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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI B.R. BASKARAN & SHRI AMIT SHUKLA
आदेश / O R D E R
PER AMIT SHUKLA, JUDICIAL MEMBER:
The aforesaid appeals have been filed by the assessee against separate impugned orders dated 3rd April, 2012 and 14th October, 2013 passed by the ld. CIT (Appeals)– 7, Mumbai for the quantum assessment passed u/s 143(3) of the Income Tax Act, 1961; and in relation to the penalty proceedings u/s 271 (1)(c) of the Act for assessment year 2004-05.
ITA 5383/M/12 & ITA 221/M/14 2
First, we will take up the quantum appeal in , wherein the assessee has raised the following grounds of appeal:-
1. The Learned Commissioner of Income Tax (Appeals) erred in confirming the reopening of the completed assessment without valid reasons U/S 147 of the Income Tax Act as appellant company has disclosed fully and truly all material facts necessary for the assessment for the relevant assessment year.
2. The Learned Commissioner of Income Tax (Appeals) erred in rejecting the ground of appeal (Ground no-2) and treating it as infructuous ground of appeal being the ground of setting off of losses of Non-EOU units against the profit of the Eau units which is governed by exemption section 1OB of the Income Tax Act & thereby not granting carry forward of losses of Non EOU units.
3. The Learned Commissioner of Income Tax (Appeals) erred in confirming the setting off of the losses of non Eau units against the profits of the EOU units which is governed by exemption under section 1OB of the Income-Tax Act and thereby not granting carry forward of losses of Non EOU units restricting the exemption u/s 1OB of the Income Tax Act.
The Learned Commissioner of Income Tax (Appeals) erred in confirming the allocation of all the expenses including depreciation of incineration plant of Dombivali unit amounting Rs. 107,49,414/- to Taloja EOU unit and thereby reducing the amount of exemption u/s 1OB of the Income Tax Act.
5. The Learned Commissioner of Income Tax (Appeals) failed to appreciate that the incinerator plant at Dombivali unit is stand alone and independent unit and not a part of the Taloja unit.
ITA 5383/M/12 & ITA 221/M/14 3
Without prejudice to Ground No-4 above, the Learned Commissioner of Income Tax (Appeals) failed to appreciate that the appellant company has already charged the inter- divisional transfer of services of incineration services at the prevailing market prices while determining profitability of the Eau units in accordance with the provision of S. 10B(7) of the Income Tax Act.
7. The Learned Commissioner of Income Tax (Appeals) erred in upholding the allocation of research & development expenditure amounting to Rs. 50,67,9651- to the income of Eau units instead of non-EOU units in determining deduction u/s 1OB of the Income Tax Act.
8. The Learned Commissioner of Income Tax (Appeals) erred in upholding the allowance in respect of expenditure of Research and Development Centre U/S 35(1)(vi) to the extent of Rs. 1,46,79,997/- in respect of Non-EOU units instead of Rs. 1,93,92,095/- claimed in the return of income.
9. The Learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance under section 14A by reopening the assessment under section 147 of the Income Tax Act.
Without prejudice to Ground No.9 above, the Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs. 42,468/- U/S 14A of the Income Tax Act made on mere assumption that such expenditure might have incurred in order to earn an exempt income.
The appellant company prays that,
i. The order confirming the reopening of the completed assessment U/S 147 of the Income Tax Act may be set aside or be held as against the provision of Law.
ITA 5383/M/12 & ITA 221/M/14 4 ii. The order confirming the reduction of the deduction U/S 1OB by Rs. 107,49,414/- in respect of Taloja unit may be set aside as being passed without considering the submission made by the appellant company during the course of the appellate proceedings. iii. The exemption U/S 1OB be allowed of Rs. 34,35,27,392/- and thereby allow the carry forward of losses by following the appellant company's own order dated 10.07.2010 as decided by Hon'ble Mumbai Income Tax Tribunal for the same assessment year. iv. The expenditure of Research & Development amounting to Rs. 50,67,965/- be allocated to the income of non EOU units instead of Eau units. v. The deduction in respect of expenditure U/S 35(1)(vi) be allowed at Rs. 1,93,92,0951- in respect of Non- EOU units. vi. Any other relief your honour may deem fit.
