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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 ..... s the Revenue filed appeals before the Income-tax Appellate Tribunal. The Tribunal partly allowed the appeals filed by the assessee and dismissed the appeals filed by the Revenue. Aggrieved by the said order the Revenue has filed T. C. (A.) Nos. 310 to 312 of 2007. Likewise, T. C. (A.) Nos. 1388 to 1390 of 2007 are filed by the Revenue against the order dated November 17, 2006, passed by the Income-tax Appellate Tribunal in I. T. A. Nos. 1036/1058/1489/Mds/2005. At the time of admitting T. C. (A.) Nos. 310 to 312 of 2007, on March 26, 2007, the following substantial questions of law were framed by this court : "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 years 1996-97, 1998-99 and 1999-2000 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 borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 148. Thereafter, the Assessing Officer issued notices under sections 142(1) and 143(2) seeking certain details, information and explanations. Pursuant to the said notices, the assessee appeared through its authorized representatives who appeared in person and furnished certain details. After perusing the reply, the Assessing Officer came to a conclusion in pages 15 and 16 of the assessment order, that huge amounts were received by RPG Enterprises Ltd. from the RPG group companies in the name of licence fee. In respect of the subsequent assessment years, i.e., 1996-97, 1997-98, 1998-99, 1999-2000 and 2001-02 similar procedure was followed. In so far as the assessment for the years 1996-97 which is the subject matter of I. T. A. No. 751/Mds/2005, the assessee had objected to the reopening of the assessment claiming it as statutorily barred by limitation. On the contrary the Assessing Officer pursuant to the notice under section 142(1) and 143(2) came to a conclusion that the facts emerging from the response would indicate that the assessment could be reopened under section 147 read with section 148. It was this reopening of assessment which was the subject matter of challenge be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessment year 1996-97 and whether such reopening is barred by limitation in view of the proviso to section 147. This issue is covered by the substantial question of law No. 1 in T. C. (A.) Nos. 310 to 312 of 2007. The said substantial question of law, however, has two aspects for consideration, viz., (i) reopening of the assessment under section 147 invoking the proviso to section 147 by invoking the extended period of limitation, and (ii) whether the reopening of the assessment under section 147 is in accordance with the provisions even though it is within a period of four years. In this regard, it is useful to extract section 147 of the Income-tax Act, which reads as under : "147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er sub-section (1) of section 142, such return shall be processed in the following manner, namely :- (a) the total income or loss shall be computed after making the following adjustments, namely : (i) any arithmetical error in the return ; or (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return ; (b) the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a) ;. . . Explanation.For the purposes of this sub-section, (a) 'an incorrect claim apparent from any information in the return' shall mean a claim, on the basis of an entry, in the return,- (i) of an item, which is inconsistent with another entry of the same or some other item in such return ; (ii) in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished ; or (iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction ; . . . (2) Where a return has been furnished under section 139 or in response to a notice under sub-section (1) of section 142, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly. (5) (Omitted by the Finance Act, 1999, with effect from June 1, 1999.)" A bare perusal of section 143 would indicate that the Assessing Officer is required to comply with the provisions of section 148 before reassessment proceedings and, therefore, a perusal of section 148 also becomes inevitable. "148. (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed ; manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held as follows (page 456 of 137 ITR) : "On these facts it was held that the Tribunal would be justified in upholding the reopening of the assessment under section 147(a) if the confessional statements were in any manner related to the assessee ; otherwise, not. In view of these two decisions, the law, so far as, this court is concerned, is well settled that though the assessee may have disclosed fully the facts at the time of the original assessment, if they are found to be untrue on the basis of the material discovered later on by the assessing authority, the assessment would be liable to be reopened under section 147(a) because in such a case, the assessee failed to disclose truly all the material facts necessary for the assessment and it would not merely be a case of change of opinion." (b) In Indo-Aden Salt Mfg. and Trading Co. P. Ltd. v. CIT [1986] 159 ITR 624 (SC), the honourable Supreme Court held (page 628) : " . . . . mere production of evidence before the Income-tax Officer was not enough, that there may be omission or failure to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn did not require a particular fact to be set out and, therefore, the failure to disclose the facts will provide immunity to the assessee from any notice being issued under section 148 of the Act after a period of four years. The duty that is cast upon the assessee is to disclose the primary facts on the basis of which the Assessing Officer can decide as to whether the assessee is entitled to the deduction claimed or not. The mere fact that the Income-tax Officer had reached some conclusions and had allowed the deduction does not necessarily imply that the Income-tax Officer had been provided with the primary facts required for making a decision