SWANSTON MULTIPLEX CINEMAS P.LTD,MUMBAI vs. ASST CIT CIR 11(1), MUMBAI

आदेश / O R D E R

Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated

22/12/2014 of the Ld. First Appellate Authority, Mumbai.

The first ground raised by the assessee pertains to reopening

of assessment u/s 147 r.w.s 148 of the Income Tax Act, 1961

(hereinafter the Act).

Shri R. Deshpande, contended that reopening was done

beyond four years, thus, it is bad in law. Our attention was

invited to page-2 of the impugned order by contending that the

assessment was completed u/s 143(1) of the Act. On the other

hand, the ld. DR, Shri V. Justin, strongly defended the

reopening of assessment u/s 147 by inviting our attention to

the finding recorded in the impugned order.

2.1. We have considered the rival submissions and

perused the material available on record. The facts, in brief,

are that the assessee is in the business of exhibition of films,

programming, conducting, operating and management of multiplex theaters, declared income of `5,53,21,141/- in its

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return filed on 30/03/2012. The assessment was completed

u/s 143(1) of the Act accepting the returned income. Later on,

the Ld. Assessing Officer recorded the reasons for reopening as

reproduced in para-3.1 of the impugned order as there was

reason to believe that income of ` 30,94,732/-, chargeable to

tax, had escaped assessment. The notice u/s 148 was served

upon the assessee and thereafter another notice u/s 143(2)

dated 24/09/2012 was served upon the assessee. The Ld.

Assessing Officer vide another notice dated 11/04/2012 asked

the assessee to show cause as to why TDS on film rentals may

not be disallowed u/s 40(a) of the Act and the assessee was

also asked to furnish the proof and documentary evidence to

justify its claim. The assessee furnished its reply vide letter

dated 16/04/2012. The Ld. Assessing Officer was unsatisfied

with the reply of the assessee and held that since, the assessee

company has made payment to a non-resident film distributor

i.e. M/s Paramount Films and has not deducted TDS as per

the provision of section 40(a) of the Act, therefore, the Ld.

Assessing Officer disallowed the amount of ` 30,94,732/-

being the payment made to a non-resident distributor to the

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total income of the assessee. Now, under these facts, we shall

analyze, the validity of reopening u/s 147 r.w.s 148 of the Act.

2.2. In the light of the foregoing uncontroverted factual

matrix, there is no dispute to the fact that the tax was not

deducted by the assessee on the payment made to non-

resident film distributor, therefore, we shall analyze, whether

there was a reasonable belief with the Assessing Officer

whether income chargeable to tax had escaped assessment. It

is our bounded duty to examine the validity of reopening u/s

147 r.w.s 148 of the Act. Before adverting further we are

reproducing hereunder the relevant provision of section 147 of

the Act for ready reference and analysis:-

“. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section

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(1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year: Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :— (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; (ba) where the assessee has failed to furnish a report in respect of any international transaction which he was so required under section 92E; (c) where an assessment has been made, but— (i) income chargeable to tax has been underassessed ; or (ii) such income has been assessed at too low a rate ; or (iii) such income has been made the subject of excessive relief under this Act ; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed; (d) where a person is found to have any asset (including financial interest in any entity) located outside India. Explanation 3.—For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in

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respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148. Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section, as amended by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012.”

2.3. If the aforesaid provision of the Act is analyzed, we

find that after insertion of Explanation -3 to section 147 of the

Act by the Finance (No.2) Act of 2009 with effect from

01/04/1989 section 147 has an effect that Assessing officer

has to assess or reassess income (such income) which has

escaped assessment and which was basis of formation of belief

and, if he does so, he can also assess or reassess any other

income which has escaped assessment and which came to the

notice during the course of proceedings. Identical ratio was

laid down by Hon’ble jurisdictional High Court in CIT vs Jet

Airways India Pvt. Ltd. (2010) 195 taxman 117 (Mum.) and the

full Bench decision from Hon’ble Kerala High Court in CIT vs

Best Wood Industries and Saw Mills (2011) 11 taxman.com

278 (Kerala)(FB). A plain reading of explanation-3 to section

147 clearly depicts that the Assessing Officer has power to

make addition, where he arrived to a conclusion that income

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has escaped assessment which came to his notice during the

course of proceedings of reassessment u/s 148. our view is

fortified by the decision in Majinder Singh Kang vs CIT (2012)

25 taxman.com 124/344 ITR 358 (P & H) and Jay Bharat

Maruti Ltd. Vs CIT (2010) Tax LR 476 (Del.) and V. Lakshmi

Reddy vs ITO (2011) 196 taxman 78 (Mad.). The provision of

the Act is very much clear as with effect from 01/04/1989, the

Assessing Officer has wide powers to initiate proceedings of

reopening. The Hon’ble Kerala High Court in CIT vs Abdul

Khadar Ahmad (2006) 156 taxman 206 (Kerala) even went to

the extent so long as the AO has independently applied his

mind to all the relevant aspect and has arrived to a belief the

reopening cannot be said to be invalid.

2.4. We are aware that “mere change of opinion” cannot

form the basis of reopening when the necessary facts were

fully and truly disclosed by the assessee in that situation, the

ITO is not entitled to reopen the assessment merely on the

basis of change of opinion. However, powers under amended

provision are wide enough where there is a reasonable belief

with the Assessing Officer, that income has escaped

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assessment, because the powers with effect from 01/04/1989

are contextually different and the cumulative conditions spelt

out in clauses (a) and (b) of section 147, prior to its

amendment are not present in the amended provision. The

only condition for action is that the Assessing Officer “should

have reason to believe” that income chargeable to tax has

escaped assessment. Such belief can be reached in any

manner and is not qualified by a pre-condition of faith and

true disclosure of material facts by an assessee as

contemplated in pre-amended section 147. Viewed in that

angle, power to reopen assessment is much wider under the

amended provision. Our view is fortified by the decision from

Hon’ble Delhi High Court in Bawa Abhai Singh vs DCIT (2001)

117 taxman 12 and Rakesh Agarwal vs ACIT (1996) 87

taxman 306 (Del.). The Hon’ble Apex Court in CIT vs Sun

Engineering works Pvt. Ltd. 198 ITR 297 (SC) clearly held that

proceedings u/s 147 are for the benefit for the Revenue, which

are aimed at gathering the ‘escaped income’. At the same

time, we are aware that powers u/s 147 and 148 of the Act are

not unbridled one as it is hedged with several safeguards

conceived in the interest of eliminating room for abuse of this

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power by the AO. However, the material available on record,

clearly indicates that income chargeable to tax had escaped

assessment, therefore, the ld. Assessing Officer was within

his jurisdiction to reopen the assessment. The Hon’ble Apex

Court in Ess Ess Kay Engineering Co. Pvt. Ltd. (2001) 247

ITR 818 (SC) held that merely because the case of the assessee

was correct in original assessment for the relevant assessment

year, it does not preclude the ITO to reopen the assessment of

an earlier year on the basis of finding of his fact that fresh

material came to his knowledge.

