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TMI Blog2018 (6) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... branch office. ITAT merely accepted the claim of the assessee in principle that gross income cannot subjected to tax and assessee must be granted deduction of the expenses from the gross income and tax only net income. To determine the net income the issue was set aside to the file of the ld AO at the request of both the parties which is evident from the order of the coordinate bench. In the interest of justice, we set aside the issue of determination of indirect expenditure to be reduced from gross total income back to the file of the AO with a direction to him to first examine the claim of the assessee, give reasons why the same is not proper and then if he is not satisfied with the explanation of the assessee give his reasons for adopting an alternative method and after giving opportunity of hearing to the assessee decide the issue afresh. Assessee is also directed to substantiate its claim with proper reasoning. Therefore, ground No. 1 of the appeal of the assessee is rejected for the reasons given above and ground No. 2 of the appeal is allowed with above direction. - ITA No. 3815/Del/2013 - - - Dated:- 25-6-2018 - SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI PRAS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed the order on 01.02.2012 in pursuance of order of the coordinate bench. The ld AO noted direction of the coordinate bench in para NO. 4.2 of the assessment order and para No. 5 the computation of the direct expenses and indirect expenses was made. The ld AO further sought direction from Addl DIT, Range-2, International Taxation wherein, an alternative method of allocation of expenses was proposed along with the detailed reasons. The ld Assessing Officer after that calculated the expenses allocable of ₹ 1877818/- for the commission income of ₹ 5216507/-. The taxable income from commission from group companies was thus determined at ₹ 3338689/- . The claim of the assessee is that commission incomes should be reduced by indirect expenses of ₹ 4892399/- and direct expenses of ₹ 1417132/- totaling to ₹ 6309531/-. The above dispute reached to the ld CIT(A) who held that the ld Assessing Officer allowed all direct expenses but the ld AO rejected the basis of allocation of indirect expenses against commission income from group companies and other income. The ld CIT(A) further held that the argument of the appellant that coordinate bench has alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00-01 2001-02 but regarding the present assessment year, the assessee has raised technical objections before us also although these objections were rejected by the CIT(A). 4. Regarding the validity of the reassessment proceedings in AY 2002- 03, the main objection of the assessee is that reassessment proceedings are not valid because the AO had no reason to believe that income had escaped assessment. This objection is based on this factual position that the assessee company was incorporated in Singapore on 14.8.2001 and thereafter, the assessee company was established in India after RBI approval obtained on 7.9.2002 and hence, the assessee had no presence in India during this year. The second objection of the assessee is that the reasons recorded by the AO for issuance of notice u/s 148 were not provided to the assessee as had been held by the Hon'ble Apex Court in the case of GKN Drive Shafts - 259 ITR 19. The third objection of the assessee is that when 4 ITA-1725 to 1727/D/2009 the reassessment proceedings are initiated u/s 148, the AO cannot pass an assessment order u/s 144 and this is the fourth objection of the assessee that such an order passed by the AO u/s 144 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the course of assessment proceedings for AY 2003-04. It is a well established principle that while recording reasons for the reopening the assessment it is not necessary to compute the income. Prima facie reason to belief that income has escaped assessment will be sufficient to form his belief as laid down by the Hon'ble Supreme Court of India in the case of Raymond's Ltd. Only distinction that has to be made is that while recording reasons it is only a reason to believe not a reason to suspect and at the same time and not necessarily computation of income. In view of this, the AO cannot be faulted with for having issue notice u/s 148 on the basis of information which came into his possession while framing the assessment for AY 2003-04. So far as the legality of the issue for assuming jurisdiction u/s 147 is that there should be a reason to believe that income chargeable to tax has escaped assessment. Thus where there is information, after the assessment is made or even where time for filing return has passed, reassessment is unavoidable if the AO acts on the information. However, the information should be definite and not vague and may not be in the nature of chang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39(1) and because of this failure of the assessee, the AO is empowered to resort to Section 144 for making best judgement assessment. Hence, this objection is also rejected. 9. Regarding the fourth objection of the assessee that the assessment order passed by the AO is time barred, we are not satisfied 7 ITA-1725 to 1727/D/2009 because we find that the reassessment proceedings were initiated by the AO on 3.7.2006 by way of issuing notice u/s 148 and hence, as per the provisions of Section 153(2), the order of assessment/reassessment can be passed upto the expiry of one year from the end of the financial year in which the notice u/s 148 was served. Hence, the reassessment in the present case could have been completed upto 31.3.2008 because the reassessment proceedings were initiated in the FY 2006-07 by way of issuing notice u/s 148 on 3.7.2006. Simply because the AO has mentioned in the assessment order that the assessment order is being passed u/s 144 and he has omitted to mention Section 144/148, it cannot be held that the assessment is time barred because admittedly, the proceedings itself were initiated by issuing notice u/s 148 and therefore, the provisions of Section 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of expenses is as under:- RELIEF SOUGHT FROM YOUR HONOR'S S.No. Particulars Assessment Year 2002- Year 2003- Year 2004- 2003 (from 14 August 2001 to 31 March 2002) 2004 (from 1 April 2002 to 31 Marc 2003) 05 (from 1 April 2003 to 31 March 2004) 1. Commission income from 538,731* PIA, Singapore (based on revised computation) (refer 538,731* 1,233,302 1,822,735 2. page 2 of paper book) Commission income from appeal effect order - it is actual income as reported in financial statements) (refer page 17 and page 18 of paper book) 0 5,216,507 15,588,357 3. Other income (This includes revenue on sale of certain spare parts and subsidy received which is actually reimbursement of certain expenses incurred by branch office) (refer page 3 of paper book) 0 1,845,318 7,377,175 4. Total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to receipt considered as income in India. The working regarding such allocation of expenses is available on pages 4 5 of the submissions of the assessee before us dated 1.11.2010 and for the sake of ready reference, these workings are reproduced herein below:- S.No. Particulars Assessment Year 2002 Assessment 2003 Assessment Year 2004 2003 (from 14 August 2001 to 31 March 2002) 2004 (from 1 April 2002 to 31 March 2003) 2005 (from 1 April 2003 to 31 March 2004) 1. Total expenses incurred (as per Not Applicable* financial statements) (refer page 15 of paper book) Less : Expenses Directly Allocated 12,665,590 32,154,525 2. Amount of reimbursements (as Not Applicable per financial statements) (refer page 14 of paper book) As mentioned in the details of other income, reimbursement of expenses by PIA, Singapore have already been considered as part of PIA, Singapore's profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come to the extent of returned income. The AO should pass necessary order as per law as per above discussion after providing adequate opportunity of being heard to the assessee in AY 2003-04 and 2004-05. Regarding AY 2002- 03, it has been submitted by the assessee that no working can be made available regarding expenses of this year. Hence, for AY 2002-03, we confirm the order of CIT(A) because in this year only commission from PIA, Singapore has been brought to tax and no income on account of commission from group companies and other income has been brought to tax in this year and therefore, no deduction is to be allowed in this year on account of expenses. As a result, the appeal of the assessee for AY 2002-03 is dismissed whereas the remaining two appeals for AY 2003-04 2004- 05 are partly allowed for statistical purposes. (Underline supplied by us) 7. On careful reading of the order of the coordinate bench in para No. 13 it has been held that the gross commission income cannot be charged to tax and they have directed the ld Assessing Officer to allow the expenses from the gross commission income. In that paragraph the coordinate bench has reproduced the working as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onductors, machinery and batteries. PIAPL established a Branch Office ( BO‟) in India which received approval from Reserve Bank of India ( RBI‟) on 7 September 2002. As per the approval granted by the RBI, the activities of BO were restricted to marketing and technical support and research activities. Thus, activities of the BO are restricted to provisions of said services only. The BO is not allowed to carry trading activities in India. In view of the fact that the BO has earned income in India from provision of services only, it is respectfully submitted that allocation of indirect expenses should be made based upon service / commission income i.e. income generated from provision of services. Further, it is a fundamental principle of cost allocation that cost is allocated to cost objective that cause it. In the instant case, indirect expenses are incurred by the BO with the objective of earning service / commission income. Therefore, indirect expenses incurred by the BO should be allocated based upon service / commission income. This principle is confirmed by Cost Accounting Standard 3 (CAS-3) issued by Institute of Cost and Works Accountants of Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales only to Customer C and D. Therefore, Company B pays commission to Company A based on sales made to Customer C and D only. It may be noted that Company A has earned commission in respect of sales made to Customer C and D only. However, the market research activities and relative indirect expenses incurred by Company B cannot be identified specifically to Customer C and D. Company A had incurred indirect expenses in indentifying others customers as well. Therefore, indirect expenses cannot be allocated based upon sales made to Customer C and D only. In light of above discussion, we request your good self to allocate the indirect expenses based upon service income / commission income only. We hope your goodself would find the above in order and to your satisfaction. Please do let us know in case you need any other information / clarification. 8. The ld AO has simply rejected the explanation of the assessee. The ld CIT(A) also has rejected the explanation of the assessee vide para No. 7.4 holding that as assessee is having two streams of income. The assessee has constantly reiterated that the coordinate benches accepted principally the working of the assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax only net income. To determine the net income the issue was set aside to the file of the ld AO at the request of both the parties which is evident from the order of the coordinate bench. From the above facts it is apparent that assessee proceeded on the wrong presumption and ld AO rejected the explanation of the assessee without detailed reasoning, in the interest of justice, we set aside the issue of determination of indirect expenditure to be reduced from gross total income back to the file of the ld Assessing Officer with a direction to him to first examine the claim of the assessee, give reasons why the same is not proper and then if he is not satisfied with the explanation of the assessee give his reasons for adopting an alternative method and after giving opportunity of hearing to the assessee decide the issue afresh. Assessee is also directed to substantiate its claim with proper reasoning. Therefore, ground No. 1 of the appeal of the assessee is rejected for the reasons given above and ground No. 2 of the appeal is allowed with above direction. 9. In the result appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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