The facts in brief qua the validity of reopening u/s 147 are that, the assessee company is engaged in the business of manufacturing of agrochemical and pharma products. The assessee is having its administrative office at Great Eastern Chambers, 6th floor, CBD Belapur, Navi Mumbai. In addition, the assessee has manufacturing units situated at following places:-
(i) Mahad : Manufacturing agrochemicals (ii)Taloja : EOU, manufacturing agrochemicals & claiming deduction u/s. 1OB (iii) Panoli : EOU, manutacturlnq Pharma products of lactam & cydohexidine and claiming ITA 5383/M/12 & ITA 221/M/14 5 deduction (iv) Panoli : Non-EOU, manufacturing agrichemicals for local markets (v) Bangalore : EOU, manufacturing pharma products for export and claiming deduction u/s. 1OB.
(vi) Bangalore (R&D) : The Company is doing Research & Development for in-house pharma product, this is non-EOU. (vii) Dombivali : The assessee is having incineration plant which is non-operational for last 3 years.
(viii) Bangalore (Non-EOU) : In this plant company does solvent recovery process for its Bangalore (EOU) and it was purchased in September 2005 (relevant to A.Y. 2006-07).
The assessee company has manufacturing unit for agrochemicals at Mahad, Taloja and Panoli unit. In Dombivali unit, the assessee has undertaken job of providing incineration services to various chemical and other plants including other division of the assessee company. The assessee company has disclosed total loss of Rs. (-) 7,34,14,900/- in the return of income. However in the return of income, the assessee company has separately computed the taxable income of EOU units claiming exemption u/s 10B and other non-EOU units. As against the returned loss, the assessment was completed under scrutiny proceedings u/s 143(3), vide order dated on 23.2.2006, whereby the total income was determined at Rs. 1,52,618/- after making various disallowances. As a result of such additions/disallowances, there was decrease in the eligible claim of deduction u/s 10B. Later on, the ITA 5383/M/12 & ITA 221/M/14 6 assessee’s case has been sought to be reopened u/s 147 after issuing notice u/s 148, dated 18.3.2009 on the following “reasons recorded”:-
“Return of income was filed by the assessee for A. Y. 2004-05 on 29/10/2004 declaring total loss of Rs. 7,34,14, 900/-. The return was processed u/s.143 (1) on 21/02/2005 accepting the returned loss. Subsequently, the return was selected for scrutiny and assessment u/s.143(3) was completed on 23/02/2006 assessing total income at Rs.NIL and income from Short Term Capital Gains at Rs.1,52,618/-. During the course of survey u/s.133A and statement recorded on 07/03/2007, it was gathered that Assessee Company was showing losses from its Non-EOU Units and huge profits from its EOUs. It was also observed during the course of survey action that the assessee's operations at its Dombivali incinerator plant was not operational since last 2 years and the assessee was using the Dombivali incinerator plant for disposal of its industrial waste generated at its Taloja Unit and MAHAD Unit. Since the Taloja Unit is an EOU Plant, the Dombivali Unit expenses needs to be allocated to the Taloja EOU Unit which will reduce the 108 Deduction and reduce the c/f losses.
On verification of records of A. Y.2004-0S, it is seen that assessee company had claimed loss in respect of its Dombivali incinerator plant which needs to be examined.
As per judicial precedents, assessment could be reopened based on information obtained pursuant to subsequent search/survey as well as information obtained from external agencies/otherwise. Further, in the following cases it has been held that such information would constitute valid reason for reopening of the completed assessment.
(1) BPL Ltd. vs. DGIT (2007) 293 ITR 321 (Karn) (2) ITO vs. Smt. Gurmdes Kaur (2006) 102 ITR 189 (Del.) (3) ACIT vs. Balbir Chand Mani (2007) 111 TTJ (Chd) 160 ITA 5383/M/12 & ITA 221/M/14 7
(4) Central Provinces Mangansh Ore Co. Ltd.”