2.5. Under section 147, as substituted with effect from

01/04/1989, the scope of reassessment has been widened.

After such substitution, the only restriction, put in that

section is that “reason to believe”. That reason has to be a

reason of a prudent person which should be fair and not

necessarily due to failure of the assessee to disclose fully and

partially some material facts relevant for assessment (Dr.

Amin’s Pathology Laboratory vs JCIT (2001) 252 ITR 673, 682

(Bom.) Identical ratio was laid down by Hon’ble Delhi High

court in United Electrical Company Pvt. Ltd. vs CIT (2002) 258

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ITR 317, 322 (Del.) and Prafull Chunnilal Patel vs ACIT 236

ITR 832, 838 (Guj.). The essential requirement for initiating

reassessment proceeding u/s 147 r.w.s 148 of the Act is that

the ld. Assessing Officer must have reason to believe that any

income chargeable to tax has escaped assessment for any

assessment year. The Hon’ble Gujara High Court in Prafull

Chunnilal Patel vs ACIT (supra) even went to the extent that at

the initiation stage formation of reasonable belief is needed

and not a conclusive finding of facts. Identical ratio was laid

down in Brijmohan Agrawal vs ACIT (2004) 268 ITR 400, 405

(All.) and Ratnachudamani S. Utnal vs ITO (2004) 269 ITR

272, 277 (Karnataka) applying Sowdagar Ahmed Khan vs ITO

(1968) 70 ITR 79(SC).

2.6. So far as, the meaning of expression, “reason to

believe” is concerned, it refers to belief which prompts the

Assessing Officer to apply section 147 to a particular case. It

depend upon the facts of each case. The belief must be of an

honest and reasonable person based on reasonable grounds.

The Assessing Officer is required to act, not on mere

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suspicion, but on direct or circumstantial evidence. Our view

find support from the ratio laid down in following cases:-

i. Epica Laboratories Ltd. vs DCIT 251 ITR 420, 425-426 (Bom.), ii. Vishnu Borewell vs ITO (2002) 257 ITR 512 (Orissa), iii. Central India Electric Supply Company Ltd. vs ITO (2011) 333 ITR 237 (Del.), iv. V.J. Services Company Middle East ltd. vs DCIT (2011) 339 ITR 169 (Uttrakhand), v. CIT vs Abhyudaya Builders (P. ) Ltd. (2012) 340 ITR 310 (All.), vi. CIT vs Dr. Devendra Gupta (2011) 336 ITR 59 (Raj.), vii. Emirates Shipping Line FZE vs Asst. DIT (2012) 349 ITR 493 (Del.). viii. Reference may also made to following judicial decisions:- ix. Safetag international India P. Ltd. (2011) 332 ITR 622 (Del.), x. CIT vs Orient Craft Ltd. (2013) 354 ITR 536 (Del.) xi. Acorus Unitech Wirelss Pvt. Ltd. vs ACIT (2014) 362 ITR 417 (Del.). xii. Praful Chunilal Patel: Vasant Chunilal Patel vs Asst. CIT (1999) 832, 843-44, 844-45 (Guj.), xiii. Venus Industrial Corporation vs Asst. CIT (1999) 236 ITR 742, 746 (Punj.), xiv. Srichand Lalchand Talreja vs Asst. CIT (1998) 98 taxman 14, 19 (Bom.), xv. Usha Beltron Ltd. vs JCIT (1999) 240 ITR 728, 736-37, 739 (Pat.) xvi. Kapoor Brothers vs Union of India (2001) 247 ITR 324, 331, 332-33 xvii. Vippy Processors Pvt. Ltd. vs CIT (2001) 249 ITR 7, 8 (MP)

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2.7. In Dilip S. Dahanukar vs Asst. CIT (2001) 248 ITR

147, 150-51 (Bom.). The Hon’ble jurisdictional High Court

held as under:-

“Held, that there was material on record on the basis of survey and statement of person to show that the assessee had wrongfully claim deduction u/s 80IA. Therefore, the Assessing Officer had reason to believe that income had escaped assessment for assessment year 1994-95.”

Identically in the case of Srichand Lalchand Talreja v. Asst. CIT, (1998) 98 Taxman 14, 19 (Bom), where the information regarding acquisition of the asset was not available with the Assessing Officer during the relevant assessment year 1992-93 and such information was disclosed in the return for the assessment year 1995-96, the Hon’ble jurisdictional High Court held that the Assessing Officer can form a bona fide belief that there was escapement of income in relation to assessment year 1992-93.

2.8. The Hon’ble jurisdictional High Court in Export

Credit Guarantee Corporation of India Ltd. v. Addl. CIT, (2013)

350 ITR 651 (Bom), where there had been no application of

mind to the relevant facts during the course of the assessment

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proceedings by the Assessing Officer, the reopening of the

assessment was held to be valid.

2.9. The Hon’ble jurisdictional High Court in Girilal & Co. v. S.L. Meena, ITO, (2008) 300 ITR 432 (Bom), held that in order to invoke the extraordinary jurisdiction of the court the petitioner must also make out a case that no part of the relevant material had been kept out from the Assessing Officer). The information was in the annexures and consequently Explanation 2(c)(iv) of section 147 would apply. The reassessment proceedings after four years were valid.

2.10. In the case of Deputy CIT v. Gopal Ramnarayan

Kasat, (2010) 328 ITR 556 (Bom), it was not the case of the

assessee that the notice issued was after the expiry of the time

limit provided in section 153(2). The reassessment proceedings

were held to be valid. In Indian Hume Pipe Co. Ltd. v. Asst.

CIT, (2012) 348 ITR 439 (Bom), both in the computation of

taxable long-term capital gains in the original return of income

and in the computation that was submitted in response to the

query of the Assessing Officer there was a complete silence in

regard to the dates on which the amounts were invested, as

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such there being a failure to disclose fully and truly material

facts necessary for assessment. The reassessment proceedings

were held to be valid. This view was also confirmed in following

cases:-

a. Dalmia P. Ltd. v. CIT, (2012) 348 ITR 469 (Del); b. CIT v. K. Mohan & Co. (Exports), (2012) 349 ITR 653 (Bom); c. Remfry & Sagar v. CIT, (2013) 351 ITR 75 (Del); d. OPG Metals & Finsec Ltd. v. CIT, (2013) 358 ITR 144 (Del).

