9911796707
TMI Blog2025 (3) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. The company entered into an agreement with M/s. United Breweries Limited (UBL) for manufacturing of their various Brands of Beer at the new Brewery commissioned by the Company at Village Ahmedpura, District: Aligarh, U:P. The agreement provides for committing a substantial portion of the Beer manufacturing capacity of the Company to UBL and accordingly UBL has been treated as Principal Manufacturer. While Sales and purchase for manufacture of UBL's Brands is done in the name of the Company as it holds requisite licenses for manufacture and sale, in essence the Company has shown to get paid only a fixed amount for manufacture of UBL's Brands Accordingly, the Company has not included the following income and expenses relating to manufacture/ sale of UBL's Brands in its account: 1. Sales-Rs. 35765.45Lakhs 2. Consumption of Raw materials and Packing materials Rs. 11384.87 Lakhs 3. Other Expenses Rs. 5883.21 Lakhs 4.1 I have gone through the facts of the case and the reply of the assessee on the issues and have gone through the agreement thoroughly. Being the relevant industry highly regulated in Uttar Pradesh, it is not possible for any company to set up a disti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly authorizes the assessee for application of income or distribution of profits after having paid due taxes on the income earned by the assessee from the activity of manufacturing of beer, bottling of beer, selling of beer. Further the judgment of court further holds that it is undisputed principle that only real income of the assessee shall be subject to levy of Income Tax unless provisions of law provide otherwise as in cases of presumptive income taxation in the Act itself. However, the question of what is real income of the assessee merits consideration and requires thoughtful examination of facts and law. Liquor business in India is very different from other business as it is highly regulated. The terms of granting licences are highly stringent. The assessee M/s Wave Distilleries in the given case is the Excise Licencee and UBL may have exhausted Excise Licence Limit in the relevant assessment period. Assessee M/s Wave Distilleries and Breweries Limited (WDBL) being the licencee was alone to manufacture and sell the liquor. The terms of contract being agreed upon by the parties cannot override upon the assessee at the time of issuing the Excise Licence. The contract can provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the case records and further it is seen that the assessee has not disclosed fully and truly all material facts on this issue and therefore there was omission and failure on part of the assessee with regard to this transaction to disclose fully and truly all necessary material facts necessary for assessment. Accordingly, after considering the facts mentioned as discussed above and in view of the material available on record, I have reasons to believe that income chargeable to tax to the tune of Rs. 1,56,56,37,000/- has escaped assessment for the AY 2013-14. The escaped income being above Rs. One Lakh is covered by the provisions of section 49(1) (b) of the 1.T. Act, 1961. Further in view of decision of Hon'ble Supreme Court in the case of Larsen & Toubro Ltd. Civil App No. 5390/2007., Hon'ble Supreme Court, ITO Vs. Sarabhai M Lakhani 243 ITR 1 and A.L.A. firm Vs. CIT reported in 189 ITR 285, proceedings u/s 147 may be initiated on the basis of decision of Hon'ble High Court of Karnataka in case of Principal Commissioner of Income Tax, Bangalore Vs. M/s Chamundi Winery & Distillery, [2018] 97 taxmann.com 568 (Karnataka)/ [2018] 408 ITR 402 (Karnataka) passed where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusively for and on behalf of UBL only who was not at all subjected to any control under the Excise Act. The AO further observed that for all practical and legal purposes, the assessee was the Excise Licensee engaged in the business of manufacture and sale of liquor and, therefore, the assessee must account for all of the profits from such manufacture and sale and offer tax on the same. The AO was of the opinion that it was the case of application of income and not diversion of income by overriding title at source. The AO placed heavy reliance on the judgment of the Hon'ble Karnataka High Court in the case of PCIT, Bangalore vs. Chamundi Winery & Distillery [2018] 97 taxmann.com 568 (Karnataka) and concluded that the Courts and the Tax Authorities have the power to look into the real purpose of the commercial arrangements and transactions to reach the truth and the transactions having the sole purpose of tax avoidance, will have no effect on the actual tax liability of the taxpayer. Accordingly, for assessment year 2013-14, the AO proceeded to compute the income of the assessee by making an addition of Rs. 1,56,56,37,000/- and the total income under section 143(3) read with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38,000.00 Escapement of Income (D-E) 2,14,57,74,000.00 Assessment year 2017-18: Detail Amount (Rs.) Sales not included as it has been claimed relating to UBL brand (A) 2,18,82,36,000.00 Consumption of raw materials and packing materials not included as it has been claimed relating to UBL brand (B) 65,66,34,000.00 Other expenses not included as it has been claimed relating to UBL brand (C) 33,99,05,000.00 Income not considered for computation D=A-B-C` 1,19,16,97,000.00 Charges received by the assessee in the name of Bottling Fees (E) 30,12,13,000.00 Escapement of Income (D-E) 89,04,84,000.00 4. Aggrieved, the assessee approached the Ld. First Appellate Authority challenging the five assessments, wherein the assessee challenged the reopening of the assessments and also challenged the quantum additions. 