as to whether the deduction claimed was allowable in terms of the relevant statutory provisions." (e) In South India Corporation Agencies P. Ltd. v. CIT [1999] 239 ITR 305 (Mad), it has been held (page 310) : "Though the expenditure incurred might have been shown or figured in the profit and loss account, mere filing of the profit and loss account would not be sufficient and that would not discharge the duty cast upon the assessee to disclose all primary facts before the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld constitute a full disclosure and, therefore, we have no hesitation to hold that the reopening of assessment is barred by the proviso to section 147. Further, the facts which emerge from the assessment order as well as the order of Commissioner of Income-tax (Appeals) are well founded and in terms of the principles laid down by the apex court. For the aforesaid reasons, we find that the Tribunal has correctly appreciated the facts in holding that the reopening of the assessment orders are barred by limitation. We find that the Commissioner of Income-tax (Appeals) as well as the Tribunal has concurrently held from the facts that the proviso to section 147 would not apply to the facts of this case and since it is a finding of fact that too which is essentially based on the principles which are gathered from the judgments referred to above, we find that the Assessing Officer has departed from the said principles in arriving at a conclusion that the proviso to section 147 would apply in the instant case. We see no reason to deviate from the finding of fact and, hence, the appeal of the Revenue fails on this ground. Therefore, the first part of the substantial question of law No. 1 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther pointed out that the factum of payment to RPG Enterprises Ltd. in the form of licence fee came to the knowledge of the Assessing Officer only from the assessment order of RPG Enterprises Ltd., Bombay, and, therefore, it is not as if the assessee has disclosed all the materials fully and truly even when the original assessment proceedings were concluded and, therefore, it can by no stretch of imagination be termed as "change of opinion". In conclusion, the learned counsel also contended that the assessee had failed to let in evidence that the payment to RPG Enterprises Ltd., Bombay, was for any services that were rendered and, therefore, the payments were not wholly and exclusively for the purpose of business and, hence, not allowable as an expenditure under section 37. To fortify the said contentions, no citations were relied upon before us, nevertheless, we have considered some of the judgments, cited by the Revenue before the Tribunal, which are as follows : (a) In A. L. A. Firm v. CIT [1976] 102 ITR 622 (Mad) this court held (page 629) : "It is enough if the material, on the basis of which the reassessment pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information that was contained in paragraph 2 of the letter of Shri Bagai was not definite information and it could not be acted upon by the Incometax Officer for taking action under section 147(b) of the Act . . . Merely because the impugned notice was sent on the next day after receipt of the letter of Shri Bagai does not mean that the Income-tax Officer did not apply his mind to the information contained in the said letter of Shri Bagai. On the basis of the said facts and information contained in the said letter, the Income-tax Officer, without any further investigation, could have formed the opinion that there was reason to believe that the income of the assessee chargeable to tax had escaped assessment." (e) In Salem Provident Fund Society Ltd. v. CIT [1961] 42 ITR 547 (Mad), this court held : "We hold that the mistake apparent on the face of the order of assessment itself constitutes information : whether someone else gave that information to the Income-tax Officer or whether he informed himself is immaterial. Further, in the circumstances of this case, the availability of the powers vested in the Income-tax Officer by section 35 did not bar recourse to the jurisdiction v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an indeterminate body only after the assessment, and that the applicability of section 41 came up for consideration by him only in the subsequent assessment years. Though the learned counsel for the assessee may be right in his general submission that the Income-tax Officer cannot change his opinion merely in the guise of reopening an assessment, in this case, we are not inclined to hold that the Income-tax Officer has merely attempted to change his opinion by making the revised assessment. We have to, therefore, answer the first question in the affirmative and against the assessee. On the second question, we are clearly of the opinion that the proviso to section 41(1) of the old Act is quite applicable to the facts of this case. It is not in dispute that the shares of the various beneficiaries of the trust are indeterminate and unknown and, as a matter of fact, the beneficiaries themselves are a fluctuating body of persons. We have to, therefore, agree with the view taken by the Tribunal on this aspect. The second question is, therefore, also answered in the affirmative and against the assessee." The following cases were cited by the respondent-assessee : (a) Andhra Bank Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments 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. Any lack of comprehension on the part of the Assessing Officer in understanding the details placed before him cannot confer a justification for reopening the assessment, long after the period of four years had expired. On the facts of this case, it is clear that the escapement of income, if any, on this account is not on account of any failure on the assessee's part to disclose the material facts fully and truly. The notice issued by the Assessing Officer in exercise of his power under section 147, therefore, cannot be sustained. As the error here is one of