2.11. In the case of Venus Industrial Corporation v. Asst.

CIT, (1999) 236 ITR 742, 746 (P & H) [Where initiation was

started within four years for re-examining the deduction under

section 80HHC, was held to be wrongly allowed in the original

assessment. Identically, in the case of Happy Forging Ltd. v.

CIT, (2002) 253 ITR 413,416-17 (P & H), where excise duty

paid in advance was shown as an asset in the balance sheet

and was allowed as a deduction, reassessment notice on the

ground that excise duty was shown as an asset in the balance

sheet and was not routed through the profit and loss account.

The reopening at this stage was held to be valid. In the

case of Vipan Khanna v. CIT, (2002) 255 ITR 220, 230 (P & H),

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where from the facts it was clear that the assessee had

claimed depreciation in the return at the rate of 50 per cent

and he had nowhere disputed the fact that the admissible rate

of depreciation to him was 40 per cent., such fact alone was

sufficient to initiate reassessment proceedings under section

147 and, therefore, such initiation was sustained. The Hon’ble

Punjab & Haryana High Court in Mrs. Rama Sinha v. CIT,

(2002) 256 ITR 481, 483, 486, where the reassessment notice

has been issued on the basis of definite information from CBI

regarding investments by the assessee which had not been

disclosed during the original assessment proceedings, such

initiation has been upheld.

2.12. In the case of Pal Jain v. ITO, (2004) 267 ITR 540,

544-45, 548, 549 (P & H), applying Phool Chand Bajrang Lal v.

ITO, (1993) 203 ITR 456 (SC), although the transaction of sale

of shares was disclosed and accepted in the original

assessment, but the subsequent discovery by the DDI

(Investigation) revealed that the transaction was not genuine, a

reassessment notice after four years has been held to be valid

because there was no true disclosure of the material facts. In

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this regard, the petitioner-assessee cannot draw any support

from the statement for challenging the validity of the notice for

reassessment. It goes without saying that for the purpose of

making the assessment, the Assessing Officer shall have to

confront the petitioner with the entire material in his

possession on the basis of which he proposes to make the

additions. In Punjab Leasing Pvt. Ltd. v. Asst. CIT, (2004) 267

ITR 779, 781-82 (P & H), where depreciation was allowed to

the assessee, who was engaged in the business of financing of

vehicles and consumer durables on 'hire-purchase basis' as

well as on 'lease/rent basis', a reassessment notice issued

after four years has been held not to suffer from any illegality

as the same was based on the bona fide action of the

competent authority to determine whether or not the vehicles

in respect of which the petitioner had been claiming

depreciation, were actually owned by it.

2.13. In Jawand Sons v. CIT(A), (2010) 326 ITR 39 (P &

H), in the initial assessment, the benefit of deduction of the

duty drawback and DEPB under section 80-IB was wrongly

granted to the assessee, for which it was not entitled.

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Therefore, reassessment proceedings to withdraw the

deduction were held to be valid. Likewise, in CIT v. Hindustan

Tools & Forgings P. Ltd., (2008) 306 ITR 209 (P & H), where,

the assessee in the regular assessment had been allowed

deduction more than actually allowable under section 80HHC.

Therefore, the action initiated by the AO for reassessment

under section 147(b) could not be held to be invalid.

2.14. In the case of Markanda Vanaspati Mills Ltd. v. CIT,

(2006) 280 ITR 503 (P & H), wherein, the information

furnished by the assessee gave no clue to the payment of

liability in regard of the sales tax collected in excess. The

Assessing Officer was held to be validly initiated the

reassessment proceedings under section 147 for both the

years under consideration. In the case of Sat Narain v. CIT,

(2010) 320 ITR 448 (P & H), the document did not form the

sole basis for the Assessing Officer to initiate reassessment

proceeding but he also took into consideration the letter

written by the Assistant Commissioner as well as the fact that

no return had been filed by the assessee for assessment year

1995-96. Thus, it was held that the Assessing Officer had

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rightly invoked the jurisdiction to initiate the reassessment

proceedings under section 147. In the case of CIT v.

Hukam Singh, (2005) 276 ITR 347 (P & H), it was held that the

respondents did not have the locus standi to question the

orders of reassessment on the ground of lack of notice. Non-

issuance of notice to some of the legal heirs of the late P was

merely an irregularity and the same did not affect the validity

of the reassessment orders. Likewise, in Tilak Raj Bedi v.

Joint CIT, (2009) 319 ITR 385 (P & H), wherein, facts coming

to light in a subsequent assessment year could validly form

the basis for initiating reassessment proceedings, in view of

Explanation 2 to section 147. The action of the income tax

authorities in reopening the assessment of the assessee and

restricting the deduction under section 80-IB was held to be

valid.

2.15. In the case of Smt. Usha Rani v. CIT, (2008) 301 ITR

121 (P & H), there was nothing on record to show the

relationship between the donor and the donee, capacity of the

donor to make gifts and the occasion therefore. The assessee

had failed to discharge the onus to prove the gifts. The

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reassessment proceedings were held to be valid. In the case of

Usha Beltron Ltd. v. Joint CIT, (1999) 240 ITR 728, 736-37,

739 (Pat), where the investigation report indicated that the

Officer had reason to believe that on account of failure on the

part of the petitioner-assessee to disclose true and full facts,

income had been grossly under assessed, reassessment

proceedings were held validly initiated.

2.16. In the case of Kapoor Brothers v. Union of India,

(2001) 247 ITR 324, 331, 332-33 (Pat), where the material

evidence for the purpose of reopening of the assessment

already completed has been brought to the notice of the

authority during the course of enquiry. The notice was held to

be valid by the Hon’ble High Court. In the case of Vippy

Processors Pvt. Ltd. v. CIT, (2001) 249 ITR 7, 8 (MP), where the

need to issue notice arose due to noticing of vast difference in

value of properties disclosed by the assessee and that of the

report of the Valuation Officer and the reasons that led to the

issue of the notice were duly recorded and the same were also

adequate and based on relevant facts and material, initiation

was upheld. In Triple A Trading & Investment Pvt. Ltd. v.

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Asst. CIT, (2001) 249 ITR 109, 110-11 (MP), where the notice

was issued after recording reasons in that regard, initiation

was upheld.