Thus, the entire basis for entertaining the “reason to believe” to reopen the case by the AO is based on information gathered during the survey u/s 133A which was carried out on 07-03-2007 (that is, relevant for the A.Y. 2007-08), which in turn is inferred from the statement recorded that, assessee’s Dombivili Unit has been closed since last two years and adverse presumption has been drawn for the A.Y. 2004-05. The relevant statement recorded at the time of survey reads as under:-
“Q. 14 It is seen that in the Dombivali Unit you don’t have any substantial income. It is understood that this unit was started as a incineration unit for all your Taloja and MAHAD Units. Is it not fair if the net expenses of this unit is apportioned on the turnover basis to these two units:-
Ans: This unit was set up to carry out work for customers besides our own requirements in Taloja Unit. After setting up the unit the Maharshtra Pollution Control Board set up their own incineration unit offering services at a much lower cost via its CETP. Hence added to this, was the sharp increase in fuel oil prices which made it uneconomical to run. In case we restart this facility, we would incur much higher losses then what we are incurring at present. Whatever stated above is true and correct to the best of my knowledge and belief. This statement is given voluntarily and without any threat, coercion or undue inducement.”
From this statement/information, the ld. A.O. inferred that the assessee company was showing losses from non-EOU units and huge profits from EOU units. He further inferred that, the assessee’s operation at Dombivali plant was not operational, therefore, the expenses of Dombivali unit need to be allocated to Taloja Unit which is EOU plant. Thus, there has been wrong deduction u/s 10B.
ITA 5383/M/12 & ITA 221/M/14 8
4. The validity of such reopening was challenged by the assessee before the A.O. as well as ld. CIT(A). The A.O. without dealing with the validity of reopening has passed the assessment order thereby allocating the expenses of Dombivali Plant to Taloja and also making further disallowance on account of deduction u/s 14A and R&D expenses. The ld. CIT(A), after detail discussion and following the earlier order for assessment years 2002-03 and 2003-04, upheld the reopening u/s 147 and rejected the assessee’s ground on the legal issue. The relevant discussion by the ld. CIT(A) and assessee’s submission on this issue are dealt with from pages 3 to 10 of the appellate order.
Before us, the ld. Counsel for the assessee submitted, that first of all, the reopening has been done on wrong assumption of facts, because the survey was conducted in the month of March, 2007 and the A.O. has drawn adverse inference without any tangible material on record for the A.Y. 2004-05 for which reopening has been sought. Not only that, at the time of survey itself, regarding the Dombivali unit, it was categorically stated that this unit was set up to carry out work for outside customers besides their own requirements in Taloja Unit. Regarding non carrying out the activities in the said Unit it was clarified that due to Maharashtra Pollution Control Board had set up their own incineration unit offering services at a much lower cost and also there was increase in fuel oil prices which made it uneconomical to run. But nowhere has it been said by the assessee that the said unit was closed in financial year 2003-04. In fact, during the course of original assessment proceedings, the assessee had submitted various ITA 5383/M/12 & ITA 221/M/14 9 bill/invoices raised by Dombivali unit to its various customers, the copies of which are appearing from pages 214 onwards, sample bills are appearing in page 229 onwards of the paper book. Thus, it clearly shows that during financial year 2003-04, the Dombivali Unit was in full operation. In fact, the material available on record does not suggest that the Dombivali unit was not operational as inferred by the AO rather it was fully operational and it had earned business income as well as carried out full activities. In the ‘reasons’, the A.O. noted that the Dombivali plant is not operational since last 2 years i.e. from March, 2005. This also cannot lead any inference that in the financial year 2003-04, the Dombivali unit was non-operational. Thus, the entire presumption of facts by the AO to entertain ‘reasons to belief’ is incorrect, therefore, the whole re-assessment proceedings initiated on the basis of such addition deserves to be quashed. Apart from that, he pointed out that in the original assessment proceedings, the A.O. has sought various details regarding deduction u/s 10B, in response to which the assessee had filed all the details which are appearing in the paper books. Thus, such reopening without any tangible material coming on record amounts to “change of opinion”, which is impermissible in law. In support, he relied upon various decisions, the copies of which have been filed before us which are as under:- a) CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC); b) ACIT v. ICICI Securities Primary Dealership Ltd. (2012) 348 ITR 299 (SC); c) CIT v. Jet Speed Audio Pvt. Ltd. (2015) 372 ITR 762 (Bom); ITA 5383/M/12 & ITA 221/M/14 10 d) Lalitha Chem Industries P. Ltd. v. DCIT (2014) 364 ITR 213 (Bom) e) Aroni Commercials Ltd. v. DCIT (2014) 362 ITR 403 (Bom); f) ACIT v. ICICI General Insurance Co. Ltd. (2014) 41 CCH 162 (Mum)(Trib); g) Shri Sunil Gavaskar [ITA No. 3970 & 3971IMuml20 1 0] at paras 11.4 to 11.7 on pages 16 to 18; On merits, he submitted that this issue stands squarely covered by various decisions, some of which have been filed before us, however, the same are not being discussed as we have only heard the parties only issue of validity of the reopening.
