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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
ON THE 23RD DAY OF NOVEMBER, 2018
BEFORE THE HON'BLE MR. JUSTICE RAVI MALIMATH
AND
THE HON'BLE MR. JUSTICE K. NATARAJAN
INCOME TAX APPEAL NO.90 OF 2010 CONNECTED WITH INCOME TAX APPEAL NO.91 OF 2010
BETWEEN:
THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, QUEENS ROAD, BENGALURU.
THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-1(1) C.R. BUILDING, QUEENS ROAD, BENGALURU. ... APPELLANTS (COMMON)
(BY SRI K.V. ARAVIND, ADVOCATE)
AND:
M/S. MINERAL ENTERPRISES LTD. NO.300/B, 16TH CROSS, SADASHIVANAGAR, BANGALORE. ... RESPONDENT (COMMON)
(BY SRI A. SHANKAR, SENIOR COUNSEL,
ALONG WITH SRI M. LAVA, ADVOCATE)
* * *
THESE INCOME TAX APPEALS ARE FILED UNDER SECTION 260A OF INCOME-TAX ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEALS AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU, IN I.T.A. NO.645/BANG/2009 AND ITA NO.493/BANG/2009 RESPECTIVELY DATED 9-10-2009 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE- 1(1), BENGALURU.
THESE INCOME TAX APPEALS COMING ON FOR HEARING THIS DAY, RAVI MALIMATH, J., DELIVERED THE FOLLOWING:
J U D G M E N T
The assessee – M/s. Mineral Enterprises Limited (for short, ‘MEL’) is a public limited company, engaged in the business of mining, trading and export of iron- ore and generation of power through windmills. The Company has two units, one is MEL (Export Oriented Unit), [for short, ‘MEL (EOU)’] and the other is MEL (Non-Export Oriented Unit) [for short, ‘MEL (Non- EOU)’]. The Company is owned by Sri Basant Poddar and his family members.
On 22-7-2005, a search under Section 132 of the Income Tax, 1961, (for short, ‘the Act’) was initiated in the case of MEL and during the course of search proceedings, several books of accounts and incriminating documents were seized. Consequent to the search, a notice under Section 153A of the Act was issued to the assessee. In response to the same, the Company filed its return of income, declaring the
income as originally returned. Subsequently, a notice under Section 143(2) of the Act was issued to the assessee. The Assessing Officer computed the profits of both the units on the basis of allocation of proportionate expenditures, in the ratio of their respective turnover to the combined turnover. Aggrieved by the same, an appeal was filed before the Commissioner of Income Tax (Appeals).
The Commissioner of Income Tax (Appeals) partly allowed the appeal and confirmed the additions. Questioning the same, the Revenue filed I.T.A Nos.645 & 493/Bang/2009 for the Assessment Years 2005-06 and 2006-07 respectively. The assessee filed I.T.A. No.527/Bang/2009 for the Assessment Year 2005-06. Cross Objection No.40/Bang/2009 was also filed by the assessee for the Assessment Year 2006-07. The assessee’s appeal in I.T.A. No.527/Bang/2009 was partly allowed. The Revenue’s appeals in I.T.A Nos.645 & 493/Bang/2009 were dismissed and the Cross-
Objection No.40/Bang/2009 was also dismissed. Hence, Income Tax Appeal Nos.90 of 2010 and 91 of 2010 are filed by the Revenue for the Assessment Years 2005-06 and 2006-07 respectively.
By the order dated 23-11-2011, the appeals were admitted to consider the following substantial questions of law:
i. Whether in the facts and circumstances of the case and the law, the finding of the Appellate Authorities holding that the assessee has not inflated the profits from MEL (Non-EOU) and MEL (EOU) by debiting the common expenditure in the books of accounts of the Non-EOU and the estimation of the profits by the Assessing Officer is not correct, is perverse and arbitrary?
ii. Whether the finding of the Appellate Authorities is contrary to the provisions
of Section 10-B(7) r/w Section 80IA(8) of the Act?
Sri K.V. Aravind, the learned counsel appearing for the appellants - Revenue, contends that the orders of the Commissioner of Income Tax as well as the Tribunal are erroneous. They have failed to consider the material placed on record and have not considered the books of accounts of the Company. He contends that MEL (EOU) receives various income and the same was exempted from tax for the relevant years. Therefore, in order to show a higher rate of profit, the expenses have wrongly shown in MEL (Non-EOU). Consequently, the net profit, as shown for MEL (EOU), is an inflated and unnatural amount. The Authorities have failed to consider the same. Therefore, he pleads that the substantial questions of law be answered in his favour.
The same is disputed by Sri A. Shankar, the learned senior counsel appearing for the respondent’s counsel. His submission is that both the units are maintaining separate books of accounts.
The Commissioner of Income Tax (Appeals) has considered each one of the expenditures. The reasons assigned by the Tribunal, as to why the plea of the assessee has to be accepted, is that the nature of the expenses involved by MEL (EOU) and MEL (Non-EOU) being different, the same cannot be attributed equally. Therefore, the apportionment is based on the relevant expenses incurred. He further pleads that these are questions of apportionment and hence, no substantial question of law arises for consideration.
Heard learned counsels.
Two units are being run by the Company. One is MEL (EOU) and the other is MEL (Non-EOU). The expenditures, according to the Revenue, have
been allocated to MEL (Non-EOU) in order to inflate the net profit of MEL (EOU). The expenses apportioned reads as under:
Sl. No. Expenditure Claimed Debited in MEL(EOU) Debited in MEL(Non-EOU) 1 Key man Insurance Nil Rs.11,70,27,000/- 2 Business Promotion Rs.31,822/- Rs.27,27,434/- 3 Advertisement Nil Rs.13,59,835/- 4 Retainer Charges Nil Rs.64,82,800/- 5 Staff & Labour Welfare Rs.54,143/- Rs.10,35,746/- 6 Traveling Exp. Directors Rs.73,767/- Rs.21,93,334/- 7 Finance Charges Rs.30,19,200/- Rs.2,44,25,919/- 8 Mines Maintenance Nil Rs.4,51,01,508/-
Therefore, it is contended that so far as expenses shown as ‘Nil’ towards four heads therein is inappropriate. The expenses shown for MEL (Non-EOU) would have been incurred for MEL (EOU). The Assessing Officer, on considering the same, recomputed the profit. Accordingly, the net profit was worked out as under:
Sl. No. Particulars F.Y. 2004-05 1 Total turnover of the company (Both MEL (EOU) & MEL (Non-EOU) Rs. 336,71,17,482/- 2 Total Net Profit (Both EOU & Non-EOU) Rs. 50,87,26,086/- 3 Turn over of MEL (EOU) Rs. 61,34,48,618/- 4 Turn over of (Non-EOU) Rs. 2,75,36,68,863/- 5 Net Profit attributable to MEL (EOU) Rs. 9,26,83,821/- 6 Net Profit attributable to MEL (Non- EOU) Rs. 41,60,42,264/-
The Commissioner of Income Tax (Appeals) considered each one of the grounds, which was considered by the Assessing Order. So far as the Keyman Insurance is concerned, he came to the conclusion that the insurance Premium paid is based on the profits of the Company. That MEL (EOU) was not in existence prior to the year under consideration. Therefore, MEL (EOU) could not have incurred such expenditure. So far as the business promotion expenses are concerned, it was of the view that there was no reason assigned by the Assessing Officer as to
why the expenses have to be allocated disproportionately. There should be reasoning by the Assessing Officer. In so far as advertisement expenses are concerned, it was noted that advertisement expense incurred was for the purpose of marketing the products with respect to MEL (Non-EOU). Therefore, the question of advertisement would not arise for consideration. With regard to retainer charges, the same was incurred for meeting the retainer charges in respect of the Money Train Project, which was carried by MEL (Non-EOU). Therefore, it could not be added to MEL (EOU). With regard to staff and labour welfare expenses, there has been appropriate reasoning. That the number of employees are higher in MEL (Non-EOU) as there are multiple units, whereas in MEL (EOU), the activities are confined to manufacturing and export of iron-ore. Since there is higher administrative expense in MEL (Non-EOU), the expenses allocated are acceptable. With regard to traveling expenses of the
Directors, it is not backed by any reason. With regard to finance charges, it was incurred in respect of loans and other credit taken by respective units and the same is reflected in the Balance Sheet of the respective units.
10.
Hence, for all these reasons, the Commissioner of Income Tax (appeals) accepted the re-computation made by the Assessing Officer. The Tribunal affirmed the view of the Commissioner of Income Tax. It also came to the view that the Assessing Officer has not found any defect or mistake in the books of accounts so as to justify invocation of Section 145 of the Act. That in fact, the Assessing Officer having accepted the books profit as shown in respect of MEL (EOU), profit and loss account as well as that of MEL (Non-EOU) could not have interfered with the same. That in the absence of any defect in the books of accounts, there was no justification for
determination of profits of MEL (EOU) undertaking in the ratio of turnover by aggregating the profit shown in respect of two undertakings. That activity of MEL (Non-EOU) is largely trading, whereas in the case of MEL (EOU), it is manufacturing and production. Therefore, the comparison of the financial result has to be considered likewise.
On considering the contentions and reasons, we do not find any ground to interfere in the impugned orders. The orders passed by both the Authorities are just and proper. Each of the expenses allocated by the assessee has been rightly reflected in the books of accounts of both the units. Therefore, the findings recorded by the Tribunal, being just and proper, do not call for interference. Hence, the first substantial question of law is answered by holding that the findings of the appellate authorities that the assessee has not inflated the profits from MEL (Non-EOU) and MEL
(EOU) by debiting the common expenditure in the books of accounts of MEL (Non-EOU) and the estimation of the profits by the Assessing Officer is just and appropriate.
In view of the answer to the first substantial question of law, the second substantial question of law would not arise for consideration.
The appeals are, disposed off, accordingly.
SD/-
SD/- JUDGE
JUDGE
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