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TMI Blog2016 (10) TMI 1341X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the Dy. Commissioner of Income Tax- 3(3) ("DCIT") was justified in reopening the assessment under section 147 of the Act. 2. The CIT(A) erred in confirming the addition of Rs. 1,16,50,971 as deemed income under sections 69B/69C of the Act. 3. The CIT(A) erred in confirming the disallowance of Rs. 9,00,000 being professional fees paid to consultants. 4. The CIT(A) erred in confirming the disallowance of Rs. 7,65,120 towards rent paid to OMCI Marine Services Private Limited by invoking provisions of section 40A(2)(b) of the Act. 5. The above grounds are without prejudice to each other." 3. During the course of hearing, it was stated at the very outset by the Ld. Counsel appearing on behalf of the assessee that in this case, the impugned order passed u/s 147 of the Act is illegal in the eyes of law. Our attention was drawn to the additional grounds filed by the assessee vide its petition dated 21-06-2016, which are as under: "1. On the facts and circumstances of the case, the learned Assessing Officer erred in not following the procedure for reassessment as laid down by the Supreme Court in its decision in GKN Driveshafts (India) Pvt Ltd vs. ITO (259 ITR 19). 2. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer did not accept the request of the assessee for dropping the proceedings and framed the assessment order making additions on other issues which were not raised in the reasons recorded. It was submitted that the assessment order framed by the Assessing Officer is not permissible under the law in view of the judgment of the Hon'ble Bombay High Court in the case of CIT(A) vs Jet Airways Ltd 331 ITR 236 (Bom). Reliance was also placed on another judgment of the Hon'ble Bombay High Court in the case of V.M. Salgaonkar Sales International vs ACIT 59 Taxman.com for the proposition that the Assessing Officer could not have completed the reassessment proceedings without disposing of the objections raised by the assessee. Reliance was also placed in this regard on the judgment of the Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd 259 ITR 19 (SC). 7. Per contra, the Ld. DR submitted that on perusal of the assessment order, admittedly, in this case the objections were not disposed of by the Assessing Officer and admittedly no addition has been made in the reassessment order framed by the Assessing Officer with regard to the income which was alleged to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed on 21.11.2006. In the return of income the assessee has not shown any income from other sources. The additional income disclosed during survey should have been disclosed in the return as income from other sources. The return fled does not indicate that the additional income of Rs. 50,00,000/- admitted during the course of survey, has been included in the total income. I have, therefore, reason to believe that the income of Rs. 50,00,000/- has escaped assessment." 10. In response, the assessee filed detailed reply clarifying that the income alleged to have been escaped in the Reasons has already been included by the assessee while filing its original return and, therefore, there was no escapement of income, therefore, the proceedings should be dropped. Relevant part of assessee's reply dated 23-08-2008 reads as follows: "The income referred to during the survey u/s 133A is contained in the head Management Fees' and the amount of USD 100.0001- due from M/s Belmont Ship Management B V. has been included in the income of the company and contained in the profit of the company. The same has been considered for computation of the total income in the return of income filed wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndate given under the law as also explained by the jurisdictional High Court in the case of CIT vs Jet Airways Ltd (supra) observing as under:- "14. The second line of precedent is reflected in a judgment of the Rajasthan High Court in (CIT v. Shri Ram Singh 306 ITR 343. The Rajasthan High Court construed the words used by Parliament in section 147 particularly the words that the Assessing Officer 'may 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 section 147. The Rajasthan High Court held as follows: ". . . if is only when, in proceedings under section 147 the Assessing Officer, assesses or reassesses any income chargeable to tax, which has escaped assessment for any assessment year, with respect to which he had "reason to believe" to be so, then, only in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under section 147. To clarify it further, or to put it in other words, in our opinion, if in the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned in the notice under section 148 were incorrect or non-existent. The decisions of the Punjab & Haryana High Court in Atlas Cycle Industries' case (supra) and of the Rajasthan High Court in Shri Ram Singh's case (supra) would not be affected by the amendment brought in by the insertion of Explanation 3 to section 147. Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under section 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Explanation 3 by the Finance Act (No. 2) of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we do not regard the decision of the Tribunal in the present case as being in error. The question of law shall, accordingly, stand answered against the revenue and in favour of the assessee. The appeal is, accordingly, dismissed. There shall be no order as to costs." 13. It is well accepted legal position that the judgment of jurisdictional High Court is binding upon all the authorities working under the jurisdiction of the High Court. It is further noted by us that identical view has been taken by Hon'ble Delhi Court in the case of Ranbaxy Laboratories Ltd vs CIT 12 taxmann.com 74 (Delhi), wherein it was held that where reasons for initiation of reassessment proceedings ceased to survive then the AO had no jurisdiction to reassess issues other than the issues in respect of which proceedings were initiated. This judgment was followed by Hon'ble Delhi High Court in its recent judgment in the case of Oriental Bank of Commerce vs Addnl. CIT 49 taxmann.com 485 (Delhi). 