9911796707
TMI Blog2025 (3) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... Breweries Ltd. (UBL). The assessee filed its return of income for the year under consideration on 30.11.2013, declaring a total income of Rs. 30,90,13,100/- and tax was paid on the deemed total income of Rs. 36,12,49,703/- as per the provisions of section 115JB of the Income Tax Act, 1961 (hereinafter called "the Act'). The case of the assessee was reopened by issuing notice dated 27.03.2021 under section 148 of the Act. For the sake of ready reference, the reasons recorded by the AO for re-opening the assessment are reproduced as under: "The facts of the case are that M/s Wave Distilleries and Breweries Limited (WDBL) owned a distillery for the manufacture and sale of alcoholic beverages under a license obtained from the State Government. 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 U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Wave Distilleries and Breweries Limited (WDBL) in favour of M/s UBL India. Here it would be relevant to mention that M/s WDBL has shown Rs 2841 Lakh as Bottling Charges. 4.2 At this juncture, it is pertinent to mention the 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) wherein similar issue has been decided by the Hon'ble court and it has been held in the case that in case of contracts such as entered with by assessee company and United breweries Limited (UBL), there does not exist any diversion of income by overriding title. Rather, in such cases, position of law only 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is being based on the inputs given in notes on account by the Chartered Accountant in his report. Escapement of income is calculated: Assessment Year Sales not included as it has been claimed relating to UBL brand. Consumption of raw materials and packing materials not included as it has been claimed relating to UBL brand. Other expenses not included as it has been claimed relating to UBL brand. Charges received by the assessee in the name of bottling fees. Escapement of income 2013-14 35765.45 lakhs 11384.87 lakhs 5883.21 lakhs Rs.2341 Lakhs Rs.15,656.37 Lakhs 5. Basis of forming reason to believe and details of escapement of income: On the basis of material available on record as discussed above and having gone 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L was the principal manufacturer. It was further submitted that while sales and purchases for the manufacturing of UBL brands was done in the name of the assessee-company, in essence, the assessee company was receiving only a fixed amount for such manufacture and therefore, sales, consumption of raw materials and packing materials and other expenses were not to be treated as part of the profit and loss account of the assessee-company. 3.2 However, these contentions of the assessee did not find favour with the AO and he concluded that since the assessee was the Excise Licensee under the provisions of the Excise Act and that further time UBL had no Excise License in its name, it could not be said that the assessee was carrying on business 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 applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to UBL brand (C) 77,99,18,000.00 Income not considered for computation D=A-B-C` 2,59,43,25,000.00 Charges received by the assessee in the name of Bottling Fees (E) 41,70,03,000.00 Escapement of Income (D-E) 2,17,73,22,000.00 Assessment year 2016-17: Detail Amount (Rs.) Sales not included as it has been claimed relating to UBL brand (A) 5,02,72,95,000.00 Consumption of raw materials and packing materials not included as it has been claimed relating to UBL brand (B) 1,64,93,33,000.00 Other expenses not included as it has been claimed relating to UBL brand (C) 80,57,50,000.00 Income not considered for computation D=A-B-C` 2,57,22,12,000.00 Charges received by the assessee in the name of Bottling Fees (E) 42,64,38,000.00 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 compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely 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. (III) Holding the 'application of income' as reimbursement to M/s United Breweries Limited, India on the ground that sale proceeds were deposited in the bank account of the M/s United Breweries Limited, India and M/s United Breweries Limited, India would be providing necessary funds to the assessee for meeting all direct expenses. 7. The Revenue has raised following common grounds of appeal, except the difference in amount, for assessment 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 148 of the Act is illegal, bad in law and without jurisdiction as there is no fresh tangible material on the basis of which the purported reasons have been recorded and therefore, there are no valid reasons to believe in the eyes of law. 6. That in view of the facts and circumstances of the case and in law, the notice issued under Section 148 of the Act is illegal, bad in law and without jurisdiction as the same has been issued without a valid approval as required under the provisions of Section 151 of the Act. That the sanction u/s 151 of the Act is illegal, bad in law and not sustainable in law as there is no application of mind while granting the approval. 