6. The ld. D.R., on the other hand, strongly relied upon the order of the ld. CIT(A) and submitted that the information received after the assessment to reopen the case was in the form of survey and statement recorded during the course of survey proceedings, wherein it was found that the Dombivali unit was not operational and the assessee was showing huge losses in non-EOU units, therefore, this itself constitutes the relevant material to draw adverse inference to acquire jurisdiction to reopen the case u/s 147.
We have heard the rival contentions and also perused the relevant material placed on record. From the perusal of the “reasons recorded”, it is quite evident that the only material which has been referred to for reopening the assessment is the statement recorded u/s 133A from which following presumptions has been drawn; firstly, the Dombivali ITA 5383/M/12 & ITA 221/M/14 11 unit was not operational since last two years; and secondly, it was using incineration services for disposal of its industrial waste generated at Taloja unit and since Taloja unit is EOU, therefore, the Dombivali unit expenses needs to be allocated to Taloja EOU unit which will have effect of reducing the 10B deduction and also reducing the carry forward losses. The entire hypothesis is based on wrong assumption of facts because, nothing has been gathered during the course of survey to show that either in financial year relevant to the assessment year 2004- 05, the Dombivali unit was not operational or there is any material to prove that the assessee has been transferring the expenses to other unit. On the contrary, there was sufficient material on record to show that the Dombivali unit was fully operational in the A.Y. 2004-05 which is evident from various invoices and bills raised by the Dombivali unit to various third parties pertaining to this period and other evidences which have been placed in the paper book, on which our attention was drawn. These details and evidences goes to prove that not only this unit was fully operational but also it generated business income. These invoices/bills and details regarding claim of deduction u/s 10B for the eligible units have been stated to be filed before the A.O. during the course of assessment proceedings for assessment years 2002-03, 2003- 04 and also 2004-05. Thus, the material on record rather negates and rebuts the observations made in the “reasons recorded” and, therefore, the same cannot be reckoned to be ‘reasons to belief’ as contemplated u/s 147. Its trite proposition of law that the ‘reason to believe’ must be based on tangible material coming on record having live-link nexus with the income chargeable to tax having escaped assessment. The tangible material should refer to factual material coming in the possession of the ITA 5383/M/12 & ITA 221/M/14 12 A.O. and not any inference based on either wrong assumption of fact or material already in existence which has already been considered during the course of original assessment proceedings. The ‘reason to believe’ should be held in good faith based on objective facts and specific material so as to acquire jurisdiction to reopen the assessment u/s 147, especially when the assessment has already been made under scrutiny proceedings u/s 143(3) after analyzing the relevant detail filed on record qua the claim of deduction made by the assessee. Thus, the ‘reasons’ as recorded by the A.O. do not clothe him with the jurisdiction to reopen the case u/s 147, because, firstly, they are not based on tangible material suggesting any adverse objective facts relevant for the assessment year 2004-05; and secondly, the presumption drawn by the A.O. is contrary to the material facts already on record. Resultantly, the entire reassessment proceedings by the AO initiated by issuance of impugned notice u/s 148 is hereby quashed as without jurisdiction. Accordingly, we allow the appeal filed by the assessee on legal ground.
Now, we shall take up the appeal filed by the assessee in for A.Y. 2004-05.
This appeal relates to the penalty proceedings initiated u/s 271(1)(c) in relation to the aforesaid quantum of assessment passed from the same assessment year. Since we have already quashed the reopening proceedings u/s 147 in the aforesaid quantum of assessment, therefore, the impugned penalty proceedings u/s 271(1)(c) do not have any legs to stand; and thus, entire penalty levied by the A.O. and confirmed by the ld. CIT(A) is also quashed.
ITA 5383/M/12 & ITA 221/M/14 13
In the result, both the appeals filed by the assessee company are allowed.
Order pronounced in the open court on 16th January, 2017. आदेश क� घोषणा खुले �यायालय म� �दनांकः 16-01-2017 को क� गई ।