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2018-TIOL-1123-HC-MUM-IT + Case Story
ZUARI FOODS AND FARM PVT LTD Vs ACIT: BOMBAY HIGH COURT (Dated: April 11, 2018)
Income Tax - Writ - Sections 147 & 148.
Keywords: Agricultural income - Arbitrary power - Agricultural activity - Change of opinion - Fresh material - Mushroom cultivation - Pre-existing Circular - 'Reasons to believe' & Tangible material.
The assessee company, engaged in the activity of mushroom farming, had returned income for the relevant AY. The case was selected for scrutiny. A notice was issued u/s 142(1) to the assessee to substantiate his claim. In reply, the assessee had submitted explanation regarding its activity. During the scrutiny assessment, the assessee stated that mushrooms were grown in a closed chamber. The assessee had also produced various certificates/letters issued by different Govt. disclosing its income from mushroom cultivation as agricultural income. Therefore, while accepting the contention of the assessee, the Asst. CIT passed the assessment order on 27 August 2015 u/s 143(3) by stating that the assessee was deriving an agricultural income, and its activity was agricultural activity.
However, on 28 September 2016, the AO found that income chargeable to tax had escaped assessment and thus, a notice was issued to the assessee u/s 148(1). Consequently, the sought for the reasons for issuance of such a notice. In reply, the Asst. CIT furnished reasons by stating that mushrooms were grown in wooden containers & bags inside closed chamber, using different layers of artificial soil filled in wooden trays and temperature controlled to a specific degree by closing the inlet and outlets of air to provide necessary humidity for cultivation of mushrooms, and hence, there was no connection with land. Thereafter, the Revenue stated that when there was no connection with land, the assessee's activity couldnot be called as agriculture. It was also pointed that the income arising from mushroom farming was not covered under Explanation 3 to Sec. 2(1A) and also not exempted u/s 10(1). Nevertheless, the assessee objected the reopening notice and submitted that it was merely a 'change of opinion' since, there was no discovery of new tangible material. Hence, there was no jurisdiction for the Revenue Authorities to proceed with the re-assessment. It was also contended by the assessee that the CBDT Circular no. 258 dated 14 June 1979 which was made basis of reopening the assessment, was not applicable as it lost its relevance after promulgation of Sec. 80JJA and in view of the subsequent circular dated 27 March 2009. Regardless with the assessee's contentions, the Asst. CIT passed the re-assessment order.
In Writ, the High Court held that,
Whether in absence of any new tangible material, the AO is still empowered to reopen an existing assessment without fulfiling jurisdictional requirements as mentioned under the Act - NO: HC
Whether a pre-existing circular can be considered as a 'new tangible material' for reopening an assessment even when, such a circular has no relevance with the issue in hand and was substituted by subsequent amendment - NO: HC
++ the reopening of assessment is sought to be made within a period of four years. The Ss 147 and 148 deal with Section of reopening of assessment. Sec. 147 provides that if the AO has reason to believe that any income chargeable to tax has escaped assessment for any AY, he may, subject to the provisions of Ss 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, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the AY concerned. In respect of the reopening of assessment after period of four years, Sec. 147 states that no action shall be taken under this Section after the expiry of four years from the end of the relevant AY, unless any income chargeable to tax has escaped assessment for such AY by reason of the failure on the part of the assessee to make a return u/s 139 or in response to a notice issued under Ss 142(1) or 148 or to disclose fully and truly all material facts necessary for his assessment, for that AY. In the present case, reopening is sought before four years and therefore, the proviso will not apply;
++ the mandate of Sec. 147 however, is that the AO must have a 'Reason to Believe'. The meaning and connotation of the phrase 'Reason to Believe' arose for consideration of the Apex Court in the case of Kelvinator India Ltd. The Bench of the three learned Judges of the Supreme Court emphasized on the difference between Review and Power to Reassess. The Court held that the AO has no power to Review, but he has the power to Reassess. The phrase 'Reason to Believe' has to be given schematic interpretation failing, which Sec. 147 would give arbitrary power to the AO to reopen assessments on the basis of mere change of opinion, which cannot be per se reason to reopen the assessment. Reassessment has to be based on fulfillment on certain preconditions and the concept of change of opinion has to be treated as a test to check abuse of power by the AO. It was noted that, by Direct Tax Laws (Amendment) Act, of 1997, the Parliament had deleted the words 'Reason to Believe' from Sec. 147 and there were various representations from all over the country against the deletion. The Parliament reintroduced the words 'Reason to Believe' and deleted the word 'opinion'. Circular 549 dated 31 October 1989 explains the reintroduction of the word 'Reason to Believe' stating that omission might give arbitrary powers to reopen past assessments on mere change of opinion. Thus, the reintroduction of the words 'reason to believe' by the Parliament has been taken note of by the Apex Court in the case of CIT vs. Kelvinator India Ltd., to emphasize that the assessments cannot be reopened on a 'mere change of opinion';
