M.R.M.PLANTATIONS P. LTD.,CHENNAI vs. DCIT, MADURAI

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

The ITA Nos.2772 & 2773/Mds/2014 are filed by the

assessee and ITA Nos.2946, 2947 & 2948/Mds2014 are filed by the

Department. All these appeals are directed against the different

orders of the Commissioner of Income Tax (Appeals)-I, Madurai, dated

25.09.2014 for the above assessment years.

First we take up ITA No.2947/Mds/2014 for adjudication. 2.

The Department has raised the following grounds:-

‘’2. The CIT(A) erred in holding that the AO has not made out a case that there was a permanent establishment in India in regard to carrying on the business of plantations in Malaysia.

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Malaysian Branch of the assessee is situated in India as the Share Holders and Annual General Meeting were conducted in India’’.

assessee filed its return of income for the AY 2006-07 on 21.11.2006

declaring a total income of �13,77,120/-. The return was processed

u/s 143(1)(a) on 15.02.2008. As income chargeable to tax has

escaped assessment, proceedings u/s 147 was initiated by issue of

notice u/s 148 dt. 22.03.2012. The reasons for initiating proceedings

u/s 147 are reproduced below:

During the course of assessment proceedings for the AY 2007-08, the expenditure claimed against the interest income was disallowed on the ground that the interest income had to be assessed under the head "Income from other sources". Since the company did not have any other business income, the expenditure did not qualify for deduction u/s.57.

Similarly, on verification of miscellaneous records for the AY 2006-07, it has been found that the assessee is in receipt of only interest income against which they have claimed expenditure of ₹13,54,443/- which is not allowable.

Further, on verification of statement of income, it has been found that the income from Malaysian Branch amounting to ₹55, 92,897/- is not included in the total income for the purpose of taxation in India. The case law CIT vs.PVRM Kulandayan Chettiar [267 ITR 657] is not applicable in the instant case for the following reasons. a) The assessee is a company registered in India under the Companies Act and is therefore, a resident, as per section 6(3).

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b) Annual report and Directors report stated that the assessee company has its branch in Malaysia and the control and management of the affairs of the Malaysian Branch is situate in India as the share holders and annual general meeting were conducted in India. c) The income of the Malaysian branch is included in the accounts of the company and profits appropriated.

In view of the above, the Assessing Officer had reasons to believe that

income to the tune of �69,47,340/- has escaped assessment.

Accordingly assessment was computed interalia taxing the Malaysian

plantation. Aggrieved, the assessee preferred an appeal before the

Commissioner of Income Tax (Appeals).

The Commissioner of Income Tax (Appeals) upheld the 4.

assessment. Further, he observed that in view of the judgment of

Supreme Court in the case of CIT vs. PVRM Kulandayan Chettiar 267

ITR 654, plantation income received from Malaysian cannot be taxed in

India. Against this, the Revenue is in appeal before us.

We have heard both the sides and perused the material on 5.

record. Admittedly, a similar issue was considered by the Supreme

Court in the case of PVRM Kulandayan Chettiar (cited supra) wherein it

was held that business income arising out of rubber plantations in

Malaysia cannot be taxed in India because of closer economic relations

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between the assessee and Malaysia which determines the fiscal

domicle of the assessee in terms of Article 4 of the DTAA between

India and Malaysia; Being so, the Assessing Officer not justified in

treating the assessee having permanent establishment in India. In

Article 5(2)(g) the term ‘’permanent establishment’’ shall include

especially ‘’a farm or plantation’’.

permanent establishment through which the business is carried on by

the assessee and applying the test of permanent establishment the

income from the plantation would be taxable only in Malaysia and not

in India. The assessee already filed its return of income and the

return filed for all these assessment years which was kept in record.

Accordingly, in our opinion the order of the Commissioner of Income

Tax (Appeals) is to be confirmed. This appeal of the Revenue is

dismissed.

ITA No.2773/Mds/2014, assessment year 206-2007, (Assessee Appeal)

In this appeal, the first ground raised by the assessee is 7.

with regard to disallowance of expenditure at �43,35,061/- and

according to the assessee the said amount was incurred by the

Malaysain branch of the company and the expenditure incurred by the

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head office of the company at Chennai was �15,65,918/- only which

is allowable as income from business/other sources.

