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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI RAJESH KUMAR (AM) & SHRI RAM LAL NEGI (JM)
O R D E R PER RAM LAL NEGI, JM These are the cross appeals filed by the assessee and the revenue against the order dated 06.01.2012 passed by the Commissioner of Income Tax (Appeals)-24 (for short ‘the CIT (A)’), Mumbai, for the assessment year 2005-06, whereby the Ld. CIT (A) has partly allowed the appeal filed by the assessee Assessment Years: 2005-06 against the assessment order passed u/s 143 (3) r.w.s. 147 of the Income Tax Act, 1961 (for short the ‘Act’). Brief facts of the case are that the assessee engaged in the business of merchant shipping, filed its return of income for the assessment year under consideration declaring the total income of Rs. 98,31,28,573/- claiming TDS amounting to Rs. 5,73,81,225/-. Revised return was also filed claiming TDS of Rs. 7,77,82,646/-. The return was processed and assessment order u/s 143 (3) of the Act was passed assessing the total income of the assessee at Rs. 101,44,81,685/-. The assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee granted partial relief in respect of the TDS claim.
Subsequently, the case was reopened u/s 147 of the Act by issuing notice u/s 148. In response to the notice u/s 148, the assessee asked for reasons for reopening of assessment and further requested to treat the original return and revised return filed by the assessee as the return filed in response to notice u/s 148 r.w.s. 147 of the Act. Accordingly, the AO supplied the reasons recorded for reopening. The AO thereafter asked the assessee to file factual objections, the assessee submitted that it has already submitted objections vide letter dated 29.10.2010/01.11.2010 and further submitted that it did not file any separate objection under the bona fide belief that the proceedings have been dropped in view of the submissions made earlier. However, the assessee further placed on record a Compact Disc (CD) containing details of prior period income, prior period expenses, reimbursement of overheads, profit on sale of vessels, sundry receipts, excess provisions written back etc. and also submitted the copies of written submissions made before the CIT (A) during the appellate proceedings pertaining to the AY 2007-08. However, the AO after making additions on account of sundry credits, excess provisions, prior period income, sundry receipts, 0.25% of turnover from core activity computed by the assessee, Assessment Years: 2005-06 incidental activity income out of prior period adjustment as discussed in para 7 and administrative expenses etc., determined the total income of the assessee at Rs. 158,63,31,560/-. The assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) partly allowed the appeal of the assessee. Aggrieved by the order passed by the Ld. CIT (A) the assessee and the revenue are in appeal before the Tribunal.
The assessee has challenged the impugned order passed by the Ld.CIT (A) on the following effective grounds: Ground No. 1: Re Assessment U/s 147 The Commissioner of Income Tax (Appeals) (Hereafter referred to as CIT (A) failed to appreciate that the jurisdictional pre-conditions necessary for invoking the jurisdiction under section 147 to 151 of the Income Tax Act, had not been fulfilled in the present case and therefore the re assessment order passed by the Assessing Officer (hereafter referred to as A.O.) was illegal and bad in law.
Ground No. 2: Income under the head Prior Period Adjustments:
The CIT (A) erred in upholding the action of the A.O. in assessing the prior period income of Rs. 19.30 crore. He failed to appreciate that the prior period income constituted profits from core activities and therefore could not be brought to tax under the Act. Ground No. 3: Additions under Sundry Receipts 3.1 the CIT (A) has erred in holding that sundry receipts of Rs. 11.75 crore were not arising out of the core activities of operation of qualifying ships and the provisions of Tonnage Tax scheme was not applicable to these receipts.
3.2 In the alternative and without prejudice to the above since the sundry receipts are assessed to tax as business income. The CIT (A) ought to have granted deduction in respect of expenditure laid out or expended wholly and exclusively for the purpose of its business and earning such income. Assessment Years: 2005-06 3.3 The CIT (A) failed to appreciate that, the expenses Rs. 10.88 crore were incurred on account of rent to take the premises on lease which were subsequently let out to the employees from whom income by way of house rent was earned.
Ground No. 4: Adjustment to calculate Turnover:
On the Facts and circumstances of the case and as per provisions of law the CIT (A) erred in confirming the A.Os action of adjustment the turnover by reducing sundry receipts Rs. 11.76 crores and profit on sale of ships of Rs. 173.80 crore from turnover to calculate excess over 0.25% of turnover.
