2011 (7) TMI 530 - AT - Income Tax

Jurisdiction power u/s 263 by CIT(A) - assessee has borrowed funds from McDowell Alcobev Pvt. Ltd. on which interest was paid in the earlier years - as per CIT AO has not ascertained the effective date from which the interest was not charged and whether the interest charged in the accounts for the earlier years had also been written off- Held that - The assessee had appended a note to the accounts on this issue stating therein that in view of the weakened financial conditions and the impending merger of the company with its holding company, McDowell Alcobev Private Ltd., the Board of Directors of the company requested the holding company not to charge interest on monies borrowed from them. Thus when the assessee has not charged interest to Profit & Loss Account, there is no question of creeping any error in the assessment order in question - Hence, this issue cannot be treated as a ground leading to revision of the assessment order as there is neither any error nor any relatable loss to the Revenue. Amalgamation of the assessee-company with its holding company - Held that - Pursuant to the approval by the Board of Directors at its meeting held on 28-1-2004, and approval by the Board of Directors of McDowell Alcobev Private Ltd. (Formerly McDowell Alcobev Limited) at its meeting held on 27th January, 2004, the Company has filed a petition in the Hon ble High Court of judicature at Chennai for merger of the Company, with the holding company McDowell Alcobev Private Ltd. with effect from 1st July, 2002 which is pending admission by the court. Consequently, no effect of the merger/operations has been given in preparing the accounts of the company. Thus keeping in view the explanation of the assessee, incorporated hereinabove, which could not be found to be false either by the AO or CIT, the reasoning given by the CIT in his revisional order cannot satisfy the test laid down under section 263. Depreciation on Trade marks and Licences - Held that - When the Assessing Officer has not allowed the claim of depreciation on intangible assets, there cannot be any prejudice caused to the interests of the Revenue. No prejudice could be shown by the Revenue in this regard during the hearing - Hence, there is no question of any further verification on this issue. Service charges paid to United Breweries Ltd and Inertia Industries Ltd. - Held that - Verification of a transaction with the group company is at arm s length and is not a statutory requirement under section 40A(2) - It was argued that as per the provisions of section 40A(2) what is required of the Assessing Officer is to form an opinion that an expenditure is not excessive or unreasonable - The discretion to decide this issue is vested with the Assessing Officer and he has exercised the same in favour of the assessee - Thus, it cannot be said that an error has crept into the assessment order causing prejudice to the Revenue. In favour of assessee.

Issues Involved:
1. Interest charged to Profit & Loss Account.
2. Amalgamation of the assessee-company with its holding company.
3. Claim of depreciation on intangible rights.
4. Service charges paid to United Breweries Ltd and Inertia Industries Ltd.

Issue-wise Detailed Analysis:

1. Interest Charged to Profit & Loss Account:
The assessee borrowed funds from McDowell Alcobev Pvt. Ltd. and paid interest in earlier years. For the financial year 2003-04, no interest was debited or claimed as expenditure due to a waiver by McDowell Alcobev Pvt. Ltd. The CIT contended that the Assessing Officer did not ascertain the effective date from which the interest was not charged and whether the interest charged in earlier years had been written off. The Tribunal found that no interest was charged for the year ended 31-3-2004, thus no error existed in the assessment order, and there was no loss to the Revenue.

2. Amalgamation of the Assessee-Company with its Holding Company:
The assessee filed a petition for amalgamation with McDowell Alcobev Pvt. Ltd., pending admission in the High Court. The CIT directed further investigation regarding the claim. The Tribunal noted that the explanation provided by the assessee was neither found false by the Assessing Officer nor the CIT. Therefore, the reasoning given by the CIT did not satisfy the requirements under section 263, and no error was found in the assessment order.

3. Claim of Depreciation on Intangible Rights:
The assessee claimed depreciation on Trade Marks and Licences amounting to Rs. 4,15,13,720. The Assessing Officer did not allow this claim. The Tribunal observed that since the Assessing Officer had already disallowed the depreciation, there was no prejudice to the interests of the Revenue. Consequently, this issue could not be a ground for revising the assessment order.

4. Service Charges Paid to United Breweries Ltd and Inertia Industries Ltd:
The assessee paid service charges amounting to Rs. 5,58,23,719 as per bottling arrangements. The CIT questioned whether the transactions were at arm's length. The Tribunal noted that the Assessing Officer had the discretion to decide under section 40A(2) whether the expenditure was excessive or unreasonable and had exercised this discretion in favor of the assessee. Therefore, no error causing prejudice to the Revenue was found.

Conclusion:
The Tribunal concluded that the CIT's assumption of jurisdiction under section 263 was not according to law as no error or prejudice to the Revenue was found in the assessment order regarding all the issues raised. Consequently, the Tribunal set aside the order of the CIT and restored the original assessment order by the Assessing Officer. The appeal was allowed.

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