The facts relating to the issue are that the Assessing Officer 8.

observed that in the profit and loss account for the year ended 2006-

07, the assessee received interest income from bank and others and

dividend receipt of �12,70,603/-. From the interest income and

dividend receipts, the assessee has claimed major expenses as under:-

Salary and Bonus : �11,61,594/- Managing Director Remuneration and Commission : �14,06,799/- Vehicle Maintenance : � 2,15,908/- Postage & Telephone expenses : � 1,12,743/- Travelling Expenses : � 2,81,078/- Rates and Taxes : � 32,860/- Repairs & Maintenance : � 34,150/- Income tax paid : �10,89,929/- ------------------ Total : �43,35,061/- -----------------

The Assessing Officer held that as the interest income from banks is to

be taxed as income from other sources, the above expenses cannot be

claimed as per Sec.57 of the I.T. Act. The Assessing Officer also held

that the assessee has no known business activity in India. Hence, the

Assessing Officer disallowed the expenses to the tune of �43,35,061/-

and computed accordingly. Aggrieved, the assessee preferred an

appeal before the Commissioner of Income Tax (Appeals). The

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Commissioner of Income Tax (Appeals) confirmed the order of the

Assessing Officer. Against this, the assessee is in appeal before us.

We have heard both the sides and perused the material on 9.

record. Under section 57 only expenditure incurred in connection with

earning of income was allowable as deduction. The assessee admitted

that the entire income is by way of interest from the bank deposits. It

was seen that the expenditure made by the assessee towards salary,

remuneration, commission, building maintenance etc, these expenses

have no nexus with earning of interest on bank deposits and cannot be

allowed as deduction u/s.57 of the Act. Further, the assessee made a

plea before us that expenditure at head office at �15,65,918/- instead

of �43,35,061/-. In our opinion, the Assessing Officer already brought

on record the total expenditure at �43,35,061/- as recorded in earlier

para. Being so, the contention of assessee counsel is devoid of merit

as it is not based on any evidences. Accordingly, this ground of the

appeal of the assessee is rejected.

The next ground raised by the assessee is that the 10.

Commissioner of Income Tax (Appeals) erred in upholding the addition

of �8,04,623/- made by the Assessing Officer being ‘exchange rate

fluctuation’ brought to charge by the Assessing Officer without any

discussion or assigning reasons in the assessment order.

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The facts of the issue are that the Assessing Officer noted 11.

that the assessee received �8,04,623/- on account of exchange rate

fluctuation which was not offered as income. The Assessing Officer

proceeded to tax �8,04,623/- as income of the assessee. Aggrieved,

the assessee preferred an appeal before the Commissioner of Income

Tax (Appeals).

the assessee had earned �8,04,623/- due to exchange rate fluctuation.

Gain due to exchange rate on the foreign exchange held on revenue

account is to be treated as income. During appeal proceedings, the

assessee had not adduced any argument as to why the gain is not

income except arguing that the Assessing Officer had added

�8,04,623/- without reason. The Commissioner of Income Tax

(Appeals) confirmed the order of the Assessing Officer. Against this,

the assessee is in appeal before us.

The ld. Authorised Representative for assessee submitted 13.

that the sum of �8,06,423/- was shown in the profit and loss account for the year ended 31st March, 2006 with the narration “Amount

adjusted for the purposes of finalizing the balance between the head

office and the branch owing to fluctuation in foreign exchange’’ and is

a mere notional entry made for the purpose of equalizing the balance

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between the head office and the Malaysian branch office. The

assessee further submitted that the sum of �8,06,423/- was a notional

amount and not a gain real terms, being an accounting entry relating

to the assessee’s own branch in Malaysia which cannot result in any

income.

The ld. Departmental Representative relied on the orders of 14.

the lower authorities.

We have heard both the sides and perused the material on 15.

record. The assessee admittedly received the above amount on

account of exchange rate fluctuation which is revenue receipt and the

same to be liable to be taxed and it cannot be considered as notional

entry Accordingly, this ground of the appeal of the assessee is

dismissed.

In the result, the assessee of the appeal in ITA No.2773/Mds/2014 is

dismissed.

ITA No.2946/Mds/2014, assessment year 2005-2006 (Department

appeal)

The issue in this appeal is identical which was considered in 16.

ITA No.2773/Mds/2014 for the assessment year 2006-2007,. Applying

the above ratio, this appeal of the Revenue is also dismissed.

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ITA No.2772/Mds/2014, assessment year 2005-2006 (assessee

appeal):

No.2773/Mds/2014 for the assessment year 2006-2007 and there is

only change in amount of disallowance. Applying the ratio laid in ITA

No.2773/Mds/2014, this appeal of the assessee is dismissed.

