M/S. KESARVAL BEVERAGES LTD vs THE DEPUTY COMMISSISONER OF

- 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE

DATED THIS THE 11TH DAY OF DECEMBER 2013

PRESENT

THE HON’BLE MR.JUSTICE N.KUMAR

AND

THE HON’BLE MRS.JUSTICE RATHNAKALA

INCOME TAX APPEAL NO.631 OF 2013

BETWEEN:

M/s. Kesarval Beverages Ltd., (Now merged with United Breweries (Holdings) Ltd) UB Towers, Level 14, UB City, 24 Vittal Mallya Road, Bangalore – 560 001.

.. APPELLANT

(By Smt. S.R. Anuradha, Adv.)

AND:

The Deputy Commissioner of Income Tax, Circle 12(5), Revisionary Proceedings Bhavan, 4th Floor, 14/3, Nrupatunga Road Bangalore – 560 001.

..RESPONDENT

This appeal is filed under Section 260-A of Income Tax Act 1961, arising out of order dated 22/11/2013 passed in ITA No.159/Bang/2013 and consequentially the order of CIT Appeals vide ITA.24/C-12(5)/CIT(A) III/10-11 dated 21/11/2012 and the order of Assessing Officer dated 29/12/2008, for the Assessment Year 1989-90, praying this Hon’ble Court to:

- 2 - i. formulate the substantial questions of law stated therein,

ii. allow the appeal and set aside the orders passed by the ITAT, Bangalore in ITA No.159/Bang/2013 dated 22/11/2013 and consequentially the order of the CIT Appeals vide ITA.24/C-12(5)/CIT(A) III/10-11 dated 21/11/2012 and the order of Assessing Officer dated 29/12/2008.

This Appeal coming on for Admission this day, KUMAR J., delivered the following:

J U D G M E N T

This appeal is preferred by the assessee, challenging the order passed by the Tribunal, which has declined to grant the total disallowance claimed made by the assessee. The relevant assessment years are 1989 – 90 and 1990 – 91, 1991 – 92, 1992 – 93.

The assessee is a subsidiary of United Breweries (Holdings) Limited. They have claimed certain sum paid to the corporate management division of the United Breweries (Holdings) Limited. The assessee on being called upon to furnish particulars of services rendered by the corporate management division, have not produced the required particulars. After examining the same and not accepting the evidence produced, the assessing

- 3 - authority passed an order adverse to the assessee. He disallowed the claim of the assessee. Aggrieved by the said order, the assessee preferred an appeal. The appellate authority allowed 10% on the expenditure incurred as corporate management division and the balance was disallowed under Section 40A(2) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’ for brevity). Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal allowed the appeal and the entire claim of the assessee was allowed and it dismissed the appeal preferred by the department. Aggrieved by the same, the revenue preferred an appeal to the High Court in ITA.NO.52/2001. This Court after hearing the parties, held that the services are certainly rendered by management corporate division in the matter of business activity and it cannot be said to be an unreasonable for the purposes of disallowance of the claim. It was held that the expenses incurred is nothing but an business expenditure, on the basis of the material available on

- 4 - record. However, the matter was remanded to the Tribunal to consider as to whether such expenditure incurred was reasonable or unreasonable in terms of Section of 40A(2) of the Act.

With regard to the quantum, the parties are given opportunity to furnish calculation or any other material in items of Section 40A(2) of the Act. After such remand, the Tribunal in-turn remanded the matter to the assessing authority. Before the assessing authority, the assessee appeared, they were called upon to furnish any further evidence or to furnish the calculation, the assessee filed a memo to the following effect:-

“We refer to your letter dated 22.09.2008 on the above subject asking us to make our submissions with regard to the allowability of Corporate Management Division expenses in full, pursuant to the ITAR order. In this connection, since the issue involved is similar for the four assessment years mentioned above, we are making common submissions apart from furnishing a backgrounder to the facts of the case, so as to

- 5 - enable you to appreciate the position prevailing at the relevant time.

In making submissions, we assure the following: i) No new additional evidence is produced now, but instead, those papers which were part of the original assessment records are brought before you once again to plead our case. ii) Uniformly, the expenditure was allowed by all the appellate authorities including the Hon. High Court of Karnataka, High Court of Punjab & Haryana, High Court of Kolkata and High Court of Mumbai in all the other Group companies as well and there is no dispute pending in any other High Court or this issue. iii) Even in cases like Punjab Breweries & Herbertsons Ltd., where similar issues were involved, Department has not taken up the matter to the Higher Authorities, viz., High Court & Supreme Court.

We would like you to approach this issue in a judicious manner, keeping in mind the above background.

- 6 - A self contained note covering this issue is furnished in this regard as a separate annexure to this letter. It is evident from the annexure that since the CMD expenditure exclusively refers to the expenditure incurred towards employees’ costs (the employees being in the rolls of CMD, a Division of UBL), the market value of the services and the cost reimbursed to CMD are equal. This is also borne out by the Auditor’s Certificate filed with the Department year after year. Thus, we submit that there is no excess sum paid for availing the CMD services by the company.”