2.17. Likewise, Hon’ble Gujarat High Court in Garden

Finance Ltd. v. Add/. CIT, (2002) 257 ITR 481, 489, 494-95,

special leave petition dismissed by the Supreme Court: (2002)

255 ITR (St.) 7-8 (SC), where the assessee was holding shares

in an amalgamating company and he was allotted shares in

the amalgamated company and such shares were sold by him

and he has disclosed the market price of such shares as on

the date of amalgamation as the cost of acquisition of such

shares and has not disclosed the cost of acquisition of shares

in the amalgamating company in accordance with section

49(2) read with section 47(vii), initiation of reassessment

proceedings after four years has been sustained because there

was failure on the part of the assessee to disclose material

facts necessary for assessment. Likewise, in Suman Steels

v. Union of India, (2004) 269 ITR 412,418-19 (Raj), where the

return of the assessee for assessment year 1995-96 was

processed under section 143(1)(a) accepting the net profit rate

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declared by the assessee, who carried on con- tract business,

initiation of reassessment proceedings by issuing a notice

dated 15-5-2001 proposing to reassess petitioner-assessee at

higher rate in view of the presumptive rate prescribed under

section 44AD has been sustained. In the case of Dr. Sahib

Ram Giri v. ITO, (2008) 301 ITR 294 (Raj), the reassessment

proceedings were initiated after recording reasons in writing by

the AO. The non-availability of a few documents demanded by

the assessee would not make the reassessment proceedings

initiated for the reasons recorded in detail illegal.

2.18. In the case of Desh Raj Udyog : Chaman Udyog v.

ITO, (2009) 318 ITR 6 (All), in the assessment years in

question, the matter was still to be decided finally by the

assessing authority whether the income should be treated

under the head 'Business income' or 'property income'. The

assessee would get opportunity to show sufficient cause to the

assessing authority during the course of assessment. Thus, it

could not be said that there was no relevant material to

initiate proceedings under section 147. In the case of

Kartikeya International v. CIT, (2010) 329 ITR 539 (All), in view

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of the matter, the petitioner was not entitled for the deduction

on the duty drawback amount under section 80-IB and since

it had been allowed in the assessment order passed under

section 143(1), it had escaped assessment. On these facts the

initiation of the proceedings under section 147 read with

section 148 for assessment years 2005-06 and 2006-07 was

legal and in accordance with law.

2.19. Likewise, in the case of Sunil Kumar lain: Suresh

Chandra lain v. ITO, (2006) 284 ITR 626 (All), notwithstanding

the fact that the amount had been assessed to tax in the

hands of P, he had taken a stand that the amount did not

belong to him and instead belonged to S. Thus, it was not

clear as to in whose hands the amount in question had to be

assessed. The ITO was justified in taking proceedings under

section 147 for assessing the amounts in the hands of the

petitioners according to the claim made by the petitioners.

Likewise, Hon’ble Kerala High Court in CIT v. Dr. Sadique

Ummer, (2010) 322 ITR 602 (Ker), where, the Assessing Officer

collected further information to complete the reassessments

which was also permissible under the Act. The finding of the

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first appellate authority as well as the Tribunal, that the

Assessing Officer had no material to believe that the income

had escaped assessment was wrong and contrary to facts. The

assessee had not maintained any books of account. Therefore,

the reopening of assessments was held to be valid and within

time. In the case of CIT v. Uttam Chand Nahar, (2007) 295

ITR 403 (Raj), the notice requiring the assessee to file the

return within 30 days was in accordance with section 148 as it

must be deemed to be in force with effect from 1-4-1989, and

in force as on the date notice was issued. There was no

violation of section 148 in respect of the specified period within

which the return is to be submitted. The reassessment

proceedings were held to be valid.

2.20. In the case of CIT v. C. V. layachandran, (2010) 322

ITR 520 (Ker), where, the assessee did not concede the income

on capital gain either under the un-amended provision or

un-der the amended provision, the recourse open to the

Department was to bring to tax income escaping assessment

under section 147 which was not time barred or otherwise

invalid. Likewise, in Atul Traders v. ITO, (2006) 282 ITR 536

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(All), the account books or record and other material were all

common which were being considered by the CIT(A) in the

proceedings relating to three appeals. The petitioner had

notice and opportunity of being heard. The reassessment

proceedings were held to be validly initiated. In the case of

Inductotherm (India) P. Ltd. v. lames Kurian, Asst. CIT, (2007)

294 ITR 341 (Guj), the Assessing Officer had found that there

were errors in the computation of allowances. The

reassessment proceedings were held to be valid. In the case of

Papaya Farms Pvt. Ltd. vs. DCIT, (2010) 323 ITR 60 (Mad),

where the assessee had furnished incorrect particulars and

therefore, the reopening of the assessment was held to be

justified.

2.21. In the case of CIT v. Kerala State Cashew

Development Corporation Ltd., (2006) 286 ITR 553 (Ker),

wherein, the assessee was following the mercantile system of

accounting should not have claimed deduction of penal

interest which had accrued not in the previous year relevant to

the assessment year but in earlier years. This the assessee

had not disclosed. The reassessment was held to be valid.

25 ITA No.1135/Mum/2015 Swanston Multiplex Cinemas Pvt. Ltd.

Likewise, in Kusum Industries P. Ltd. v. CIT, (2008) 296 ITR

242 (All), as the award had become final it would be taken that

the directors of the assessee had accepted the factum of

earning of secret profit not reflected in the books of account,

which was also binding on the company. The non-appearance

of one of the arbitrators and one of the directors in respect of

the summon issued under section 131 would not make the

reassessment invalid. The Hon’ble Kerala High Court in CIT v.

Indo Marine Agencies (Kerala) P. Ltd., (2005) 279 ITR 372

(Ker), held that the entry would amount to an order under

section 144. The mere fact that it was not communicated to

the assessee would not make such an assessment recorded in

the order sheet illegal and that would not bar further

proceedings under section 147. Thus, the assessment was

held to be validly reopened under Explanation 2(c) to section

(Ker), where, the assessee could not, after having persuaded

the assessing authority to withdraw the notice dated 1-10-

1993, pointing out that it was not in conformity with law, be

allowed to contend that the notice was valid due to the

omission of the time-limit by the Finance (No.2) Act, 1996,

26 ITA No.1135/Mum/2015 Swanston Multiplex Cinemas Pvt. Ltd.

with effect from 1-4-1989. In the absence of specific provision

in the Finance (No. 2) Act, 1996, invalidating proceedings

initiated by the Income-tax Officer, the action taken by him

applying the then existing law could not be said to be invalid.

