to Rs.27.67 lakhs;
(c) the petitioner had in its accounts viz. profit and loss accounts
allocated various common expenses between the non 80IB unit and 80IB
unit and this was a vital ingredient in determining the deduction
available under Section 80IB of the Act to the Silvasa Unit; and
(d) according to the revenue income chargeable to tax has escaped
assessment in view of excessive relief having been granted in respect
of deduction under Section 80IB of the Act (as noted in the impugned
order 1st August 2013)
13. As the assessment sought to be reopened is beyond the expiry of
four years from the end of the relevant assessment year i.e. 2006-07,
two conditions precedent have to be satisfied. Firstly, the Assessing
officer issuing the notice for reassessment must have reason to
believe that income chargeable to tax has escaped assessment on the
basis of tangible material and secondly there must be a failure to
disclose truly and fully all facts necessary for assessment when the
original assessment proceedings took place.
14. So far as the first precondition for reopening is concerned, we
find that reasons as disclosed rely upon the same tangible material
which was and/or ought to have been a subject matter of examination
before determining the deduction available under Section 80IB of the
Act and passing the Assessment order. The material which forms the
basis of reason to believe is the allocation of expenditure between
the two units leading to higher deduction under Section 80IB of the
Act in respect of the petitioner's Silvasa Unit. We find that during
the Assessment proceedings the Assessing Officer has examined the
claim for deduction under Section 80IB of the Act and for that purpose
had called upon the petitioner to file details of expenses claimed in
its profit and loss account. This allocation of expenditure between
the two units was very much present before the Assessing Officer while
considering the claim for deduction under Section 80IB of the Act with
regard to Silvasa Unit. The Assessing Officer at that point of time
appears to have been satisfied that the allocation of expenditure made
by the petitioner between the two units and did not reduce the claim
by increasing the expenditure attributable to Silvassa Unit. The
contention of the revenue that this aspect of the matter has not in
terms been dealt with and/or examined in the Assessment order is not
acceptable. We find that while considering the claim of the quantum of
deduction available under Section 80IB of the Act the passing on of
expenditure to the other unit while allocating common expenditure is
too obvious an aspect to have not been examined by the Assessing
officer particularly when he is considering the quantum of deduction
available under Section 80IB to one of the units i.e. Silvasa Unit.
Therefore one must necessarily proceed on the basis that while
examining the quantum of deduction to be allowed under Section 80IB of
the Act (which admittedly the assessment order does consider) the
issue of allocation of expenditure for that purposes would necessarily
have been examined. Therefore there is no tangible material to lead to
a reason to believe that income has escaped assessment but only change
of opinion on the part of the Assessing Officer on the material
available, thus cannot be a subject matter of reassessment.
15. So far as the second precondition for reopening of assessment
beyond the period of four years from the end of the relevant
assessment year is concerned viz. failure to disclose fully and truly
all materials facts necessary for assessment is concerned there is no
dispute that the petitioner had in its accounts viz. profit and loss
accounts allocated various common expenses between the non 80IB unit
and 80IB unit. This was also subject to examination in determining the
deduction available under Section 80IB of the Act to the Silvasa Unit.
However the objection of Mr. Tejveer Singh on behalf of the revenue is
that to qualify as full and true disclosure the petitioner was obliged
to disclose/point out to the Assessing officer that the common
expenses allocated by them between the Silvasa Unit and the Tarapur
Unit can also be differently allocated. We find this rather strange as
there is no dispute that these expenses as allocated had been
disclosed. However the reasons allege that the expenses had to be
allocated in a different ratio. The alternative methods/manner of
allocation of expenses is not for the assessee to disclose. This is
beyond the realm of disclosure of material facts necessary for
assessment by the assessee. Therefore we find that there has been
disclosure of material facts truly and fully for the purposes of
assessment on the part of the petitioner.
16. The reliance by the revenue upon the decision of Delhi High Court
in Honda Siel Power Products Ltd. (supra) is misplaced. In the above
case the revenue sought to reopen an assessment beyond the end of four
years from the end of the relevant Assessment year 2000-2001 on the
ground of failure to fully and truly disclose all material facts
during the original assessment proceedings. In its return of income as
originally filed no details with regard to proportionate expenses
relatable to tax free and other income were furnished and deduction of
all expenses from taxable income was claimed. The case of the
petitioner therein was that there was no obligation when the return
was filed in 2000 to disclose the proportionate expenses relating to
tax free income as Section 14-A of the Act was not in the statute.