ITA No.2948/Mds/2014, assessment year 2007-08 (Department

appeal):

In this appeal, the department has filed revised grounds of 18.

appeal as under:-

2.1 The learned Commissioner of Income tax (Appeals) has erred in holding that the proceedings for the re- opening of the assessment u/s 147 of the IT Act, 1961 in the assessee's case for the assessment year 2007~08 are; invalid. 2.2 The learned Commissioner (Appeals) has also erred in holding that re-visiting of the same issue which was considered in the original assessment with a different meaning for initiating proceedings u/s 147 amounts to change of opinion. 2.3 The learned Commissioner (Appeals) has failed to note that the provisions of clauses (b) and (c) of the

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Explanation (2) to section 147 are clearly applicable in the assessee's case for the assessment year 2007-08 under consideration because the assessee. had deliberately kept away the income of Malaysian Plantation from Indian Taxation laws when the company affairs are controlled in India.

2.4 The learned Commissioner (Appeals) has failed to appreciate that the assessee's total income for the assessment year 2007-08 had been under assessed in the original assessment order dated 22.12.2009, inter alia to an extent of RS.9841036/- being income from Plantation from Malaysia which was not earlier included to the total income of the assessee company in the said original assessment thereby attracting application of provisions of clause © of Explanation (2) to section 147 of the. Income tax Act, 1961 i.e "where an assessment has been made but income chargeable to tax has been under assessed".

2.5 The learned Commissioner (Appeals) ought to have noted the fact that the assessee had deliberately kept away the income from plantation in Malaysia treating it as not forming part of total income by quoting the Hon'ble Supreme Court decision of CIT Vs P.V.Kulandayan Chettiar whereas the ratio of the said decision is not applicable to the assessee's case.

2.6 It is respectfully submitted that even if the assessee's contention that the assessee had furnished all the details at the time of original scrutiny assessment u/s 143(3) were to be considered, Explanation (1) to section 147 of the Act which is reproduced below may kindly be taken note of :-

"Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing provision" i.e proviso 1 of section 147).

2.7 This issue of jurisdiction to reopen assessment u/s 147

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by the Assessing Officer is reiterated in many cases by the Supreme Court for mere production of evidence before the Assessing Officer is not enough that there may be omission or failure to make a true and full disclosure by the assessee, if some material for the assessment lay embedded in the evidence which the revenue could have uncovered but did not, then, it is the duty of the assessee to bring it to the notice of the assessing authority because the assessee knows all the material and relevant facts if the Assessing Officer might not. But if there is omission to disclose material facts, the Assessing Officer has jurisdiction to reopen the assessment. This decision was taken in the following cases by the Supreme Court.

In this case, on verification of statement of income by the Assessing Officer, it has been found that the income from Malaysian Branch amounting to ₹55,92,897/- was not included in the return of income filed by the assessee. From the annual and director’s report, it was observed by the Assessing Officer that the control and management of the affairs of the Malaysian Branch was situated in India as the share holders and the annual general meeting was conducted in India. As there is omission or failure to make a true and full disclosure by the assessee, the Assessing Officer has a valid reason to believe that income has escaped assessment for the A.Y. 2007-2008 in respect of this case.

2.8 The learned Commissioner (Appeals) ought to have upheld the reopening of assessment u/s.147 for the

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assessment year 2007-2008.

assessee filed its return of income for the AY 2007-08 on 23.110.2007

declaring a total income of �10,13,510/-. The return was processed

u/s 143(1)(a). The case was selected for scrutiny and assessment

u/s.143(3) was completed on 22.12.2009 raising the demand of

�6,01,419/-. As income chargeable to tax has escaped assessment,

proceedings u/s 147 was initiated by issue of notice u/s 148 dt.

22.03.2012. The reasons for initiating proceedings u/s 147 are

reproduced below:

During the course of assessment proceedings for the AY 2007-08, the expenditure claimed against the interest income was disallowed on the ground that the interest income had to be assessed under the head "Income from other sources". Since the company did not have any other business income, the expenditure did not qualify for deduction u/s.57.

Similarly, on verification of miscellaneous records for the AY 2006-07, it has been found that the assessee is in receipt of only interest income against which they have claimed expenditure of ₹13,54,443/- which is not allowable.

Further, on verification of statement of income, it has been found that the income from Malaysian Branch amounting to ₹55, 92,897/- is not included in the total income for the purpose of taxation in India. The case law CIT vs.PVRM Kulandayan Chettiar [267 ITR 657] is not applicable in the instant case for the following reasons.

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a)The assessee is a company registered in India under the Companies Act and is therefore, a resident, as per section 6(3). b)Annual report and Directors report stated that the assessee company has its branch in Malaysia and the control and management of the affairs of the Malaysian Branch is situate in India as the share holders and annual general meeting were conducted in India. c)The income of the Malaysian branch is included in the accounts of the company and profits appropriated.

