2025 (3) TMI 648 - AT - Income Tax

Reopening of assessment u/s 147 - reason to believe - basis of audit objection - HELD THAT - It is worthwhile to point out that reopening was initiated with respect to alleged profit generated on account of sales made on behalf of UBL. Disclosure to this effect had categorically been made by the assessee in its Notes to Accounts attached with the Balance Sheet which were duly before the AO during the course of regular assessment proceedings. Thus apart from the audit objections and in the case of M/s Chamundi Winery Distillery 2018 (10) TMI 65 - KARNATAKA HIGH COURT AO had no new tangible material which could justify the reopening. However as stated by us also in the preceding paragraphs the AO had specifically refused to accept the audit objections and even the judgment of M/s Chamundi Winery Distillery supra was accepted by the AO as having a bearing on the sales and income of the assessee only after being pointed out by the Office of the PCIT Bareilly which again would demonstrate that the opinion of the AO was not an independent opinion but was borrowed and that it was a change of opinion. Therefore in view of the settled judicial precedents and specially the factual matrix in this case we have no hesitation in holding that the reopening in all the five years was based on mere change of opinion by the AO and therefore such reopening is invalid in the eyes of law and therefore we quash the reassessment proceedings in all the five years under appeal. Accrual of income - income from the manufacture and sale of beer under the agreement between the assessee and United Breweries Limited (UBL) - nature of Agreement was empirical to that of a job work and that the right title and interest over receipts/expenses attributable to such Agreement/ arrangement was exclusively belonging to UBL - HELD THAT - In the present case undisputedly the assessee has only acted as a manufacturing agent for other party i.e. UBL and as per terms of the Agreement and various documents which are on record nothing more than being a contract manufacturer can be attributed to the assessee. Here in the present case the assessee has been obligated by virtue of Agreement to divert the income/revenue at source and is entitled only towards reimbursement of expenses and bottling charges and nothing less nothing more. Therefore on the facts of the case and the documents produced before us we have no hesitation in concurring with the order of the CIT(A) insofar as holding of assessee as a contract manufacturer is concerned. The Ld. First Appellate Authority has rightly deleted the impugned additions on merits by holding that UBL was the de facto earner of income arising from manufacture and sale of its brands of liquor manufactured and bottled at the facility of the assessee. Decided against revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

• Whether the reopening of assessments for the years 2013-14 to 2017-18 was valid under Section 147 of the Income Tax Act, 1961.
• Whether the income from the manufacture and sale of beer under the agreement between the assessee and United Breweries Limited (UBL) should be treated as income of the assessee or as income by overriding title to UBL.
• Whether the reassessment proceedings were initiated based on a change of opinion by the Assessing Officer (AO) and if such initiation was legally sustainable.
• Whether the deletion of additions by the First Appellate Authority was justified.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Reopening of Assessments

• Relevant Legal Framework and Precedents: The reopening of assessments is governed by Section 147 of the Income Tax Act, which requires a "reason to believe" that income has escaped assessment. The precedents cited include the Supreme Court judgment in CIT vs. Kelvinator of India Ltd., which emphasizes the necessity of tangible material for reopening and prohibits reopening based on mere change of opinion.
• Court's Interpretation and Reasoning: The Tribunal found that the AO's decision to reopen was influenced by higher authorities and not based on independent judgment. The AO initially rejected the audit objections but later changed his stance under the influence of the Principal Commissioner of Income Tax (PCIT).
• Key Evidence and Findings: The AO's initial reports did not support the audit objections, and there was no new tangible material presented to justify reopening. The Tribunal noted that the AO's final decision was a result of external influence rather than independent assessment.
• Application of Law to Facts: The Tribunal applied the principles from the Kelvinator case, ruling that the reopening was based on a change of opinion and lacked the necessary tangible material.
• Treatment of Competing Arguments: The Department argued that audit objections constituted valid reasons for reopening, but the Tribunal disagreed, noting the lack of independent application of mind by the AO.
• Conclusions: The Tribunal quashed the reassessment proceedings for all years, finding them invalid due to the lack of independent belief and reliance on a change of opinion.

2. Nature of Income from the Agreement with UBL

• Relevant Legal Framework and Precedents: The concept of diversion of income by overriding title was considered, with reference to Supreme Court judgments in Bijli Cotton Mills and Imperial Chemical Industries India Pvt. Ltd.
• Court's Interpretation and Reasoning: The Tribunal agreed with the First Appellate Authority's conclusion that the income from the manufacture and sale of beer was diverted to UBL by overriding title, as evidenced by the contractual agreement and the flow of funds.
• Key Evidence and Findings: The Tribunal noted that the sales proceeds were deposited directly into UBL's accounts, and UBL held the necessary licenses for manufacturing and selling beer, supporting the claim of income diversion.
• Application of Law to Facts: The Tribunal applied the principles of income diversion by overriding title, concluding that the income belonged to UBL and not the assessee.
• Treatment of Competing Arguments: The Department's reliance on the Chamundi Winery case was distinguished based on factual differences, such as the holding of excise licenses and the flow of funds.
• Conclusions: The Tribunal upheld the First Appellate Authority's decision to delete the additions, affirming that the income belonged to UBL by overriding title.

SIGNIFICANT HOLDINGS

• The Tribunal held that the reopening of assessments was invalid, as it was based on a change of opinion and lacked independent application of mind by the AO.
• The Tribunal established that the income from the manufacture and sale of beer under the agreement with UBL was diverted by overriding title to UBL, not the assessee.
• The Tribunal dismissed the Department's appeals and partly allowed the assessee's cross-objections, upholding the First Appellate Authority's deletion of additions.
• Verbatim Quotes: The Tribunal emphasized, "The AO did not hold independent belief at any point of time that the income of the assessee had escaped assessment for five years under appeal."
• Core Principles Established: The judgment reinforced the necessity of independent and tangible material for reopening assessments and clarified the application of the concept of income diversion by overriding title.
• Final Determinations: The reassessment proceedings were quashed, and the additions made by the AO were deleted, affirming the income belonged to UBL.