However the court held that Section 14-A of the Act was brought on the
statute on 1 April 2001 w.e.f. 1962. Thus during the course of
assessment proceedings which culminated with an Assessment order on 30
November 2003, the petitioner therein was required to disclose the
facts during the Assessment Proceedings. Thus the court held there was
a failure to disclose material facts truly and fully leading to the
court not interfering with the notice for reopening under section 148
of the Act even when the same was beyond a period of four years from
the end of the relevant assessment year. Besides unlike in the case of
Honda Siel Power Products Ltd. (supra) where no disclosure of expenses
incurred in respect of tax free income was at all made, in this case
the petitioner had disclosed the allocation of expenditure between the
non 80IB unit and 80IB unit in its profit and loss accounts and would
obviously been subject of scrutiny while considering the claim for
deduction under Section 80IB of the Act.
17. Thus we are of the view that the petitioner had disclosed fully
and truly all material facts necessary for assessment. Even if it is
assumed that the expenses were not allocated appropriately between the
Tarapur Unit (non 80IB unit) and Silvasa unit (80IB unit) as contended
by the revenue, yet the same was accepted by him while considering the
deduction under Section 80IB of the Act. To permit the present
proceedings for reassessment would be to permit the reopening
proceedings on account of change of opinion. If re-assessment is
allowed, on the basis of said change of opinion, it would amount to
review which is not permissible under the law.
18. In view of the above, we are of the view that the notice dated 28
March 2013 under Section 148 of the Act, seeking to re-open the
assessment for the Assessment Year 2006-07 as well as the order dated
1 August 2013 rejecting the petitioner's objections to the re-opening
of the assessment are bad in law. Therefore, the impugned notice dated
28th March 2013 and order dated 1 August 2013 are quashed and set
aside.
19. Petition allowed. Rule made absolute in the above terms with no
order as to costs.
POOJA
*In favour of assessee.
IT : Where there was no commercial consideration or business
expediency for payment of, excessive commission, payment of commission
should be restricted to sum as allowed to other workers
■■■
[2014] 46 taxmann.com 171 (Allahabad)
HIGH COURT OF ALLAHABAD
S. M. Haq
v.
Commissioner of Income-tax*
R. K. AGRAWAL AND PRAKASH KRISHNA, JJ.
INCOME-TAX REFERENCE NO. 76 OF 1986
JANUARY 10, 2013
Section 40(A)(2) of the Income-tax Act, 1961 - Business disallowance -
Excessive or unreasonable payments (Commission) - Assessment year
1977-78 - Assessee, a partnership firm, was enjoying income from
manufacture and sale of tobacco - It had paid excessive commission to
son of one of partners named 'Habib' on account of utilization of his
services in labour, production, packing and dispatch - Same was
disallowed - Facts revealed that Habib was having no expertise in
preparing tobacco and was employed to render service only in new
factory but he had been given commission on entire production -
Whether payment of commission be restricted to sum as allowed to other
workers, particularly when there was no commercial consideration or
business expediency for payment of excessive amount - Held, yes [Paras
6 & 7] [In favour of revenue]
FACTS
■ The assessee, a partnership firm, was enjoying income from
manufacture and sale of tobacco.
■ It had paid excessive commission to one Habib who was son of the
one of the partners and whose services were utilised in execution of
orders and supervision of the production.
■ However, the Assessing Authority examined Habib on oath and
invoked the provisions of section 40A(2)(a). He allowed the deduction
of Rs. 3000 and the balance commission was disallowed.
■ The Commissioner (Appeals) did not accept the plea of the
assessee and confirmed the disallowance.
■ The Tribunal partly allowed the appeal and enhanced the
commission to Rs. 6000 from Rs. 3000 as allowed by the Assessing
Officer.
■ On further appeal, the assessee submitted that Habib had
expertise in preparing mixture of perfumed tobacco and by his effort
the production was increased almost 100 per cent and, therefore, the
commission paid to Habib was fully justified.
