2023 (2) TMI 1212 - AT - Income Tax

Reopening of assessment u/s 147 - Capital gain computation - validity of reference to DVO - HELD THAT - The condition precedent for assumption of jurisdiction under section 147(a) is reason to believe of the ITO. If that be so, then a report or information of a valuer cannot substitute the words 'reason to believe' of the ITO. An opinion of a third person cannot be 'a reason to believe' of the ITO. It is the ITO who has to assert on materials available that he has reason to believe that any income chargeable to tax has escaped assessment or that the same was due to the fact that the assessee failed to disclose his income truly and fully. The reason to believe of an ITO cannot be substituted by an opinion of a valuer. Therefore, reopening of assessment merely on basis of valuation report is not valid. In this case, assessment order was passed under section 147 r.w.s.143(3) on March 31, 2015 accepting the earlier return filed on March 31, 2013, but in the meanwhile, a reference was made to the Departmental Valuation Officer (Assistant Valuation Officer-II), Mumbai in terms of section 55A of the Act, 1961 in which a preliminary valuation report was furnished on March 2, 2015, but the final report was furnished only after the completion of assessment proceedings. Thereafter, the petitioner was served with second notice under section 148 of the Act, 1961. As entire reassessment notice has been issued based upon DVO s report which is impermissible in the eyes of law. The notice issued by Assessing Officer u/s 148 deserves to be quashed and consequent additions made in assessment order does not survive. On perusal of reasons recorded, it is observed that reassessment notice has been issued based upon DVO s report in which DVO has determined fair market value of land as on 01/04/1981 which means that alleged escapement of income is to the extent of Income from capital gain based upon DVO s report called u/s. 55A of the Act. It is observed that in original assessment proceedings, Assessing Officer has referred matter to DVO but assessed Income from Capital gain as shown in return of income as DVO s report was not received by then. Assessee has challenged such action of Assessing Officer and consequent re-computation of Long Term Capital Gain based upon DVO s report as well as in Ground No 2 in present appeal. As observed that considering detailed discussion made in assessee s appeal and mainly relying upon decision of Hon ble Bombay High court in the case of CIT v. Puja Prints 2014 (1) TMI 764 - BOMBAY HIGH COURT and CIT V. Gauranginiben S. Shodhan Indl 2014 (2) TMI 78 - GUJARAT HIGH COURT it was held that as land sold by assessee is prior to 01/07/2012 i.e amendment brought to Section 55A, assessee has determined Income from capital gain based upon Registered Valuer report and Assessing Officer has claimed that fair market value of land as on 01st April 1981 was lower than such valuer report, Assessing Officer was not justified in considering fair market value of land based upon DVO s report obtained u/s 55A of the Act and recomputing Income from Long term capital gain based upon such report. Once the addition made in reassessment order based upon reasons recorded by Assessing Officer while issuing notice u/s 148 of the Act or basis of reassessment notice issued by Assessing Officer does not survive, other additions made in reassessment order itself does not survive. Deduction u/s.80IA on Rail Infrastructure allowed. Adjustment on account of CENVAT in the profits of the eligible units is to be deleted. Re-work disallowance u/s.14A under rule 8D(2)(iii) on investment which has yielded exempt income. Addition made on account of unutilised MODVAT credit - Tribunal has not committed any error. (underlined for emphasis by us) It is evident from the above that irrespective of the method of accounting followed by the assessee, i.e. 'Inclusive method', wherein the taxes are included in the opening stock, purchases, etc. or the 'Exclusive method', the MODVAT credit does not have any impact on the profit of the assessee. Thus, following the ratio laid down by the Hon'ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. 