4.1 The Ld. First Appellate Authority upheld the reopening in all the captioned years. However, on the merits of the case, the Ld. First Appellate Authority observed that having regard to the terms of the Agreement, Excise License, Sale Invoices, Gate Passes, Bank Accounts, etc. it was evident that the assessee company was a contract manufacturer for UBL and that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment years 2014-15 to 2017-18: 1. The Ld. CIT(A) has erred in 1. Deleting the addition of Rs. 2,23,83,23,000/- (in A.Y. 2014-15) Rs. 2,17,73,22,000/- (in A.Y. 2015-16) Rs. 2,14,57,74,000/- (in A.Y. 2016-17) and Rs. 89,04,84,000/- (in A.Y. 2017-18), holding the same as 'distributable surplus' paid by the assessee M/s Wave Distilleries and Breweries Limited to M/s United Breweries Limited, India in pursuance of agreement dated 04.11.2011. 2. Ignoring the fact that the assessee has paid brand charges to the UBL and merely that the sale was made in the name of UBL under the arrangement of the agreement thereby treating the reimbursement as 'distributable surplus' without appreciating the fact that profit and gains from the business of manufacture and sale of liquor by assessee were assessable in its hands. 8. The assessee has raised following common grounds of Cross Objection for assessment years 2013-14 and 2014-15: 1. That, in view of the facts and circumstances of the case, and in law, the CIT(A)/NFAC has erred in not appreciating that the assessment order dated 29.03.2022 passed under Section 147 read with Section 144B of Act is liable to be set aside and qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order dated 29.03.2022 passed pursuant to the notice under Section 148 of the Act is illegal, bad in law and without jurisdiction as the reopening in instant case is only on account of change of opinion which is based on re-appreciation of facts and material already on record. 8. Without prejudice to the above, the notice under section 148 of the Act. the assessment order dated 29.03.2022 passed under Section 147 read with Section 144B of Act and the additions made therein are illegal and bad in law as the alleged escaped income is not the income of the appellant at and all and as such the allegation of escapement of income is incorrect and frivolous. The notice under section 148 of the Act and the assessment order dated 29.03.2022 are liable to be quashed on this ground alone. 9. That, in view of the facts and circumstances of the case and in law, the addition made vide assessment order dated 29.03.2022 is based on mere surmises and conjectures and is made without appreciating the explanations given, evidence produced and material placed and made available on record. 10. That, in view of the facts and circumstances of the case, the additions made are illegal, high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid procedure had been followed by the assessee year-after-year and undisputedly, a note in this regard had also been given in the assessee's balance sheet. It was submitted that more importantly, it had been categorically and rightly stated by the AO that this has not resulted any suppression of revenue. The Ld. A.R. also submitted that the Ld. Pr. CIT, vide letter dated 17.06.2020 had directed the JCIT/AO to resubmit the report dated 20.02.2020 in view of certain decisions, thereby influencing the independent satisfaction of the AO. The ld. AR submitted that in response to the letter dated 17.06.2020 of the PCIT, the AO, in a complete volte face, had resubmitted his proposal to initiate reassessment proceedings on the very same set of facts. It was further submitted that thereafter, the Ld. Pr. CIT, through JCIT, issued another letter dated 13.11.2020, directing the AO to take suitable action with regard to initiation of proceedings under section 147 of the Act. The Ld. A.R. further submitted that the flow of correspondence between the Revenue authorities clearly showed that the AO had acted upon the dictates of higher authorities and thus, the satisfaction was borrowed satisfact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year. The Ld. A.R. submitted that proviso to section 148 of the Act placed fetters on the powers of the Assessing Officer to initiate reassessment proceedings beyond the period of 4 years from the end of the relevant assessment year, where the assessment has been completed under section 143(3) of the Act unless the income has escaped assessment by reason of the failure of the assessee to disclose fully and truly all material facts necessary for assessment. The Ld. A.R. submitted that the Hon'ble Courts have consistently held that where there was no case of any failure on the part of the assessee to fully disclose all material facts and it was only a question of drawing an inference from these facts, reopening of assessment beyond four years period is invalid. The Ld. A.R. further submitted that the Revenue, in cases falling under the aforesaid proviso, must prove that the assessee had failed to disclose fully and truly all material facts required for assessment of its income. It was submitted that in the instant case, the AO had merely made a bald allegation that the assessee has failed to disclose fully and truly all material facts. The Ld. A.R. submitted that since all the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce on the judgement of Hon'ble Supreme Court of India in the case of Income Tax Officer vs. Lakhmani Mewal Das: [1976] 103 ITR 437 (SC), wherein their Lordships held that the duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Income-tax Officer with regard to the inference which he should draw from the primary facts. If an Income-tax Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment. 11.7 In light of the above facts and the legal position, the submission of the Ld. A.R. was that for assessment years 2013- 14 and 2014-15, the AO had failed to satisfy the prerequisite conditions to issue notice under section 148 of beyond the prescribed period of 4 years from the end of the relevant assessment years. It was also submitted by the Ld. A.R. that in the order passed by NFAC, disposing of the objections, it is clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier assessment and, therefore, the same was available with the AO and would tantamount to change of opinion. The Ld. A.R. submitted that for assessment year 2013- 14, the Assessing Officer posed a specific question with respect to the agreement with UBL and justified details of amounts received from UBL with specific reference to Point no. 6 of note 25 to the Audited Financial Statements furnished by the assessee during the course of original assessment proceedings, vide notice dated 22.09.2014. Moreover, for assessment year 2012-13 also, books of accounts were examined and vide Assessment Order dated 22.10.2014 passed under section 143(3) of the Act, no adverse inference was drawn against the assessee. 11.11 The Ld. A.R. further submitted that with reference to Assessment years 2015-16 and 2016-17, the law relating to "change of Opinion" will equally apply in light of the judgment of Hon'ble High Court of Delhi in the case of CIT vs. Orient Craft Ltd.: 354 ITR 536, wherein the reasons for reassessment was that AO reached on a belief that there was escapement of income on going through the return of income filed by assessee after he accepted return u/s. 143(1) of the Act w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FL-1A (for sale) from Uttar Pradesh Excise Department. The FL-1A License makes it apparent that the right to sell Beers manufactured in the premises of the assessee (by virtue of FL-3A license) exclusively rested with UBL and that the assessee cannot sell Beers manufactured by it while acting as a contract manufacturer for UBL. Further, it is also evident from FL-36 (i.e. gate pass issued for removal of goods from premise of manufacturer), that it is drawn in the name of UBL and not the assessee, since excise duty on sales of Beer from the premises of the assessee was paid by UBL itself. It was further submitted that the sale proceeds from the sale of Beer were directly paid to the Bank Account of UBL as is evident from confirmations given by purchasers He submitted that in light of the these facts as well as the fact that the assessee has disclosed the accounting treatment of its arrangement with UBL vide Point No. 6 of Note 25 to the Audited Financial Statements, there was no occasion to treat the sales of Beer by UBL as income earned by the assessee. It was further submitted that the Assessing Officer has entirely misconstrued the facts of the case and relied upon the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced by the Ld. A.R., the ld. CIT (DR) defended the action of the ld. CIT(A) in upholding the validity of reassessment proceedings. It was submitted that the reopening was based on suppression of sales by the assessee and that such suppression in quantum was more that Rs. 1 lakh and, therefore, the reopening could be validly made within six years and therefore, the argument of the Ld. A.R. that reopening after expiry of four years was invalid was incorrect. It was further submitted that the Department had noticed variation in figures as appearing in Form No.26AS and the financial statements submitted by the assessee and this constituted additional information which could be validly utilized by the Department for the purpose of issuance of notice under section 148 of the Act. 12.1 The ld. CIT (DR) referred to Proviso (1) to section 147 of the Act in this regard. Referring to the letter issued by the Office of the Asstt. Commissioner