■ On further appeal:
HELD
■ From the findings recorded by the Tribunal it is absolutely clear
that Habib was aged about 21 years during the previous year relevant
to the assessment year in question and was still studying. He had no
expertise in preparing tobacco mixtures. Even though he claimed to
have made purchases and placed orders he could only remember the names
of two sellers and did not remember the names of the other sellers.
The assessee-firm had engaged Habib to look after the labour,
production, packing and despatch and he was not at all entrusted with
the work of making purchases. In the statement given by Habib there is
no whisper about his looking after the labour, production, packing and
dispatch of goods. The acquiring of expertise had also been doubted by
the Tribunal. The Tribunal has also recorded that he had been given
commission on the entire production whereas he was employed to render
services only in the new factory. Besides Habib several other persons
had been paid commission for working along with him. The Tribunal,
therefore, restricted the payment of commission to Rs. 6000. On the
finding recorded by the Tribunal the Tribunal was justified in holding
that the payment of commission was excessive as there was no
commercial consideration or business expediency for payment of such
excessive amount. Moreover, the findings recorded by the Tribunal are
based on relevant material and evidence on record. [Para 7]
CASES REFERRED TO
Abbas Wazir (P.) Ltd. v. CIT [2004] 265 ITR 77/[2003] 133 Taxman 702
(All.) (para 8).
Vikram Gulati for the Appellant. A. Kumar, A.N. Mahajan, B. Agarwal,
D. Awasthi, G. Krishna and S. Chopra for the Respondent.
JUDGMENT
1. The Income-tax Appellate Tribunal, Delhi Bench "B", Delhi has
referred the following questions of law under section 256(2) of the
Income-tax Act, 1961, hereinafter referred to as "the Act", for
opinion to this court.
"(i) Whether, on the facts and in the circumstances of the case, the
learned Tribunal was justified in holding that the amount of
commission paid was excessive and there was no commercial
consideration or business expediency for the payment of such an
excessive commission ?
(ii) Whether, on the facts and in the circumstances of the case,
there was any evidence before the Tribunal to come to the conclusion
that the amount of commission amounting to Rs. 36,078 paid to Sri
Habib Akhtar was excessive and that there was no commercial
consideration or business expediency for the payment of such
commission ?
(iii) Whether, on the facts and in the circumstances of the case,
the Tribunal was right in applying the provisions of section 40A(2) of
the Income-tax Act, 1961, in disallowing the commission paid to the
extent of Rs. 30,078 as against Rs. 36,078 paid by the assessee
absolutely for business purpose and for the technical expertise of Sri
Habib Akhtar in preparing the exportable quality of tobacco ?"
2. Briefly stated the facts giving rise to the present reference are
as follows :
The reference relates to the assessment year 1977-78 to which the
previous year is the year ending on March 31, 1977. The
applicant-assessee is a partnership firm, which enjoys the income from
manufacture and sale of tobacco. For the assessment year in question
it had filed its return of income declaring an income of Rs. 2,01,438.
The proceeding under section 143(2) of the Act was undertaken by the
assessing authority and during the course of assessment proceedings it
was noticed that the assessee had paid a commission of Rs. 36,078 to
one Sri Habib Akhtar, son of the one of the partner. The assessee was
asked to prove the services rendered by Sri Habib Akhtar for which
commission was paid. The assessee took the stand that it had started a
new factory in addition to the earlier one and that his services were
utilised in execution of orders and supervision of the production. It
was claimed that the production had increased from Rs. 20,56,956 in
the preceding assessment year to Rs. 39,23,753 in the year under
consideration. The payment of commission of Rs. 36,078 to Sri Habib
Akhtar was, therefore, justified. However, the assessing authority
examined Sri Habib Akhtar on oath and invoked the provisions of
section 40A(2)(a) of the Act. He allowed the deduction of Rs. 3,000
and the balance commission amounting to Rs. 33,078 was disallowed. The
assessee preferred an appeal before the Commissioner of Income-tax
(Appeals), who, vide order dated March 17, 1982, did not accept the
plea of the assessee and confirmed the disallowance on this ground.
Still feeling aggrieved the assessee presented a second appeal before
the Income-tax Appellate Tribunal, Delhi Bench, which, vide order
dated July 1, 1983, partly allowed the appeal and enhanced the
commission to Rs. 6,000 from Rs. 3,000 as allowed by the Assessing
Officer. The balance amount of Rs. 30,078 remained disallowed.