In view of the above, the Assessing Officer had the reasons to believe

that income to the tune of �98,41,036/- has escaped assessment.

Accordingly assessment was computed interalia the Malaysian

plantation. Aggrieved, the assessee preferred an appeal before the

Commissioner of Income Tax (Appeals).

the gist of the argument is that original assessment was completed

u/s.143(3) and the same issue was examined and a finding was given

by the Assessing Officer. The reopening the same issue with a

different interpretation would amount to change of opinion. The

Commissioner of Income Tax (Appeals) placed reliance on the order of

the Tribunal in assessee’s own case in ITA No.2326/Mds/2012, dated

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05.07.2013 for the assessment year 2004-2005, wherein it was held as

under:-

The Commissioner of Income Tax (Appeals) observed that reopening is

invalid. Against this, the Revenue is in appeal before us.

We have heard both the sides and perused the material on 21.

record. The issue in this case is squarely covered by the order of the

Tribunal in assessee’s own case in ITA No.2326/Mds/2012 & ITA

233/Mds/2013, dated 05.07.2013 for the assessment year 2004-05

wherein the Tribunal annulled reassessment observed as follows:-

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ITA Nos.2772, 2773, 2946 , :- 17 -: 2947 & 2948/2014

brought by Direct Tax Law (Amendment) Act, 1987. Two sets of provisions are available under section 147 in clause (a) and clause (b). This distinction has now been taken away by the Amendment Act. Previously, the line of distinction was a limitation period of four years and the limitation period exceeding four years. The Assessing Officer would reopen a back assessment within a period of four years as long as he had reason to believe in consequence of any information, that income has been under assessed or income has escaped assessment. In the case of limitation, providing for a period exceeding four years, there should have been a failure on the part of the assessee to disclose fully and truly all material facts leading to the escapement of income. But, as a result of the amendment brought with effect from 01.04.1989, the above distinction had been obliterated and the Assessing Officer could reassess the income as long as he had reason to believe that income chargeable had escaped assessment. The new law has inserted a proviso to section 147 in the following words:

“Providing that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax had escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.”

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escape of income is insufficient to justify the initiation of action after the expiry of four years from the end of the assessment year. Such escapement must be by reason of the failure on the part of the assessee either to file a return referred to in the proviso or to truly and fully disclose the material facts necessary for the assessment. 20. In the present case, the notice under section 148 was issued after four years. There is no specific finding by the Assessing Officer in the reasons recorded as extracted from the assessment order that the assessee failed to disclose fully and truly all the particulars required to complete the assessment. Therefore, we find that the notice issued under section 148 is not valid. 21. In similar circumstances, the Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. v. ACIT (268 ITR 332) has observed that “reasons recorded by the Assessing Officer nowhere stating that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment and, reopening of assessment made under section 143(3), after expiry of four years from the end of the relevant assessment was not valid. 22. In Sadbhav Engineering Ltd. v. DCIT (333 ITR 483), the Hon’ble Gujarat High Court has observed that in the absence of any averment that the assessment is sought to be reopened by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for the relevant assessment year, the very initiation of proceedings under section 147 by issuance of notice under section 148 after expiry of four years from the end of relevant assessment year is bad and cannot be sustained. 23. In view of the above and taking into consideration of the facts and circumstances of the case, the issuance of notice under section 148 after expiry of four years from the end of relevant assessment year is bad and cannot be sustained and the ground raised by the assessee is allowed. 24. So far as Revenue’s appeal is concerned, once the reopening of assessment is decided as bad and not valid, it is not necessary to decide the issues on merits. Therefore, the appeal filed by the Revenue is dismissed.

Accordingly, we uphold the findings of the Commissioner of Income

Tax (Appeals) for this assessment year also. The other grounds raised

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by the Revenue are only academic and require no adjudication in view of quashing of assessment. This ground of the appeal of the Revenue

is dismissed.

In the results, the appeals of the assessee in ITA Nos.2772 22.

&2773/Mds/2014 are dismissed and the appeals of the Revenue in ITA Nos. 2946, 2947 & 2948/Mds/2014 are also dismissed.

Order pronounced on Friday, the 9th day of October, 2015, at Chennai.

Sd/- Sd/- (चं� पूजार�) (एन.आर.एस. गणेशन)) (CHANDRA POOJARI) (N.R.S. GANESAN) लेखा सद�य /ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated:09.10.2015 KV

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF