ACIT, BHUBANESWAR vs. INDIAN METALS & FERRO ALLOYS LTD, BHUBANESWAR

IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK

BEFORE S/SHRI N.S SAINI, ACCOUNTANT MEMBER AND PAVAN KUMAR GADALE, JUDICIAL MEMBER

ITA Nos 47 & 48/CTK/2014 Assessment Years : 2007-08 & 2008-2009

Indian Metals & Ferro Vs. ACIT, Circle 2(1), Alloys Ltd.,IMFA Building, Bhubaneswar. Bomikhal, Rasulgarh. Bhubaneswar. PAN/GIR No.AAACI 4818 F (Appellant) .. ( Respondent)

ITA Nos.73 & 74/CTK/2014 Assessment Years : 2007-08 & 2008-2009

ACIT, Circle 2(1), Vs. Indian Metals & Ferro Bhubaneswar. Alloys Ltd.,IMFA Building, Bomikhal, Rasulgarh. Bhubaneswar PAN/GIR No. .AAACI 4818 F (Appellant) .. ( Respondent)

Assessee by : Shri Sachit Jolly, AR Revenue by : Shri Kunal Singh, CIT DR

Date of Hearing : 09/10/ 2017 Date of Pronouncement : 25 /10/ 2017

O R D E R Per N.S.Saini, AM These are cross appeals filed by the assessee and the revenue

against the common order of the CIT(A)- -II, Bhubaneswar dated

12.12.2013 for the assessment years 2007-08 & 2008-09.

08 are as under:

“1. That on facts and circumstances of the case and in law, the Commissioner of Income tax (Appeals) ["CIT(A)"] erred in confirming the action of the assessing officer ('AO") in initiating reassessment proceedings under Section 147 of the Income Tax Act, 1961 ('the Act') on mere change of opinion and without there being any valid reason to believe that the income has escaped assessment.

1 .1 That on facts and circumstances of the case and in law, the CIT(A) erred in not appreciating that the re-assessment proceedings had been initiated on a change of opinion as the original assessment had been completed under Section 143(3) of the Act after detailed scrutiny and no tangible material had come to the knowledge of the AO thereafter justifying initiation of proceeding under Section 147/148 of the Act.

1.2 That on facts and circumstances of the case and in law, the CIT(A) erred in not appreciating that in the original assessment completed under section 143(3) of the Act, the AO had disallowed certain payments made to non-resident recipients under section 40(a)(i) after detailed scrutiny and, therefore, reassessment proceedings could not have been initiated in respect of a similar issue without any fresh tangible material coming to the knowledge of AO.

1.3 That on facts and circumstances of the case and in law. the CIT(A) erred in confirming the action of the AO in initiating reassessment proceedings under section 147 of the Act on the issue of disallowance under section 40(a)(i) of the Act without appreciating that the AO failed to point out how payments made to various non-resident parties were chargeable to tax in India on which tax was deductible under section 195(1) of the Act.

1.4 That on facts and circumstances of the case and in law, the CIT(A) erred in not appreciating that the reassessment proceedings had been initiated by the AO on an erroneous assumption that all payments to non-resident are subject to withholding taxes under section 195 of the Act and. therefore, income had escapement assessment for failure to withhold tax u/s 195(1) r/w 40(a)(i), which is in complete disregard of the decision of Supreme Court in the case of GE India Technology Centre (P) Ltd. v. CIT: 327ITR456.

09 are as under:

“1. That on facts and circumstances of the case and in law, the Commissioner of Income tax (Appeals) ["CIT(A)"] erred in confirming the action of the assessing officer ('AO") in initiating reassessment proceedings under Section 147 of the Income Tax Act, 1961 ('the Act') on mere change of opinion and without there being any valid reason to believe that the income has escaped assessment.

1 .1 That on facts and circumstances of the case and in law, the CIT(A) erred in not appreciating that the re-assessment proceedings had been initiated on a change of opinion as the original assessment had been completed under Section 143(3) of the Act after detailed scrutiny and no tangible material had come to the knowledge of the AO thereafter justifying initiation of proceeding under Section 147/148 of the Act.