3. We have heard the learned counsel for the parties.
4. Learned counsel for the applicant submitted that Sri Habib Akhtar
had expertise in preparing mixture of perfumed tobacco and by his
effort the production was increased almost 100 per cent and,
therefore, the commission of Rs. 36,078 paid to Sri Habib Akhtar was
full justified and the view to the contrary taken by the authorities
including that by the Tribunal is erroneous and cannot be sustained.
5. Learned standing counsel relying upon the order of the Tribunal
submitted that Sri Habib Akhtar was a man of 21 years of age and was a
studying. He had no expertise and, moreover, the payment of commission
did not relate to the services rendered by him. It was done only to
reduce the profits, therefore, the Assessing Officer had rightly
invoked the provisions of section 40A(2)(a) of the Act.
6. We have given our thoughtful consideration to the various pleas
raised by the learned counsel for the parties. We find that the
Tribunal while allowing the commission to the extent of Rs. 6,000 had
recorded the following findings in its order which for ready reference
are reproduced below :
"4. We have heard both the representative for the assessee, Mr. Gupta
and the Departmental representative at length. It is an admitted
position that Habib Akhtar is the son of one of the partners of the
assessee-firm. As such, the matter has to be examined in the matter of
the allowance of commission to Habib Akhtar in the light of the
provisions of section 40A(2)(i) of the Act, which lays down that in
respect of an expenditure of the type involved in the present case the
Income-tax Officer has to form the opinion as to whether the payment
of commission so made was excessive or unreasonable having regard to
the fair market value of the services for which the payment was made
or the legitimate needs of the business of the assessee or the benefit
derived by or accruing to the assessee therefrom and to the extent of
the expenditure being excessive or unreasonable the same was to be
disallowed.
5. This takes us to the statement of Habib Akhtar, which is at page 6
of the paper book filed by the assessee. In the year under
consideration, he was aged about 21 having born on August 9, 1955. He
passed his Matriculation Examination in 1975. In the year under
consideration, he was studying as he passed his Intermediate
Examination in 1977. He claims in the said statement that in the new
factory he was preparing mixture of tobacco perfumed mixture, purchase
of tobacco and despatch of goods. He used to purchase the tobacco of
different qualities. He also decided as to the extent in which one
quality tobacco will be mixed with another. He claims to have acquired
this art since his childhood because that was dope in his presence. He
claims to have made the purchases from different places, such as Haji
Nawab Ali, Sadiq Ali of Rampur from Chandausi though he does not
remember other places from where he had purchased. He used to send the
bills after his signatures as and when the goods were received. Let us
now compare the said statement with the agreement entered into between
the assessee and Habib Akhtar. According to that agreement, which is
in the form of a letter addressed by the assessee to Habib Akhtar, he
was to look after the labour, production, packing and despatch.
According to this letter, he was not to make any purchases. In the
statement made by Habib Akhtar he does not talk about his looking
after labour, packing and despatch of goods.
6. Habib Akhtar is a boy of 21. He was at the relevant time studying
in a college. It is doubtful if he had such a mastery merely on the
basis of what he used to see to know the art of mixing of different
tobacco to produce the requisite results. The functions performed by
him, according to his statement, are different from the purpose for
which he was employed. He is paid commission not on the turnover of
the new factory but of the entire production of the assessee, though
he had not rendered any services in the old factory. Besides, Habib
Akhtar, several other persons have been paid commission for working
along with Habib Akhtar. We, therefore, keeping in view the facts and
circumstances of the case and the material on record consider that the
payment of commission of Rs. 36,078 by the assessee to Habib Akhtar
was highly excessive and unreasonable having regard to the fair market
value of the services for which the payment was made for the
legitimate business need of the assessee or the benefit derived by or
accruing to it therefrom. At the same time, the extent of the
expenditure held to be excessive or unreasonable at Rs. 33,078 was
excessive. It would be fair and reasonable to consider an expenditure
of Rs. 6,000 to be reasonable having regard to the services rendered
and the legitimate needs of the business of the assessee or the
benefit derived by or accruing to it therefrom. As such, the
disallowance will be of Rs. 30,078. We hold likewise."