++ even though power of the AO to reopen an existing assessment and that it is wider within a period of four years, there are certain jurisdictional requirements that must exist before this power is exercised. The reintroduction of the phrase 'Reason to Believe' on the Statute book has been construed as a check on the arbitrary powers. The phrase 'Reason to Believe' cannot be considered as a mere change of opinion. The AO does not have power to Review on the basis of the same material which was available earlier. Ultimately, what is required for reopening the assessments is that there must be tangible material to come to the conclusion that there has been escapement of income from assessment. There cannot be a mere change of opinion on the part of the AO, but the Revenue must demonstrate that, subsequently some new information or material had been brought on record which was not available when the assessment order was passed earlier. If no fresh material was before the Revenue in the course of assessment subsequently, the Revenue cannot justify reopening of the assessment. This is the position of law as regard the jurisdiction of the AOs to reopen the assessment;
++ the issue whether the activity of the assessee is agriculture or not clearly arose before the AO. The AO considered the aspect of mushroom cultivation. The assessee had produced various certificates and letters including that of the Pollution Control Board stating that growing and processing tropical mushroom in Goa is not an agricultural activity. Based on this material the AO accepted the assessee's case and recording a categorical finding treated the income as an agricultural income. When the disputed reopening notice was served on the assessee and reasons were supplied, the Asst. Commissioner stated in the reasons that mushroom cultivation cannot be treated as agricultural activity as it has no connection with land. Apart from the comments on the manner of cultivation, as it can be seen from the reasons given, substantial emphasis was placed on Circular of the year 1979. When the assessee submitted his explanation to the Reasons, the assessee pointed out that there was no tangible material before the AO and what is sought to be done is 'mere change of opinion'. While rejecting the objections, the AO has only referred to the Circular dated 14 June 1979 again;
++ when the assessee had categorically asserted both in the reply to the reasons as well as in the present petition that the Circular dated 14 June 1979 has no relevance, the contention of the assessee that this Circular was issued in context of Sec. 80JJA which was in operation prior to insertion of explanation 3 to Sec. 2(1A) and it had no relevance, has not been dealt with by the AO at all, except stating that it cannot be ignored. If by subsequent amendments, the Circular had lost its efficacy and that it was substituted by another circular dated 27 March 2009, the same cannot be considered as new and tangible material. Whether the Circular has lost its relevance and is substituted by a subsequent Circular has not been explained in the order rejecting the reasons, neither in the affidavit of reply. How a pre-existing Circular amounts to discovery of new tangible material is also not explained;
++ therefore, what is before us is only a change of opinion of the AO, without any new material. The assessee had placed the material before the AO. The AO is supposed to apply law, including the Circulars, to the material placed before him. The AO took a particular view and the Asst. CIT has merely on a change of opinion sought to reopen the proceedings. Since the criteria for exercise of the jurisdiction are not met, the action of the Asst. CIT is without jurisdiction and will have to be set aside. Further, the Counsel for the Revenue has drawn our attention to the concluding paragraph of the disputed reopening order where the Asst CIT has observed that the Act provides a complete machinery for the assessment/reassessment of tax, imposition of penalty and for obtaining relief in respect of any improper order passed by the Revenue authorities. The law says that, it is mandatory, to first exhaust all avenues under the Act (which are equally effective) before filing a Writ Petition before the High Court, and no assessee can bypass the alternate remedies available under the Act and file WP to bring interim order, to short circuit and circumvent the statutory procedure in finalization of the 're-assessment' order. We believe that the stated observations made by the Asst CIT are highly objectionable and are bordering on contempt. We however, give him the benefit of doubt of being oblivious to law. We had, in fact, in an earlier Writ Petition No. 1000 of 2017, after noticing that the very same Asst CIT had passed series of order reopening assessments in ignorance of legal position, had requested the Counsel to furnish the compilation of judgments of re-assessment proceedings to the Commissioner to study the same. The position of law regarding the writ remedy is so settled, that it is understood even by the law students.