1.2 That on facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in initiating reassessment proceedings under section 147 of the Act on the

issue of disallowance u/s.40(a)(i) of the Act without appreciating that the AO failed to point out how payments made to various non-resident parties were chargeable to tax in India on which tax was deductible under section 195(1) of the Act.

1.3 That on facts and circumstances of the case and in law, the CIT(A) erred in not appreciating that the reassessment proceedings had been initiated by the AO on an erroneous assumption that all payments to non-resident are subject to withholding taxes under section 195 of the Act and. therefore, income had escapement assessment for failure to withhold tax u/s 195(1) r/w 40(a)(i), which is in complete disregard of the decision of Supreme Court in the case of GE India Technology Centre (P) Ltd. v. CIT: 327ITR456.

4.That the CIT(A) erred on facts and in law in confirming the action of the AO in disallowing deduction of Rs.8,72,14,918/- by invoking section 43B of the Act, without appreciating that the said sum represented deposit of electricity duty in a designated non-lien bank account as per the directions of the Hon'ble Odisha High Court.

4.1 That in holding as aforesaid, the CIT(A) erred on facts and in law in not appreciating that the liability having crystalized and discharged by the appellant. Section 43B of the Act could not have been invoked.”

of the Act was completed on 29.12.2010 for the assessment years 2007-

08 and 2008-09. The Assessing Officer thereafter recorded the following

reasons for reopening of assessment for assessment year 2007-08 as

under:

“Later on it is noticed that an amount of Rs.7697.44 lakh has been paid in foreign currency for import expenditure and charged to P&L account for the year ending 31.3.2007 on which no tax was deducted u/s.195(1) of the I.T.Act, thus not to be eligible for deduction in computing the income chargeable under the head “Profits and Gains of Business or profession” u/s.40(a)(ia) of the I.T.Act, 1961. Since the income of the assessee has escaped assessment to the tune of Rs.76.77,44,000/- the case of the assessee for the assessment year 2007-08 is reopened u/s.147 of the I.T.Act, 1961.”

recorded following reasons for reopening the assessment:

“"Later on it is noticed that (1) The assessee company has debited Rs. 15,33,71,000/- towards electricity Duty in the P&L Account, but has paid to the Government account and "no lien account" in the ratio 6:14(i.e. 6 parts to the government account of Rs. 4,60,11,000/- and 14 parts to the "no lien' account of Rs. 10,73,59,000/-). Since the assessee had disputed the rate at which electricity duty was demanded by the Government of Orissa before the Hon'ble Orissa High Court, a sum of Rs. 10,73,59,000 was deposited in a designated non lien bank account on the direction of electricity duty debited to the P&L account. As per the provisions of section 43B, the amount would be allowed

as a deduction only when the actual payment is made, notwithstanding the method of accounting followed by the assessee. The deposited made in the no-lien account cannot be regarded as payment of electricity duty to the Govt, of Orissa. Therefore, the amount of Rs. 1073,59,000/- deposited in the no lien account calls for disallowance u/s 43B of the I.T Act, 1961 and added back in total income.

(2) The amount of Rs. 14789.03 lakh paid towards foreign currency for import and charged to the P& L account for the year ending 31.03.2008 on which no tax was deducted u/s 195(1) would be eligible for deduction in computing the income chargeable under the head " Profit and Gain of Business of profession under section 40(a)(ia) of the I.T Act, 1961. The amount was required to added back to the total income of the assessee company,

As the income of the assessee has escaped assessment by Rs. 1,58,62,62,000-/( Rs. 10,73,59,000/- + Rs. l,47,89,03,000/-)-the case of the assessee is reopened u/s 147 of the I.T Act ,1961"

on 6.3.2012 for the assessment year 2007-08 and on 5.3.2012 for the

assessment year 2008-09 for reopening the assessment.

imported raw materials worth Rs.6999.60 lakhs, components and spare

parts of Rs.697.84 Lakhs from foreign suppliers both aggregating to Rs.

