TIOL Update, Friday, Aug 26, 2016

CIT Vs KARNATAKA PLANTERS COFFEE CURING WORK PVT LTD : SUPREME COURT OF INDIA (Dated: August 22, 2016)

Income Tax - matching transactions - trade creditors - investigation - modus operandi - crop loans - estate owners - interim order.

Whether merely because fresh assessment proceedings have been carried out by the AO during remand, it would preclude the Court from judging the validity and correctness of the order of Division Bench of High Court - NO: SC

The assessee is a company. The High Court judge had dismissed the writ petition filed by assessee against the revisional order upholding the order of assessment insofar as addition of an amount of Rs.2,72,19,285/- was concerned, which was claimed by Assessee as being legally liable for deduction. CIT had held that regarding the addition relating to trade creditors, the records established that the assessee had shown sudden in trade creditors without any significant transactions of purchases during the year. Obviously, there cannot be trade creditors without matching transactions. The investigation carried out by the A.O. exposed the modus operandi of the assessee. It was claimed before the A.O. that crop loans were raised in the names or planters within the family circle hailing from Chennai purportedly owning some estates. The loans-raised by them from the bank where the assessee also operated its bank accounts were claimed to be given to the assessee. The investigation further revealed that these crop loan applications were prepared and signed by none other than the top man in the management of the assessee. The crop loans accounts in the bank were also operated by the same person from the assessee. When the investigation arm was extended to Chennai and some details were collected about these so-called estate owners, no such accounts appear in their records. Besides, the nexus of their sacrificial loans to bail out the assessee could not be bridged either. In effect, there was clear instance of creation of accounts by way of name leading, a fraudulent practice. All these aspects were fully exposed in the investigation carried out by A.O. The HC held that there was no cause for interference in the present proceedings to approve the findings of the excellent investigation carried out by A.O.

The Apex Court held that,

++ both the AO and the C.I.T. had recorded findings of fact adverse to the Assessee which has been upheld by the single judge of HC. The Division Bench of HC in the Writ Appeal thought it appropriate to reverse the said findings on the ground that the 37 persons who had advanced the loan to the Assessee ought to have been given notice. The jurisdiction of the Division Bench in a Writ Appeal is primarily one of adjudication of questions of law. Findings of fact recorded concurrently by the authorities under the Act and also in the first round of the writ proceedings by the single judge are not to be lightly disturbed. In the present case, in the face of the clear findings that the loan applications were processed by the Officers of the Assessee and the loan transactions in question of the aforesaid 37 persons were also handled really by the Assessee and further in view of the categorical finding that the loan amounts were not reflected in the returns of the 37 persons in question, we do not see how the HC could have taken the above view and remanded the matter to the AO. It has been pointed out before us that pursuant to the impugned order passed by the Division Bench of the HC fresh assessment proceedings have been finalized by the AO. The said exercise has been done in the absence of any interim order of this Court. However, merely because fresh assessment proceedings has been carried out in the meantime it would certainly not preclude the Court from judging the validity and correctness of the order of the Division Bench of HC. For the reasons stated, we cannot uphold the order of the Division Bench passed in the Writ Appeal in question. Consequently, we allow this appeal and set aside the order of the Division Bench and consequently all further orders passed pursuant thereto.

Revenue's appeal allowed

2016-TIOL-132-SC-IT

ACIT Vs UNITED SPIRITS LTD : SUPREME COURT OF INDIA (Dated: August 22, 2016)

Income Tax - Section 32A.

Keywords: investment - treatment plan - error apparent.

Whether benefit u/s 32A can be granted to an assessee in respect of investment made in effluent treatment plan - YES: SC

The assessee is a company. It was noticed that the HC had granted the benefit of Section 32A of the Income Tax Act on the investment which has been made by the assessee in respect of effluent treatment plant.

The Apex Court held that,

++ keeping in view the specific provisions contained in sub-section 2C of Section 32A of the Income Tax Act, we do not find any error in the view taken by the High Court in this behalf. This appeal is, accordingly, dismissed. There shall be no order as to costs.

