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Income Tax Appellate Tribunal, BENCH “A”, KOLKATA
Before: Hon’ble Shri M.Balaganesh, AM & Shri K.Narasimha Chary, JM]
Per Shri M.Balaganesh, AM
This appeal of the assessee and the revenue arise out of the order of the Learned CIT(A) in Appeal No. 1010/CIT(A)-XXIV/C-1/11-12 dated 27.09.2012 for the Asst Year 2003-04 passed against the order of assessment framed by the Learned AO u/s 143(3)/147 of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). Both the appeals are taken up together and disposed off by a common order for the sake of convenience.
The assessee has raised a preliminary objection on the validity of reassessment proceedings u/s 147 of the Act. The brief facts of this issue is that the ld. AO had sought to reopen the assessment for the purpose of disallowing the interest expenditure of Rs.51,48,511/- treating the same as capital in nature and had also sought to treat certain items to be added back for the purpose of computing book
2 M/s. Avery India Ltd. A.Yr.2003-04 profits u/s 115JB of the Act. The reasons recorded by the AO for reopening the assessment are reproduced hereunder :- “It is seen from Schedule 'P" dealing with extraordinary item that a sum of Rs.51 ,48,511/- was spent by e assessee towards settlement of claim with United Bank of India. The background as apparent from item No.7 of the Notes to the financial statements is that in the year 1979, the assessee came out with a public issue of its shares which was over-subscribed. In order to issue the refund to the share applicants for such over- subscription, the assessee approached to the U.B.I. to act as its Banker for the purpose of refund to the share applicants. The UBI calculated the total dues of Rs.1 ,75,00,000/- plus interest. For recovery of dues from the assessee U.B.I. filed suit against the assessee before Calcutta High Court. The matter was referred to Debt Recovery Tribunal and then came back to Calcutta High. Court. The assessee made Out of Court settlement with U.B.I. to pay Rs.75,00,000/- which was paid in the financial year 2002- 03 relevant to A.Yr.2003-04. Out of Rs.75,00,000/-- a sum of RS.51,48,511/- (shown as extraordinary item) was recorded as interest. The amount of Rs.51,48,511/ which has been recorded as interest is capital expenditure as it relates to share issue expenses. But assessee claimed it as revenue expenditure. This income has escaped asstt. for R.51 ,48,511/-. Again the assessee claimed following deduction while calculating book profit u/s.115JB :- Rs. 1 Voluntary Retirement Scheme 2,65,84,234/- 2 Raw material Component written off 30,54,0001- 3 Mis-appropriation of inventory 51,48,511/- 4 Settlement Claim with UBI 2,66,186/- 5 Prior period expenses/items 35,56,000/- TOTAL 3,86,08,931/- The list of adjustment (plus or minus) for the purpose of computation of book profit u/s.115JB is limited to the specific items as specified in Explanation below second proviso 10 section 115JB. As decided by Hon'ble Supreme Court in the case of Appolo Tyre Ltd vs. CIT (255 ITR 273), no adjustment other than what has been specified in explanation below second proviso to section 115JB is' allowable for the purpose of computation of book profit. This is how it is seen that book profit chargeable to tax has escaped assessment. In view of the above, I have reason to believe that income chargeable to tax for RS.51,48,511/- (as discussed in para-I) and book profit for Rs.3,86,08,931/- chargeable to tax escaped astt. within the meaning of Sec.147. Notice u/s 148 is issued accordingly.”
The ld. AR stated that the aspect of allowability of interest expenditure in the sum of Rs.51,48,511/- was examined in detail by the ld. AO during the original scrutiny assessment proceedings completed u/s 143(3) of the Act on 29.03.2006. The ld. AR argued that this interest was paid as part of the settlement process agreed with U.B.I. based on Out of Court Compromise memo filed before the Hon’ble Calcutta High Court for a sum of Rs.75,00,000/- and as per the assessee’s books a sum of 3 M/s. Avery India Ltd. A.Yr.2003-04 Rs.23,51,489/- was remaining as amounts due to U.B.I. towards principal portion and accordingly the assessee treated the remaining sum of Rs.51,48,511/- (75,00,000- 23,51,489) as attributable towards interest and claimed the same as revenue expenditure in its return. The ld. AR brought to our attention that as against the claim of Rs.1,75,00,000/- by U.B.I. against the assessee for which suit proceedings were pending before Debts Recovery Tribunal and also in Calcutta High Court a sum of Rs.75,00,000/- was arriving as Out of Court settlement and assessee had made the said payment to U.B.I. This very same issue was subjected to due verification by issuance of specific questionnaire u/s 142(1) of the AO by the ld. AO during the course of original assessment proceedings vide proceedings under reference no.ACIT/Circle- 1/Avery India /2005-06/D-287 dt. 26.10.2005 vide questionnaire no.16 which is reproduced as under :- “16. As per Schedule P. Rs.51,48,511/- has been debited as settlement of claim with United Bank of India. Please furnish the details of claims to justify the claim of expenditure.”