of Income Tax, Circle 1, Bareilly to the Principal Commissioner of Income Tax, Bareilly, vide dated 08.12.2020 and placed at pages 36 to 43 of the assessee's paper book, it was submitted that in assessment year 2014-15, suppression of sales had res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licensee, i.e. Chamundi Winery & Distillery and after payment of income tax, distribution of surplus between the two parties was at their discretion. The ld. CIT (DR) submitted that the Hon'ble Karnataka High Court went on to hold that the distributable surplus paid to Indian subsidiary was nothing but application of income by the assessee and that the same was neither an allowable expenditure under section 37(1) of the Act nor a trade loss and that further the same did not amount to diversion of income at source by overriding title because the entire business belonged to Chamundi Winery & Distillery only. 12.3 The ld. CIT (DR) submitted that essentially and undisputedly the assessee was itself carrying out the business of brewery and in terms of excise license issued to it by the State Government and therefore income had to be taxed in the hands of the assessee only, as rightly done by the AO. 12.4 On merits of the case, the ld. CIT (DR) submitted that the ld. CIT(A) had erred in deleting the addition for the reason that he did not appreciate the observations made by the AO while making the impugned addition. The ld. CIT (DR) submitted that the source of income is from manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis from the assessee's facility. It was further submitted that in order to sell their products in the State of U.P., UBL was required to obtain license under the excise law and accordingly UBL had also obtained excise license FL-1A and had also furnished sample sales invoices which would show that these were not issued by the assessee but by UBL. It was further submitted that even the excise gate passes in relation to UBL were issued in the name of UBL. The Ld. A.R. drew our attention to the copies of sample invoices and licenses No. FL-3A and FL-1A placed in the paper book in this regard to substantiate his arguments. Our attention was also drawn to confirmation from UBL placed at page 104 of the paper book, vide dated 19.02.2020 wherein it has been confirmed that for financial years ending on 31.03.2012, 31.03.2013 and 31.03.2014, all the collections from the debtors with regard to sale of their brands of Beer made from the assessee's unit have been received directly by UBL in their account and further that as per the terms of the agreement, UBL had provided funds to the assessee for payment to creditors who had supplied material for production and packing of Beer brands of UB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions in this regard. The basic facts for assessment year 2013-14 are undisputed. The return of income for assessment year 2013-14 was filed on 30.11.2013 and was finalized in terms of the provisions of section 143(3) of the Act, vide order dated 22.10.2014 and the returned income of Rs. 30,90,13,100/- was accepted by the Department. It was only on 27.03.2021 that notice under section 148 of the Act was issued by the Department seeking to reopen the assessment by mentioning that there was an escapement of income to the tune of Rs. 15,656.37 lakhs in the reasons recorded for reopening. A perusal of the reasons recorded would show that the reasons behind reopening was the audit objection raised by the CAG Audit as well as the judgment of the Hon'ble High Court of Karnataka in case of Principal Commissioner of Income Tax, Bangalore Vs. M/s Chamundi Winery & Distillery (supra). In the show cause notice, it was contended by the Department that the assessee was manufacturing, bottling and selling Beer on its own account under the facade of UBL and in view of the agreement entered into between the assessee and UBL, the assessee was in effect the actual dealer and the effect of the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not acceptable. Thereafter, the AO submitted another Report dated 20.02.2020 dealing with the audit objections which has been placed at pages 294 to 299 of the paper book submitted by the assessee and in this report also the AO reiterated that the procedure actually adopted by the assessee will not have any adverse effect on the income of the assessee. It was also mentioned by the AO that the procedure/methodology has been followed by the assessee year-after-year and Note to this effect has also been given in the assessee's audited Balance Sheet and final accounts and that the practice adopted by the assessee had not resulted in any suppression of revenue or income and that the audit objection raised by the audit party was not based on any proper appreciation of facts of the case and thus the audit objections were not acceptable and that they should be dropped. Thereafter, on 17.06.2020, the Office of the Ld. PCIT wrote to the Joint Commissioner of Income Tax, Range 2, Bareilly (JCIT), requiring examination of assessment of the assessee and resubmit the report/proposal after considering the judgment of the Hon'ble