2015 (11) TMI 1450 - AT - Income Tax

Business of plantations in Malaysia - whether there was a permanent establishment in India? - whether plantation income received from Malaysian cannot be taxed in India? - Held that - Admittedly a similar issue was considered by the Supreme Court in the case of PVRM Kulandayan Chettiar (2004 (5) TMI 8 - SUPREME Court) wherein it was held that business income arising out of rubber plantations in Malaysia cannot be taxed in India because of closer economic relations 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 . In this case the plantation in Malaysia would be the 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. - Decided in favour of assessee. Disallowance of expenditure - according to the assessee the said amount was incurred by the Malaysain branch of the company and the expenditure incurred by the head office of the company at Chennai was 15, 65, 918/- only which is allowable as income from business/other sources - Held that - 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 Addition being exchange rate fluctuation - Held that - 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. Reopening of assessment - Held 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. - Decided in favour of assessee

Summary

Issues Involved:
1. Determination of Permanent Establishment in India.
2. Disallowance of expenditure against interest income.
3. Addition of exchange rate fluctuation as income.
4. Validity of reopening assessments under section 147.

Issue-wise Detailed Analysis:

1. Determination of Permanent Establishment in India:
The Department contended that the CIT(A) erred in holding that the AO had not established a permanent establishment (PE) in India concerning the business of plantations in Malaysia. The AO argued that the control and management of the Malaysian branch were situated in India, as evidenced by the Shareholders and Annual General Meetings held in India. The CIT(A) upheld the assessment but noted that based on the Supreme Court decision in CIT vs. P.V.A. Kulandagan Chettiar (267 ITR 657), the plantation income from Malaysia could not be taxed in India. The Tribunal confirmed the CIT(A)'s order, stating that the Malaysian plantation constituted a PE through which the business was carried on, and thus, the income was taxable only in Malaysia.

2. Disallowance of Expenditure Against Interest Income:
The assessee appealed against the disallowance of Rs. 43,35,061/- in expenditure, arguing that only Rs. 15,65,918/- incurred by the Chennai head office should be allowed as business/other sources income. The AO disallowed the expenses, noting that the interest income from banks was to be taxed under "Income from other sources" and that the expenses claimed had no nexus with earning interest. The CIT(A) confirmed the AO's order. The Tribunal upheld this decision, emphasizing that under section 57, only expenditure incurred in connection with earning income was allowable, and the expenses claimed did not qualify.

3. Addition of Exchange Rate Fluctuation as Income:
The assessee disputed the addition of Rs. 8,04,623/- due to exchange rate fluctuation, claiming it was a notional entry for balancing accounts between the head office and the Malaysian branch. The AO taxed this amount as income, and the CIT(A) upheld this decision. The Tribunal agreed with the lower authorities, ruling that the exchange rate fluctuation gain was a revenue receipt and taxable, rejecting the assessee's argument of it being a notional entry.

4. Validity of Reopening Assessments Under Section 147:
The Department challenged the CIT(A)'s decision that reopening the assessment under section 147 for AY 2007-08 was invalid. The CIT(A) found that the original assessment under section 143(3) had already examined the issue, and reopening it with a different interpretation amounted to a change of opinion. The Tribunal upheld the CIT(A)'s decision, referencing its previous ruling in the assessee's case for AY 2004-05, which annulled a similar reassessment. The Tribunal reiterated that reopening an assessment based on a mere change of opinion was not permissible, particularly when the original assessment had considered all material facts.

Conclusion:
The Tribunal dismissed all appeals from both the assessee and the Department. It confirmed that the Malaysian plantation income was not taxable in India, upheld the disallowance of expenditure against interest income, ruled that the exchange rate fluctuation gain was taxable, and validated the CIT(A)'s decision that reopening the assessment under section 147 was invalid due to it being a change of opinion. The Tribunal's decisions were based on established legal precedents and thorough examination of the facts.