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Income Tax Appellate Tribunal, DELHI BENCHES : H : NEW DELHI
Before: SHRI R.S. SYAL, AM & SMT. BEENA A. PILLAI, JM
ITA No.86/Del/2006 ORDER PER R.S. SYAL, AM: These two cross appeals – one by the assessee and the other by the Revenue – arise out of the order passed by the CIT(A) on 30.11.2005 in relation to the assessment year 2000-01.
2. The first ground of the assessee’s appeal is against upholding of the action taken by the AO u/s 147 of the Income-tax Act, 1961 (hereinafter also called `the Act’).
Briefly stated, the facts of the case are that the assessee company is running sugar mill and filed its return on 30.11.2000 declaring loss of Rs.7.87 crore and odd. The return was processed u/s 143(1)(a) on the declared loss. During the course of assessment proceedings for the AY 1998-99, the issue of valuation of property was referred to the DVO for determination of the correct valuation of the property. The assessee disclosed investment of Rs.55,77,582/- in the Site development during the year under consideration. The Valuation Officer gave preliminary report. Though it has been mentioned in the assessment order that the ITA No.86/Del/2006 AO initiated proceedings u/s 147 on the basis of such valuation report and other issues, but factually reassessment was initiated on the basis of other reasons as reproduced infra. The assessment order was passed converting declared loss of Rs.7.87 crore into a loss of Rs.83,71,101/-.
The assessee remained unsuccessful before the ld. CIT(A) against the initiation of reassessment proceedings. Certain additions made by the AO on merits were sustained while others were deleted, against which both the sides have come up in appeal before us on their respective stands.
We have heard the rival submissions and perused the relevant material. The first issue before us is challenge to the re-assessment proceedings. In order to properly evaluate the submissions made by both the sides on this issue, it would be relevant to note the reasons recorded by the AO on 7.12.2001 before issuing notice u/s 148, a copy of which is available on page 47 of the paper book, reading as under:-
“1. On going through the case records it is noticed that during the year under consideration, the assessee earned an amount of Rs.35,11,976/- on sale of additional quota of sugar in free market. The assessee has treated this amount as capital receipt in view of 3 ITA No.86/Del/2006 case decided of Balrampur Chini Mills Ltd. And Sekkari Biswar Sugar Ltd. and has not offered this amount for taxation. But the Hon'ble Supreme Court has held in the case of KCP Ltd., 245 ITR 421 that such receipts are trading receipts and are liable to tax. Since the assessee has not included the above amount in its revenue, this amount should be included in the income of the assessee in view of the above decision of the Hon'ble Supreme Court.
The assessee company credited reserve fund (schedule- 2) for construction of Molasses Storage Tank during the year at Rs, 1,30,625/-. This amount has not been credited after debited Profit & Loss Appropriation account. It means that such amount of reserve has been credited only after debiting the Profit & Loss Account. Hence it is not an allowable expenditure and liable to be added in the income of the company.
3. On perusal of details filed during the course of assessment proceedings of assessment year 1998 -99, it is noticed that the assessee company incurred expenses to defend the case in connection with grant of licence to install the factory and all these expenses before the commencement of business have been capitalised and bifurcated under the head of building and plant & machinery which is incorrect and this should be done in the assessment year 2000-01 i.e. assessment year under consideration.
4. In the column No.21(B) of the Tax Audit Report the auditors have mentioned in the remarks col. that the amount unpaid on the due date of filing the return has been adjusted. These amounts are excise duty(sugar) Rs. 76,47,126/-, cess duty (sugar) Rs. 15,07,884/- and purchase tax at Rs.10,61,560/-. In the tax audit report it is mentioned that the amounts are unpaid but in the remarks col. it is written as adjusted. Hence it is not clear whether these expenses have been paid within time or not. Therefore, I have reason to believe that the assessee has income which escaped from assessment. Action u/s 147 of the Income-tax
ITA No.86/Del/2006 Act, 1961 is taken. Issue notice u/s 148 of the Income-tax Act, 1961.”