7. From the findings recorded by the Tribunal it is absolutely clear
that Sri Habib Akhtar was aged about 21 years during the previous year
relevant to the assessment year in question and was still studying. He
had no expertise in preparing tobacco mixtures. Even though he claimed
to have made purchases and placed orders he could only remember the
names of two sellers and did not remember the names of the other
sellers. The assessee-firm had engaged Sri Habib Akhtar to look after
the labour, production, packing and despatch and he was not at all
entrusted with the work of making purchases. In the statement given by
Sri Habib Akhtar there is no whisper about his looking after the
labour, production, packing and despatch of goods. The acquiring of
expertise had also been doubted by the Tribunal. The Tribunal has also
recorded that he had been given commission on the entire production
whereas he was employed to render services only in the new factory.
Besides Sri Habib Akhtar several other persons had been paid
commission for working along with him. The Tribunal, therefore,
restricted the payment of commission to Rs. 6,000 to Sri Habib Akhtar.
On the finding recorded by the Tribunal we are of the considered
opinion, that the Tribunal was justified in holding that the payment
of commission was excessive as there was no commercial consideration
or business expediency for payment of such excessive amount. Moreover,
the findings recorded by the Tribunal are based on relevant material
and evidence on record.
8. Learned counsel for the applicant has relied upon a Division Bench
decision of this court in the case of Abbas Wazir (P.) Ltd. v. CIT
[2004] 265 ITR 77/[2003] 133 Taxman 702 (All.) and submitted that the
reasonableness of an expenditure has to be considered from the view
point of a prudent businessman. In the aforesaid case, this court has
held that whenever a claim is made by the assessee before the
Income-tax Officer for allowing an expenditure as a legitimate
business expenditure, the approach of the Income-tax Officer (or other
income-tax authority) has to be that he has to look at the matter from
the view point of a prudent businessman, and not from his own view
point, and then ascertain whether the said expenditure has been
incurred for the purpose of commercial expediency or not. In other
words, the Income-tax Officer must try to put himself in the shoes of
a prudent businessman and try to look at the matter from that point of
view. The court has further held that a businessman may make an
expenditure, which he is under no legal obligation to make, but if he
does so as a measure of commercial expediency, it must be allowed
under section 37 of the Act as legitimate business expenditure. The
court came to the conclusion that when a company pay a higher salary
to the directors or the managers or to other officers or employees as
a matter of commercial expediency, it is not for the Income-tax
Officer to say that in his opinion the said salary should not have
been paid. A company may decide to pay a higher remuneration to its
directors, officers or employees so as to encourage them to work hard,
expand the business, or for a host of other commercial considerations
and the matter has to be looked at from the view point of the company.
Applying the principles laid down in the aforesaid case to the facts
of the present case we find that in the case in hand the assessing
authority has considered all the relevant factors, viz., the
agreement, the work done in the new factory as also the quantum of
amount paid with relation to the production done in the old as well as
the new factory and had acted from the view point of a prudent
businessman while invoking the provisions of section 40A(2) of the Act
and disallowing a part of the commission on the ground of being
excessive in nature.
9. In view of the foregoing discussion, we answer all the three
questions, referred to us for opinion, in the affirmative, i.e., in
favour of the Revenue and against the assessee.
POOJA
*In favour of revenue.
--
Regards,
*Pawan Singla ,** LLB*
*M. No. 9825829075*
expediency for payment of, excessive commission, payment of commission
should be restricted to sum as allowed to other workers
■■■
[2014] 46 taxmann.com 171 (Allahabad)
HIGH COURT OF ALLAHABAD
S. M. Haq
v.
Commissioner of Income-tax*
R. K. AGRAWAL AND PRAKASH KRISHNA, JJ.
INCOME-TAX REFERENCE NO. 76 OF 1986
JANUARY 10, 2013
Section 40(A)(2) of the Income-tax Act, 1961 - Business disallowance -
Excessive or unreasonable payments (Commission) - Assessment year
1977-78 - Assessee, a partnership firm, was enjoying income from
manufacture and sale of tobacco - It had paid excessive commission to
son of one of partners named 'Habib' on account of utilization of his
services in labour, production, packing and dispatch - Same was
disallowed - Facts revealed that Habib was having no expertise in
preparing tobacco and was employed to render service only in new
factory but he had been given commission on entire production -
Whether payment of commission be restricted to sum as allowed to other
workers, particularly when there was no commercial consideration or
business expediency for payment of excessive amount - Held, yes [Paras
6 & 7] [In favour of revenue]
FACTS
■ The assessee, a partnership firm, was enjoying income from
manufacture and sale of tobacco.