Assessee's Writ petition allowed
2018-TIOL-1120-HC-MUM-IT
CIT Vs RAKESH RAMANI : BOMBAY HIGH COURT (Dated: June 4, 2018)
Income tax - Section 69A
Keywords - Additions on suspicion - After thought - Block assessment - Unexplained jewellery
The assessee, an individual, was searched by the police. On examination of a suitcase in his possession, the police found jewellery valued at Rs 36.90 lakhs. Accordingly, the assessee was asked to produce documentary evidence in support of the same. Even though the assessee submitted the neccesary documents, the police intimated these facts to the Income Tax Authorities at Ernakulam. Consequently, the I-T Authorities searched the suitcase on the same day and also recorded the statement of assessee u/s 132. Consequent thereto, the jewellary found in the suitcase was seized and the assessment proceedings for the block period commenced against the assessee. During block assessment proceedings, the assessee pointed out that he was a salesman working with one M/s. Pravin Jewellers, Mumbai and the seized jewellery belonged to his employer. In support of his contentions, the assessee produced various evidences. However, the AO rejected those evidences on the grounds that they were an after-thought. Finally, the AO concluded that the jewellery be treated as unexplained jewellery of assessee and so invoked the provisions of Section 69A.
On appeal, the FAA recorded the fact that various evidences which was produced during the course of assessment proceedings, were disbelieved by AO without investigating into the same on the ground that it was merely make believe version. This for the reason that no evidence was produced when jewellery was seized. Thus, the addition made u/s 69A was deleted. On further appeal, the Tribunal came to the conclusion that AO had made the addition merely on suspicion and on having ignored the factual evidence on record.
On appeal, the HC held that,
Whether the Revenue can make additions u/s 69A on account of unexplained jewellery, where the ownership of such jewellery is not clearly established - NO: HC
Whether an assessee is required by law to produce evidences in support of his case only at the time of seizure, and not during the assessment proceedings - NO: HC
++ in the present case, the entire grievance of the Revenue that the impugned order is perverse stands nullified by the fact that the first ground of appeal taken by Revenue is that "it is doubtful whether the jewellery belongs to assessee or assessee's employer". Thus, even the Revenue is not certain about the ownership of the seized jewellery. Besides, the entire basis of the Revenue's case is the statement made on the date of the seizure. The voluminous evidence filed by the assessee during the course of assessment proceedings has been completely ignored on the ground that the same was not produced when the seizure was made. There is no requirement in law that evidence in support of its case must be produced only at the time when the seizure has been made and not during the assessment proceedings. Besides, the reference to the newspaper report in the impugned order was not the basis of the decision, it was referred to as it corroborated the assessee's claim that documents given to the Police at the time of seizure of jewellery indicated that they belonged to his employer in Mumbai. However, the basis of the decision was the evidence led by the assessee during the assessment proceedings which established that the jewellery belonged to his employer M/s. Pravin Jewellers, Mumbai. Therefore, the view taken by the two Authorities namely the CIT(A) as well as the Tribunal is a possible view.