Ground no. 5: Disallowance of expenses:
5.1 On the facts and circumstances of the case and as per provisions of law, interest income of Rs. 80.23 crore and dividend income Rs. 3.71 crore constituted profits from core activities and therefore could not be assessed to tax.
5.2 In the alternative and without prejudice to the above, assuming without admitting that interest and dividend income is assessable to tax, then deduction ought to have been allowed in respect of proportionate expenditure incurred by the appellant.
5.3 The CIT (A) ought to have held that since incidental income in excess of 0.25% of the turnover from core activities was chargeable to tax, expenditure relatable to earning such income and a reasonable apportionment of general and administrative expenditure ought to be allowed as deduction.
Ground No. 6: Interest u/s 234D On the facts and circumstances of the case and as per provisions of law the CIT (A) erred in upholding the levy of interest under section 234D.”
4. At the outset, the Ld. counsel for the assessee submitted that the AO has reopened the assessment on the basis of change of opinion, which is not permissible under law. The Ld. counsel invited our attention to page 148 of the Assessment Years: 2005-06 paper book which is the copy of the reasons for reopening recorded by the AO on 24.03.2010. The Ld. counsel pointed out that in the said reason, the AO has not referred any new material for forming his belief that the income of the assessee has escaped. The Ld. counsel pointed out that so far as the inclusion of Rs. 2229 lacs (reimbursement of overhead expenses), Rs. 17380 lacs (profit on sale of ships) and 1176 lacs (sundry receipts) in its turnover for the purpose of computing the income under tonnage tax scheme is concerned, the provisions of chapter XII – G of the Act are applicable to a qualifying company from the business of operating ships and the assessee company is a qualifying company as per section 115VC of the Act and all its ships whether owned or operated within the meaning of section 115VB of the Act. Section 115 (1) of the Act includes profit from core activities and from incidental activities. As per the proviso to section 115VI (1) incidental income in excess of 1/4th per cent of the turnover from core activities is taxable under the Act. The assessee has complied with the aforesaid provisions. The Ld. counsel invited our attention to pages 103 to 109 of the paper book which is the copy of revised computation of income under tonnage tax regime pertaining to the assessment year under consideration. The Ld. counsel further pointed out that all the relevant facts and details were available with the AO at the time of original assessment proceedings and after going through the same, the AO passed the assessment order, therefore, this is the case of change of opinion. The Ld. counsel further invited our attention to the relevant pages of the paper book to demonstrate that the assessment order was passed by the AO after due application of mind with regard reimbursement of overheads expenses, sundry receipts, prior period income, sundry credit balance written back, excess provision written back and allocation of administrative expenses. The Ld. counsel further submitted that the reasons as recorded by the AO show that the same were based on the material on record and there was no tangible material to form a belief that the assessment has escaped income of the assessee. The Ld. counsel relying on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Kelvinator India Ltd. 320 ITR 561 (SC), the judgments of the Hon’ble Bombay Assessment Years: 2005-06 High Court in the case of CIT vs. Jet Speed Audio P. Ltd. 372 ITR (Bom), Idea Cellular Ltd. vs. DCIT 301 ITR 407 and Asian Paints Ltd. vs. DCIT 308 ITR 195, and the decision of the Mumbai Bench of the Tribunal in the assessee’s own case, and 2129/Mum/2012 for the AY 2006-07 submitted that since the action of the AO of reopening the assessment is bad in law, the Ld. CIT (A) ought to have set aside the order passed by the AO. The Ld. counsel accordingly submitted that in view of the aforesaid facts and in the light of the judgments of the Hon’ble High Court, the proceedings initiated u/s 147 r.w.s. 148 of the Act may be quashed.
5. On the other hand, the Ld. Departmental Representative (DR) supporting the orders of the authorities below submitted that since the assessee had not furnished the complete details and failed to disclose the facts with regard to the reimbursement of overhead expenses, profit of sale on ships, sundry receipts and further the assessee had allocated administrative expenses amounting to Rs. 316 lacs towards income from other sources, the AO rightly issued notice u/s 148 of the Act. The Ld. DR further submitted that since there was no illegality in initiating action u/s 147 r.w.s. 148 of the Act, the Ld. CIT (A) has rightly dismissed the ground of appeal
challenging the reopening on the ground that reopening is based on mere change of opinion on the same set of facts, therefore not sustainable.