Revenue's appeal dismissed

2016-TIOL-1549-ITAT-MUM

ABBOT INDIA LTD Vs ACIT: MUMBAI ITAT (Dated: August 24, 2016)

Income tax - Sections 14A, 32(1)(iia), 43B, 143(3), 147, 148 & Rule 8D

Keywords - additional depreciation - buyback expenses on shares - exempt income - escaped assessment - formation of belief - revised return & reopening

Whether a concluded assessment which was accepted after detailed scrutiny, can be reopened, in the absence of any tangible material which has live nexus with the formation of belief that income chargeable to tax has escaped assessment - NO: ITAT

Whether a claim of buyback expenses on shares, can be denied to the assessee, without verifying the claim and on mere ground that it was claimed only in the revised return and not in the original return - NO: ITAT

A) The assessee is engaged in the business of manufacturing and trading of medicinal and pharmaceutical products, insulin and its formulations. The assessee imported reagents from its parent company namely, Sevorane and Isoforane. These re-agents were administered with the help of Vaporizers and were used as anaesthetic at hospitals. In order to sell its reagents, the assessee installed vaporizers at the hospitals free of cost. However, the assessee retained the ownership of vaporizers and claimed depreciation on the same. The assessee also has a manufacturing unit at Goa where it manufactures drugs like Digene, Pediasure etc. However, no reagent was manufactured at this facility. It claimed additional depreciation as per provisions of section 32(1)(iia) aggregating to Rs. 45,10,828/-and on perusal of the details of additions during the year made in the block of plant and machinery on which the additional depreciation was claimed, the AO observed that the assessee had claimed an amount of Rs. 25,77,617/-as additional depreciation on Vaporizers. Since these vaporizers were related purely to the trading activity of the assessee, the assessee was asked to explain why the additional depreciation claimed should not be disallowed. During assessment, the AO held that the vaporizers were installed at the hospital and hospitals were nothing but in the nature of temporary sales office of the assessee, hence, no additional depreciation was allowable on these service equipments. Hence, additional depreciation claimed on vaporizers amounting to Rs. 25,77,616/-was disallowed and added to the total income of assessee u/s 143(3) r.w.s. 147. On appeal, the CIT(A) observed that the assessee was engaged in two types of business one is simple trading i.e. import of medicines and their local sales and the other business is of manufacturing at Goa Unit. The vaporizers are useful for promoting the sale of imported medicines and they have no relationship with the manufacturing activity of the product. These vaporizers were not located on the factory or business premises of the assessee. He therefore upheld the order of AO.

B) The assessee has claimed an amount of Rs. 3,69,32,082/-as deduction u/s 80-IB being 30% of the profits of Goa unit. The AO observed that the entire expenses relates to implementation and standardization of manufacturing process and as such the entire expenses should be deducted from the profits as direct expenses. It was observed that the business of trading activity in pharmaceutical products did not involve any scientific research expenditure since the assessee was merely purchasing the goods and selling them subsequently. He therefore held that, however, the assessee had allocated R&D expenses in accordance with sales turnover on prorate basis and due to failure on the part of the assessee to furnish complete details of unit-wise expenditure which had led to escapement of income by claim of excessive deduction, hence deduction to the extent of Rs. 3,40,71,018/-was allowable u/s 80IB as against claim of Rs. 3,69,32,082/-made by the assessee, vide assessment order u/s 143(3) r.w.s. 147. On appeal, the CIT(A) held that no research was required for trading activities hence expenses on research relates to manufacturing unit only. He held that the assessee had to prove if such expenses were incurred by filing detailed evidence but the assessee failed to do so. Hence, the claim of the assessee that research expenses were required to be allocated in the ratio of turnover to trading activity and manufacturing was not having any basis.

C) The assessee had paid sales tax in advance of Rs. 40,39,333/-in the previous year relevant to the A.Y 2007-08 and claimed the same as deduction for the A.Y 2007-08 u/s 43B which deduction was disallowed by the AO on account of being advance payment of sales tax vide assessment orders passed u/s. 143(3) r/w/s 144C(13) for the A.Y 2007-08. The assessee contended that appeal was filed with the Tribunal wherein the assessee did not press this ground considering that the same ought to have been allowed in the year to which it pertains. Thus, it was prayed that the said ground be admitted as it was purely a legal ground and also otherwise serious prejudice would be caused to the assessee as the assessee would be denied of the legitimate deduction under the provisions of the Act to which it was legally entitled.

D) The assessee had filed revised returnm, whereby it had claimed deduction on account of buy-back expenses on shares at Rs. 23,38,849/-. The assessee contended that in the original return, it had erroneously disallowed the claim of deduction on account of buy-back expenses on shares incurred during the year. This revised return was not considered by the AO as well as by the CIT(A). The CIT(A) dismissed the grounds raised by the assessee on the ground that the assessee had stated that the assessee shall take up this issue with the AO.

