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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
Date of Hearing – 10.05.2016 Date of Order – 20.05.2016 2 M/s. Royal Palms India Ltd. O R D E R PER SAKTIJIT DEY, J.M.
Instant appeal by the Department and the cross objection by the assessee are directed against the order dated 7th February 2014, passed by the learned Commissioner (Appeals)–20, Mumbai, for the assessment year 2007–08.
While the Department has filed the appeal challenging the decision of the learned Commissioner (Appeals) in deleting the addition of ` 8,88,11,535 made by the Assessing Officer on account of disallowance under section 40(a)(ia) of the Income Tax Act, 1961 (for short "the Act"), the assessee in its cross objection has raised the issue of validity of proceedings under section 147 of the Act.
Brief facts are, the assessee, a company, filed its return of 31st income on October 2007, declaring total income of ` 10,29,45,040. Assessment in assessee’s case was originally completed under section 143(3) of the Act vide order dated 30th October 2009, determining the total income at ` 10,44,01,990. Subsequently, on the basis of information available on record, the Assessing Officer having reason to believe that assessee’s income assessable to tax for the impugned assessment year has escaped assessment initiated action under section 147 by issuing notice under section 148 of the Act on 3 M/s. Royal Palms India Ltd.
31st January 2012. In the course of re–assessment proceedings, the Assessing Officer called upon the assessee to explain why payment made of ` 8,88,11,535 to its group company M/s. Royal Palm Property Pvt. Ltd. (RPPL) without deduction of tax at source should not be disallowed under section 40(a)((ia). In response to a query raised by the Assessing Officer, it was submitted by the assessee that considering the fact that there would be 6% to 10% hike in the advertisement cost if the assessee would have directly engaged the advertisement company, it made an arrangement with its associate company RPPL to play a role of intermediary between the ultimate advertisement company and the assessee. It was submitted, associate company RPPL made payment to the advertisement company towards advertisement expenses and the assessee, in turn, from time to time reimbursed the expenditure incurred by RPPL on behalf of the assessee. It was submitted, the payment made by the assessee to RPPL comprised of reimbursement of cost of advertisement of ` 8,79,32,213 and service charges paid ` 8,79,322 towards administrative expenses. Thus, it was submitted by the assessee, the payment made to RPPL being towards reimbursement of cost, there is no requirement to deduct tax at source, hence, no disallowance under section 40(a)(ia) could be made. The Assessing Officer, however, did not find merit in the submissions of the assessee and ultimately held
4 M/s. Royal Palms India Ltd. that RPPL having provided managerial services to the assessee and received the payment, the assessee was liable to deduct tax at source on such payment. Since the assessee has not deducted tax at source on such payment, the Assessing Officer disallowed the amount of ` 8,88,11,535 by invoking the provisions of section 40(a)(ia). Being aggrieved of the assessment order passed under section 143(3) r/w section 147, assessee preferred appeal before the learned Commissioner (Appeals) challenging the assessment order both on the validity of re–opening under section 147 as well as on the merits of the disallowance.
As far as the legal issue relating to the re–opening of assessment is concerned, the learned Commissioner (Appeals) held that while completing the original assessment as the Assessing Officer had not examined the issue on which the Assessing Officer re–opened the assessment under section 147, there is no change of opinion and the re–opening of assessment is valid in law. However, as far as the merit of the disallowance is concerned, the learned Commissioner (Appeals) after considering the submissions of the assessee and examining the material on record found that as per the ledger account of respective advertisement companies appearing in the books of account of RPPL, the said company had not only paid to the advertiser but at the time of payment also deducted tax at source and remitted the TDS amount to 5 M/s. Royal Palms India Ltd.
Government account. He also found from the books of account that the assessee from time to time has made payments to RPPL towards reimbursement of expenditure incurred on behalf of the assessee and at the end of accounting year, RPPL has issued a debit note for ` 8,79,32,213, mentioning the reimbursement of expenditure incurred towards advertisement. Thus, having found that the payment made by the assessee to RPPL is nothing but reimbursement of cost incurred by the said company on behalf of the assessee towards advertisement and further RPPL has already deducted tax on payment made by it to the advertisers on behalf of the assessee, learned Commissioner (Appeals) held that no disallowance under section 40(a)(ia) can be made. Accordingly, he deleted the addition.
Learned Authorised Representative submitted, assessee is obliged under the Act to get its books of accounts audited. He submitted, along with the return of income, assessee had submitted the audit report as required under section 44AB and the audit report contained all necessary information in respect of assessee’s business activities. He submitted, in the course of original assessment proceedings, the Assessing Officer after examining the audit report and all other relevant materials completed the assessment under section 143(3). Drawing the attention of the bench to the reasons recorded for re–opening the assessment under section 147, the 6 M/s. Royal Palms India Ltd.
learned Authorised Representative submitted, there was no fresh material available before the Assessing Officer for forming belief that income had escaped assessment. He submitted, the Assessing Officer solely relying upon the audit report has again re–opened the assessment. He submitted, there being no fresh material before the Assessing Officer to form his belief the re–opening of assessment on the basis of material already available before the Assessing Officer at the time of original assessment amounts to change of opinion. As far as merits of the disallowance is concerned, the learned Authorised Representative submitted, documentary evidence produced before the Assessing Officer as well as the learned Commissioner (Appeals) clearly demonstrate that the payment made was towards reimbursement of expenditure incurred by RPPL on behalf of the assessee. Therefore, the payment made being purely in the nature of reimbursement of cost incurred by the payee is not fee for managerial service, hence, not subject to deduction of tax at source. He, therefore, submitted the decision of the learned Commissioner (Appeals) in deleting the addition is absolutely correct.
Learned Departmental Representative on the other hand submitted only because the assessee has furnished the audit report along with the return of income is not enough to hold that the Assessing Officer has formed an opinion on the issue while completing
7 M/s. Royal Palms India Ltd. the original assessment. Learned Departmental Representative referring to Explanation–1 to section 147 of the Act submitted, if a particular issue / fact appearing from assessee’s books of account or their documents could not be examined by the Assessing Officer with due diligence, mere production of such document will not constitute disclosure of information by the assessee so as to term it as formation of opinion by the Assessing Officer. As far as the merits of the addition made is concerned, the learned Departmental Representative submitted, the very fact that the assessee has paid service charges to RPPL towards the services rendered by the said company indicates that payments made were towards managerial services, he, therefore, submitted the Assessing Officer having correctly applied the provisions of section 40(a)(ia) of the Act, the addition made should be restored.
In rejoinder, learned Authorised Representative submitted, the entire payment made by the assessee was not towards service charges. He submitted, service charges paid by the assessee to RPPL is 1% of the actual expenditure incurred which comes to ` 8,79,322 and the assessee at the time of payment to RPPL has also deducted tax at source on this amount.
We have considered the submissions of the parties and perused the material available on record. At the outset, we propose to deal
8 M/s. Royal Palms India Ltd. with the issue relating to the validity of re–opening of assessment under section 147 of the Act. Undisputedly, the assessment in assessee’s case was originally completed under section 143(3) of the Act. It is evident, the assessee along with the return of income has furnished the audit report as required under section 44AB of the Act. On a reference to the reasons recorded for re–opening of assessment which is reproduced by the Assessing Officer in Para–2 of the assessment order, it is patent and obvious the very basis for re– opening of assessment is the audit report submitted by the assessee and available in the assessment record itself. It is noticed that the Assessing Officer specifically referring to Annexure–4 to the tax audit report has formed the belief that as the assessee has failed to deduct tax at source on payment of ` 8,88,11,535 towards advertisement expenditure, the same has to be disallowed under section 40(a)(ia). Thus, it is clear from the reasons recorded that the Assessing Officer has no fresh tangible material available before him to re–open the assessment. Only on the basis of material available on record at the time of original assessment, the Assessing Officer has initiated proceedings under section 147. It has been argued by the Department that at the time of completing original assessment, the Assessing Officer has not examined the issue, hence, there is no formation of opinion by the Assessing Officer to constitute change of opinion.
9 M/s. Royal Palms India Ltd.
However, we are unable to agree with the said proposition. It is well accepted principle of law that tax audit report submitted by the assessee in terms of section 44AB of the Act has statutory force. Tax audit report not only contains all necessary information but gives an insight into the business and financial affairs of the assessee for the relevant financial year. Therefore, tax audit report is not only the primary and most important document but is the foundation on which assessment proceeds. That being the case, it is totally unacceptable that the Assessing Officer at the time of completing original assessment has not examined the tax audit report. On the contrary, presumption should be, at the time of completing original assessment, the Assessing Officer must have examined the tax audit report. Even otherwise also, if the Assessing Officer at the time of original assessment failed to examine the information contained in a document having statutory forces, the assessee cannot be penalized for such lapse on the part of the Department with re–opening of assessment. Thus, in absence of fresh tangible material there cannot be formation of belief in vacuum for re–opening the assessment under section 147 of the Act. Therefore, re–opening on mere reappraisal / review of material already considered at the time of original assessment tantamount to change of opinion and review of the order passed
10 M/s. Royal Palms India Ltd. earlier. For this reason alone, impugned assessment order deserves to be quashed.
Even otherwise also as far as merits of the issue are concerned, in our view, the assessee having made out a strong case before us is bound to succeed. As could be seen, the payment of ` 8,88,11,535 to RPPL comprises of advertisement expenses of ` 8,79,32,213 and ` 8,79,322 as service charges. As far as the amount of ` 8,79,32,213 is concerned, the documentary evidences produced before the Departmental Authorities including the ledger account copies clearly demonstrate that RPPL has paid such amount to different advertisement companies on behalf of the assessee towards advertisement cost. It is also evident that while making such payment RPPL has deducted tax at source and remitted to the Government account. Thus, it is clearly evident that the payment of ` 8,79,32,213 by the assessee to RPPL is towards reimbursement of expenditure incurred on behalf of the assessee and not towards fee for managerial services. What RPPL received from the assessee towards services rendered is service charges of ` 8,79,322 being 1% of the actual expenditure. It is seen from the material placed on record that RPPL has raised two separate debit notes i.e., one for ` 8,79,32,213 towards advertisement expenses incurred on behalf of the assessee and another of ` 8,79,322 towards service charges. It is also evident, on 11 M/s. Royal Palms India Ltd.
the service charges of ` 8,79,322 paid to RPPL assessee has not only deducted tax at source but RPPL has declared such amount as its income. Therefore, in the aforesaid facts and circumstances of the case, when it is evident that the payment made by the assessee to RPPL is towards reimbursement of cost of expenditure incurred on behalf of the assessee such payment cannot be subject to deduction of tax. Consequently, no disallowance under section 40(a)(ia) can be made. In any case of the matter, department has not controverted the fact that RPPL at the time of making payment to advertisement companies has debited tax at source and remitted to government account. That being the case, the learned Commissioner (Appeals) was justified in deleting the addition made by the Assessing Officer. Thus, the assessee succeeds both on legal issue as well as on merit.
In the result, Department’s appeal is dismissed and assessee’s cross objection is allowed.
Order pronounced in the open Court on 20.05.2016