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TMI Blog2014 (2) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... to a conclusion that there were reasons to believe that the income has escaped assessment – there was no substantial question of law arises – Decided against Revenue. Licence fee to be deducted as business allowance – Held that:- RPG Life Sciences as well as Philip Carbon Black are group companies of RPG Enterprises Ltd. and that both these companies are paying licence fees to RPG Enterprises Ltd - the expenditure incurred by the respondent assessee towards licence fee payment were relatable to the business expediency and profits of the respondent-assessee and that the benefits availed of by the respondent-assessee from the service of the group resource company was tangible and justified – Decided against Revenue. Interest paid on borrowed capital u/s 36(1)(iii) of the Act – Held that:- The appellate authority and the Tribunal found that the investment made in shares by the assessee by utilising borrowed capital was for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments, thus, the claim was fully allowable under section 36(1)(iii) - the Revenue did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Whether, in the facts and in the circumstances of the case, the Tribunal was right in allowing the claim of interest on borrowed funds utilised for investment in shares of CESC, as a business expenditure on the ground that investment is one of the objectives of the assessee-company ?" With regard to T. C. (A.) Nos. 1388 to 1390 of 2007, the following substantial questions of law were framed on October 31, 2007, at the time of admitting these appeals : "1. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the reopening of the assessment was illegal ? 2. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the licence fee paid by the assessee to RPGE, Bombay, for the assessment year 1997-98 (T. C. A. No. 1388 of 2007) and 2001-02 (T. C. A. Nos. 1389 and 1390 of 2007) are nothing but expenditure incurred wholly and exclusively for the purpose of business? 3. Whether, in the facts and in the circumstances of the case, the Tribunal was right in allowing the claim of interest on borrowed funds utilised for investment in shares of CESC, as a business expenditure on the ground that invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opened under section 147 read with section 148. It was this reopening of assessment which was the subject matter of challenge before the Commissioner of Incometax (Appeals) claiming that the reopening of the assessment is barred by limitation under the proviso to section 147 of the Act. It was contented before the Tribunal by the assessee that the Commissioner of Income-tax (Appeals) had not rendered a finding on the issue of limitation and, therefore, before the Tribunal the assessee, as a preliminary objection, had raised the issue of limitation claiming that the reopening of assessment is clearly barred by the proviso to section 147. The Tribunal, while considering the issue of limitation has elaborately considered the contentions of the assessee as well as the Department and has also taken note of several judgments rendered by various High Courts, including this court as well as the apex court, on the proposition and came to a conclusion that in so far as the reopening of the assessment for the year 1996-97 is concerned, the assessments were reopened after a lapse of four years and, therefore, it would clearly be barred by the limitation set out in section 147 of the Act. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year" The proviso to the said section provides for action to be taken after the expiry of four years, if the income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to file a return under section 139 and in response to issue of notice under section 142(1) or section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (1) of section 142, the Assessing Officer shall, (i) where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, serve on the assessee a notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him, on a date to be specified therein to produce, or cause to be produced, any evidence or particulars specified therein or on which the assessee may rely, in support of such claim : . . . (ii) notwithstanding anything contained in clause (i), if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return : Provided that no notice under clause (ii) shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished. (3) On the day specified in the notice,- (i) issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as if such return were a return required to be furnished under section 139 . . (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so." The Assessing Officer has formulated an opinion that the assessee has failed to fully and truly disclose all material facts necessary for completion of assessment. The Assessing Officer had served a notice under section 143(1) and under section 148 seeking response to certain specific queries which has admittedly been provided for by the assessee. Now, the issue that requires to be decided is as to whether the response to the queries would justify a true and full disclosure of all material facts as contemplated under the proviso to section 147. We have given our anxious consideration to the submissions on either side and our attention was specifically drawn to the finding of the Assessing Officer contained in page 3 of the assessment order dated March 26, 2004. The learned counsel for the Revenue did not, however, cite any judgment in support of the contentions and merely drew our attention to the findings of the Assessing Officer and the Commissioner of Income-tax (Appeals) to substantiat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the duty of the assessee to bring it to the notice of the assessing authority . . . Further, if there are some primary facts from which reasonable belief could be formed that there was some nondisclosure or failure to disclose fully and truly all material facts, the Income-tax Officer has jurisdiction to reopen the assessment." (c) In Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 (SC), the honourable Supreme Court observed (pages 477 and 478) : ". . . an Income-tax Officer