Revenue's Appeal Dismissed
2018-TIOL-1119-HC-MAD-CUS
S CANNUSSAM Vs CC & CE: MADRAS HIGH COURT (Dated: June 4, 2018)
Cus - Goods of foreign origin seized including diamonds, which were valued on that date at Rs.4,27,074/- -After enquiry, authority ordered confiscation of gold sheets, as well as 485 numbers of diamonds - Appeals were filed and the order of absolute confiscation was modified to one allowing the goods to be cleared on payment of fine in lieu of confiscation - Though, diamonds were assayed at Madurai and value fixed at Rs.40 Lakhs, on 26.06.1998, assessee accepted the value fixed by CEGAT at Rs.4,27,000/- and accordingly, paid redemption fine - Diamonds were not returned, hence, petition is filed for direction to deliver 485 numbers of diamonds seized and also to pay interest on value of aforesaid diamonds estimated at Rs.40 Lakhs at the rate of 18% per annum, from the date on which they were bound to be returned - Though assessee reiterated that the value of diamonds seized, was Rs.40 Lakhs and that therefore, Court should direct modification of abovesaid order, to the effect that respondents should pay, the amount as prayed for, Court is not inclined to accept the said contention for the reason that assessee had already accepted the value of diamonds fixed by CEGAT at Rs.4,27,000/- and also paid the redemption fine - Assessee cannot approbate and reprobate - At one stage, for purpose of redeeming the goods, assessee had accepted the value of diamonds as Rs.4,27,000/-, which decision cannot be retracted, by filing a writ petition - Having accepted the same, contrary contention of assessee that at the time of seizure, the value of diamonds, was Rs.40 Lakhs, cannot be accepted - No manifest illegality found in the order of writ Court warranting interference: HC
Writ Appeal dismissed
2018-TIOL-1118-HC-MAD-CX
SESHASAYEE PAPER AND BOARDS LTD Vs CCE : MADRAS HIGH COURT (Dated: April 25, 2018)
CX - Assessee claimed refund of excess duty paid on account of change of duty on 07.12.2008, where the rate of duty on paper and paper products reduced from 8% to 4% vide Notfn 58/2008 – Claim rejected in adjudication; allowed by Commissioner (A) and agitated by Revenue before the Tribunal, who restored the original authority's rejection of refund – Meanwhile, refund was paid in wake of Commissioner (A) order; and consequent to the Tribunal ruling in favor of Revenue, proceedings initiated to recover erroneous refund; demand for its recovery adjudicated; upheld by Commissioner (A), and agitated before Tribunal in 2015-TIOL-458-CESTAT-MAD who settled the issue in favour of Revenue - On this day, when the matter came up for hearing, assessee fairly submitted that the questions of law framed in instant appeal are covered against the assessee, in the judgment rendered in Addison & Co. Ltd. 2016-TIOL-146-SC-CX-LB - He further submitted that a Review Petition preferred against said judgment, was also dismissed - The questions of law are answered in favour of revenue and against the assessee: HC
Appeal dismissed
2018-TIOL-1117-HC-MAD-CUS
TRINITY FORWARDERS MADRAS Vs CC : MADRAS HIGH COURT (Dated: June 4, 2018)
Cus - Revocation of licence - Though the impugned order was mainly challenged on grounds that the reasons for disagreeing with enquiry report was not furnished and thus, there was violation of principles of natural justice, besides, time limit prescribed in regulation, was not adhered to, writ Court dismissed the writ petition giving liberty to petitioner to go before the appellate authority - Though the instant writ appeal has been filed reiterating the same grounds, court do not want to deal with the same on merits, inasmuch as there is no manifest illegality in directing the writ petitioner to approach, the forum provided under Customs Act, 1962 - On more than one occasions, Supreme Court, as well as this court, held that, ordinarily, writ petitions should not be entertained when the statutes provide for an effective and alternative remedy, moreso, in revenue matters - Reference can be made to decision in case of C.A.Ibrahim 2002-TIOL-1120-SC-IT-LB wherein it is held that where there is a hierarchy of appeals provided by statute, the party must exhaust the statutory remedies before resorting to writ jurisdiction - While sustaining the order of writ Court, petitioner is permitted to prefer a statutory appeal, within a period of one month: HC