7697.44 lakhs. The said payments were duly disclosed in the audited

statement of accounts for the year ended 31`.3.2007 under the head

“other additional information”. It is further contended that deduction

under Section 37 of the Income tax Act is claimed by the assessee only

with respect to raw material and components utilized during the relevant

previous year and even though the sum of Rs.7697.44 lakhs which

appears in the balance sheet of the assessee is not necessarily claimed as

deduction. Depending on the requirement, the raw material and spare

parts are utilized and the balance is taken to inventory, which is valued at

cost or market value, whichever is lower. Hence, the Assessing Officer

erred in alleging that income of Rs.7697.44 has escaped assessment,

without appreciating that the aforesaid figure does not form part of the

profit and loss account of the assessee for the relevant previous year.

not necessarily suffer deduction of tax at source under Section 195 of the

Income tax Act and failure to withhold will render the payment non-

deductible under Section 40(a)(i) of the Act is contrary to the decision of

the Hon'ble Supreme Court of India in the case of GE India Technology

Centre (P) Ltd. v. CIT: 327 ITR 456 (SC), wherein over-ruling the decision

of the Hon’ble Karnataka High Court in the case of CIT v. Samsung

Electronics Co. Ltd.: 320 ITR 209 (Kar), it has been held by the Hon’ble

Supreme Court that the provisions of section 195 of the Act are attracted

only if the payments made to the non-resident recipient are chargeable to

tax in India and hence subject to deduction of tax. The Assessing Officer

having failed to demonstrate how the payments to non-resident were

chargeable to tax in India, could not have formed the belief that income

has escaped assessment.

on a mere change of opinion. It is submitted that the Assessing Officer

issued notice u/s.142(1) of the Act, wherein, various details, documents

and information and books of account were called for. Vide notice dated

18.9.2009 at Point No.7, the assessee was required to submit hard copy

of annual TDS return filed for financial year 2006-07 together with details

of deductees. Further vide Point No.19 to the said notice, the assessee

was required to submit details item-wise and party-wise of Energy

Transmission Charges of Rs.777.82 lakhs alongwith amount of TDS

deducted and paid on the same, conversion fees of Rs.2784.34 lakhs

alongwith amount of TDS deducted and paid on the same, Quarrying,

raising & other expenses of Rs.2421.30 lakhs alongwith the amount of

TDS deducted and paid on the same, and other factory expenses of

Rs.541.87 lakhs and export promotion expenses (foreign travelling of

Directors) of Rs.99.02 lakhs alongwith tour itinerary of all the Directors,

countries visited, period of visit, business meetings held with

documentary evidences and export orders obtained as a result of such

visits and other selling expenses of Rs.613.00 lakhs. It was therefore,

contended that all the materials facts/information which were necessary

for framing the assessment were disclosed including the details of import

expenditure in foreign currency as per Schedule -O of the audited

accounts for financial year 2006-07, therefore, it cannot be said that no

opinion was formed by the Assessing Officer during the original

assessment proceedings. The original assessment order was passed

u/s.143(3) of the Act and the Assessing Officer has disallowed deduction

for payments made to non-residents parties amounting to

Rs.78,76,01,837/- u/s. 40(a)(i) of the Act for alleged non-deduction of

tax at source.

knowledge of the Assessing Officer after framing of assessment

u/s.143(3) of the Act on 25.3.2013 for assessment year 2007-08, which

may afford ‘ reason to believe’ which may afford 'reason to believe' that

income of the appellant had escaped assessment. It is clearly evident

from the reasons recorded that no new tangible information/material

came to the knowledge of the assessing officer subsequent to the

conclusion of the original assessment. The reasons recorded by the

assessing officer do not even indicate or allege that any fresh information

came to the knowledge of the assessing officer warranting exercise of

jurisdiction under section 147/148 of the Act.