The first reason taken by the AO for initiating reassessment is treating the sale of additional quota of sugar in free market amounting to Rs.35,11,976/- as revenue receipt against the assessee’s claim of capital receipt. The assessee earned profit of Rs.35.11 lac from the sale of additional free sugar under Incentive scheme of the Government of India, which amount was not offered for taxation on the ground that it was a receipt of capital nature. The assessee was called upon to show cause as to why this amount be not treated as a revenue receipt in the light of the judgment of the Hon’ble Supreme Court in the case of KCP Ltd. 245 ITR 421 (SC). The assessee submitted that the facts of the case of KCP Ltd. (supra) were distinguishable. It was further explained that the said amount of Rs.35.11 lac was in the nature of incentive given by the Government for repayment of term loans. The assessee relied on certain judgments in support of its contention that the amount was not a revenue receipt. Not convinced with the assessee’s contentions, the AO came to hold that since the said receipt was to be used for the running of 5
ITA No.86/Del/2006 business and, hence, constituted a trading receipt. The ld. CIT(A) upheld the action of the AO by noticing that the assessee did not produce any evidence to show that the amount of Rs.35.11 lac was utilized for repayment of loan during the year.
We have heard the rival submissions and perused the relevant material on record. It is noticed that the Government of India came out with an Incentive scheme for setting up of new sugar factories and expansion projects licensed/to be licensed during the period 7.9.1990 to 31.3.1994, a copy of which has been placed at page 22 of the paper book. The object of this scheme is `augmenting indigenous sugar production’ and providing assistance to the entrepreneurs in setting up sugar factories ‘through higher free sale quota for repayment of term loans advanced by the Central financial institutions.’ Clause 12 of this Scheme provides that the beneficiaries of the Incentive scheme shall ensure that the surplus funds generated through sale of the incentive sugar are utilized for the repayment of term loans, if any, outstanding from the Central financial institutions/Sugar Development Fund. It
ITA No.86/Del/2006 further provides that the sugar factories shall submit utilization certificate annually from a Chartered/Cost Accountant. The above clause of the scheme fairly indicates that higher free sale quota was granted to new sugar factories licensed between 7.9.1990 to 31.3.1994 for enabling them to repay the term loans advanced by the central financial institutions for their setting up. This shows that the object of this scheme is to encourage the setting up of new sugar factories and higher free sale quota is a mode of giving incentive for repayment of term loans utilized for their setting up. It is a settled legal position that if subsidy or incentive is given for setting up new units, then, it is a capital receipt. The decisive factor in this regard is to see the `object’ of the incentive and not the source or mode of payment. So long as the object of an incentive scheme remains to encourage the setting up of new units, the incentive given in any shape or at any time, whether before or after the commencement of business, retains its capital nature. If, on the other hand, subsidy is given to incentivize the running of business more appropriately, whose object is not to encourage the setting up of units, but, to facilitate the carrying on of business, it assumes the character of a 7
ITA No.86/Del/2006 revenue receipt. The Hon’ble Supreme Court in CIT vs. Ponni Sugar and Chemicals Ltd. and Ors. (2008) 306 ITR 392 (SC) has held that the subsidy for setting up sugar mills, to be utilized for repayment of term loans undertaken for setting up new units/expansion of existing business, is a capital receipt and not chargeable to tax. Adverting to the facts of the instant case, we find that the assessee is covered under the Incentive scheme dated 10.3.1993 as it was set up in 7.3.1994. It is so borne out from the letter dated 10.7.2000 issued to the assessee by the Government of India, Ministry of Food, Directorate of Sugar, a copy of which is placed at page 175 of the paper book, giving licence and covering it under the Incentive scheme dated 10.3.1993. Pursuant to the requirement of submission of Utilization certificate from a Chartered Accountant, the assessee submitted such certificate, a copy of which is available at pages 38 and 39 of the paper book. Such certificate indicates repayment of interest on loan to the financial institutions to the tune of Rs.2.65 crore against which the amount of subsidy is only a sum of Rs.35.11 lac. This exhibits that the object of subsidy given to the assessee is setting up of sugar mill and the mode of discharge of subsidy 8
ITA No.86/Del/2006 is free sale of additional quota, which is meant to be utilized for the repayment of term loans taken from the financial institutions etc.
The reliance of the AO on the judgment of the Hon’ble Supreme Court in KCP Ltd. vs. CIT (2000) 245 ITR 421 (SC) is misconceived. In that case, the excess amount was realized and retained though the right to realize the amount was subject of dispute. Interim order was passed by the Hon’ble High Court pursuant to which the excess realization was made. It was under those circumstances that the Hon’ble Supreme Court held that the price of sugar realized by the sugar manufacturer in excess of levy price fixed by the Government and retained as such was trading receipt liable to tax. In contrast to the factual position prevailing in KCP Ltd. (supra), we find that in the instant case, the assessee has simply realized excess price in terms of Incentive scheme dated 10.3.1992 and there is no excess realization over and above the sanctioned realizable amount. Thus, it is manifest that the facts of the instant case are strictly governed by the judgment in the case of Ponni Sugar rather than KCP Ltd. We, therefore, overturn the impugned order on this issue.
The second reason taken by the AO for issuing notice u/s 148 is that the assessee created a reserve fund for construction of Molasses Storage Tank during the year at Rs.1,30,625/- which was credited to Reserve account after debiting the same to the Profit & Loss Account.
In the opinion of the AO, this was not an allowable expenditure. The assessee’s contention that the said amount was an allowable deduction in terms of several decisions cited before him, did not convince the AO in granting deduction. He, therefore, disallowed a sum of Rs.1,30,625/-.
The ld. CIT(A), after considering the assessee’s contentions and the case law relied before him, allowed deduction. The Revenue is aggrieved against the grant of deduction.
We have heard the rival submissions and perused the relevant material on record. The undisputed facts are that the assessee created Molasses reserve fund for construction of molasses storage tank by crediting a sum of Rs.1,30,625/- to this account in accordance with UP Sheera Niyantran Niyamavali. The Hon’ble Calcutta High Court in CIT vs. Upper Ganges Sugar Mills Ltd. (1994) 206 ITR 215 (Cal) has held
ITA No.86/Del/2006 that contribution towards Molasses Storage Fund is eligible for deduction as business expenditure. Similar view has been taken by the Hon’ble Madras High Court in certain decisions including CIT vs. Salem Cooperative Sugar Mills Ltd., 229 ITR 285 (Mad). In view of several decisions taken note of by the ld. CIT(A) in the impugned order supporting the assessee’s contention, which have not been controverted by the ld. DR with any contrary decision, we are of the considered opinion that the ld. first appellate authority has taken an unimpeachable view on this issue. We, therefore, uphold the impugned order on this score.
The third reason taken by the AO for initiating re-assessment is that the assessee incurred certain expenses to defend the case in connection with grant of licence to install the factory and all these expenses before the commencement of business were capitalized and bifurcated under the head of ‘Building’ and ‘Plant & Machinery’ which was incorrect as the same should have been done in the assessment year 2000-01. Taking cognizance of this reason, the AO discussed on page 32
ITA No.86/Del/2006 of his order about certain pre-operative expenses which were capitalized by the assessee for which disallowance of Rs.4,98,17,057/- was made.
The ld. CIT(A) deleted this addition on the ground that these expenses were not claimed as deduction in the Profit & Loss Account.