Further another questionnaire was also issued by the ld. AO vide proceedings under reference no.ACIT/Cir-1/Kol/AACCA4694B/2005-06/566 dated 14.12.2005 vide Questionnaire no.3 which is reproduced as under :- “3. To file the details of expenses in form of misc. expenses, bad debt with ledger copy and also file the evidence regarding settlement of claim with United Bank. “
The assessee in response to the said questionnaire filed its reply vide letter dt. 15.03.2006 which was filed in person before the ld. AO and the relevant paragraph-11 of the said reply is reproduced as under : “11. In respect of the assessee's claim towards settlement of dispute with United Bank of India [hereinafter referred to as "UBI"], the assessee prefers to put on record the brief history of the matter: In the year 1979, the assessee came out with a public issue of its shares which was oversubscribed. Towards issuance of refund orders to unsuccessful applicants the assessee approached UBI to act as its banker which were made payable by all branches of UBI or through State Bank of India where UBI had no branch. The assessee opened a bank account with UBI for this purpose, being Account No. A-139. The. assessee executed an indemnity in favour of UBI to make good an claims, payments, actions, losses, damages, costs, charges and expenses on demand by the bank, in case of any undue loss to the bank arising out of this deal.
4 M/s. Avery India Ltd. A.Yr.2003-04 Andrew Yule & Company acted as the Registrar to the issue and was working on the issue of shares and / or refund orders issued to unsuccessful applicants. Andrew Yule informed UBI in November, 1979 that about two lakhs refund orders would be issued. The assessee informed UBI that the total amount to be refunded would be approximately Rs. 19,48,26,441/- and an initial arrangement was made for making payment to UBI for 'an amount of Rs. 11,59,90,372/-. At the request of the assessee, UBI transferred a sum of Rs. 25,00,500/- to State Bank of India for honouring refund orders at places where UBI had no branch in the said Account No. A-139. The assessee deposited funds from 'lime to for which UBI gave credit to the assessee and at the same time debited the said account with the amounts paid against the refund orders. . The State Bank of India had paid to the extent of Rs.1,29,143/- only out of Rs. 25,00,000/- transferred to it The balance amount was utilized by the assessee for other purposes. After making all necessary adjustments, the outstanding claims of UBI stood at Rs. 20.04,500/- with interest and bank charges as on April 21. 1980 which was debited to the said Account No. A-139. In April, 1980, the assessee requested UBI to hand over the paid refund orders to Andrew Yule for preparation of proper statements and reconciliation of the same. The assessee undertook to produce or return those refund orders to UBI whenever asked for and they undertook to keep the latter fully indemnified against any 10$5 or misuse of the said orders. After such undertaking, Andrew Yule had obtained the paid refund orders. From 1st January 1982, Andrew Yule ceased to act as the Registrar and Choksey Bhargava and Company become the Registrar to the issue of the assessee. In April, 1989 Avery India limited, further requested UBI to hand over the encashed refund orders to Choksey Bhargava and the latter on an undertaking and trust to return or deliver to UBI obtained the remaining encashed refund orders. After all adjustments the total amount due from the assessee to UBI in Account No. A- 139, worked out to Rs. 1,75,26,638.55, including interest as on 31st March 1991. Repeated requests made by the assessee to Andrew Yule and Choksey Bhargava to deliver the encashed Refund Pay Orders and the list thereof, the statement of accounts and computerised tabulations of the encashed Refunds Pay Orders turned futile. UBI instituted a suit in 1991 vide Suit No. 276 of 1991 in the Calcutta High Court praying, interalia, for recovery of a sum of Rs, 1,75,26,638.55 with further interest from 1st April 1991 till realisation at the rate of 18% per annum from the assessee. During pendency of the suit, "The Recovery of Debts Due to Banks and Financial Institutions Act, 1993" came into force and following Section 31 of the said Act, the suit was transferred from the Hon'ble Calcutta High Court to The Debts Recovery Tribunal established under the aforesaid act. No objection was taken in the High Court for not transferring the case. The same was renumbered as T.A No. 163 of 1996. The assessee in applications before the Debt Recovery Tribunal prayed for return of the plaint on the ground that the Tribunal had no .jurisdiction to entertain the transferred application in view of the frame of the suit and nature of the reliefs prayed for therein by UBI. The Tribunal disposed of the applications filed by Andrew Yule, Cbokesy Bhargava and the assessee [hereinafter referred to as the "applicants'] by holding that the Tribunal has jurisdiction to decide the claim of UBI. All the applicants filed separate applications before the Hon 'ble