■ It had paid excessive commission to one Habib who was son of the
one of the partners and whose services were utilised in execution of
orders and supervision of the production.
■ However, the Assessing Authority examined Habib on oath and
invoked the provisions of section 40A(2)(a). He allowed the deduction
of Rs. 3000 and the balance commission was disallowed.
■ The Commissioner (Appeals) did not accept the plea of the
assessee and confirmed the disallowance.
■ The Tribunal partly allowed the appeal and enhanced the
commission to Rs. 6000 from Rs. 3000 as allowed by the Assessing
Officer.
■ On further appeal, the assessee submitted that Habib had
expertise in preparing mixture of perfumed tobacco and by his effort
the production was increased almost 100 per cent and, therefore, the
commission paid to Habib was fully justified.
■ On further appeal:
HELD
■ From the findings recorded by the Tribunal it is absolutely clear
that Habib was aged about 21 years during the previous year relevant
to the assessment year in question and was still studying. He had no
expertise in preparing tobacco mixtures. Even though he claimed to
have made purchases and placed orders he could only remember the names
of two sellers and did not remember the names of the other sellers.
The assessee-firm had engaged Habib to look after the labour,
production, packing and despatch and he was not at all entrusted with
the work of making purchases. In the statement given by Habib there is
no whisper about his looking after the labour, production, packing and
dispatch of goods. The acquiring of expertise had also been doubted by
the Tribunal. The Tribunal has also recorded that he had been given
commission on the entire production whereas he was employed to render
services only in the new factory. Besides Habib several other persons
had been paid commission for working along with him. The Tribunal,
therefore, restricted the payment of commission to Rs. 6000. On the
finding recorded by the Tribunal the Tribunal was justified in holding
that the payment of commission was excessive as there was no
commercial consideration or business expediency for payment of such
excessive amount. Moreover, the findings recorded by the Tribunal are
based on relevant material and evidence on record. [Para 7]
CASES REFERRED TO
Abbas Wazir (P.) Ltd. v. CIT [2004] 265 ITR 77/[2003] 133 Taxman 702
(All.) (para 8).
Vikram Gulati for the Appellant. A. Kumar, A.N. Mahajan, B. Agarwal,
D. Awasthi, G. Krishna and S. Chopra for the Respondent.
JUDGMENT
1. The Income-tax Appellate Tribunal, Delhi Bench "B", Delhi has
referred the following questions of law under section 256(2) of the
Income-tax Act, 1961, hereinafter referred to as "the Act", for
opinion to this court.
"(i) Whether, on the facts and in the circumstances of the case, the
learned Tribunal was justified in holding that the amount of
commission paid was excessive and there was no commercial
consideration or business expediency for the payment of such an
excessive commission ?
(ii) Whether, on the facts and in the circumstances of the case,
there was any evidence before the Tribunal to come to the conclusion
that the amount of commission amounting to Rs. 36,078 paid to Sri
Habib Akhtar was excessive and that there was no commercial
consideration or business expediency for the payment of such
commission ?
(iii) Whether, on the facts and in the circumstances of the case,
the Tribunal was right in applying the provisions of section 40A(2) of
the Income-tax Act, 1961, in disallowing the commission paid to the
extent of Rs. 30,078 as against Rs. 36,078 paid by the assessee
absolutely for business purpose and for the technical expertise of Sri
Habib Akhtar in preparing the exportable quality of tobacco ?"
2. Briefly stated the facts giving rise to the present reference are
as follows :
The reference relates to the assessment year 1977-78 to which the
previous year is the year ending on March 31, 1977. The
applicant-assessee is a partnership firm, which enjoys the income from
manufacture and sale of tobacco. For the assessment year in question
it had filed its return of income declaring an income of Rs. 2,01,438.