6. We have heard the rival submissions and perused the material on record including the cases relied upon by the authorities below. We have also gone through the cases relied upon by the Ld. counsel for the assessee. The assessee has challenged the action of the Ld. CIT (A) on legal ground as well as on merits. The legal ground raised by the assessee is that the AO has reopened the assessment merely on the basis of change of opinion as the entire facts , details and explanations were available with him during the assessment proceedings u/s 143(3) of the Act. Hence, in view of the contention of the assesse we see the contents of reasons recorded for reopening of the assessment, the relevant paras of which read as under:- Assessment Years: 2005-06 “2. It is seen from the records that assessee has included Rs. 2229 lakhs (reimbursement of overhead expenses), Rs. 17380 lakhs (profit on sale of ships) and Rs. 1176 lakhs (sundry receipts) in its turnover for the purpose of computing the income under tonnage tax scheme. However, as per section 115VI, the assessee was liable to reduce these receipts from its turnover. Thus, assessee failed to discloses these facts in its return of income and also during the assessment proceedings u/s 143 (2).
3. Further, it is seen that before A.Y. 2005-06, assessee was assessed under normal provisions of the I.T. Act. During A.Y. 2005-06, prior period income of Rs. 2715 lakhs sundry credit balances written back of Rs. 1236 lakhs, excess provisions written back of Rs. 1505 lakhs and sundry income of Rs. 1176 lakhs was received and/or written back as income in its books of accounts. Since, all these incomes are from the assessment years before tonnage tax scheme, assessee should have included the same under normal provisions of the I.T. Act, 1961. However, assessee failed to disclose these facts in its return of income and also during the assessment proceedings u/s 143 (2).
It is also seen that assessee has allocated administrative expenses of Rs. 316 lakhs towards income from other sources. U/s 57 (iii) of the I.T. Act, only expenses wholly and exclusively expended towards earning of income from other sources is allowed as deduction. Assessee has interest income from suplus funds parked with banks/institutions and dividend income under the head income from other sources’. Since, there cannot be any cost wholly and exclusively expended towards earning this income, assessee was liable to disclose this fact during the assessment proceedings u/s 143 (2) and should have added back the amount while computing the total income.
Due to the above mentioned reasons, there has been a failure on part of assessee to disclose the facts fully and truly necessary for its assessment. The above mentioned facts have given rise to estimated escapement of income of about 50,12,88,670/- and estimated Assessment Years: 2005-06 tax thereon of Rs. 18,34,34,057/- as per the annexure to these reasons. In view of the above, I have reasons to believe that income to the extent of Rs. 50,12,88,670/- has escaped assessment in view of provisions of section 147 of the I.T. Act, 1961.”
We notice that the AO has started para No. 2 and 3 of the reasons with the words “It is seen from the record” and “Further it is seen” respectively, which apparently show that there was no new material before the AO to form a belief that the income of the assessee or part thereof has escaped assessment. The contention of the Ld. counsel is that the initiation of reopening proceedings is merely based on change of opinion as the AO has already dealt with the issues raised in the reasons of reopening during the original assessment proceedings. In order to substantiate its contention, the Ld. counsel invited our attention to the provisions of Chapter XI-G of the Act and further referred to page 103 to 109 of the paper book. As pointed out by the Ld. counsel, the assessee has submitted the profit and loss account showing receipt which formed part of the operating earnings schedule of operating earnings at page 63 of the paper book where the said amount has been included as a part of income from managed vessels. In the scheduled to the computation, the assessee has included remuneration for managed vessels as well as reimbursement of overheads for managed vessels. The remuneration has been reflected as income from incidental activity and reimbursement of overheads has been shown as shipping income. In response to the notice dated 23.11.2007 the assessee has explained the nature of receipt.