2.22. Likewise, in CIT v. S.R. Talwar, (2008) 305 ITR 286

(All), the factum of taking advances or loan from T and K, in

which the assessee was one of the directors had not been

disclosed nor a copy of the ledger account of the assessee

maintained by the company filed. In view of the absence of

these details, the Assessing Officer could not examine the

taxability of advances or loan raised by the assessee. There

was failure to disclose material facts necessary for assessment.

The reassessment proceedings were held to be valid. In

another case, the Hon’ble Allahabad High Court in Chandra

Prakash Agrawal v. Asst. CIT, (2006) 287 ITR 172 (All),

wherein, the Income-tax Department had sent a requisition on

27-3-2002, under section 132A requisitioning the books of

account and other documents seized by the Central Excise

Department. The record of the proceeding dated 18-4-2002,

showed that the requisition was not fully executed as all the

27 ITA No.1135/Mum/2015 Swanston Multiplex Cinemas Pvt. Ltd.

books of account and other documents had not been delivered

to the requisitioning authority. The proceedings initiated

under section 147 was held to be valid.

2.23. In Ramilaben Ratilal Shah v. CIT, (2006) 282 ITR

176 (Guj), held that the noting in the diary constituted

sufficient information for the escapement of income by

either non-declaration of correct sale consideration or

furnishing of inaccurate particulars as regards sale

consideration. Thus, the Tribunal was justified in holding

that the assessee had failed to disclose fully and truly all

material facts necessary for the assessment of the relevant

assessment year. The reassessment proceedings had been

validly initiated.

Likewise, in CIT v. Abdul Khader Ahamed, (2006) 285

ITR 57 (Ker), it was clear from the reasons recorded by the

Deputy CIT that he prima facie had reason to believe that the

assessee had omitted to disclose fully and truly the material

facts and that as a consequence income had escaped

assessment. The reassessment was held to be valid. In the

case of U.P. State Brassware Corporation Ltd. v. CIT, (2005)

28 ITA No.1135/Mum/2015 Swanston Multiplex Cinemas Pvt. Ltd.

277 ITR 40 (All), the principles laid down by the Calcutta High

Court in CIT v. New Central Jute Mills Co. Ltd. : (1979) 118

ITR 1005 (Cal) did constitute information on a point of law

which should be taken into consideration by the ITO in

forming his belief that the income to that extent had escaped

assessment to tax and, the reassessment was held to be valid.

In Sunder Carpet Industries v. ITO, (2010) 324 ITR 417 (All),

held that the Departmental Valuer's Report constituted

material for entertaining a belief of escaped income in the

years under consideration. The reassessment proceeding was

held to be valid.

2.24. In Aurobindo Sanitary Stores v. CIT, (2005) 276 ITR

549 (Ori), there being a substantial difference between the

figures of liabilities towards sundry creditors in the party

ledgers of the assessee-firm and the figures of liabilities

towards sundry creditors in the balance-sheet of the assessee-

firm for the previous year relevant to the assessment year

1989-90. These materials had a direct link and nexus for

formation of a belief by the Assessing Officer that income of

the assessee-firm had escaped assessment because of failure

29 ITA No.1135/Mum/2015 Swanston Multiplex Cinemas Pvt. Ltd.

of the assessee to disclose fully and truly all material facts

necessary for the assessment. In the case of CIT v. Best Wood

Industries & Saw Mills, (2011) 331 ITR 63 (Ker), the assessee

challenged the validity of the reassessment on the ground that

the AO had exceeded his jurisdiction under section 147 and

both the first appellate authority as well as the Tribunal

accepted the contention of the assessee holding that so far as

the reassessments related to assessment of unexplained trade

credits, they were invalid. On appeal, it has been held that the

reassessments were to be valid. In Honda Siel Power Products

Ltd. v. Deputy CIT, (2012) 340 ITR 53 (Del), there being

omission and failure on the part of the assessee to disclose

fully and truly material facts Thus reassessment proceedings

were held to be valid.

In Atma Ram Properties Private Ltd. v. Deputy CIT,

(2012) 343 ITR 141 (Del), as the books of account and other

material were not produced and no letter was filed, the order

passed by the Commissioner (Appeals) in the assessment year

2001-02 would constitute 'information' or material from any

external source and, as such, the reassessment proceedings

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for the assessment year 2000-01 were held to be valid.

Likewise, in the case of CIT v. Smt. R. Sunanda Bai, (2012)

344 ITR 271 (Ker), the reassessment in question were held to

be valid on the fact that the assessee claimed and was given

relief under section 80HHA for the three preceding year which

disentitled her for deduction under section 80HH for the

assessment years 1992-93 and 1993-94.

2.25. In the case of Aquagel Chemicals P. Ltd. v. Asst.

CIT, (2013) 353 ITR 131 (Guj), since there being sufficient

material on record for the Assessing Officer to form a belief as

regards the escapement of income in relation to the claim of

depreciation in respect of the building of coal fire boiler, the

reassessment was held to be valid. In the case of Convergys

Customer Management v. Asst. DIT, (2013) 357 ITR 177 (Del),

where there being prima facie material in the possession of the

Assessing Officer to form a tentative belief that section 9(1)(i)

held attracted, said reason by itself constituted a relevant

ground to reopen the assessment of the assessee.

Reference can also be made to following cases and the ratio laid down therein:-

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i. Ajai Verma v. CIT [(2008) 304 ITR 30 (All)]; ii. Ashok Arora v. CIT [(2010) 321 ITR 171 (Del)]; iii. CIT v. Chandrasekhar BaLagopaL [(2010) 328 ITR 619 (Ker)]; iv. Jayaram Paper Mills Ltd. v. CIT [(2010) 321 ITR 56 (Mad)]; v. Kerala Financial Corporation v. Joint CIT [(2009) 308 ITR 434 (Ker)]; vi. Mavis Satcom Ltd. v. Deputy CIT [(2010) 325 ITR 428 (Mad)]; vii. CIT v. Madhya Bharat Energy Corporation Ltd. [(2011) 337 ITR 389 (Del)]; viii. Kone Elevator India P. Ltd. v. ITO [(2012) 340 ITR 454 (Mad)]; ix. Vijay Kumar Saboo v. Asst. CIT [(2012) 340 ITR 382 (Karn)]; x. Siemens Information Systems Ltd. v. Asst. CIT [(2012) 343 ITR 188 (Bom)]; xi. I.P. Patel & Co. v. Deputy CIT [(2012) 346 ITR 207 (Guj)]; xii. Dishman Pharmaceuticals & Chemicals Ltd. v. Deputy CIT [(2012) 346 ITR 228 (Guj)]; xiii. Video Electronics Ltd. v. Joint CIT [(2013) 353 ITR 73 (Del)]; xiv. A G Group Corporation v. Harsh Prakash [(2013) 353 ITR 158 (Guj)]; xv. Inductotherm (India) P. Ltd. v. M. GopaLan, Deputy CIT [(2013) 356 ITR 481 (Guj)]; CIT v. Dhanalekshmi Bank Ltd. [(2013) 357 ITR 448 (Ker)]; xvi. Sitara Diamond Pvt. Ltd. v. ITO [(2013) 358 ITR 424 (Bom)]; xvii. Rayala Corporation P. Ltd. v. Asst. CIT [(2014) 363 ITR 630 (Mad)].

