2016 (6) TMI 292 - HC - Income Tax

Validity of reopening of assessment - trade discount given by the Appellant to Mahindra & Mahindra Limited ( MML ) for obtaining exclusive vendor status was in the nature of a capital expenditure and not a revenue expenditure - Held that - The ITAT appears to have overlooked the fact that specific queries were raised by the AO during the course of the original assessment proceedings as regards the agreement entered into between the Assessee and M&M which is referred to in para 12 of the Notes to the Accounts. Query No. 36, as already extracted hereinbefore, was specific to the issue. The reply dated 28th July 2008 by the Assessee to the above questionnaire was a fairly detailed one. Inter alia it was pointed out that this was merely a commercial arrangement entered into between the management of both the companies, providing for a committed overriding volume discount by the Appellant. While the AO could have insisted on seeing the agreement, he appears to have been satisfied with the above detailed reply of the Assessee explaining the nature of the agreement. Merely because the AO did not ask for the copy of the agreement to be produced cannot lead to the inference that he had no occasion to form an opinion thereon. Such a conclusion drawn by the ITAT is belied by the above specific query raised by the AO on the agreement and the detailed explanation offered by the Assessee in response thereto This Court is satisfied that there was occasion for the AO in the original assessment proceedings, to form an opinion on the question of the nature of the agreement between the Assessee and the MM. The AO did form an opinion thereon and after raising a specific query and examining the reply thereto of the Assessee. The original assessment was completed after accepting the explanation offered by the Assessee. The reasons to believe did not refer to any fresh tangible material that came to the notice of the AO after the passing of the original assessment order. It may be recalled that the assessment proceeding under Section 143 (3) of the Act was completed after scrutinizing the documents produced by the Assessee and after specific queries were put to the Assessee which were replied to by the Assessee to the satisfaction of the AO.- Decided in favour of assessee

Summary

Issues:
1. Validity of reassessment proceedings under Section 147/148 of the Income Tax Act
2. Nature of trade discount given by the Appellant to obtain exclusive vendor status

Issue 1: Validity of reassessment proceedings under Section 147/148 of the Income Tax Act
The appeal challenged the impugned order by the Income Tax Appellate Tribunal (ITAT) upholding the addition of a specific amount by the Assessing Officer (AO) on the grounds that the trade discount given by the Appellant was a capital expenditure. The central question was whether the reassessment proceedings initiated by the AO under Section 147/148 of the Income Tax Act were valid in law. The Appellant contended that the reassessment was based on a mere change of opinion by the AO without any fresh tangible material. The court analyzed the original assessment proceedings and concluded that the AO had formed an opinion on the nature of the agreement between the Appellant and the other party. It was noted that specific queries were raised during the original assessment, and the AO was satisfied with the detailed explanation provided by the Appellant. The court held that the reasons to believe for reopening the assessment did not refer to any new material and deemed the reassessment as a mere change of opinion, contrary to the law. Consequently, the court ruled in favor of the Assessee, setting aside the impugned orders.

Issue 2: Nature of trade discount given by the Appellant to obtain exclusive vendor status
The Appellant, engaged in the automotive industry, had entered into agreements with a major customer to design and provide products. A supplementary agreement modified the terms, adjusting a specified amount by way of a discount/price reduction in the products supplied. The AO contended that this amount was for obtaining exclusive vendor status, thus a capital expenditure, leading to a disallowance of a significant sum. The Appellant argued that the discount was a pure business expense and a revenue expenditure under relevant sections of the Income Tax Act. The AO capitalized the amount under intangible assets, providing depreciation and resulting in the disallowance. The Appellant's appeals before the Commissioner of Income Tax (Appeals) and the ITAT were dismissed. However, the High Court, after detailed scrutiny of the facts and submissions, held that the trade discount was a revenue expenditure, not a capital expenditure. The court emphasized that the AO had the opportunity to form an opinion during the original assessment and rejected the reassessment based on a change of opinion. Consequently, the court allowed the appeal, setting aside the orders against the Assessee.

This detailed analysis of the legal judgment highlights the key issues involved, the arguments presented by the parties, and the court's reasoning leading to the final decision in favor of the Assessee.