2003 (1) TMI 8 - SUPREME COURT and followed by case of Diamond Dye Chem Ltd. 2017 (7) TMI 616 - BOMBAY HIGH COURT addition is to be deleted. Nature of receipts - sales tax incentives received by assessee are rightly considered as Capital Receipts. Additional depreciation u/s 32(1)(iia) - whether additional depreciation is allowable only on new machinery be the first year in which it is put to use? - HELD THAT - It is observed that coordinate bench in its later decision in the case of Ambuja Cement Limited 2022 (11) TMI 1419 - ITAT MUMBAI holding company of assessee has allowed similar claim of depreciation. When coordinate bench of ITAT in its latest decision has decided issue in favour of assessee by holding that assessee is entitled for additional depreciation u/s 32(1)(iia), such later decision would prevail over the decision of Everst Industries Limited 2018 (4) TMI 426 - ITAT MUMBAI relied upon by Ld DR. As a result, since this aspect of the matter is no longer res integra, we see no reasons to take any other view of the matter than the view so taken by the coordinate bench in the group concern s case of the assessee. We uphold the plea of the assessee and direct the Assessing Officer to allow depreciation u/s.32(1)(iia) of the Act. Deduction u/s 80IA on TG-3 and TG-3, Wadi unit allowed - As deduction u/s. 80-IB was granted for an initial assessment year, same could not be rejected for subsequent assessment years unless relief for initial year was withdrawn. Auditor s fee and director s remuneration (indirect expenses) should not be apportioned for computing deduction u/s 80IA - AO is directed to allocate Head office expenses (other than auditor fees and CMA expenses) on the basis of expenditure incurred by the units vis- -vis overall expenditure. Thus, related ground of appeal in departmental appeal is dismissed. Preoperative expenses - assessee itself had claimed the expenses as capital expenses and added them to its capital- work-in progress/fixed assets and there is no provision in Income-tax Act permitting the allowance of such expenses - HELD THAT - It is observed that identical issue was decided by coordinate bench of Mumbai ITAT in the case of holding company of the assessee being Ambuja Cement Limited 2022 (11) TMI 1420 - ITAT MUMBAI held as in the books of account the assessee had capitalised the expenses does not prevent the assessee from claiming them as revenue expenses since the question of allowance of expenses has to be considered in the light of the legal position and the accounting treatment cannot be conclusive. Provision for additional gratuity is a provision for ascertained liability. Provision for Normal/Additional Gratuity is in the nature of provision for an ascertained liability and is, therefore, not required to be added back while computing Book Profits in terms of Clause (c) of Explanation 1 to Section 115JB(2). Wealth tax provision is not required to be added back while computing Book Profits under Section 115JB. Disallowance u/s 14A cannot be made while computing book profit u/s.115JB of the Act. Expenditure incurred on club entrance fee and subscription fee is made to promote business interest is an allowable expenditure u/s 37(1). Capital gain computation - AO was not justified in considering fair market value of land based upon DVO s report obtained u/s 55A Provision for leave encashment made while computing book profit u/s 115JB is deleted. Recompute taxable long term capital gains arising on transfer of fixed assets as well as investments after giving the benefit of indexed cost of acquisition (if applicable) while computing taxable profits u/s 115JB VAT paid u/s. 43B by the date of filing of return of income - deduction of VAT payment as per provision of section 43B of the Act. The issue requires verification at the end of the AO hence, this ground of appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 147/148 of the Income Tax Act, 1961.
2. Addition of Long Term Capital Gains (LTCG) based on the DVO's report.
3. Deduction under Section 80-IA for Rail System.
4. Disallowance of proportionate CENVAT credit.
5. Disallowance under Section 14A and its impact on book profits under Section 115JB.
6. Exclusion of Sales Tax and Excise Duty Incentives from total income and book profits.
7. Additional depreciation under Section 32(1)(iia).
8. Allocation of indirect expenses for computing deduction under Section 80-IA.
9. Treatment of pre-operative expenses.
10. Provision for gratuity and its impact on book profits.
11. Provision for wealth tax and its impact on book profits.
12. Interest expenses under Section 14A and its impact on book profits.
13. Disallowance of club entrance fees.
14. Allowability of VAT paid under Section 43B.
15. Exclusion of capital profits from book profits.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The tribunal found that the reassessment was based solely on the DVO's report, which is impermissible in law. The tribunal cited various judicial pronouncements, including the Supreme Court's decision in ACIT v. Dhariya Construction Co., which held that the DVO's opinion is not information for reopening assessments under Section 147. Consequently, the reassessment notice and the subsequent additions were quashed.