2.26. So far as, the decision in the case of CIT vs

Kelvinator of India Ltd. (2010) 320 ITR 561 (SC) is concerned,

the Hon’ble Apex Court, while coming to a particular

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conclusion, only in a situation, when not a single piece of

paper or document was recovered, therefore, the Hon’ble

Court held that since there was no tangible material found

and the addition was merely on the basis of statement only

then reopening of assessment u/s 147 of the Act was not

permissible. It is further noted that retraction was made by

the assessee, merely after a long gap of more than two years

and not at the earliest possible time. It was merely as

afterthought. There is a possibility that the statement, if,

recorded under duress and threat (which is not the case in the

present appeals) in that situation, there is a less possibility of

retraction during that period, however, if the retraction is

made within short span of time then retraction carries more

weight. The assessee never alleged that the statement was

recorded under duress and threat. Likewise, in the case of CIT

vs S. Khader Khan Son (2012) 254 CTR 228 (SC), affirming the

decision of Madras High Court in (2008) 300 ITR 157 (Mad.),

the whole addition was made solely on the basis of statement

u/s 133A and no other material was found, in that situation,

it was held that the such statement has no evidentiary value,

thus, under the peculiar facts in the present appeal, the cases

33 ITA No.1135/Mum/2015 Swanston Multiplex Cinemas Pvt. Ltd.

relied upon by the assessee are not of much help as is clearly

oozing out from the contents of the statement tendered by the

assessee without duress or threat, connecting the assessee of

non-recording of purchase and sale in the regular books of

accounts.

If the material available on record and the judicial

pronouncements discussed hereinabove are kept in

juxtaposition with the facts of the present appeal, we find that

there was reasonable belief with the Ld. Assessing Officer that

income chargeable to tax had escaped assessment as the Ld.

Assessing Officer made payment to the non-resident film

distributor without deducting TDS, therefore, we are of the

opinion that, so far as, initiation of proceedings u/s 147 r.w.s.

148 of the Act are concerned, the ld. Assessing Officer was

justifiably within the parameter of the law to reopen the

assessment, therefore, we affirm the stand of the ld. First

Appellate Authority, resulting into dismissal of the impugned

ground raised by the assessee.

disallowance of ` 30,94,732/- made u/s 40(a) for non-

34 ITA No.1135/Mum/2015 Swanston Multiplex Cinemas Pvt. Ltd.

deduction of tax at source u/s 195 of the Act, on the payment

made a non-resident company is concerned, the argument of

the ld. counsel is that a non-resident company is excluded

from the definition of royalty, per clause (v) to Explanation-2

to section 9(1)(vi) of the Act. Reliance was placed upon the

decision in the case of Channel Guide India Ltd. vs ACIT

(2012) 25 taxman.com 25 (Mum.). It was also pleaded that

when the payment was made, there was no such provision in

the Act, therefore, reliance was placed upon the decision from

Hon'ble Apex Court in the case of Krishnaswamy S. Pd. Vs

UOI (2006) 281 ITR 305 (SC). It was also pleaded that the

decision in the case of G.E. India (327 ITR 456)(SC) favours

the case of the assessee. Our attention was invited to section

40(a) of the Act.

3.1. We have considered the rival submissions and

perused the material available on record. Before adverting

further, we are reproducing hereunder the relevant provision

of section 40(a) of the Act:-

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chargeable under the head "Profits and gains of business or profession",— (a) in the case of any assessee— (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,— (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.—For the purposes of this sub-clause,— (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid : Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso. Explanation.—For the purposes of this sub-clause,— (i) "commission or brokerage" shall have the same meaning as in clause (i) of the Explanation to section 194H; (ii) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

36 ITA No.1135/Mum/2015 Swanston Multiplex Cinemas Pvt. Ltd.

(iii) "professional services" shall have the same meaning as in clause (a) of the Explanation to section 194J; (iv) "work" shall have the same meaning as in Explanation III to section 194C; (v) "rent" shall have the same meaning as in clause (i) to the Explanation to section 194-I; (vi) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; [(ib) any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 : Provided that where in respect of any such consideration, the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid;] (ic) any sum paid on account of fringe benefit tax under Chapter XIIH; (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91. Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A; (iia) any sum paid on account of wealth-tax. Explanation.—For the purposes of this sub-clause, "wealth-tax" means wealth-tax chargeable under the Wealth-tax Act, 1957 (27 of 1957), or any tax of a similar character chargeable under any law in force in any country outside India or any tax chargeable under such law with reference to the value of the assets of, or the capital employed in, a business or profession carried on by the assessee, whether or not the debts of the business or profession are allowed as a deduction in computing the amount with reference to which such tax is charged, but does not include any tax chargeable with reference to the value of any particular asset of the business or profession; (iib) any amount—

37 ITA No.1135/Mum/2015 Swanston Multiplex Cinemas Pvt. Ltd.

(A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or (B) which is appropriated, directly or indirectly, from, a State Government undertaking by the State Government. Explanation.—For the purposes of this sub-clause, a State Government undertaking includes— (i) a corporation established by or under any Act of the State Government; (ii) a company in which more than fifty per cent of the paid-up equity share capital is held by the State Government; (iii) a company in which more than fifty per cent of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken together); (iv) a company or corporation in which the State Government has the right to appoint the majority of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner; (v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government; (iii) any payment which is chargeable under the head "Salaries", if it is payable— (A) outside India; or (B) to a non-resident, and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B; (iv) any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head "Salaries"; (v) any tax actually paid by an employer referred to in clause (10CC) of section 10; 3.2. The ld. counsel for the assessee, before us,

contended that the distributor shares paid to a non-resident

company is excluded from the definition of royalty as per

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section 9(1)(vi) Explanation-2 clause (v) of the Act. Therefore,

we are reproducing hereunder the relevant section:-

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(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. Explanation 3.—Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India. Explanation 4.—For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of". Explanation 5.—For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India: [Provided that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD for an assessment year commencing on or after the 1st day of April, 2012 but before the 1st day of April, 2015:] [Provided further that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).] [Explanation 6.—For the purposes of this clause, it is hereby declared that—