7. That in view of the facts and circumstances of the case and in law. the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptable in the light of the fact that the sales made by the Assessee on behalf of the UBL was duly recorded in the books of accounts of the UBL and that the assessee had only received bottling charges from UBL for such services which had been duly recorded in its books of account of the assessee. Thereafter, another report dated 20.02.2020 was submitted by the AO to the Pr. CIT, wherein the AO had recorded a finding that the procedure adopted by the assessee that where total sale proceeds was actually received by the UBL directly and then UBL had reimbursed various costs and bottling charges to the assessee, would not have any adverse effect on the income of the assessee. The Ld. A.R. submitted that the AO had also rightly noted that the said 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 2013-14 & 2014-15, the assessee had also raised the ground that impugned notices for the respective Assessment years were barred by limitation in terms of first proviso to section 147 of the Act. The Ld. A.R. submitted that the impugned notice under section 148 of the Act was issued on 27.03.2021 for Assessment year 2013-14 and on 30.03.2021 for Assessment year 2014-15, therefore, these notices were issued beyond the prescribed period of 4 years. The Ld. A.R. also submitted that as per section 147 of the Act, the Assessing Officer has the power to re-open a case even beyond 4 years, when there is failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for the relevant assessment 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated the transaction to be genuine and on that footing had completed the assessment, then it was no open for the AO to re-open the assessment on the ground that there was failure on the part of the assessee to disclose all material facts. 11.5 The Ld. A.R. also placed reliance on the judgement of Hon'ble Supreme Court of India in the case of Indian Oil Corporation vs. Indian Tax Officer, Central Circle V, Calcutta and Ors: [1986] 159 ITR 561 (SC) and submitted that in this case the Hon'ble Apex Court had ruled that there must be materials to come to the conclusion that there was 'omission or failure to disclose fully and truly all material facts necessary for the assessment of the year. 11.6 The Ld. A.R. further placed reliance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nator of India Ltd. (2010) 320 ITR 561(SC). 11.10 The Ld. A.R. submitted that in the instant case, proceedings for reopening had been initiated with respect to alleged profit generated on account of sale made on behalf of UBL. The disclosure in this behalf had been categorically made by the assessee in its Notes to Accounts attached to the Balance Sheet which were before the AO during the regular assessment proceedings. Therefore, neither there was any failure to disclose fully and truly all material facts nor there was any new tangible material which could justify the reopening of the present case. The reasons recorded were primarily based on the audit objection report which in turn is based on the records which were already part of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the light of the above facts, the Ld. A.R. submitted that initiation of reassessment proceedings for the captioned Assessment years was void-ab-initio, illegal and in contravention to the provisions of section 148 of the Act. Consequently, the proceedings under section 148 of the Act and the assessment orders passed are liable to be quashed. 11.14 On merits of the case, the Ld. A.R. submitted that as per the agreement, the assessee has received remuneration in terms of the bottling charges only and the same was offered to tax for all the concerned Assessment years. The allegation that the proceeds of sales were the income of the assessee is entirely baseless. Firstly, UBL procured License FL-3A (for contract manufacturing) and License 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of manufacture/sale of UBL's Brand and the same accrued to UBL only. 11.16 The Ld. A.R. concluded his submission by stating that the assessee had merely acted as a contract manufacturer and was only entitled to the agreed contract charges as per the agreement which had been duly offered for tax and that the assessee had neither recognized the sales, manufacturing expenses, purchase and other expenses incurred by them in its books, nor any loss for non-payment of bills, discounts, selling expenses which were made by UBL had been claimed by the assessee and, thus, the ld. CIT(A) has rightly appreciated the facts of the case and deleted the additions made by the AO in the captioned assessment years. 12. In response to the arguments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to believe. The ld. CIT (DR) also referred to the case of PCIT, Bangalore vs. M/s Chamundi Winery & Distillery (supra) and submitted that in this case also Chamundi Winery & Distillery was the Excise Licensee and was undertaking entire business activity of manufacture and sale of liquor in its name and ownership. It only purchased raw materials from market, sold the entire liquor in the open market and to other purchasers under its own invoices, collected all gross sale receipts, met day-to-day expenses, met all sales tax, excise duty, VAT, labour charges, etc. as its operating cost and the Hon'ble Karnataka High Court had concluded that whatever income was generated out of liquor business, had to be first taxed in the hands of excise 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire business was also carried out under its own name by booking sales and purchases in its name. It was pointed out by the Ld. A.R. that in that case, M/s Chamundi Winery & Distillery had been assessed under the Sales Tax/ VAT provisions, as the principle owner of the liquor products manufactured and sold and it was under these set of facts that it was consequently held that M/s Chamundi Winery & Distillery was responsible to pay income tax on such income as well. Whereas in the present case, the assessee was only having a license for contract manufacturing of brand of Beer owned by UBL which was evident from Form FL-3A issued by the State Excise Department. It was pointed out that UBL could do its brand of Beer manufactured on contract 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 13.2 The Ld. A.R. prayed that the C.O.s of the assessee deserved to be allowed and the appeals of the Department deserveed to be dismissed. 