Court in the case of CIT v. Usha International Ltd. 348 ITR 485

(Del), wherein, the Hon’ble High Court has held as under:

aspects including papers filed and submitted with the return and during the original proceedings are relevant and material. Sometimes application of mind and formation of opinion can be ascertained and gathered even when no specific question or query in writing had been raised by the Assessing Officer. The aspects and questions examined during the course of assessment proceedings itself may indicate that the Assessing Officer must have applied his mind on the entry, claim or deduction etc. It may be apparent and obvious to hold that the Assessing Officer would not have gone into the said question or applied his mind. However, this would depend upon the facts and circumstances of each case.”

Delhi High Court was also in line with the decision of the Hon’ble apex

Court in CIT v. Kelvinator of India Ltd.: 320 ITR 561(SC). The

relevant observations of the apex Court are as under:

"On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the- Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post-lst April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re- open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to reassess. But re- assessment has to be based on fulfillment of certain pre- condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income

from assessment. Reasons must have a live link with the formation of the belief."

having examined the issue of disallowance under Section 40(a)(i) in

respect of some of the payments to non-residents and also having made a

disallowance on that issue, it is presumed that he applied his mind to the

material on record and formed an opinion. Therefore, in the absence of

any fresh material, the reappraisal of same material to initiate

reassessment proceedings tantamounts to change of opinion and hence

bad in law.

dated 25.1.2010, the assessee was required to submit copy of e-return,

Copy of audited balance sheet and profit and loss account, tax audit

report, copy of original TDS certificate. Again, vide notice dated

22.7.2010, the assessee was required to submit details of commission

paid during the year and TDS details thereof, which were filed by the

assessee on 11.2.2010. The details of travelling and conveyance,

commission under the head other selling expenses” were filed by the

assessee vide letter dated 27.10.2010 & 18.11.2010 respectively. It was

further submitted that in respect of the issue of disallowance under

Section 43B of the Act, the assessee made adequate disclosure in

Schedule I & N at point No. 4 of the annual accounts. The same was also

disclosed in director's report forming part of the financial statement.

Therefore, it was the contention that it is clear that apart from reappraisal

of the same material i.e. audited accounts and directors report, no fresh

material came to the knowledge of the Assessing Officer for initiating

reassessment proceedings even in assessment year 2008-09. Further,

the Assessing Officer having applied his mind to the same material in the

original assessment proceedings, the reassessment proceedings for the

Assessment Year 2008-09 also tantamounts to change of opinion and

hence, bad in law.

available on record and orders of lower authorities. We find from the

copy of recorded reasons for reopening of assessment by issuance of

notice u/s.148 of the Act for the assessment year 2007-08, the Assessing

Officer has noted as under:

“Later on it is noticed that an amount of Rs.7697.44 lakh has been paid in foreign currency for import expenditure and charged to P&L account for the year ending 31.3.2007 on which no tax was deducted u/s.195(1) of the I.T.Act, thus not to be eligible for deduction in computing the income chargeable under the head “Profits and Gains of Business or profession” u/s.40(a)(ia) of the I.T.Act, 1961. Since the income of the assessee has escaped assessment to the tune of Rs.76.77,44,000/- the case of the assessee for the assessment year 2007-08 is reopened u/s.147 of the I.T.Act, 1961.”

recorded following reasons for reopening the assessment:

“"Later on it is noticed that

(1) The assessee company has debited Rs. 15,33,71,000/- towards electricity Duty in the P&L Account, but has paid to the Government account and "no lien account" in the ratio 6:14(i.e. 6 parts to the government account of Rs. 4,60,11,000/- and 14 parts to the "no lien' account of Rs. 10,73,59,000/-). Since the assessee had disputed the rate at which electricity duty was demanded by the Government of Orissa before the Hon'ble Orissa High Court, a sum of Rs. 10,73,59,000 was deposited in a designated non lien bank account on the direction of electricity duty debited to the P&L account. As per the provisions of section 43B, the amount would be allowed as a deduction only when the actual payment is made, notwithstanding the method of accounting followed by the assessee. The deposited made in the no-lien account cannot be regarded as payment of electricity duty to the Govt, of Orissa. Therefore, the amount of Rs. 1073,59,000/- deposited in the no lien account calls for disallowance u/s 43B of the I.T Act, 1961 and added back in total income.