jurisdiction it is not necessary for the assessee to have recourse to the remedies by way of appeal, revision, etc. It is well settled that when a jurisdictional error is brought to the notice of this court such errors are capable of being corrected by this court in exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment." (g) CWT v. B. Vijayakumar [1999] 238 ITR 728 (Mad) ; [2000] 161 CTR (Mad) 524, wherein this court held (page 729 of 238 ITR) : ". . . the reliance placed by the Assessing Officer on the report of the audit party which had not merely drawn the attention of the Assessing Officer to the law, but had coloured his view of the law did not constitute 'information' on the basis of which, the concluded assessment could be reopened and a fresh assessment made." (h) Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC), wherein the honourable Supreme Court held (page 1004) : "That part alone of the note of an audit party which mentions the law which escaped the notice of the Income-tax Officer constitutes 'information' within the meaning of section 147(b) ; the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the Incometax Officer . . . the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income-tax Officer." (i) Kalyanji Mavji and Co. v. CIT [1976] 102 ITR 287 (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he crux of the issue that emerges for consideration as to whether the Assessing Officer has recorded reasons to believe that the income chargeable to tax has escaped assessment or not. In this regard, a detailed scrutiny of the assessment order would lead to a conclusion that certain specific queries were raised by the Assessing Officer and that the assessee had submitted its reply to the said queries which form the essential basis to determine as to whether there has been any income which has escaped assessment. We have carefully examined the assessment orders and we find that the reasons recorded by the Assessing Officer goes into various details while coming to the conclusion that the income has escaped assessment and, in our opinion, the said material and details were already available with the Assessing Officer at the time of initial assessment and it does not appear to be something which has been gathered afresh or that which came to the notice of the Assessing Officer after the completion of original assessment. The payment of licence fee to RPG Enterprises Ltd. was not a new fact which has emerged, on the contrary in the original returns that were filed, the factum of paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that while examining the orders of the Tribunal and the Commissioner of Income-tax (Appeals) when it is found that the findings were perverse or contrary to the law in this regard, we would have no hesitation to interfere. However, from an overall conspectus of the facts and law that emerges from the judgments referred to supra, we find no reasons to interfere with the findings of the Tribunal, which in turn confirmed the finding of the Commissioner of Income-tax (Appeals). We, therefore, answer these substantial questions of law in favour of.the assessee and against the Revenue. Substantial question of law No. 2 in both the batches : The first of the other two remaining issues that has to be considered is as to whether the payment of licence fee by the assessee to RPG Enterprises Ltd. is incurred wholly and exclusively for the purpose of the business. The learned counsel for the Revenue, taking us through the assessment orders (which are almost identical for all the assessment years) pointed out that the Assessing Officer has dealt with this issue elaborately and various facts including the payment by the subsidiary company to RPG Enterprises Ltd. over the years and has come to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , M/s. RPG Enterprises Ltd. is a group resource company providing centralised resources to all the group companies. The respondent-assessee, in terms of the agreement entered into with M/s. RPG Enterprises Ltd. availed of valuable services from M/s. RPG Enterprises Ltd. and also made use of RPG logo as part of their business operations for their business prospects. The respondent-companies by availing of service benefits from M/s. RPG Enterprises Ltd. also availed of valuable benefit for their business operations. The payment of licence fee to M/s. RPG Enterprises Ltd. by the respondent-assessee was towards their share of actual expenses incurred by M/s. RPG Enterprises Ltd. Learned counsel submitted that the assessee-companies were, therefore, gained through this cost sharing arrangement with M/s. RPG Enterprises Ltd. and in the absence of such cost sharing arrangement, the assessee would have incurred higher financial costs. The payment of licence fee paid to M/s. RPG Enterprises Ltd. was undoubtedly, as has been held by the Commissioner of Income-tax (Appeals) and the Tribunal, a business expenditure wholly and exclusively for the purpose of respondents' business. Learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A. Nos. 751 to 753/ Mds/2005, held that since the material facts and circumstances governing payments made by the assessee towards licence fee were same as in the case of RPG Transmission Ltd., confirmed the order of the Commissioner of Income-tax (Appeals) in deleting the disallowance of licence fees paid to RPG Enterprises Ltd. and rejected the appeal filed by the Revenue. It, however, appears that in the appeal before the Tribunal neither the Revenue nor the assessee has brought to the notice of the Tribunal that the earlier order passed by the Tribunal in the case of RPG Transmission Ltd. in I. T. A. Nos. 751 to 753/Mds/2005 was the subject matter of further appeal before this court. Before us, reiterating the findings of the Tribunal in the orders impugned in this appeal, learned senior counsel for the respondent-assessee drew our attention to the decision of the Calcutta High Court in Phillips Carbon's case, where the Calcutta High Court had dismissed the appeal filed by the