14. We have heard the rival submissions and have also perused the material on record. We have also gone through the paper books filed by the assessee in support of its contentions and have also duly considered the implications of the factual matrix of the appeals as is clear from the records. First of all, we proceed to deal with the assessee's challenge to the validity of reassessment proceedings as taken in grounds in the C.O.s. 14.1 As assessment year 2013-14 was argued as the lead case by the Ld. A.R., we will take the facts of this assessment year for disposing of the assessee's Cross Objections 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that the difference in sales as per 26AS Statement and the sales shown in the profit and loss account has been reconciled and that in view of the facts available in the case records and after getting the required information from the assessee under section 133(6) of the Act, the audit objection was not acceptable. There were as many as 14 objections raised by the CAG Team and in his reply, the AO did not accept any of the objections and in the concluding paragraph of the reply, submitted that the Audit Party had made sweeping and generalized observations which had no bearing on the income of the assessee and that in view of the detailed facts enumerated in the reply, the various audit objections made by the Special Revenue Auditor 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no new set of facts which came into possession or knowledge of the AO between the period 20.01.2020 and 22.06.2020, i.e., the dates of the first and third Report respectively, which would prompt the AO to submit before the Ld. PCIT that there was suppression of sales and income. Even the judgment of the Hon'ble Karnataka High Court in the case of M/s Chamundi Winery & Distillery (supra) is of year 2018 and thus, apparently there was no justifiable reason for the AO to reach a conclusion that there has been suppression of sales or income except the continued prompting by the Office of the Ld. PCIT to draft the Report in a particular manner. Thus, we, in no uncertain terms, hold that the final conclusion reached by the AO regarding the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thereafter, revising the opinion by the AO in his third Report would only tantamount to change of opinion and the audit objections of the CAG would lose the character of tangible material. 14.5 It is also seen that although the AO has, in his third Report, stated that there was failure on the part of the assessee to disclose the material facts necessary for the purpose of assessment, he has not mentioned as to what those material facts were and what new facts had come in his possession/knowledge between the period of the first Report and the third Report. Therefore, in the absence of any specific instance being pointed out about suppression of material facts and their non-disclosure by the assessee, the statement of the AO regarding suppression 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment. The Hon'ble Gujarat High Court also referred to the Head Note in the judgment rendered by the Hon'ble Apex Court in the case of Indian and Eastern Newspaper Society vs. CIT reported in [1979] 119 ITR 966 (SC) and reiterated that the opinion rendered by the Audit Party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law and that true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer. Thus, based on the above judicial precedents also, we are of the considered opinion that the AO did not hold independent belief at any point of time that the income of the assessee had escaped assessment for five years under 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 dul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market rates. It has also been stated by the Ld. First Appellate Authority that during the course of hearing a confirmation certificate from UBL was taken on record which confirmed that all the sale proceeds were deposited in the bank account of UBL and that UBL would be providing to the assessee necessary funds for meeting all the direct expenses to be incurred on behalf of UBL. After analyzing these Clauses, the Ld. First Appellate Authority has reached the conclusion that the 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. The Ld. First Appellate Authority had also required the assessee to 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rriding title is not explicitly defined in the Act, however, it is more or less well established through various judicial decisions. The core principle on diversion of income is the presence of overriding title that causes income to be re-directed before it reaches the hands of the assessee. The Hon'ble Apex Court had an occasion to elaborate on the concept of diversion of income in the case of CIT vs. Bijli Cotton Mills (P) Ltd. [1979] 116 ITR 60 (SC) and the Hon'ble Apex Court held that for an income to be considered diverted at source, there must be an overriding title that diverts the income before it reaches the assessee and that if such title exists, the income never becomes the property of the assessee and, therefore, does 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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