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(a) the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets— (i) exceeds the amount of ten crore rupees; and (ii) represents at least fifty per cent of the value of all the assets owned by the company or entity, as the case may be; (b) the value of an asset shall be the fair market value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, determined in such manner as may be prescribed; (c) "accounting period" means each period of twelve months ending with the 31st day of March: Provided that where a company or an entity, referred to in Explanation 5, regularly adopts a period of twelve months ending on a day other than the 31st day of March for the purpose of— (i) complying with the provisions of the tax laws of the territory, of which it is a resident, for tax purposes; or (ii) reporting to persons holding the share or interest, then, the period of twelve months ending with the other day shall be the accounting period of the company or, as the case may be, the entity: Provided further that the first accounting period of the company or, as the case may be, the entity shall begin from the date of its registration or incorporation and end with the 31st day of March or such other day, as the case may be, following the date of such registration or incorporation, and the later accounting period shall be the successive periods of twelve months: Provided also that if the company or the entity ceases to exist before the end of accounting period, as aforesaid, then, the accounting period shall end immediately before the company or, as the case may be, the entity, ceases to exist; (d) "specified date" means the— (i) date on which the accounting period of the company or, as the case may be, the entity ends preceding the date of transfer of a share or an interest; or (ii) date of transfer, if the book value of the assets of the company or, as the case may be, the entity on the date of transfer exceeds the book value of the assets as on the date referred to in sub-clause (i), by fifteen per cent. Explanation 7.— For the purposes of this clause,— (a) no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India, referred to in the Explanation 5, (i) if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the

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total voting power or total share capital or total interest, as the case may be, of such company or entity; or (ii) if such company or entity indirectly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds any right in, or in relation to, such company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India, nor holds such percentage of voting power or share capital or interest in such company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India; (b) in a case where all the assets owned, directly or indirectly, by a company or, as the case may be, an entity referred to in the Explanation 5, are not located in India, the income of the non-resident transferor, from transfer outside India of a share of, or interest in, such company or entity, deemed to accrue or arise in India under this clause, shall be only such part of the income as is reasonably attributable to assets located in India and determined in such manner as may be prescribed; (c) "associated enterprise" shall have the meaning assigned to it in section 92A;] (ii) income which falls under the head "Salaries", if it is earned in India. Explanation.—For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for— (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India ; (iii) income chargeable under the head "Salaries" payable by the Government to a citizen of India for service outside India ; (iv) a dividend paid by an Indian company outside India ; (v) income by way of interest payable by— (a) the Government ; or (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India ; [Explanation.—For the purposes of this clause,—

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(a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly; (b) "permanent establishment" shall have the meaning assigned to it in clause (iiia)of section 92F;] (vi) income by way of royalty payable by—

XXXXXXXXXXXXXX

Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for— (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or XXXXXXXXXXX

3.3. If the aforesaid section is analyzed, clause (v) of

Explanation-2 to section 9(1)(vi) of the Act specifically excludes

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the payment of distributor share paid to a non-resident

company specifically exclude/consideration for the sale,

distribution or exhibition of cinematographic films. It is also

noted that Hon'ble Apex Court in G.E. India Technology Cen.

(P.) Ltd. vs CIT (2010) 327 ITR 456 /(2010) 234 CTR 153 (SC)

vide order dated 09/09/2010 held as under:-

The most important expression in s. 195(1) consists of the words "chargeable under the provisions of the Act". A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the IT Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the IT Act. It may be noted that s. 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct tax at source in respect of such composite payments. The obligation to deduct tax at source is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in s. 195(1), namely, "chargeable under the provisions of the Act". It is for this reason that vide Circular No. 728, dt. 30th Oct., 1995 the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting tax at source. The application of s. 195(2) pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO(TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO(TDS) that the question of making an order under s. 195(2) will arise. While deciding the scope of s. 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of s. 195. Hence, apart from s. 9(1), ss. 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying TDS provisions. Reference to ITO(TDS) under s. 195(2) or s. 195(3) either by the non-resident or by the resident payer is to avoid any future hassles for both resident as well as non-resident. Secs. 195(2) and 195(3) are safeguards. The said provisions are of practical importance. From this it follows that where a

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person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. If the contention of the Department that the moment there is remittance the obligation to deduct tax at source arises is to be accepted then the words "chargeable under the provisions of the Act" in s. 195(1) would be obliterated. The said expression in s. 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct tax at source only if the income is assessable in India. If income is not so assessable, there is no question of tax at source being deducted.—Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC) and Vijay Ship Breaking Corpn. & Ors. vs. CIT (2008) 219 CTR (SC) 639 : (2008) 14 DTR (SC) 74 : (2009) 314 ITR 309 (SC) relied on; CIT vs. Cooper Engineering Ltd. (1968) 68 ITR 457 (Bom) impliedly approved.

(Paras 7 & 8)

Sec. 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in s. 195. In none of the provisions the expression "sum chargeable under the provisions of the Act" is found, which, is an expression used only in s. 195(1). It follows, therefore, that the obligation to deduct tax at source arises only when there is a sum chargeable under the Act. Sec. 195(2) is not merely a provision to provide information to the ITO (TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, s. 195 has to be read in conformity with the charging provisions, i.e., ss. 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in s. 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe s. 195 widely so as to require deduction of tax at source even in a case where an amount paid is not chargeable to tax in India at all. Sec. 195 cannot be read, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct tax at source arises. If such a contention is accepted it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from s. 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the IT Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Hence, the provision relating to TDS applies only to those sums which are chargeable to tax under the IT Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct tax at source is accepted then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the IT Act by which a payer can obtain refund. Sec. 237 r/w s. 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must

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therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. Sec. 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. There is no merit in the contention. As stated hereinabove, s. 195(1) uses the expression "sum chargeable under the provisions of the Act." One has to give weightage to those words. Further, s. 195 uses the word 'payer' and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under s. 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the IT Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the IT Act for the said sum as an "expenditure". Under s. 40(a)(i), inserted vide Finance Act, 1988 w.e.f. 1st April, 1989, payment in respect of royalty, fees for technical services or other sums chargeable under the IT Act would not get the benefit of deduction if the assessee fails to deduct tax at source in respect of payments outside India which are chargeable under the IT Act. This provision ensures effective compliance of s. 195 relating to TDS in respect of payments outside India in respect of royalties, fees or other sums chargeable under the IT Act. In a given case where the payer is an assessee he will definitely claim deduction under the IT Act for such remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the IT Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1st April, 2008 sub-s. (6) has been inserted in s. 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. Therefore, there are adequate safeguards in the Act which would prevent revenue leakage.—CIT vs. Eli Lilly & Company (India) (P) Ltd. (2009) 223 CTR (SC) 20 : (2009) 21 DTR (SC) 74 : (2009) 312 ITR 225 (SC) relied on; Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC) distinguished; CIT vs. Samsung Electronics Co. Ltd. & Ors. (2009) 227 CTR (Kar) 335 : (2009) 31 DTR (Kar) 257 and CIT (International Taxation) & Anr. vs. Sonata Information Technology Ltd. (2010) 232 CTR (Kar) 20 : (2010) 38 DTR (Kar) 350 set aside.