13.1. Hon'ble Gujrat High Court in the case of CIT vs Mohmed Juned Dadani 30 taxmann.com 1(Gujarat) held that when on ground on which reopening of assessment was based, no addition was made by the AO in the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut already included in its taxable income and offered to tax by the assessee, it was not legally permissible for him to continue with the reassessment proceedings. 14. It is further noted by us from the perusal of the Reasons recorded that Reasons have been recorded on the basis of mere doubts. There were no bases with the AO to allege that too with the support of any cogent material that impugned income was not included by the assessee in its income offered to tax. Reopening of an assessment is not permitted merely on the basis of some notions or presumptions. Nor it is allowed merely for making verification of some basic facts. There must be existence of some tangible material indicating escapement of income. Then only, an AO is permitted to resort to provisions of reopening contained in sections 147 to 151 of the Act. Because, once an assessment is reopened on valid basis, entire pandara's box is open before the AO. Therefore the AO may then bring to tax not only income escaped from tax which was mentioned in the Reasons recorded, but also any other escaped income that may come to his notice during the course of reassessment proceedings. Reopening of an assessment attacks and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and submitted that these expenses are revenue in nature in as much as the expenditure has been incurred for valuation of shares. It was alternatively argued that in any case, the entire amount of professional fees is not connected with valuation of shares. But, Ld. CIT(A) was not satisfied with the submissions of the assessee and, therefore, he confirmed the disallowance. 19. During the course of hearing before us, the Ld. Senior Counsel of the assessee fairly submitted that even if some part of its expenses may not be allowable as revenue expenses, but the entire professional consultancy was not rendered in connection with valuation / issuance of shares of the company only, and, therefore, the disallowance made is factually incorrect. 19.1. Per contra, the Ld. DR relied upon the orders of the lower authorities. 20. We have gone through the orders of lower authorities. It is noted by us that the Ld. CIT(A) has not carefully analysed the alternate submission of the Ld. Senior Counsel wherein it was submitted that the entire amount of fee paid did not belong to consultancy rendered for valuation / issuance of shares. It was reiterated before us that the assessee company regularl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (g) the amount of depreciation, (h) the amount of deferred Ins and the provision therefore, (i) the amount or amounts set aside as provision for diminution in the value of any asset, if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by........ 5.2 It may be noted that the leave encashment could only fall under clause (c) of the Explanation I to section 115./B of the Act. Clause (c) categorically states that ascertained liabilities should not be considered while increasing the book profits of the company. 5.3 The DCIT has also rightly accepted that if the liability is ascertained, it can be claimed under 115JB of the Act. 5.4 The company would like to invite your attention to the Note No. 10 of the Schedule 14 forming part of the Audited Balance Sheet and Profit and Loss Account of the company for the year ending 31 March 2007 (Refer page 19 & 20 of the compilation). In Note No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him" 5.10 Under provisions of the Act, Section 43B provides for allowabiity of certain expenditure only on payment basis. As per clause (7) of Section 43B of the Act, any sum payable as an employer in lieu of any leave at his credit to employee is allowed only in the year in which such sum is actually paid. 5.9 The relevant portion of section 115JB of the Act has been reproduced above in para 5.2. 5.10. Under section I15JB, Explanation (1) to the section provides that the book profits should be increased by the amount set aside to provisions made for meeting liabilities other than ascertained liabilities. 5.11 Thus, the appellant submits that it is clear from the above that the treatment as required by the legislature under normal provisions is for allowability of leave encashment on payment basis whereas under section 115JB the book profits should be increased by the leave encashment if the liability is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein relying upon the judgement of Hon'ble Supreme Court in the case of Bharat Earth Movers (supra) as well as the decision of the Tribunal in the case of ACIT vs Piramal Holdings Ltd in ITA No.3224/Mum/2007, it was argued that while computing the book profits, the provision for leave encashment (if calculated on scientific basis as per the actuarial valuation) is not required to be added back as it cannot be said to be an unascertained liability. Further, it is not the case of the lower authorities that Profit & Loss Account of the assessee company has not been prepared in accordance with provisions of Parts II & III of Schedule VI of the Companies Act, 1956. Under these circumstances, the Assessing Officer is not permitted to make any adjustment in view of well settled position of law as has been clarified by Hon'ble Supreme Court in the case of Apollo Tyres Ltd 255 ITR 273 (SC). It is noted that reliance by the lower authorities upon the provisions of section 43B is misplaced here. Thus, the lower authorities have misunderstood and misapplied the provisions of law on the facts of the case before us. In our view, provision for leave encashment debited by the assessee in its P&L A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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