Karnataka High Court in the case of M/s Chamundi Winery & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee having suppressed sales/income, vide Report dated 22.06.2020 was not based on an independent exercise of the mind, but was rather borrowed satisfaction at the behest of the Office of the Ld. PCIT, Bareilly and for this very reason, the re-assessment proceedings initiated cannot be held to be legally sustainable. There are a plethora of judgments on the issue of objective recording of satisfaction in the case of re-assessment proceedings. It is very obvious from the factual matrix leading to the issuance of notice under section 148 of the Act that the assessee had made all necessary disclosures before the AO during the course of initial assessment proceedings and thereafter had also stated very categorically in response to the audit objections that there was no suppression of sales or income and, therefore, without there being any recording of fact, duly evidenced by a document or noting evidencing suppression of material facts, which came later within the possession or knowledge of the AO, would not justify reopening of the assessment. In our considered view, the action of the AO is a change of opinion and that too apparently under the guidance of the Office of the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression of material facts is just a bald statement and would not help the case of the Revenue. It is also to be noted that the final accounts of the assessee duly disclosed by way of a Note, the agreement between the assessee and UBL and the revenue which would accrue to the assessee as a result of the said Agreement. As far as the difference in sales figures between Form 26AS and final accounts of the assessee were concerned, the AO has himself in the second Report categorically stated that the accounting treatment and the procedure being followed by the assessee would not result in any loss of revenue. Therefore, we have no hesitation in hold that the reopening of assessment for assessment year 2013-14 was without any basis and was based on mere change of opinion and was evidently at the behest of the superior authorities and thus, such initiation of reassessment proceedings do not have any foot to stand out and are hereby quashed. 14.6 It is seen that the reassessment proceedings for assessment years 2014-15, 2015-16, 2016-17 and 2017-18 were also initiated on identical lines and similar set of audit objections were raised for the above mentioned assessment years and thereafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er appeal. 14.8 Thus, to sum up, the issue of validity of reassessment proceedings, section 147 of the Act does not allow reassessment of income on change of opinion. 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 the judgment of the Hon'ble Karnataka High Court in the case of M/s Chamundi Winery & Distillery (supra), the 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 the Hon'ble Karnataka High Court in the case 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 Ld. PCIT, Bareilly, which again would demonstrate that the opinion of the AO was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clarify with supporting evidence its contention that the sale proceeds were received directly by UBL and in this regard also the assessee had furnished confirmation of the same, which has also be duly reproduced in the impugned order. Thereafter, the Ld. First Appellate Authority went on to examine the nature of License Fee and the assessee duly demonstrated that UBL was having License for contract manufacture of its brand of Beer issued by the U.P. State Excise Department and placed on record the License in Form FL-3A issued by the State Excise Department. Copy of this License has also produced before us and a perusal of this License shows that UBL can get its brand of Beer manufactured on contract basis from the assessee's facility. Clause 5 of this Certificate also mentions that in order for UBL to sell their products in the State of U.P., it is required to obtain License under Excise Laws and the assessee has furnished copy of Excise License FL-1A as well, which has been taken on record and which specifically mentions the name of M/s United Breweries Ltd. (UBL) as the License holder. This FL-1A License grants License to UBL to vend foreign liquor other than denatured spirit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not become taxable in their hands. Similarly, in the case of CIT vs. Imperial Chemical Industries India Pvt. Ltd. Reported in [1969] 74 ITR 17 (SC), the Hon'ble Apex Court differentiated between diversion of income by overriding title and application of income and ruled that where the income is diverted before it is earned due to overriding obligation, it does not form part of assessee's total income. Thus, the primary difference would lie the timing and nature of income allocation. 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 ld. CIT(A) insofar as holding of assessee as a contract manufacturer is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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