(2) The amount of Rs. 14789.03 lakh paid towards foreign currency for import and charged to the P& L account for the year ending 31.03.2008 on which no tax was deducted u/s 195(1) would be eligible for deduction in computing the income chargeable under the head " Profit and Gain of Business of profession under section 40(a)(ia) of the I.T Act, 1961. The amount was required to added back to the total income of the assessee company,

As the income of the assessee has escaped assessment by Rs. 1,58,62,62,000-/(Rs. 10,73,59,000/- + Rs. l,47,89,03,000/-)-the case of the assessee is reopened u/s 147 of the I.T Act ,1961"

any fresh tangible information, which came to the notice of the Assessing

Officer after completion of assessment under section 143(3) on

30.12.2009 for the assessment year 2007-08 and on 29.12.2010 for the

assessment year 2008-09 and before recording of aforesaid reasons.

Rather, the recorded reasons show that the reasons have been recorded

based on very same materials which were already available before the

Assessing Office prior to completion of assessment u/s.143(3) on

30.12.2009 for the assessment year 2007-08 and on 29.12.2010 for the

assessment year 2008-09. It shows that on the basis of very same

materials, the Assessing Officer has now formed a different opinion. In

our considered view, the above action of the Assessing Officer cannot be

sustained. In this connection, it is noticed that the Hon’ble Supreme

Court in the case of CIT vs. Kelvinator of India Ltd., 320 ITR 561 (SC) has

held that the concept of “change of opinion” must be treated as an in-built

test to check abuse of power by the Assessing Officer. Hence, after 1st

April, 1989, the Assessing Officer has power to reopen an assessment,

provided there is "tangible material" to come to the conclusion that there

is escapement of income from assessment. Reasons must have a live link

with the formation of the belief. In this context, the observations of

Hon’ble apex Court at page 564 are very relevant, which are reproduced

as follows:

“Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to re-assess. But reassessment has to be based on fulfillment of certain pre- condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One

must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. “ 18. The opinion of the CIT(A) is that simply because the Assessing

Officer latter on formed a belief that provisions of section 195(1), (2) &

(3) are attracted in respect of a transaction on the basis of the very same

materials, which were available before the Assessing Officer at the time of

making original assessment will empower the Assessing Officer to reopen

the assessment even in absence of fresh tangible material. In our

considered view, it is contrary to the above stated decision of Hon’ble

Supreme Court in the case of Kelvinator of India Limited (supra).

for the assessment year 2007-08 and on 29.12.2010 for the assessment

year 2008-09 and allow the appeals of the assessee.

for the assessment years 2007-08 and 2008-09, the other grounds of

appeal of the assessee on merits of the additions have become

infructuous and hence not adjudicated upon,

assessment years 2007-08 and 2008-09 in assessee’s appeals, the

appeals filed by the revenue are dismissed.

appeals of the revenue are dismissed.

Order pronounced in the open court on 25 /10/2017. Sd/- sd/- (Pavan Kumar Gadale) (N.S Saini) JUDICIALMEMBER ACCOUNTANT MEMBER Cuttack; Dated 25 /10/2017 B.K.Parida, SPS Copy of the Order forwarded to : 1. The Appellant : /Assessee: Indian Metals & Ferro Alloys Ltd.,IMFA Building, Bomikhal, Rasulgarh. Bhubaneswar. 2. The Respondent. /Revenue: ACIT, Circle 2(1), Bhubaneswar. 3. The CIT(A)- II, Bhubaneswar 4. Pr.CIT- II, Bhubaneswar 5. DR, ITAT, Cuttack 6. Guard file. //True Copy// BY ORDER,

SR.PRIVATE SECRETARY ITAT, Cuttack