Therefore it is clear that they did not produce any calculations. They did not produce any fresh material. On the contrary they were relying on the judgment of the various High Courts to contend that they are entitled to the reduction of expenditure which they were claiming. On consideration of the aforesaid materials, the assessing authority held as under:-

- 7 - “As already discussed in para 7 above, the assessee was requested to produce the documents or accounts on which it has relied upon in support of its claim for deduction on CMD expenses. Since the assessee has claimed for the deduction, the onus is on the assessee to bring all material facts on record to substantiate its claim. However, on careful examination of the submissions made by the assessee it is seen that the assessee has not produced any additional evidence in support of its claim and only submitted those papers which were filed by it during the course of original assessment. The assessee company has not come up with any evidence to prove the reasonableness in the matter of expenditure incurred. It has also not furnished any calculation or any other material in terms of Section 40A(2) of the Act, as per the directions of the Hon’ble High Court.”

Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The appellate authority on careful consideration of the entire material on record, was of the view that the

- 8 - judgments relied has no application to the facts of the case and the order passed by the assessing authority is proper and the conduct of the assessee runs counter to the directions issued by the High Court and therefore, he declined to interfere with the orders passed by the assessing authority. Aggrieved by the same, the assessee preferred appeal to the Tribunal. Tribunal also declined to interfere with the said order on the ground that the assesse has failed to comply with the directions of the High Court to furnish calculations or any other material items of Section 40A(2) of the Act and confirmed the order of the appellate authorities. Aggrieved by the said order, the present appeal is filed.

The learned Counsel for the assessee assailing the order of the Tribunal, contended that when the assessee did not produce any fresh material or fresh calculations before the assessing authority, the assessing authority should have applied its mind to the material on record and should have given a categorical finding, as to how the said claim is unreasonable. Section 40A(2) of

- 9 - the Act has no application to the case at all. None of the authorities have applied their mind and they are not justified in holding that there is no material on record to determine the correctness of the claim made by the assessee. Therefore, she submits that the case for interference is made out.

The assessee is claiming deductions of the expenditure incurred. In the earlier round of litigation, it held that the assessee is entitled to said deductions as business expenditure. Now the question is whether the assessee is entitled to claim the entire amount. It is in this context that when the first appellate authority in the earlier round of litigation, held that they are entitled to 10% and the said order was confirmed by the Tribunal, the High Court was of the view that it is not proper and therefore, the order of the lower authority was set aside and the matter was remanded. While remanding the matter, this Court categorically held that the parties are at liberty to furnish calculations or any other material in terms of Section 40A(2) of the Act. Further it directed the

- 10 - Tribunal to consider as to whether such expenditure incurred was reasonable or unreasonable in terms of Section 40A(2) with regard to quantum.

If the contentions of the assessee that Section 40A(2) of the of the Act is not applicable to the facts of the cae, they ought to have challenged the said directions issued. Once a direction is issued and it has become final, it is not open to the lower authority to say that Section 40A(2) of the Act is not applicable and therefore, the authorities were bound to determine the expenditure incurred in terms of Section 40A(2) of the Act. Along with the returns, the assessee has furnished certain particulars. On the basis of which the claim was made. The claim was not accepted. Now this Court in the earlier round of litigation, gave liberty to the parties to furnish calculation or any other material. In other words, it gave an opportunity to the assessee to substantiate its claim by furnishing calculation and if need be by producing additional evidence. Admittedly, no calculation was given, no additional evidence was

- 11 - produced. The assessee relied on the materials they have already produced. The assessing authority looked into the same and not being satisfied passed the order by holding that the amount paid by the assessee to the holding company constitutes business expenditure. He has upheld the claim of the expenditure of 20%. In the absence of the assessee substantiating the claim to the full extent, it cannot be said that the authorities have committed error in not allowing the entire claim. The material on record discloses that the assessee did not file any documents required to the satisfaction of the assessing authority and on the contrary they contended that various high courts have accepted the claim of the assessee and therefore, the assessing authority also has to accept the said claim. The lower authorities on careful perusal and appreciation of the material on record, has pointed out how it is not applicable to the assessee. In spite of giving opportunity to the assessee, they have not produced any calculation or the documents. They have not availed the opportunity but merely contending by

- 12 - pointing out the law and alleging that the authorities have not applied their mind. Therefore, the order passed by the tribunal declining to allow the claim of the assessee with regard to remaining portion of the amount cannot be found fault with. In that view of the matter, the Tribunal has not committed any error or irregularity in passing the impugned order. We find there is no merit in this appeal and hence, it is dismissed.

It is submitted that the Tribunal has not looked into the documents produced before it and did not grant the said relief. Documents have to be produced before the assessing authority. If for any reason, it is not produced, the assessee can produce the calculations or documents before the first appellate court. The first appellate court is vested with the power not only to sit in appeal against the assessment order passed by the assessing authority, but it can also take into consideration the evidence produced before it and assess the assessee. If the assessee has not utilized opportunity, it is not open to the assessee to produce the

- 13 - same before the Tribunal. It is seen that the assessee did not make use of the opportunity given on the earlier occasion and in the light of the aforesaid conduct, the Tribunal not justified in entertaining the fresh material before it. Accordingly, the appeal is dismissed.

Sd/- JUDGE

nvj

M/S. KESARVAL BEVERAGES LTD vs. THE DEPUTY COMMISSISONER OF