Having heard the parties, the Tribunal held that,

Additional depreciation

++ it is observed that the assessee has claimed additional depreciation u/s 32(1)(iia) on vaporizers which are installed in the hospital/medical institutions and which are continued to be owned by the assessee. We find that the Tribunal in assessee's own case for A.Y 2007-08 has decided the issue in favour of the assessee. The Tribunal therein held that: "....section32(1)(iia) does not state that setting up of a new machinery or a plant, which was acquired and installed after 31st Mar 2005, should have an operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore the reasoning of the AO that the vaporizers, has nothing to do with the manufacturing of articles etc., is totally not germane to the specific provision contained u/s 32(1)(iia). Respectfully following the above-stated decision of the co-ordinate Bench of this Tribunal in assessee's own case, this ground is answered in favour of assessee;

R&D Expenses vis-a-vis Reopening

++ the Revenue has reopened the assessment by invoking the provisions of section 148 within a period of four years wherein the original assessment was framed u/s 143(3), whereby the Revenue is attempting to allocate the entire R&D expenditure of Rs. 95,36,877/-to the Goa unit in the re-opened proceedings on the contention that the R & D was directed towards manufacturing unit while the assessee contentions from beginning being that the same is common cost towards establishing new technical capabilities, import substitution and new vendor development, optimization, standardization and improvements of products and manufacturing process and technical evaluation of the shelf products, to ensure quality and stability and that the expenses were not incurred to earn income but with the objects of optimization, standardization and improvements of products and manufacturing processes and reduce costs and hence the same were not apportioned /allocated by the assessee while computing profits and gains derived of Goa unit eligible for deduction u/s. 80IB. In our considered view the assessee has made claim u/s 80IB which was allowed by the Revenue after detailed enquiry wherein the assessee duly submitted the detailed explanation as to manner of computing deduction u/s 80IB which was accepted by the Revenue after scrutiny while framing original assessment u/s 143(3) and no fresh tangible material has come into possession of the Revenue which has live link/ nexus with the formation of belief that income has escaped assessment warranting re-opening of the concluded assessment, has been brought on record by the Revenue to disturb the claim of the assessee which was earlier accepted in original assessment after detailed scrutiny rather it is a case of change of opinion which is not permissible in proceedings u/s 147/148 as the powers of re-opening the concluded assessment, u/s is to ‘re-assess' and not to ‘review' the concluded assessments;

Advance sales tax payment vis-a-vis Withdrawn ground

++ in this additional ground raised by the assessee wherein it was submitted that the payment of sales tax in advance amounting to Rs. 40,39,333/-was made in the previous year relevant to the A.Y 2007-08 while the sales tax pertained to the period from 1st Apr 2007 to 31st Mar 2008 and claim of deduction was made u/s. 43B in the A.Y 2007-08 which was denied by the Revenue, it was submitted that the AO disallowed the same while framing the assessment order for A.Y as being advance payment of sales tax pertaining to the period 1st Apr 2007 to 31st Mar 2008 i.e. A.Y 2008-09. It was submitted that the matter was disposed of by the Tribunal while deciding the assessee's own appeal for the A.Y 2007-08, wherein the assessee did not pressed the said ground. It is found that the assessee is stated to have made payment of Rs. 40,39,333/-as sales tax paid in advance in the previous year relevant to the A.Y 2007-08 while the said sales tax liability paid in advance pertained to the previous year relevant to the A.Y 2008-09. The assessee has not pressed the ground of appeal before the Tribunal in assessee's own case for the A.Y 2007-08 for the A.Y 2007-08 and the same was dismissed by the Tribunal. In our considered view this issue needs to be set aside to the file of the AO and the AO shall verify the claims and contentions of the assessee and allow the same on merits in accordance with law;

Buyback expenses on shares vis-a-vis Claim under revised return

++ it is observed that the assessee has incurred buy-back expenses on shares amounting to Rs. 23,38,849/-. The assessee has stated to have not claimed the same as deduction in its original return filed with the Revenue. The assessee has revised its return of income within time prescribed by law u/s 139(5) whereby the said claim was raised by the assessee. The authorities have not considered the claim of assessee. The Tribunal in assessee's own case for the A.Y 2007-08 adjudicated the matter and held that: "....the assessee undertook the exercise of buy back, as the shares of the company were not traded in the stock market. Instead of increase in the share capital, the buy back, resulted in decrease in the funds. In these circumstances, the assessee has not earned any enduring benefit because of the buy back. The expenditure incurred thus did not result in bringing into existence any asset. Therefore, the expenses incurred by the assessee for buy back, to be a revenue expenditure, allowable u/s.37(1)...." In our considered view, this matter needs to be restored to the file of the AO for verification of the claims and contentions of the assessee to have incurred expenses of Rs.23,38,849/- towards expenses for buy back of shares and then to decide the claims and contentions of the assessee in the light of decision of the Tribunal in assessee's own case for the A.Y 2007-08.

Case remanded