After considering the rival submissions and perusing the relevant material on record, we find that the disallowance of Rs.4.98 crore made by the AO has an indirect link with third reason for reopening the assessment. On a specific query, the ld. DR could not point out any direct addition made by the AO on account of the third reason and submitted that the disallowance of Rs.4.98 crore was in support of such third reason. We are unable to find any rationale in making any disallowance for an expenditure which was admittedly capitalized by the assessee and no deduction was claimed by way of a debit to its Profit & Loss Account. The AO himself has categorically noted in the assessment order that the pre-operative expenses were capitalized. Once the assessee has not claimed any deduction for a particular amount and capitalized the same, there can be no reason for making any ITA No.86/Del/2006 disallowance of the such amount. In our considered opinion, the ld.
CIT(A) was justified in deleting this addition.
The last reason recorded by the AO for initiating the re-assessment proceedings is that in the tax audit report, the auditors mentioned that certain amount was unpaid on due date of filing the return. He noticed that in the tax audit report it was mentioned that these amounts, namely, Excise duty (sugar) Rs.76.47 lac, Cess duty (sugar) Rs.15.07 lac and Purchase tax of Rs.10.61 lac were unpaid, but, in the remarks column, it was written as ‘Adjusted.’ We observe that in the final computation of income made by the AO at the end of the assessment order, there is no such addition. The ld. AR has pointed out that the assessee had itself made disallowance of these three amounts in the computation of income, which was the reason for the AO in not making such addition.
It can be seen from the discussion made supra that the AO resorted to the re-assessment on account of four reasons. While discussing each of them separately, we have held that no addition is sustainable on account of any of these reasons. Section 147 provides that: “If the ITA No.86/Del/2006 Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section…’. A bare perusal of the above provision manifests that the AO is fully empowered to bring to tax any other income which has escaped assessment and which comes to his notice subsequently in the course of proceedings u/s 147, apart from the income escaping assessment on which the AO formed reason to believe about the escapement of income and issued notice u/s 148. The use of words ‘and ’ between the income escaping assessment forming reasons to believe for issuing notice u/s 148 and other income chargeable to tax which escaped assessment and comes to the notice of the AO in the course of the proceeding, amply shows that the existence of the former is a pre-condition for taxing the latter. To put it simply, if the grounds set out in the re-assessment notice are non-existent, i.e., either no addition is made on such grounds or the addition so made does not pass 14
ITA No.86/Del/2006 the scrutiny by the appellate forums, then, obviously, no further addition can be made for income which comes to his notice during the course of proceedings u/s 147. Without there being such a deterrent, the AO could have got unhindered powers to initiate re-assessment at the drop of a hat without any legally sustainable reasons and then made other additions resulting in multiplicity of proceedings, which the legislature has sought to curb. Any lawful jurisdiction to make addition on account of other incomes coming to the notice of the AO during the course of proceedings u/s 147 can be acquired only on the foundation of a validly acquired jurisdiction on legally sustainable items of income escaping assessment forming reasons for issuing notice u/s 148. In other words, if the AO fails to acquire a valid jurisdiction to make re-assessment on the basis of his reasons, then, he is also debarred for making additions for other incomes chargeable to tax which escaped assessment and come to his notice subsequently in the course of proceedings u/s 147. The Hon’ble jurisdictional High Court in CIT vs. Chiel Communications India Pvt. Ltd. (2013) 354 ITR 549 (Del), has held to this extent. Similar view has been taken by the Hon’ble Bombay High Court in CIT vs. Jet 15
ITA No.86/Del/2006 Airways (I) Ltd. (2011) 331 ITR 236 (Bom). When we test the facts of the instant case on the touchstone of the principle as discussed hereinabove, it turns out that all the four reasons taken note of by the AO before issuing notice u/s 148 are non-existent and, resultantly, there is no question of making any other addition. We, therefore, set aside the assessment order passed by the AO u/s 147 read with section 143(3) of the Act. As such, there is no need to discuss other additions made by the AO which have been upheld or deleted in the first appeal. As the AO is not competent to make any other addition in the instant case, all the additions so made are liable to be deleted.
In the result, the appeal of the assessee is allowed and that of the Revenue is dismissed.
The order pronounced in the open court on 21.01.2016.