Revenue on the licence fee holding that no substantial question of law was involved. It is pertinent here to note that the said decision was not rendered on the merits of such expenditure which was all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n appeal before the Bombay High Court in the judgment referred to above. We find that the findings recorded by the Bombay Tribunal were essentially based on the decision of the Madras Bench of the Tribunal rendered in RPG Transmission's case, which order is impugned before this court. We, therefore, cannot solely rely on the decisions cited by the learned counsel for the respondent-assessee as at the time of rendering the abovesaid decision, the present appeal was already admitted and, therefore, this court could very well examine the correctness or otherwise of the Tribunal's order, independently. We have carefully examined the order of the Tribunal, which is impugned before us in this appeal. We find that while concurring with the Commissioner of Income-tax (Appeals), on the issue of licence fee paid, the Tribunal had set aside the findings of the assessing authority. The essential facts which emerge from the material on record are as to whether the expenditure incurred by the assessee towards payment of licence fee to M/s. RPG Enterprises Ltd. was justifiable on the facts for such allowance. We note from the order of the Commissioner of Income-tax (Appeals) as well as the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the business expenditure is liable to be deleted from the income. We find 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. in the similar manner paid by the assessee herein. The facts in this case are identical to the facts involved in the decisions cited above as we had also an occasion to peruse the order of the Bombay and Calcutta Tribunals and, hence, we respectfully agree with the decisions of the Bombay and the Calcutta High Courts in dismissing the Revenue's appeal in those cases. We, therefore, answer substantial question of law No. 2 in both the batches against the Revenue. Substantial question of law No. 3 in both the batches : The remaining issue which requires to be considered is with regard to the payment of interest on borrowed funds utilized for investment of share in CESE Ltd. and if the same can be treated as business expenditure on the grounds that it is one of the objectives of the assessee-company. The Assessing Officer while reopening and reassessing the income has disallowed the expenditure towards payment of interest on bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred for the purpose of the business. In other words, the interest which was paid cannot be treated as business expenditure for the simple reason that the investments were made in a group company. Furthermore, it was contended that the expenditure on borrowings far exceeded the income derived therefrom. In support of his argument learned standing counsel relied on the following decisions : (a) In K. Somasundaram and Brothers v. CIT [1999] 238 ITR 939 (Mad) this court held as follows (page 943) : "The amount borrowed for the business remains a liability for the business till its discharge. The fact that the amount borrowed may have been invested in the purchase of machinery or utilised as working capital or used in any other way does not in any way affect the liability for repayment of the amount borrowed. So long as the money borrowed is used in the business, interest paid on such borrowing is a proper charge on the business and is allowable as an expenditure. Under section 36(1)(iii) of the Act, amounts diverted not being used for the purposes of the business, interest relating to the operation diverted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id on the borrowing to the extent the amount is lent to sister concern without carrying any interest for nan-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest." Per contra, the learned senior counsel for the respondent-assessee, contended that with regard to the findings of the Tribunal regarding disallowance of business expenditure, the Tribunal has rightly come to a conclusion that the investments were made for the purposes of purchase of the shares in CESE Ltd. and that it has been pointed out that one of the purposes of the business of the assessee was also to invest in other business activities, including shares, debentures, etc. Furthermore, there is nexus between the nature of business carried out, i.e., generation and distribution of electricity, power transmission, etc., an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held as under (page 150) : "The aforesaid discussion leads to the following result : The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the returns are far below the quantum of interest paid on the borrowed funds and, therefore, the basis of analysing that the payment of interest on borrowed funds has to be tested on the ground of quantum of return is untenable. Furthermore, as rightly pointed out by the learned senior counsel for the assessee, section 36(1)(iii) of the Act does not contemplate any test that the amounts so invested should be "wholly and exclusively for making or earning such income". On a plain reading of section 36(1)(iii), we do not find any such requirement mandated in the section to confine such expense. Furthermore, the section also does not place any embargo for investments to be made in group concerns and subsidiary concerns. Therefore, we are not in agreement with the findings of the Commissioner of Income-tax (Appeals) and concur with the findings of the Tribunal in this regard. In our judgment in the tax case appeal in T. C. (A.) No. 1980 of 2008, (since reported in CIT v. Spencers and Co. Ltd. (No. 3 [2013] 359 ITR 644 (Mad) which was heard along with these appeals and disposed of today, we have elaborately discussed the issue relating to payment of interest on borrowed capital and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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