Calcutta High Court under Article 227 of the Constitution of India challenging the orders passed by the Tribunal. The said applications were contested by UBI. The Honble High Court after hearing passed an order setting aside the impugned orders of the Tribunal and directing the Tribunal to 5 M/s. Avery India Ltd. A.Yr.2003-04 transmit back the records of Suit No. 276 of 1991 (renumbered as T.A No. 163 of 1996) for adjudication by the High Court on the ground that the scope and ambit of the 1993 Act is confined to the recovery of debts due to Banks and Financial Institutions and the expression “debt" can only be related to a specific and quantified amount for the purposes of the said Act and not in respect of an undetermined sum which is required to be ascertained upon an enquiry to be conducted Tribunal. The High Court was of the view that since the suit has been framed as one for damages and compensation which is required to be quantified before decree, the me is sufficient to take the suit out of the ambit of the 1993 Act which deals with the recovery of specified amounts. Meanwhile, during the financial year 2002-03 the assessee agreed to an out of Court settlement with UBI for a consideration of Rs, 7,500,000/- as full and final settlement against the pending dispute with UBI. Consequently, the payment was made on 16th . Januaary, 2003. It is humbly submitted that the dispute was finally settled and the ultimate liability of the assessee crystallized only during the previous year relevant to the ssessmenl year under reference. Copy of the order sheet of the Hon'ble Calcutta High Court recording the settlement between the assessee and UBI and thereby dismissing the Suit is enclosed and marked as Annexure-17. The amount paid had been adjusted against a liability of Rs. 2,351,489/- as appearing in the books of accounts of the Company and balance of Rs. 5,148.,511/- has been recorded as an interest and disclosed as an extra ordinary item in the financial statements of the company. In view of the above, the assessee would wish to submit that the aforesaid expenditure was incurred by it during the course of conduct of its business and was thus inextricably linked to its business. The aforesaid expenditure was wholly and exclusively incurred by the assessee for the purposes of its business and is therefore allowable .as a deductible expenditure under Section 37(1) of the Act.”
Based on this submission the ld. AO came to a conclusion that the said claim of the interest expenditure in the sum of Rs.51,48,511/- was allowable as revenue expenditure and accordingly accepted the claim of the assesse in the original scrutiny assessment proceedings completed u/s 143(3) of the Act on 29.03.2006.. The ld. AR argued that the AO had formed his opinion after duly satisfying himself on the materials available on record and there was no tangible material available with him warranting the reopening of the assessment and in any case it would only tantamount to change of opinion on the part of the ld. AO. In support of his argument he placed reliance on the decision of the Hon’ble Supreme Court in the case of Kelvinator of India Limited reported in 320 ITR 561(SC).
The ld. AO also sought to make certain additions to the book profits computed u/s 115JB towards voluntary retirement scheme debited in the sum of Rs.2,65,84,234; raw
6 M/s. Avery India Ltd. A.Yr.2003-04 material components written off – Rs.30,54,000/-; mis-appropriation of inventory – Rs.35,56,000/-; prior period expenses – Rs.2,66,186/-. In this regard the ld. AR brought to the attention of the Bench that these aspects were duly considered by the ld. AO vide specific questionnaires issued during the course of original assessment proceedings on 26.10.2005 for which reply was given by the assessee as follows :- a)Voluntary retirement expenses : Rs.2,65,85,234/- reply was given vide para no.4 vide letter dated 16.11.2005 filed in person before the AO. b)Mis-appropriation of inventories : Rs.35,56,000/- replied by the assessee vide para no.4 in letter dated 25.11.2005 filed before the ld. AO on 02.12.2005. c)Raw material components written off : Rs.30,54,000/- replied by the assessee vide para-1 in letter dated 13.02.2006 submitted before the ld. AO on the same day.
With regard to prior period expenses in the sum of Rs.2,66,186/- the ld. AR submitted that the same was already disallowed by the ld. AO in the original scrutiny assessment proceedings. Accordingly he argued that all the issues that were contemplated by the ld. AO to be adjudicated in the re-assessment proceedings were already part of adjudication and detailed verification in the original scrutiny assessment proceedings based on which an opinion was formed by the ld. AO by accepting the claim of the assessee. He placed reliance on the decision of the Hon’ble Supreme Court in the case of Kelvinator of India Ltd (supra ) and argued that the decision to reopen the assessment would only tantamount the change of opinion on the part of the ld. AO and accordingly prayed for quashing of the reassessment proceedings.
