2018 (11) TMI 1971 - AT - Income Tax

Reopening of assessment u/s 147 - deduction u/s 80IA - HELD THAT - We have gone through the audit report in Form No. 10CCB as well as other submissions filed by the assessee during the course of original assessment proceedings completed u/s 143(3) of the Act and find that there is no disclosure or discussion regarding the apportionment of any head office expenses while computing the deduction u/s 80IA of the Act. As in the present case, we find that there is nothing on record at the time of completion of original assessment proceedings disclosing the said factual position on part of the assessee. The fact remains that there are expenses incurred at the head office level and there are tax holiday eligible units and non-tax holiday units/undertakings. Unless and until, the assessee makes its position clear and make a complete factual disclosure thereof, it is clearly a case of failure on part of the assessee to disclose full and truly all material facts relating to the computation of deduction u/s 80IA and in turn, for the purposes of the completion of assessment proceedings. No infirmity in AO s exercising his jurisdiction under section 147 of the Act by issuance of notice u/s 148 - Ground of appeal is dismissed. Eligible profits for the purposes of section 80IA - first contention of the ld AR that none of the expenses at the Corporate office pertain to the 80IA undertakings in as much as the entire operation and maintenance of the plant has been given to Suzlon Energies Ltd. - The fact remains that the assessee activities are still guided towards overall supervision and management of these activities at the strategic and managerial level and to safeguard the interest of the shareholders and the assessee still remains responsible for the activities of these eligible undertakings to the outside world even though at the operational level, the whole of its activities have been outsourced to Suzlon Energies Ltd. Therefore, the contention of the AR cannot be accepted that no expenses in furtherance and support of what we have stated above has been incurred by the assessee and which has no nexus with the eligible undertakings. To our mind, these activities at the strategic, managerial, regulatory and overall oversight level definitely have a nexus with the eligible undertakings and the expenses incurred in relation thereto needs to be allocated to the eligible undertakings. Expenditure incurred at the corporate level - On perusal of the said expenditure, we find that expenditure on rates and taxes, land tax, insurance, interest on debentures, business promotion expenses and advertisement expenses cannot be said to have any nexus with the eligible undertakings engaged in generation of energy and thus, these expenses needs to be excluded. AO has himself excludes the donations while working out the eligible deductions. The remaining expenses in the nature of employee costs and other establishment expenses etc therefore needs to be allocated in the ratio of turnover for the purposes of determining the eligible profits u/s 80IA - The matter is accordingly set-aside to the file of the AO to verify these figures and recalculate the eligible profits for the purposes of section 80IA of the Act. In the result, the ground is partly allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment involves the following core legal questions:

• Whether the notice issued under section 148 of the Income Tax Act and the consequent order passed under section 147 are illegal and bad in law.
• Whether the reduction of the assessee's claim of deduction under section 80IA by apportioning establishment and financial expenses to wind power generation undertakings is justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of Notice under Section 148 and Order under Section 147

• Relevant Legal Framework and Precedents: The reopening of assessments after four years is governed by the proviso to section 147 of the Income Tax Act, which requires that income chargeable to tax must have escaped assessment due to the assessee's failure to disclose fully and truly all material facts.
• Court's Interpretation and Reasoning: The Tribunal examined whether the assessee failed to disclose all material facts necessary for assessment, particularly in relation to the apportionment of head office expenses.
• Key Evidence and Findings: The assessee argued that all material facts were disclosed during the original assessment proceedings, including the audit report in Form No. 10CCB. However, the Tribunal found no disclosure regarding the apportionment of head office expenses.
• Application of Law to Facts: The Tribunal held that the absence of any disclosure or discussion on the apportionment of head office expenses constituted a failure to disclose material facts, justifying the reopening of the assessment.
• Treatment of Competing Arguments: The assessee relied on various judicial precedents to argue against the reopening, but the Tribunal distinguished these cases based on the facts and circumstances.
• Conclusions: The Tribunal upheld the issuance of notice under section 148 and the order under section 147, dismissing the assessee's ground of appeal.

Issue 2: Apportionment of Establishment and Financial Expenses

• Relevant Legal Framework and Precedents: Section 80IA of the Income Tax Act allows deductions for profits and gains from eligible businesses, requiring the allocation of expenses directly or indirectly related to the eligible business.
• Court's Interpretation and Reasoning: The Tribunal considered whether the expenses incurred at the corporate level should be allocated to the wind power generation undertakings eligible for deduction under section 80IA.
• Key Evidence and Findings: The assessee maintained that all relevant expenses were already accounted for, and the operation and maintenance of the wind plants were outsourced to Suzlon Energy Ltd. The Tribunal found that strategic and managerial oversight by the assessee still existed.
• Application of Law to Facts: The Tribunal concluded that expenses at the strategic and managerial level have a nexus with the eligible undertakings and should be allocated accordingly.
• Treatment of Competing Arguments: The Tribunal addressed the assessee's argument that no allocation was necessary due to outsourcing, but it found that some expenses still needed allocation due to ongoing oversight responsibilities.
• Conclusions: The Tribunal directed the AO to recalculate the eligible profits under section 80IA after verifying and correctly apportioning the expenses.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The activities at the strategic, managerial, regulatory, and overall oversight level definitely have a nexus with the eligible undertakings, and the expenses incurred in relation thereto need to be allocated to the eligible undertakings."
• Core Principles Established: The necessity of full and true disclosure of material facts for assessment purposes and the requirement to allocate expenses related to eligible business activities under section 80IA.
• Final Determinations on Each Issue: The Tribunal upheld the legality of the notice under section 148 and the order under section 147. It also partially allowed the appeal regarding the apportionment of expenses, directing a recalculation of eligible profits.