The proceeding under section 143(2) of the Act was undertaken by the
assessing authority and during the course of assessment proceedings it
was noticed that the assessee had paid a commission of Rs. 36,078 to
one Sri Habib Akhtar, son of the one of the partner. The assessee was
asked to prove the services rendered by Sri Habib Akhtar for which
commission was paid. The assessee took the stand that it had started a
new factory in addition to the earlier one and that his services were
utilised in execution of orders and supervision of the production. It
was claimed that the production had increased from Rs. 20,56,956 in
the preceding assessment year to Rs. 39,23,753 in the year under
consideration. The payment of commission of Rs. 36,078 to Sri Habib
Akhtar was, therefore, justified. However, the assessing authority
examined Sri Habib Akhtar on oath and invoked the provisions of
section 40A(2)(a) of the Act. He allowed the deduction of Rs. 3,000
and the balance commission amounting to Rs. 33,078 was disallowed. The
assessee preferred an appeal before the Commissioner of Income-tax
(Appeals), who, vide order dated March 17, 1982, did not accept the
plea of the assessee and confirmed the disallowance on this ground.
Still feeling aggrieved the assessee presented a second appeal before
the Income-tax Appellate Tribunal, Delhi Bench, which, vide order
dated July 1, 1983, partly allowed the appeal and enhanced the
commission to Rs. 6,000 from Rs. 3,000 as allowed by the Assessing
Officer. The balance amount of Rs. 30,078 remained disallowed.
3. We have heard the learned counsel for the parties.
4. Learned counsel for the applicant submitted that Sri Habib Akhtar
had expertise in preparing mixture of perfumed tobacco and by his
effort the production was increased almost 100 per cent and,
therefore, the commission of Rs. 36,078 paid to Sri Habib Akhtar was
full justified and the view to the contrary taken by the authorities
including that by the Tribunal is erroneous and cannot be sustained.
5. Learned standing counsel relying upon the order of the Tribunal
submitted that Sri Habib Akhtar was a man of 21 years of age and was a
studying. He had no expertise and, moreover, the payment of commission
did not relate to the services rendered by him. It was done only to
reduce the profits, therefore, the Assessing Officer had rightly
invoked the provisions of section 40A(2)(a) of the Act.
6. We have given our thoughtful consideration to the various pleas
raised by the learned counsel for the parties. We find that the
Tribunal while allowing the commission to the extent of Rs. 6,000 had
recorded the following findings in its order which for ready reference
are reproduced below :
"4. We have heard both the representative for the assessee, Mr. Gupta
and the Departmental representative at length. It is an admitted
position that Habib Akhtar is the son of one of the partners of the
assessee-firm. As such, the matter has to be examined in the matter of
the allowance of commission to Habib Akhtar in the light of the
provisions of section 40A(2)(i) of the Act, which lays down that in
respect of an expenditure of the type involved in the present case the
Income-tax Officer has to form the opinion as to whether the payment
of commission so made was excessive or unreasonable having regard to
the fair market value of the services for which the payment was made
or the legitimate needs of the business of the assessee or the benefit
derived by or accruing to the assessee therefrom and to the extent of
the expenditure being excessive or unreasonable the same was to be
disallowed.
5. This takes us to the statement of Habib Akhtar, which is at page 6
of the paper book filed by the assessee. In the year under
consideration, he was aged about 21 having born on August 9, 1955. He
passed his Matriculation Examination in 1975. In the year under
consideration, he was studying as he passed his Intermediate
Examination in 1977. He claims in the said statement that in the new
factory he was preparing mixture of tobacco perfumed mixture, purchase
of tobacco and despatch of goods. He used to purchase the tobacco of
different qualities. He also decided as to the extent in which one
quality tobacco will be mixed with another. He claims to have acquired
this art since his childhood because that was dope in his presence. He
claims to have made the purchases from different places, such as Haji
Nawab Ali, Sadiq Ali of Rampur from Chandausi though he does not
remember other places from where he had purchased. He used to send the
bills after his signatures as and when the goods were received. Let us
now compare the said statement with the agreement entered into between
the assessee and Habib Akhtar. According to that agreement, which is
in the form of a letter addressed by the assessee to Habib Akhtar, he
was to look after the labour, production, packing and despatch.
According to this letter, he was not to make any purchases. In the
statement made by Habib Akhtar he does not talk about his looking
after labour, packing and despatch of goods.