In response to this, the ld. DR argued that the aspect of change of opinion would arise only when two views are possible. He argued that the AO had taken a wrong view on the issues that were subjected to re-assessment. Hence it would not tantamount to change of opinion. Accordingly he vehemently supported the order of the ld. AO. He further stated that the ld. CIT(A) had placed reliance on the decision of the Hon’ble Apex Court in the case of CIT vs Rajesh Jhaveri Stock Broker (P)Ltd. Reported in 291 ITR 500 (SC).
7 M/s. Avery India Ltd. A.Yr.2003-04 9. We have heard the rival submissions and perused the materials available on record including the detailed paper book filed by the assessee comprising of various questionnaires issued by the ld. AO on the subject mentioned issues and various replies filed by the assessee on the very same issues before the ld. AO in the original scrutiny assessment proceedings, among others. At the outset we find that reliance placed by the ld. DR on the decision of the Hon’ble Supreme Court in the case of CIT vs Rajesh Jhaveri Stock Broker (P)Ltd (supra) is not applicable to the facts of the instant case in view of the fact that assessment was originally completed u/s 143(1) of the Act in the case of Rajesh Jhaveri Stock Broker (P)Ltd and the Hon’ble Apex Court held that no opinion would have been framed by the AO in that case as assessment was completed u/s 143(1) of the Act. Hence reopening of the assessment thereon would not tantamount to change of opinion. Whereas in the instant case, original assessment proceedings were completed u/s 143(3) on 29.03.2006 after raising a specific questionnaire with regard to all the issues under dispute and after going through the detailed submissions made by the assessee on the very same issues. Hence in these circumstances, it can only be construed that the ld. AO had clearly formed an opinion on the subject mentioned issues during the original assessment proceedings and completed the same accordingly. Reopening the assessment to take a different view on the very same issue would only lead to abuse of power on the part of the ld. AO to review his own decision which is not contemplated under the scheme of re- assessment proceedings within the meaning of section 147 of the Act. Reliance in this regard is placed on the decision of the Hon’ble Apex Court in the case of Kelvinator of India Ltd. (supra). In CIT vs. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC) [affirming CIT vs. Kelvinator of India Ltd. [2002] 256 ITR 1 (Delhi) (FB)] J. Kapadia held that the concept of ‘change of opinion’ must be treated as an in-built test to check abuse of power by Assessing Officer and that the reasons must have a live link with formation of belief. Important excerpt of the decision is reproduced hereunder: "However, one needs to give a schematic interpretation to the words ‘reason to believe’, failing which section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of ‘mere change of opinion’, which cannot be per se reason to reopen. One must also keep in mind the conceptual difference between
8 M/s. Avery India Ltd. A.Yr.2003-04 power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess, but the reassessment has to be based on fulfilment of certain pre-conditions and if the concept of ‘change of opinion’ is removed as contended on behalf of the department, then in the garb of reopening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an in- built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989 , the Assessing Officer has power to reopen, provided there is ‘tangible material’ to come to conclusion that there is escapement of income from assessment. Under the Direct Tax Laws (Amendment) Act, 1987, the Parliament not only deleted the words ‘reason to believe’ but also inserted the word ‘opinion’ in section 147. However, on receipt of representations from the companies against omission of the words ‘reason to believe’, the Parliament reintroduced the said expression and deleted the word ‘opinion’ on the ground that it would vest arbitrary powers in the Assessing Officer."
With regard to the issue of prior period expenses of Rs.2,66,186/- we find that the same has already been added back in the original scrutiny assessment proceedings under the normal course of the act. In any case, the same cannot be added for the purpose of section 115JB of the Act as it does not fall under the mandatory conditions contemplated in Explanation to section 115JB of the Act. Similarly the other items contemplated in the reasons recorded to be added back in the computation of book profits u/s 115JB of the Act i.e VRS Compensation, raw material components written off and misappropriation of inventories also would not fall under the mandatory additions to book profits as per Explanation to Section 115JB of the Act. Respectfully following the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd vs CIT 255 ITR 273(SC), we have no hesitation to conclude that the said items does not fall under the items to be added back for the purpose of computation of book profit u/.s 115JB of the Act.
In view of the aforesaid findings and respectfully following the ratio laid down by the Hon’ble Apex Court in the case of Kelvinator of India Ltd. (supra) and Apollo Tyres Ltd supra , we quash the reassessment proceedings initiated by the ld. AO and accordingly allow the grounds 1 & 2 raised by the assessee. Since the reassessment is quashed on technical grounds, we don’t deem it fit to adjudicate the other grounds of the assessee and the revenue.
Order pronounced in the court on 03.08.2016.