Writ Appeal dismissed
2018-TIOL-1116-HC-MAD-CX
HYPERTHERM INDIA THERMAL CUTTING PVT LTD Vs ASSISTANT COMMISSIONER OF GST & CE : MADRAS HIGH COURT(Dated: June 4, 2018)
CX - Petitioner has filed the writ petition challenging the order passed by respondent dated 28.02.2018, by which, three of their refund claims have been rejected - Admittedly, against the impugned order, the petitioner has an effective alternative remedy of filing an appeal before the Commissioner of Appeals and time limit for 60 days is provided under the Act - There is no ground to entertain the writ petition as against the impugned order the remedy provided under the Act, viz., the appeal remedy before the Commissioner of Appeals is not only an effective remedy but an efficacious remedy as well - Therefore, petitioner has to necessarily avail the appeal remedy provided under the statute and should not be permitted to bypass the same - Writ petition held to be not maintainable: HC
Writ petition dismissed
2018-TIOL-1115-HC-KERALA-CX
KANNAMBRA SERVICE COOPERATIVE BANK LTD Vs Dy.CCE : KERALA HIGH COURT (Dated: May 28, 2018)
CX - Non-compliance of requirement of pre-deposit provided for under Section 35F of CEA, 1944 - While the matter was pending before Appellate Tribunal, petitioner preferred this writ petition seeking direction to Appellate Authority to take up the appeal and dispose of the same on merits, after affording petitioner an opportunity to comply with requirement of pre-deposit - Writ petition dispose of permitting the petitioner to make pre-deposit within ten days - If petitioner makes the pre-deposit as directed, Appellate Authority shall dispose of the appeal on merits in accordance with law: HC
Petition dispose of
2018-TIOL-857-ITAT-HYD + Case Story
VODAFONE MOBILE SERVICES LTD Vs ACIT : HYDERABAD ITAT (Dated: May 30, 2018)
Income tax - Sections 194H & 201(1)
Keywords - commission paid to agents - clerical error - non existing company - sale of recharge vouchers - tax at source - validity of assessment
The assessee company is engaged in providing cell phone services in various circles of India. During the year under consideration, the assessee had paid commissions to agents for selling prepaid SIM cards and recharge coupons, but did not deduct taxes thereon. After examining the information furnished by assessee with regard to TDS payments, the AO was of the opinion that the assessee had to deduct tax u/s 194H and for the failure of assessee to do so, he held the assessee to be an assessee in default u/s 201(1). Accordingly, demand was raised u/s 201(1) and interest was levied u/s 201(1A). On appeal, the FAA confirmed the order of AO.
On appeal, the ITAT held that,
Whether assessment order passed in the name of amalgamating company will be rendered invalid, if proceedings are validly initiated in the name of the merged company and the clerical error was rectified by passing a corrigendum - NO: ITAT
++ it is stated by the assessee that it was initially known as Vodafone South Ltd., and the same got merged with Vodafone Mobile Services Ltd., as per the scheme of merger approved by the Calcutta, Madras and Delhi and the same was also intimated to the AO and the CIT(A), Hyderabad. It is stated that the AO had issued the notice u/s 201(1) and 201(1A) to the assessee in its correct name, but, the final assessment order was passed in the name of a non-existing company i.e Vodafone South Ltd. It is therefore submitted that the assessment order in the name of non-existing company is not sustainable. On the other hand, the DR submitted that the initiation of proceedings was in the correct name of the assessee only i.e. the merged company and therefore, the proceedings were validly initiated and the mentioning of the name of the non-existing company in the assessment order is only a technical mistake which has subsequently been rectified by the AO, by passing a corrigendum;
++ it is noted that the Supreme Court in a recent case of Skylight Hospitality LLP Vs ACIT - 2018-TIOL-125-SC-IT, has held that the wrong name given in the notice was merely a clerical error which could be corrected u/s 292B. In fact, the AO has passed a corrigendum, correcting the name of assessee and therefore, there is no infirmity in the assessment order.
Assessee's appeal dismissed
2018-TIOL-856-ITAT-DEL
MYUNG HWAN LEE Vs ADIT : DELHI ITAT (Dated: May 25, 2018)
Income Tax - Sections 2(71), 68, 127, 147 & 148.