6. Habib Akhtar is a boy of 21. He was at the relevant time studying
in a college. It is doubtful if he had such a mastery merely on the
basis of what he used to see to know the art of mixing of different
tobacco to produce the requisite results. The functions performed by
him, according to his statement, are different from the purpose for
which he was employed. He is paid commission not on the turnover of
the new factory but of the entire production of the assessee, though
he had not rendered any services in the old factory. Besides, Habib
Akhtar, several other persons have been paid commission for working
along with Habib Akhtar. We, therefore, keeping in view the facts and
circumstances of the case and the material on record consider that the
payment of commission of Rs. 36,078 by the assessee to Habib Akhtar
was highly excessive and unreasonable having regard to the fair market
value of the services for which the payment was made for the
legitimate business need of the assessee or the benefit derived by or
accruing to it therefrom. At the same time, the extent of the
expenditure held to be excessive or unreasonable at Rs. 33,078 was
excessive. It would be fair and reasonable to consider an expenditure
of Rs. 6,000 to be reasonable having regard to the services rendered
and the legitimate needs of the business of the assessee or the
benefit derived by or accruing to it therefrom. As such, the
disallowance will be of Rs. 30,078. We hold likewise."
7. From the findings recorded by the Tribunal it is absolutely clear
that Sri Habib Akhtar was aged about 21 years during the previous year
relevant to the assessment year in question and was still studying. He
had no expertise in preparing tobacco mixtures. Even though he claimed
to have made purchases and placed orders he could only remember the
names of two sellers and did not remember the names of the other
sellers. The assessee-firm had engaged Sri Habib Akhtar to look after
the labour, production, packing and despatch and he was not at all
entrusted with the work of making purchases. In the statement given by
Sri Habib Akhtar there is no whisper about his looking after the
labour, production, packing and despatch of goods. The acquiring of
expertise had also been doubted by the Tribunal. The Tribunal has also
recorded that he had been given commission on the entire production
whereas he was employed to render services only in the new factory.
Besides Sri Habib Akhtar several other persons had been paid
commission for working along with him. The Tribunal, therefore,
restricted the payment of commission to Rs. 6,000 to Sri Habib Akhtar.
On the finding recorded by the Tribunal we are of the considered
opinion, that the Tribunal was justified in holding that the payment
of commission was excessive as there was no commercial consideration
or business expediency for payment of such excessive amount. Moreover,
the findings recorded by the Tribunal are based on relevant material
and evidence on record.
8. Learned counsel for the applicant has relied upon a Division Bench
decision of this court in the case of Abbas Wazir (P.) Ltd. v. CIT
[2004] 265 ITR 77/[2003] 133 Taxman 702 (All.) and submitted that the
reasonableness of an expenditure has to be considered from the view
point of a prudent businessman. In the aforesaid case, this court has
held that whenever a claim is made by the assessee before the
Income-tax Officer for allowing an expenditure as a legitimate
business expenditure, the approach of the Income-tax Officer (or other
income-tax authority) has to be that he has to look at the matter from
the view point of a prudent businessman, and not from his own view
point, and then ascertain whether the said expenditure has been
incurred for the purpose of commercial expediency or not. In other
words, the Income-tax Officer must try to put himself in the shoes of
a prudent businessman and try to look at the matter from that point of
view. The court has further held that a businessman may make an
expenditure, which he is under no legal obligation to make, but if he
does so as a measure of commercial expediency, it must be allowed
under section 37 of the Act as legitimate business expenditure. The
court came to the conclusion that when a company pay a higher salary
to the directors or the managers or to other officers or employees as
a matter of commercial expediency, it is not for the Income-tax
Officer to say that in his opinion the said salary should not have
been paid. A company may decide to pay a higher remuneration to its
directors, officers or employees so as to encourage them to work hard,
expand the business, or for a host of other commercial considerations
and the matter has to be looked at from the view point of the company.
Applying the principles laid down in the aforesaid case to the facts
of the present case we find that in the case in hand the assessing
authority has considered all the relevant factors, viz., the
agreement, the work done in the new factory as also the quantum of
amount paid with relation to the production done in the old as well as
the new factory and had acted from the view point of a prudent
businessman while invoking the provisions of section 40A(2) of the Act
and disallowing a part of the commission on the ground of being
excessive in nature.
9. In view of the foregoing discussion, we answer all the three
questions, referred to us for opinion, in the affirmative, i.e., in
favour of the Revenue and against the assessee.
POOJA
*In favour of revenue.
--
Regards,
*Pawan Singla ,** LLB*
*M. No. 9825829075*
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