acquires jurisdiction to reopen assessment under section 147(a) read with section 148 of the Income-tax Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons which he must record, to believe that, by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profit or gains chargeable to income-tax has escaped assessment . . . We are not persuaded to accept the argument of Mr. Sharma that the question regarding truthfulness or falsehood of the transactions reflected in the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment . . . . the Income-tax Officer, therefore, has the necessary jurisdiction to reopen the assessment under section 147(a) of the Act." On the contrary, the assessee before the Tribunal relied on the decision in Fenner (India) Ltd. v. Deputy CIT [2000] 241 ITR 672 (Mad), wherein this court held as follows (page 681) : "If the details placed by the assessee before the Assessing Officer were in conformity with the requirements of all applicable laws and known accounting principles, and material details had been exhibited before the Assessing Officer, it is for the Assessing Officer to reach such conclusions as he considered was warranted from such data and any failure on his part to do so cannot be regarded as the assessee's failure to furnish the material facts truly and fully." In a nut-shell, the principles that emerge from the aforesaid decisions including the authoritative pronouncement of the hon'ble Supreme Court are that the Assessing Officer's finding should categorically establish that the assessee has failed to disclose "fully and truly" the material facts which resulted in the escapement of the assessment on taxable income. The hon'ble apex court has also laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment under section 147, even though the same is within the period stipulated under the proviso to section 147. In so far as the assessments for the assessment years 1997-98, 1998-99 and 1999-2000 are concerned, the reopening of the assessment was done well within the period of four years, stipulated under section 147 of the Act and, therefore, the invocation of the extended period of limitation set out in proviso to section 147 does not arise for consideration for these assessment years, however, the essential issue to be considered is as to whether the Assessing Officer is justified in reopening the assessment once the original assessment has been done under section 143(3). Section 147 is the enabling provision which deals with escaped assessment under the heading "Income escaping assessment". The section enunciates the ground under which the income which has escaped assessment can be assessed or reassessed. The power of the Assessing Officer to assess or reassess such income or other income chargeable to tax, which has escaped assessment circumscribes from the preceding words of the said section that is, "if the Assessing Officer has reasons to believe that any income chargeabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly come by the material from the record itself, then such a case would fall within the scope of section 147(b) of the Act." (b) In Claggett Brachi Co. Ltd. v. CIT [1989] 177 ITR 409 (SC), the hon'ble Supreme Court held (page 413) : "It is open to an Income-tax Officer to assess either a non-resident assessee or to assess the agent of such non-resident assessee. It cannot be disputed also that if an assessment is made on one there can be no assessment on the other . . . The assessment proceedings taken by the Income-tax Officer against the agent have to be ignored and cannot operate as a bar to assessment proceedings directly against the assessee." (c) In Family of V. A. M. Sankaralinga Nadar v. CIT [1963] 48 ITR 314 (Mad), this court held (page 322) : "There is no jurisdiction on the part of the officer to start upon a venture of reassessment in a haphazard fashion on mere suspicion in the hope of unearthing in escapement of tax. Whether the officer had reason to believe, in consequence of information in his possession, may not be a justiciable issue in a proceeding of this court under section 66 of the Act and to that extent it may really be a matter of subjective satisfaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssession of information with reference to the erroneous allowance of the losses claimed by the assessee during the assessment years in question while finalising the assessment for the year 1970-71. The question whether section 10(27) of the Act would apply or not, has been remitted for on investigation and the assessee has also been given an opportunity of placing such evidence as it may have in support of its stand. We, therefore, hold that on the facts and in the circumstances of the case, section 147(b) of the Act was properly invoked and the Tribunal was right in the view it took on that question. We, therefore, answer the question referred to us in the affirmative and against the assessee." (g) In Ve. A. Vairavan Chettiar v. CIT [1973] 92 ITR 474 (Mad), this court has observed (page 476) : "On the question of jurisdiction, we are of the view that section 147(b) of the new Act is clearly applicable to the facts of this case. It is not as if the Income-tax Officer considered the applicability of section 41(1) of the old Act at the stage of the original assessment. From the records it appears to be clear that he did not advert his mind to the provisions of section 41 at all. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64 ITR 566 (SC) wherein the hon'ble Supreme Court held (page 444 of 247 ITR) : "It is settled law that an appeal is a continuation of the original proceedings and hence, when the Tribunal in the appeal relating to the petitioner has considered the decision of the Tribunal in Boudier Christian's case, the impugned notice under section 147/148 would obviously be on the basis of a mere change of opinion by the incometax authorities, which would not be valid." (c) Jindal Photo Films Ltd. v. Deputy CIT [1998] 234 ITR 170 (Delhi), wherein the Delhi High Court has held as follows (pages 178 and 179) : ". . . . if an expenditure or a deduction was wrongly allowed while computing the taxable income of the assessee, the same could not be brought to tax by reopening the assessment merely on account of subsequently the Assessing Officer forming an opinion that earlier he had erred in allowing the expenditure or the deduction . . . It is also equally well-settled that if a notice under section 148 has been issued without the jurisdictional foundation under section 147 being available to the Assessing Officer, the notice and the subsequent proceedings will be without jurisdiction, liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assessment, and thus Parliament has recognised the importance of assessment reaching a finality and the necessity to ensure that assessments are not reopened without any basis or justification. Therefore, it is crystal clear that unless the necessary ingredients of section 147 are established, the assessment cannot be reopened. But in the cases, there is not even an averment on the side of the respondent that there is any escapement of income. That being so, the reopening in question is illegal and without jurisdiction, as there is no escapement of income warranting the reopening of the assessment already completed." (f) Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 (SC), wherein the honourable Supreme Court held (pages 477 and 478) : "It would be immaterial whether the Income-tax Officer at the time of making the original assessment could or could not have found by further enquiry or investigation, whether the transaction was genuine or not if, on the basis of subsequent information, the Income-tax Officer arrives at a conclusion, after satisfying the twin conditions prescribed in section 147(a), that the assessee had not made a full and true disclosure of the material fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s warrants so and thus it was contended that the findings of the Commissioner of Income-tax (Appeals) and the Tribunal are erroneous and, hence, require to be set aside. Per contra, the learned senior counsel for the assessee pointed out that once the assessment is completed, it cannot be reopened for the mere asking unless and until the requirements of section 147 is met with all its rigour and as amplified by authoritative pronouncements of this court and the hon'ble apex court (which we have extracted above). The learned senior counsel also pointed out that once the original assessment is completed under section 143(3), the Assessing Officer cannot record vague and fanciful reasons to reopen the assessment and a mere "change in opinion" of the Assessing Officer will not entitle reopening of the assessment. It was further argued that nevertheless the expenditure incurred for payment of licence fee to RPG Enterprises Ltd. is in the nature of business expenditure and wholly and exclusively for the purpose of the business, it is allowable as a business expenditure. Therefore, it was contented that the Assessing Officer's order of reassessment recording reasons to reopen has been ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, therefore, the reasons by which the Assessing Officer reopens the assessment are actually vague and fanciful. We also find that the Commissioner of Income-tax (Appeals) while dealing with the appeals arising out of the assessment had considered at length the Assessing Officer's finding and came to a conclusion that the reasoning assigned by the Assessing Officer are not sufficient and, hence, the reopening of the assessment was bereft of materials to come to a conclusion that there were reasons to believe that the income has escaped assessment. Therefore, the order of the Commissioner of Incometax (Appeals) overturning the order of Assessing Officer is, in our opinion, correct. We have also given our anxious consideration to the order of the Tribunal which has considered the issue at length and essentially the judgments in this regard. We are of the considered opinion that the Tribunal has correctly appreciated the finding of the Commissioner of Income-tax (Appeals) and applied the law in this regard in coming to such a conclusion. Arguments were advanced to the effect that it was a concurrent finding of facts by the Commissioner of Income-tax (Appeals) and the Tribunal and, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellate authorities are called upon to carry out but rather to evaluate the reason of the Assessing Officer to come to a conclusion whether the said findings are correct. In effect, the learned counsel would submit that the payments to RPG Enterprises Ltd. is gratuitous in nature and, hence, not wholly and exclusively laid down for the purpose of the business and, therefore, in conclusion would contend that the disallowance was valid and justified. On the other hand, learned counsel for the respondent-assessee submitted that the respondent-assessee belong to the RPG group of companies. Learned counsel submitted that in case of large group of companies like that of the respondent-assessee, the business overheads is shared by establishing a common organisational service platform to provide common services to all the group companies. It is an established practice in many large business groups to establish a common administrative or service platform to cater the needs of the companies in the group. Learned counsel cited the examples of M/s. Duncon Industries Ltd. under the Duncan group of companies and M/s. Eveready Industries India Ltd. under the Williamson Magor group of companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sharing of expenditure of some other entity by the assessee was not an allowable expenditure. The assessing authority was of the view that it may be true and not disputed that RPG Enterprises Ltd. had incurred this expenditure but the business purpose of the assessee reimbursing the said expenses to RPG Enterprises Ltd. was not established and that the payment of licence fee was more in the nature of an application of income by the assessee. The Assessing Officer disallowed the claim of the assessee towards licence fee paid to M/s. RPG Enterprises Ltd. and added the said amounts to their income. The appellate authority, the Commissioner of Income-tax (Appeals), relying on the order passed by the Kolkata Income-tax Appellate Tribunal in the case of Philips Carbon Black Ltd., was of the view that by taking the benefit of the common business establishment, the assessee could access the expert advice in various business fields and, therefore, licence fee paid to