Keywords - Foreign National - Jurisdiction of AO - Reopening of assessment - School fee of Ward
DURING the relevant AY, the assessee a Korean national, was working with Hyundai Heavy Industries Co. Ltd (HHI). The assessee was on deputation with HHI Liaison Office, Mumbai during the period December 2004 to December 2007. From the AIR information, AO noticed that the assessee had paid an amount of Rs.8,22,213 as school fee of his Ward (Ji Won) and had further made payment of Rs.33,63,559/- as school fee during AYs 2005-06 & AY 2006- 07 respectively. Hence, case was reopened u/s 147 of the Act, for both the AYs 2005-06 and 2006-07. The Assessee has not filed fresh return in compliance to the notice u/s 148 of the Act. AO proceeded to hold that in AY 2005-06, assessee filed return declaring income of Rs.17,74,900/- (salary income) which was filed by non-resident company as an agent of Mr. M.H. Lee. Out of the salary income of Rs.17,74,900/-, amount of Rs.6,12,000/- was offered as perquisites leaving an amount of Rs.11,62,900/- as salary in the hands of assessee on which he had paid an amount of Rs.5,68,259/- as income-tax. So, after making payment of Rs.5,68,259/-, an amount of Rs.5,94,641/- was left with the assessee during AY 2005-06 to meet with its household and other expenses whereas he has paid an amount of Rs.8,22,213/- as school fee during the year. On failure of the assessee to bring on record, the evidence for availability of funds, addition of Rs.8,22,213/- was made u/s 68 of the Act for AY 2005-06.
Similarly, assessee's return of income of Rs. 17,79,500/- for AY 2006-07 was filed by non-resident company out of which amount of Rs. 4,62,000/- was offered as prerequisites and on the remaining amount of Rs.13,17,500/-, assessee paid tax of Rs.5,42,880/- as income-tax and had left with an amount of Rs.7,74,620/-. However, the assessee had paid an amount of Rs.33,63,559/- as school fee. AO proceeded to conclude that it was most unlikely that the assessee had funds to make this investment for which no evidence had been brought on record and consequently addition of Rs.33,63,559/- was made u/s 68 of the Act for AY 2006-07. On appeal, CIT(A) confirmed the order of AO.
On appeal, Tribunal held that,
Whether reassessment proceedings are invalid when notice issued u/s 148 by the AO is neither served upon the assessee nor is the AO vested with jurisdiction to reopen assessment - YES : ITAT
++ as far as validity of reassessment proceedings are concerned it was noted that, notice u/s 148 was issued by Income-tax Officer - 16(2), Mumbai. The assessee brought on record Notification No.9579 dated 05.08.1994 conferring jurisdiction in respect of foreign companies and employees of non-resident companies. Bare perusal of Notification goes to prove that Deputy CIT, Special Range 1, Dehradun, UP only has the jurisdiction for assessment under the Act in case of assessee who is employee of non-resident company Hyundai Heavy Industries Co. Ltd;
++ notice u/s 148 dated 28.03.2012, was issued to the assessee at address i.e. Flat No.2, 4th Floor, Suraj Apartmets, 71, B.D. Road, Mumbai-26 which was received back unserved as per postal report, with the remarks "left". Assessee had filed return of income for AY 2005-06 on 26.09.2005 and notice dated 28.03.2012 issued u/s 148 of the Act was returned by the postal authorities with remarks "left" whereas limitation for issuance of the notice u/s 148 of the Act expires on 31.03.2012 u/s 149 of the Act. So, notice issued u/s 148 is not a valid notice for reopening;
++ notice dated 25.10.2012 issued u/s 142 (1) was handed over to landlord of the assessee who has further handed over the same to Hyundai Heavy Industries Co. Ltd., employer of the assessee on 12.11.2012 who has intimated on 03.12.2012 to ITO, Mumbai that assessee was on deputation with HHI, Mumbai as liaison officer from 2004 to December 2007, thus permanently left India. Thereafter, ADIT, International Taxation, Dehradun (AO) issued the notice dated 05.03.2013 u/s 142 (1) which was served upon the assessee;
++ no notice u/s 148 of the Act along with reasons for reopening was ever served upon the assessee; that the AO, Mumbai who has issued the notice u/s 148 was not having jurisdiction as only AO, Dehradun was having the jurisdiction as per Notification; that even the notice issued by AO, Mumbai was never served upon the assessee and as such, the entire reopening proceedings and consequent reassessment is void ab initio and as such liable to be quashed. So, without entering into the merits of the case, it was decided to quash the assessment orders passed by AO and confirmed by CIT (A) for AYs 2005-06 and 2006-07. Consequently, both the appeals filed by the assessee are allowed.