2. Addition of LTCG Based on DVO's Report:
The tribunal held that the Assessing Officer was not justified in relying on the DVO's report for determining the fair market value of the land as on 01/04/1981. The tribunal cited the Bombay High Court's decision in CIT v. Puja Prints, which held that references to the DVO can only be made if the value claimed by the assessee is less than the fair market value. The tribunal allowed the assessee's appeal on this ground.

3. Deduction Under Section 80-IA for Rail System:
The tribunal allowed the assessee's claim for deduction under Section 80-IA for the Rail System. It cited the decision in Ultratech Cement Ltd. v. ACIT, which held that rail systems developed under agreements with Indian Railways qualify for deduction under Section 80-IA. The tribunal rejected the revenue's contention that the rail system was a private facility and not a public utility.

4. Disallowance of Proportionate CENVAT Credit:
The tribunal held that the CENVAT credit should not be disallowed while computing the profits of the eligible units under Section 80-IA. It cited the decision in Ambuja Cement Ltd., which held that if the expenses are debited net of the CENVAT credit availed, there is no infirmity in the stand of the assessee. The tribunal directed the Assessing Officer to delete the adjustment on account of CENVAT credit.

5. Disallowance Under Section 14A and Its Impact on Book Profits:
The tribunal upheld the deletion of disallowance under Section 14A made by the Assessing Officer in connection with proportionate interest, citing the Supreme Court's decision in South Indian Bank Ltd. It also directed the Assessing Officer to rework the disallowance under Rule 8D(2)(iii) only on investments that yielded exempt income. The tribunal further held that disallowance under Section 14A cannot be made while computing book profits under Section 115JB, following the Special Bench decision in ACIT v. Vireet Investments Pvt. Ltd.

6. Exclusion of Sales Tax and Excise Duty Incentives:
The tribunal held that sales tax and excise duty incentives received by the assessee are capital receipts and should be excluded from total income and book profits. It cited various judicial pronouncements, including the Gujarat High Court's decision in CIT v. Nirma Ltd., which held that sales tax subsidies are capital receipts.

7. Additional Depreciation Under Section 32(1)(iia):
The tribunal allowed the assessee's claim for additional depreciation on assets acquired after 01/04/2005, following the Gujarat High Court's decision in PCIT v. IDMS Ltd. It held that the condition for allowing additional depreciation only in the initial assessment year ceased to exist from 01/04/2006.

8. Allocation of Indirect Expenses for Computing Deduction Under Section 80-IA:
The tribunal upheld the allocation of head office expenses to ensure that the profits of the eligible units are correctly worked out. However, it directed that the allocation should be based on the expenditure incurred by the units vis-à-vis overall expenditure, rather than turnover.

9. Treatment of Pre-Operative Expenses:
The tribunal held that pre-operative expenses incurred for the expansion of existing business are allowable as revenue expenses. It cited the decision in Graviss Foods P. Ltd. v. DCIT, which held that expenses like salaries, wages, and professional fees are revenue in nature.

10. Provision for Gratuity and Its Impact on Book Profits:
The tribunal upheld the deletion of the addition of provision for gratuity, following its earlier decision in the assessee's own case for A.Y. 2004-05. It held that the provision for gratuity is an ascertained liability and should not be added back while computing book profits under Section 115JB.

11. Provision for Wealth Tax and Its Impact on Book Profits:
The tribunal upheld the deletion of the addition of provision for wealth tax while computing book profits under Section 115JB, following the Bombay High Court's decision in CIT v. Echjay Forgings (P) Ltd.

12. Interest Expenses Under Section 14A and Its Impact on Book Profits:
The tribunal held that disallowance under Section 14A cannot be made while computing book profits under Section 115JB, following the Special Bench decision in ACIT v. Vireet Investments Pvt. Ltd.

13. Disallowance of Club Entrance Fees:
The tribunal allowed the assessee's claim for club entrance fees, following its earlier decision in the assessee's own case for A.Y. 2004-05. It held that club fees paid to promote business interests are allowable as business expenses.

14. Allowability of VAT Paid Under Section 43B:
The tribunal remitted the issue of allowability of VAT paid before the due date of filing the return of income to the Assessing Officer for verification and allowed the ground for statistical purposes.

15. Exclusion of Capital Profits from Book Profits:
The tribunal directed the Assessing Officer to recompute taxable long-term capital gains arising on the transfer of fixed assets after giving the benefit of indexed cost of acquisition while computing book profits under Section 115JB, following the Karnataka High Court's decision in Best Trading and Agencies Limited v. DCIT.

Conclusion:
The tribunal's judgment comprehensively addressed all the issues raised, providing relief to the assessee on multiple grounds, including the validity of reassessment proceedings, deductions under Section 80-IA, and the treatment of various expenses and incentives. The judgment adhered to established legal precedents and provided detailed reasoning for each decision.