M/s. RPG Enterprises Ltd. was a business expenditure incurred wholly and exclusively for the purpose of business. The appellate authority found that the facts and circumstances of the assessee's case were identical to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial question of law involved for a decision by the High Court and it reads as follows : The second question raised by the Revenue is, whether the Tribunal was justified in holding that the expenditure incurred by the assessee was exclusively for the purposes of business. A perusal of the order passed by the Commissioner of Income-tax (Appeals) shows that the Commissioner of Income-tax (Appeals) has recorded a finding of fact that M/s. RPG Enterprises Ltd. had actually rendered service for the business needs of the assessee-company and the assessee-company has also taken benefit of infrastructure resources, services and expert guidance of the group corporate centre at RPG Enterprises Ltd. and, therefore, the expenditure was allowable. In our opinion, the decision of the Tribunal is based on finding of fact. No substantial question of law arises from the order of the Tribunal. 3. The appeal is dismissed with no order as to costs." Following the above decision, the appeals by the Revenue pertaining to subsequent assessment years were also dismissed. Similarly, the Calcutta High Court, by an order dated July 6, 2007, in the case of Philip Carbon Black Ltd. I. T. A. No. 293 of 2007, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce company are tangible and justified. We, therefore, do not see any reason to interfere with the concurrent finding of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal. The orders passed by the Commissioner of Income-tax (Appeals) and the Tribunal contain cogent reasons for arriving at such findings. As pointed out by the learned counsel for the Revenue, the Assessing Officer has considered in detail the nature of payment vis-a-vis the services rendered and the expertise of RPG Enterprises Ltd. We have also seen the order of the Commissioner of Income-tax (Appeals) overturning the said finding and that of the Tribunal affirming the findings of the Commissioner of Income-tax (Appeals). We are in agreement with the said findings and since it is a concurrent finding of fact, in normal circumstances, this court would not interfere with such concurrent finding of fact unless it is pointed that the findings were perverse or that it was an erroneous application of law. The Revenue has not been able to countenance this question of fact before us by pointing out as to how the findings are perverse. The learned counsel for the Revenue has not pointed out as to whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure. In this regard, it will be useful to refer to the said section 36(1)(iii) : "36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-. . . (iia) (Omitted by the Finance Act, 1999, with effect from April 1, 2000.) (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not) ; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction." A careful perusal of the above section contemplates that, firstly, the money should have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business and, thirdly, the assessee must have paid interest on the said amount. The learned counsel for the Revenue, vehemently put forth his arguments cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s any such deduction in the books of account, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for non-business purposes without any interest and, accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. In our view, even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest-free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted.' Entire money in a business entity comes in a common kitty. The monies received as share capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year." (b) CIT v. Phil Corporation Ltd. [2011] 244 CTR 226 (Bom), wherein the Bombay High Court has held as under : "Mr. Sonak, learned counsel for respondent No. 1 submitted that the Tribunal has rightly relied on the decision of Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45 (Guj) ; [1982] 26 CTR (Guj) 184 of the Gujarat High Court. He further relied on CIT v. Jardine Henderson Ltd. [1994] 210 ITR 981 (Cal) ; [1995] 125 CTR (Cal) 12 of the Calcutta High Court, wherein it was held that the interest paid on borrowings utilized for the purchase of shares in order to retain managing agency by the assesseecompany was held allowable as business expenditure. We find that the reasoning of the Tribunal that the overdraft was not operated only for investing in the shares of subsidiary company and that the fact that it was also used for investment in the shares of the subsidiary company to have control over that company and, therefore, the element of interest paid on the overdraft was not susceptible of bifurcation and, therefore, respondent No. 1 is entitled to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty paid by the respondent was not an allowable deduction under section 10(2)(xv) of the Act. We answer the question in the negative. The order of the High Court is wrong and is set aside." It is an admitted fact that substantial expenditure on payment of interest was incurred only on account of borrowings which appears to have been invested in shares, savings certificates, fixed deposits, etc. In fact, section 57 lays down the permissible deductions and section 57(iii) lays down that the expenditure so expended should be wholly and exclusively for the purpose of making or earning such income. It is no doubt true that one of the purposes of the assessee's business was also to invest in the shares of other companies. The Tribunal, in consideration of appeal of the assessee in paragraph 35 of the order dated January 23, 2006, has dealt with this issue at length. The Tribunal has found that there is proximate nexus between the business of the assessee-company and that of the company in which investments were made in the form of shares. It may be true that the returns are not commensurate with the expected returns in the form of interest, but if and when, the shares are liquidated, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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