Assessee's appeal allowed
2018-TIOL-855-ITAT-MUM
MAHINDRA ENGINEERING SERVICES LTD Vs DCIT : MUMBAI ITAT (Dated: March 20, 2018)
Income Tax - Sections 10A, 142(1), 143(2), 147 & 148.
Keywords - Business Development Expenses - Capital expenditure - Reopening of assessment - Reconstruction of existing business.
A) The assessee company had filed its return for relevant AY. The return was processed u/s 143 (1) of the Act. Since, the case was selected for scrutiny, notice u/s 143 (2) and 142 (1) were issued by the AO. The AO after taking into consideration the submissions made, decided to disallow Rs. 239 lacs claimed by the assessee as expenses pertaining to business development in US, holding the same as capital expenditure. On appeal, CIT(A) confirmed the action of the AO. Aggrieved assessee preferred appeal before Tribunal.
B) The assessment for relevant year was completed u/s 143(3) of the Act after allowing deduction u/s 10A of the Act. Subsequently, the assessment was reopened u/s 147 of the Act on the ground that assessee's claim u/s 10A had been rejected in the AY 2007-08 as the assessee's new undertaking (STP unit) was formed by splitting up/reconstruction of business already in existence and therefore the new undertaking did not fulfill the second condition in section 10A(2)(ii) of the Act. In response to the notice u/s 148 of the Act the assessee contended that since basic eligibility conditions had been examined and deduction had been allowed u/s 10A of the Act, reopening of the assessment was invalid and void ab initio. However, the AO disallowed the deduction holding that the assessee's new undertaking was formed by splitting up/ reconstruction of business already in existence. On appeal, CIT(A) upheld the reopening but directed the AO to restore the exemption relying on the findings of his predecessor in assessee's own case for the AY 2007-08. Aggrieved revenue filed appeal before the Tribunal.
On appeal, Tribunal held that,
Whether business development expenses paid substantially in form of salary to employees for enhancing the business of assessee abroad can be allowed as revenue expenditure - YES : ITAT
++ the assessee had debited expenses amounting to Rs. 239 lacs incurred in US for the purpose of business development. The assessee contended that the expenses were incurred for the purpose of business development mainly in the form of salary paid to an employee developing new clients in US and other business development related expenses including travelling and hospitality. Co-ordinate Bench of the Tribunal had dealt with the identical issue in the assessee's own case for the AY 2006-07. The co-ordinate Bench had decided this issue in favour of the assessee holding as under " We find force in the arguments of the AR of the assessee that the main factor of high profitably of STP unit is the reimbursement of Bench time as per terms of agreement by STP unit with the foreign customers. The AR has explained that the Bench time is reimbursement because of dedicated nature of offshore services offered by the assessee and recruitment as per manpower plan given by the customer for the year under consideration. In this way, the assessee was able to utilize 100% of resources developed to STPI....we delete the addition made by the lower authorities and allowed the claim of the assessee." Since, the co-ordinate Bench has decided the identical issue in favour of the assessee in assessee's own case for the A.Y. 2006-07, respectfully following the said decision of the co-ordinate Bench, it was decided to set aside the findings of the CIT (A) and allow this ground of appeal of the assessee;
Whether deduction u/s 10A can be allowed for new STP unit though it arrives out of reconstruction of existing Non STP unit - YES : ITAT
++ CIT(A) in assessee's case for the AY 2007-08 had specifically pointed out that the assessee's case is different from the decision relied upon by the AO on facts. Since CIT(A) had decided the identical issue in favour of the assessee in the assessee's own case for the AY 2007-08, it was decided to uphold the findings of the CIT(A) and dismiss this ground of appeal of the revenue. The AO was directed to allow the deduction and delete the addition.
Assessee's appeal allowed