Further, as pointed out by the Ld. counsel, the assessee has treated the income on sale of vessels as part of the relevant shipping income. During the assessment proceedings, the AO vide notice dated 08.10.2007 asked the assessee to explain as to why such profit should not be treated as capital gain. In response thereof the assessee filed letter dated 25.10.2007 and 07.11.2007 (copies of which are available on record) explained as to how such profits Assessment Years: 2005-06 cannot be assessed at capital gains. So far as the issue relating to sundry receipts is concerned, the assessee has given a break up of such receipts including commission of disbursement, insurance plus P&I claims, sundries core shipping, contribution for employees new PRMS, Steamer stall rent, course fees MTI, consultancy charges from govt. agencies, profit on Bar plus shop sales, house rent ownerships flats, rent on furniture and companies bus services etc. the said receipts except course fees MTI and consultancy charges form Govt. agencies have been regarded as income from shipping activities. Similarly, the assessee has furnished the details regarding prior period income sundry credit balance written back and excess provision written back, the copies of which are available in the paper book. So far as the allocation of administrative expenses is concerned, the AO vide notice dated 08.10.2007 and 27.11.2007 has made enquiries with respect to such apportionment. In response to the said letters, the assessee submitted written reply dated 25.10.2007, 07.11.2007 and 28.11.2007 (copies of which are available in the paper book). Further, the assessee was specifically asked to identify the core activities and substantiate to turnover with respect to the access the income from incidental activity over 0.25% of the turnover from core shipping activity. The detail explanation to the query raised by the AO, submitted vide letter dated 07.11.2007 is available on the record.
From the above facts, it is absolutely clear that the AO has passed the original assessment order after taking into consideration the details/explanations furnished by the assessee in response to the queries raised by him from time to time. Moreover, the AO has not pointed out any new fact or tangible material on the basis of which he formed a belief that income of the assessee has escaped. Hence, we find substance in the contention of the Ld. counsel that the AO has changed his opinion on the basis of facts and details made available by the assessee during the course of original assessment proceedings. Assessment Years: 2005-06
In the case of CIT vs. Jet Speed Audio P. Ltd. (supra), the questions before the Hon’ble Bombay High Court was that (a) whether on the facts and circumstances of the case the Tribunal was justified in cancelling the reassessment order passed u/s 147 and holding the same as bad in law (b) whether on the facts and circumstances of the case the Tribunal was justified in holding that it was a case of change of opinion as the AO had not expressed any opinion during the regular assessment proceedings. The Hon’ble Court decided both the questions in favour of the assessee and against the revenue. The observations of the Hon’ble Court read as under:-
“11. The decisions cited by Mr. Chhotaray, learned counsel on behalf of the Revenue, in support of his submissions that oversight in passing the assessment order will give the Assessing Officer jurisdiction to issue notice placed heavy reliance upon the case Kalyanji Mavji and Co. (supra). However, on the above aspect it has been held to be no longer good law by the subsequent decision of the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) wherein the Supreme Court has observed thus (page 1004): “Now, in the case before us, the Income-tax Officer had, when he made the original assessment, considered the provisions of section 9, and 10. Any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. The revenue contends that it is open to him to do so, and on that basis to reopen the assessment under section 147 (b). Reliance is placed on Kalyani Mavji and Co. v. CIT (1976) 102 ITR 287 (SC), where a Bench of two learned judges of this court observed that a case where income had escaped assessment due to the oversight, inadvertence or mistake of the Income-tax Officer must fall within section 34 (1) (b) of the Indian Income Tax Act, 1922. It appears to us, with respect that the proposition is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the Income Tax Officer discovers that he Assessment Years: 2005-06 has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power. That was the view taken by this court in Maharaj Kumar Kamal Singh v. Cit [ 1959] 35 ITR 1 (SC), CIT v. A. Raman and Co. [ 1968] 67 ITR 11 (SC) and Bankipur Club Ltd. v. CIT [ 1971] 82 ITR 831 (SC) and we do not believe that the law has since taken a different course. Any observations in Kalyanji Mavji and Co. v. CIT [ 1976] 102 ITR 287 (SC) suggesting the contrary do not, we say with respect, lay down the correct law,”(emphasis supplied). The aforesaid view on the above proposition has been reiterated by the apex court in A.L.A. Firm v. CIT [1991] 189 ITR 285 (SC), wherein the court held that change of opinion where opinion was formed earlier does not give the Assessing Officer jurisdiction to reopen an assessment. The apex court, inter alia, on the above issue held as under (page 298): “Even making allowance for this limitation placed on the observations in Kalyanji Mavji [1976] 102 ITR 287 (SC) the position as summarized by the High Court in the following words represents, in our view the correct position in law (at page 629 of 102 ITR): The result of these decisions is that the statute does not require that the information must be extraneous to the record. It is enough if the material on the basis of which the reassessment proceedings are sought to be initiated, came to the notice of the Income Tax Officer subsequent and formed an opinion on the said material in the original assessment itself then he would be powerless to start the proceedings for reassessment. Where, however, the Income Tax Officer had not considered the material and subsequently came by the material from the record itself, then such a case would fall within the scope of section 147 (b) of the Act.”
The decision of the Delhi High Court in the case New Light Trading Co. (supra) does not indicate what reasons were recorded for issuing notice of reopening therein. In the present case, the reasons as recorded by the Assessing Officer and reproduced hereinabove clearly indicate that there was no tangible material adverting to the reasons recorded for issuing Assessment Years: 2005-06 reopening notice. Similarly, the decision of this court in the case Dr. Amin’s Pathology Laboratory (supra), it has been observed that if any item has escaped from assessment which otherwise is includible within the assessment and the Assessing Officer notices it subsequently by his own investigation or by reasons of some information received by him, one cannot say that it constitutes change of opinion In the present facts during original proceedings itself this issue was investigated by the Assessing Officer by raising specific query with regard to bad debts of Rs. 1.35 crores. Consequently, this is not a case where this information has been noticed by the Assessing Officer subsequently in the assessment proceedings. In view of the above, in our opinion, none of the three decisions are applicable in the present case. 14 In view fo the above, question (A) and (B) as raised by the Revenue for our consideration do not give rise to any substantial questions of law as the findings of the Tribunal that there has been a change of opinion in issuing the impugned notice, is a finding based on the facts and the same has not been shown to be perverse. Accordingly, questions (A) and (B) are dismissed.”
As pointed out by the Ld. counsel the coordinate Bench has quashed the assessment order passed u/s 147 of the Act in assessee’s appeal for the AY 2006-07 holding that the proceedings u/s 147 of the Act was based on the change of opinion on the same set of documents which were available during the original assessment proceedings u/s 143 (3) of the Act. In the said case also, the Tribunal has held that the details were available with the AO.
In the light of the facts and circumstances of the case and on the basis of the material on record it can be concluded that in the present case, the AO has formed his belief on the basis of material already available on record which amounts to change of opinion. As per the ratio laid down by the Hon’ble Bombay High Court in the case of CIT vs. Jet Speed Audio P. Ltd. (supra), reopening on the basis of change of opinion is not permissible under the law. Hence, we respectfully following the judgment of the Hon’ble Bombay High Assessment Years: 2005-06 Court in the case of CIT vs. Jet Speed Audio P. Ltd. (supra), and other cases relied upon by the Ld counsel for the assessee, allow this ground of the appeal of the assessee and quash the order passed by the AO holding that the AO has initiated the proceedings u/s 147 r.w.s. 148 on the basis of change of opinion.
13. Since, we have quashed the reassessment order passed by the AO on legal ground, we do not deem it necessary to adjudicate the other grounds of appeal
raised on merits. The revenue has preferred the present appeal by raising the following effective grounds: 1. “On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in not deleting the addition made by the A.O. u/s 41. (1) of the I.T. Act and allowing the tonnage tax provisions to the assessee on sundry credits written back to the extent of Rs. 12,36,82,541/- pertaining to pre tonnage tax period, without appreciating the fact that the income arising from sundry credits written back does not fall into core activity of qualifying ship.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition of Rs. 12,04,22,721/- made u/s 41(1) of the I.T. Act on account of excess provisions written back, without appreciating the fact that the income arising out of excess provisions written back does not fall into the core activity of qualifying ship.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition of Rs. 2,66,83,268/- made by the A.O by denying tonnage tax provisions to the prior period income under normal provisions.
4. One the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in allowing relief to the assessee, holding Assessment Years: 2005-06 that the reimbursement of overheads for managed vessels is to be included in the turnover while working out the income as per the Tonnage Tax.