(Para 9)

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Since the High Court did not go into the merits of the case on the question of payment of royalty, the impugned judgments of the High Court are set aside and these cases are remitted to the High Court for de novo consideration of the cases on merits.

3.4. In another case of Asian Vision Home

Entertainment (P.) Ltd. (2010) 37 SOT 111 (Mum.), on

identical facts held as under:-

“4. Facts of the case, in brief, are that the AO during the course of assessment proceedings observed from the P&L a/c and the details filed by the assessee that the assessee has incurred the expenditure on royalty payment of Rs. 1,09,09,328 to M/s Columbia Tristar Films of India, Chase Manhattan Bank, 4, Chase Metro Tex Centre, 6th Floor, Broklin, New York-11245. The AO asked the assessee to submit the details of TDS deducted and paid from the above royalty payment in view of the provisions of s. 40(a) of the IT Act, 1961 (‘the Act’). The assessee vide its letter dt. 13th March, 2006 filed its reply, the relevant portion of the submission of which has been reproduced by the AO in the body of assessment order and which is reproduced as under :

"The payment made to above party was for amount payable to them for the distribution and marketing of their cinematographic film on DVD and VCD. The said fees were payable on minimum guarantee basis and is calculated per piece as fees on distribution of said films. The guaranteed licence fees were paid in advance and the same was adjusted against sale of each DVD and VCD and at the end of the period if full advance is adjusted against minimum guarantee the further amount has to be paid to them. Accordingly, out of the payment made of fees the same is clarified as expenses for the year as per sale. The above payment is not per se royalty as defined in the Act as defined in Expln. 2 to s. 9(1)(vi).

In the said definition it states that ‘transfer of all or any right (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for sale, distribution or exhibition of cinematographic films’."

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the assessee did not furnish any details of these documents to establish that the payment made to M/s CTFI do not fall in the category of payment that is liable for deduction of tax at source as per the provisions of s. 40(a) of the Act, the AO disallowed the claim of royalty payment made to M/s CTFI amounting to Rs. 1,09,09,328 under s. 40(a) of the Act.

"3.2 I have considered the rival submissions and the materials on record. Admittedly, the claim was in relation to royalty payment. The onus was squarely on the appellant to establish that it would not be so even though claimed. From the discussion in the body of the assessment order and narrated above, it is seen that the AO has allowed proper opportunity to the appellant to explain its position. The written submission filed during the assessment hearing has made a reference to s. 9 (Expln. 2) to state that it was not a case of payment of royalty ‘per se’. That means, it is otherwise a royalty. Further, the copies of agreement filed during assessment proceedings did not clear the matter. At the appeal hearing stage, the contentions made at the assessment stage were repeated. Under such facts and circumstances, I find that the appellant has itself claimed royalty payment. Later on, it backtracked on such claim without proper explanation. Under the facts and circumstances, the AO was left with no option other than to make the addition. At the appeal hearing stage also no material has been brought on record to controvert the findings of the AO. Consequently, the order of the AO deserves to be upheld."

Aggrieved with such order of the CIT(A), the assessee is in appeal before us.

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"Royalties

The licensees shall pay to the licensors or if required by the licensors directly to the original licensor by wire transfer of their bankers Chase Manhattan Bank of New York, as provided for in para 3.1 of the standard terms and conditions, royalties as follows :

"(a) Video cassettes—For rental and/or sell-through distribution of video cassettes, royalties shall equal the greater of twenty per cent (20 per cent) of gross receipts (as defined in the standard terms and conditions) or eighty US cents (US $ 0.80) per video cassette.

(b) Video CD.—

(i) For rental and/or sell-through distribution of single-disc video CDs, royalties shall equal the greater of twenty-five per cent (25 per cent) of gross receipts of one US dollar (US $ 1) per video CD sold; and

(ii) For rental and/or sell-through distribution of double disc video CDs, royalties shall equal the greater of thirty per cent (30 per cent) of gross receipts, or one US dollar and thirty cents (US $ 1.30) per video CD sold."

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"(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in s. 44BB;

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vi) the rendering of any services in connection with the activities referred to in sub-cls. (i) to (iv), (iva) and (v)."

3.5. If the relevant provision and explanation to section

40(a) of the Act is analyzed with explanation-2 to clause (vi) to

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sub-section (1) of section-9 of the Act, we find that

Explanation-2 speaks about transfer of all or any rights

(including the granting of license) in respect of Patent,

invention, model, design, secret formula or process or

trademark or similar property, therefore, royalty has not been

paid for any T.V. or radio broadcasting, consequently, we find

merit in the submission of the Ld. counsel for the assessee.

Such royalty is out of the definition of royalty as per

Explanation-2 to sub-clause (vi) of sub-section (1) of section 9,

therefore, the provision of section 40(a) is not applicable to the

case of the assessee. Therefore, we hold that the payment of

alleged royalty is outside the preview of section 40(a) of the

Act, therefore, no TDS is required to be made from such

payments, because it is outside the purview of royalty and

further the decision of the Mumbai Bench of the Tribunal in

Channel Guide India Ltd. (2012) 25 taxman.com 25(Mum.)

decided the issue in favour of the assessee. The Hon'ble Apex

Court in G.E. India Technology Cen. (P.) Ltd. vs CIT (2010)

327 ITR 456 (SC) and the ratio laid down therein held that the

payment made to non-resident, there is no obligation to

deduct the tax at source and such question only arises the

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sum so paid is chargeable u/s 4, 5 and 9 of the Act.

Respectfully following the aforesaid decisions, this ground of

the assessee is allowed.

Finally, the appeal of the assessee is partly allowed.

This Order was pronounced in the open court in the

presence of ld. representative of both sides at the conclusion of

the hearing on 12/09/2017.

Sd/- Sd/- (G. Manjunatha) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated :-03/10/2017

f{x~{tÜ? P.S /�नजी स�चव आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to :

आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai,