Income Tax Appellate Tribunal - Pune
Serum Institute Of India Ltd.,, Pune vs Deputy Commissioner Of Income-Tax,, on 30 November, 2016
आयकर अपील य अ धकरण, पुणे यायपीठ "ए" पुणे म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
ी आर. के. पांडा, लेखा सद य एवं
ी वकास अव थी, या"यक सद य के सम#
BEFORE SHRI R.K. PANDA, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No.1703/PN/2014
"नधा%रण वष% / Assessment Year : 2005-06
Serum Institute of India Ltd., .......... अपीलाथ /
Sarosh Bhavan, 16-B/1,
Appellant
Dr. Ambedkar Road,
Pune - 411 001
PAN : AABCS 4225M
बनाम v/s
DCIT Central Circle1(1), Pune
.......... यथ /
Respondent
Assessee by : Shri Sunil Pathak &
Shri R.S. Abhyankar
Revenue by : Shri Anil Kumar Chaware, CIT
सुनवाई क तार ख / घोषणा क तार ख /
Date of Hearing :06.10.2016 Date of Pronouncement:30 .11.2016
आदे श / ORDER
PER R.K.PANDA, AM :
This appeal filed by the assessee is directed against the order dated 31-03-2014 of the CIT(A)-II, Pune relating to Assessment Year 2005-06.
2. The Ld. Counsel for the assessee at the time of hearing did not press grounds of appeal No.1 & 3 for which the Ld. Departmental Representative has no objection. Accordingly, the above two grounds are dismissed as 'not pressed'. 2 ITA No.1703/PN/2014
3. Ground of appeal No.2 by the assessee reads as under :
"2. Confirming disallowance of expenditure amounting to Rs.1,17,88,000/- incurred on repairs, renovation etc. of bungalow located at 70, Koregaon Park, Pune taken on lease (belonging to M/s. Poonawalla Finvest & Agro Pvt. Ltd., ZSP Group Company).
4. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing of vaccines, anti-sera, plasma and hormonal products. It filed its return of income on 30-10-2005 declaring total income of Rs.32,40,22,220/-. The order u/s.143(3) was passed on 30-03-2007 determining the total income at Rs.37,09,15,454/-. On the basis of the order passed by the CIT(A) on 26-03-2009 the order giving effect to CIT(A) was revised to Rs.36,73,04,321/- vide order u/s.250 dated 06-11-2009.
5. Subsequently, an order u/s.263 was passed on 26-03- 2009 directing the Assessing Officer to check the deduction granted u/s.10B on export invoice of Rs.5,26,58,037/-. The Assessing Officer passed order u/s.143(3) r.w.s. 263 on 07-11- 2009 without any change in the total income as determined vide order u/s.250 dated 06-11-2009 as mentioned above after examining the issue in the order passed u/s.263.
6. Subsequently, a search action u/s.132 of the Act was carried out in the case of Poonawalla group on 21-06-2011 of which the assessee company was one of the concerns. In the said search action the group had declared an amount of Rs.54.44 crores for the A.Y. 2005-06 to 2012-13 as undisclosed income. The above disclosure includes disclosure of Rs.10.80 crores made by the assessee company for A.Y. 2005-06 to 2011-12 on the issue of expenses on bungalow located at 70, Koregaon Park, 3 ITA No.1703/PN/2014 Pune. During the course of assessment proceedings, the assessee company claimed the expenditure on construction and repairs of the said bungalow as business expenditure. The assessee company has admitted the said expenditure to be disallowed and declared it as additional income in its hands in the respective years. The undisclosed income admitted by the assessee company on this account for the year under consideration, i.e. A.Y. 2005-06 at Rs.1,17,88,000/-. The Assessing Officer, therefore, reopened the assessment within the meaning of section 147 by issue of notice u/s.148.
7. The assessee filed a letter dated 06-04-2012 requesting the Assessing Officer to consider the original return of income submitted on 30-06-2005 as the return of income filed in response to notice u/s.148. Along with the said letter the assessee filed a revised computation of income wherein the additions made in the order passed u/s.143(3) which were agreed by the assessee company were not contested. The additions contested before the Tribunal were not offered to tax or claimed as allowable to keep the issue alive.
8. So far as the additional income declared u/s.132 is concerned it was submitted that the said amount of Rs.1,17,88,000/- declared by Dr. Cyrus Poonawalla, Chairman and Managing Director in his statement u/s.132(4) dated 20-07- 2011 as additional income is to be allowed as business expenditure. It was argued that the aforesaid amount represent the part of declaration made by Dr. Cyrus Poonawalla. The amount has been spent/incurred wholly and exclusively for the purpose of business and the expenditure had been incurred to 4 ITA No.1703/PN/2014 ensure smooth running of business without being affected by the disputes between CSP Group & ZSP group. It was submitted that the assessee company is one of the parties referred to in the family settlement and have incurred these expenses to protect their business from losses and damages arising out of family disputes and litigation. Various decisions were also brought to the notice of the Assessing Officer to the proposition as to why the said expenditure should be allowed as business expenditure.
9. However, the Assessing Officer was not satisfied with the explanation given by the assessee and rejected the claim for the following reasons :
"I have gone through the assessee's replies. The submission of assessee is duly considered but not accepted on following grounds:
i. The Asseessee in his submission made and discussed in preceeding paras, itself admitted that this amount represents the amount declared by Dr. Cyrus Poonawalla, the chairman of Serum Institute of India Ltd. in his statement u/s 132 dt. 20.07.2011. This has been declared with reference to page no. 10 of loose paper bundle no. 13 found at the office of Shri. Pannalal Kothari and with a view to honor the declaration made by Dr. C. S. Poonawalla u/s 132 on 20.07.2011, assessee has added the said sum of Rs. 1,17,88,000/- in connection with repairs & maintenance expenditure incurred for property at 70, Koregaon Park, Pune in the computation of income. Thus, it is apparent that assessee has not retracted from the disclosure made during search action in the case of assessee.
ii. Assessee has taken stand that this is allowable business expenditure because it is forming the part of family arrangement as agreed upon between two brothers in order to ensure smooth functioning of the operations of the CSP group (Cyrus Poonawalla Group) & ZSP group (Zavaray Poonawalla Group) companies. The submission of assessee is duly considered but not acceptable .It is settled issue that company has an independent legal entity and in this case transfer by way of investment is made through companies not through individuals of Joint Family /HUF or between family members. Hence, the case law cited by assessee is not applicable.
Reliance was placed on Karnataka High Court Judgment in the case of Sea Rock Investment case Page No 172 Para in Bold lines and page no.174 - Para-3 and Para-B. Further for settlement of personal dispute of Shri Cyrus Soli Poonawalla & Zavereh Soli Poonawalla as reflected in clause 14 of family arrangements investment were made by companies.
5ITA No.1703/PN/2014
iii) Further, expenditure was not incurred for business purpose. As stated by assessee itself that expenditure incurred in bunglow in order to ensure the smooth running of business without being affected by the disputes between CSP Group & ZSP Group. Assessee company is one of the parties referred to in the family settlement and have incurred these expenses to protect their businesses from losses and damages arising out of family disputes and litigation. During search action, it was observed that this expenditure was incurred to provide benefit to family via investment made in bunglow, and it has nothing to do with business of assessee and there is no commercial expediency. When these facts confronted with Dr.C.S. Poonawalla u/s 132 on 20.07.2011, he agreed to withdraw claim of expenditure incurred on bunglow. It appears, that assessee is now referring case laws and other facts to get immunity from penalty only.
10. Before CIT(A) the assessee contended that the expenses incurred on the bungalow formed a part of the family arrangement as agreed upon between the two brothers to ensure smooth functioning of the operations of C.S. Poonawalla group (CSP in short) and Z.S. Poonawalls group (ZSP in short) group. Referring to the statement of Dr. Cyrus Poonawala dated 20-07- 2011 it was pointed out that Mr. Poonawalla had stated that the said expenditure was incurred in order to ensure smooth running of business without being affected by the disputes between CSP and ZSP group. It was submitted that the assessee-company is one of the parties referred to in the family settlement and expenses incurred were to protect the business from loses and damages arising out of family disputes and litigation. The assessee-company" has, however, contended that the same was agreed to be added back only to buy peace and avoid litigation. The assessee placed reliance on the following judicial decision :
i. Chemosyn Ltd. Vs. ACIT 149 TTJ 294 (Mum)
ii. Echjay Industries Ltd. Vs. DCIT ITA No.3103/Mum/1996
6
ITA No.1703/PN/2014
11. The assessee contended that the expenses are incurred for the office of the Director i.e. Mr. Zavaray Poonawala and therefore, if the expenditure is incurred on repairs/development of leased premises for the office of a Director, it is wholly and exclusively incurred for the purpose of business and such expenses on repairs of a leased premises for the use of a Director should be treated as revenue expenditure as it is prompted by commercial expediency as decided in the case of CIT Vs Sir Shadilal Enterprises Ltd (2009) 317 ITR 449 (All). It was contended that expenses incurred on leased premises be allowed as revenue expenditure and as the assessee did not acquire any capital asset alternatively depreciation will have to be allowed as the general principle is that expenditure on creation of a capital asset on capital account applies only where the capital asset belongs to an assessee. The assessee relied on the decision of the apex court in the case of CIT Vs Madras Auto Services (P) Ltd (1998) 233 ITR 468 (SC). It was argued that the expenditure incurred for terminating disadvantageous relationship to avoid pecuniary loses or commercial inconveniences occurring in the future, is purely of a revenue nature. For the above proposition the assessee relied upon the following decisions :
i. Western India Oil Distribution Co. Ltd. Vs. CIT 77 ITR 140 (Bom.) ii. CIT Vs. Dalmia Dadri Cement Ltd. (1970) 77 ITR 410 (P&H)
12. It was further argued that the said amount of Rs. 1,17,88,000/- has been offered to tax by Poonawala Finvest & Agro Pvt. Ltd, a ZSP group company and if the assessee-company of the CSP group offers the same to tax, it will amount to double taxation. It was contended that the Assessing Officer disregarded 7 ITA No.1703/PN/2014 the claim of business expenditure stating that there is no commercial expediency in making the expenditure without appreciating that the amount declared as income is nothing but forming part of the family arrangement which is with the intention to settle the dispute and not to circumvent the provisions of law.
13. However, the CIT(A) also was not satisfied with the explanation given by the assessee and upheld the action of the Assessing Officer by observing as under :
"3.7 The appellant in Ground No.1 has contested that expenditure of Rs.1,17,88,000/- in incurred on repairs, renovation of bungalow located at 70, Koregaon Park be allowed Koregaon Park be allowed as the impugned expenditure is part of family arrangement to ensure smooth running of business. The fact of the case is that a search action was carried out in the case of the Poonawala group on 21-06-2011 and the appellant being one of the entities of the group. During the said search action disclosure was made by the group in its various group concerns and out of the said disclosure, an amount of Rs. 54.44. crores was disclosed by the appellant company for A.Y. 2005-06 to A.Y. 2012-13, which included disclosure of Rs. 10.80 crores made by the appellant on the issue of 'expenses on bungalow located at 70, Koregaon Park for the aforesaid years. The undisclosed income admitted by the appellant company for the year under consideration i.e. A.Y. 2005-06 is Rs. 1,17,88,000/-. The aforesaid bungalow belonged to the group of companies of the group i.e. Poonawala Finvest & Agro Pvt. Ltd and the appellant company claimed the said amount as expenditure on construction and repairs of the bungalow as business expenditure. Dr. Cyrus Poonawala, CMD of the appellant company in his statement recorded u/s 132(4) on 20-07-2011 declared the additional income of Rs. 1,17,88,000/- which is with reference to Page No 10 of loose paper bundle No 13 found at the office of Shri. Pannalal Kothari. The appellant has raised the issue that the said expenditure has been incurred to ensure smooth running of business without being affected by the disputes between CSP and ZSP group and the appellant being one of the parties, in the family settlement incurred the said expenses to protect the business from loss and damages arising out of family disputes and litigation. The appellant has filed the copy of the said family settlement/ or the family arrangement agreement dated 22-08-2002. On perusal of the said agreement it is noticed that the same has entered into in order to avoid differences and disputes in future of the next generation and in order to ensure a suitable and equitable allocation and independent control and wherever there is joint control to ensure harmony. Thus the said family arrangement primarily contains the area of operation of the two groups viz. CSP and ZSP and equitable distribution of the assets and properties and the various companies/firms between them. The 8 ITA No.1703/PN/2014 said arrangement between the two groups however do not indicate or justify the aforesaid payment as was found recorded on the seized document. Hence the contention raised by the appellant that the amount declared as income is part of family arrangement is prima facie not correct as the mention of the expenses in the family arrangement is absent except for the fact that bungalow at 70, Koregaon Park was agreed to be fully constructed on account of Serum Institute, the appellant except for the internal furnishing, which appear to have been spent by the other group i.e. ZSP group. The appellant's contention that the said arrangement was .with the intention to settle the dispute also do not get answered by any such instance pointed out by the appellant. The said arrangement between the two families i.e. CSP and ZSP is for equitable allocation of control of the various entities viz. company firms/assets so as to avoid any likely differences and disputes for the future generation i.e. with respect to the children of the two brothers as is evident from the clauses and wordings of the family arrangement dated 22.08.2002. The appellant has raised various legal issues relating to the incurrence of the said expenditure which may be acceptable in a situation and case of normal/regular course of business. The appellant in the present case has offered the aforesaid sum as additional income voluntarily during the course of search action based on the notings made on the seized document however, now the appellant has changed its stance after a gap of substantial time period, which is not based on sound reasoning. The appellant has also not been able to bring on record any such material to indicate that the said expenditure has been incurred for the purpose of business and, therefore, there is certainly no commercial expediency so as to consider the claim made by the appellant. The expenditure incurred may have been to protect disputes in family and future litigation within the family. The aforesaid expenditure cannot be said to have been incurred wholly and exclusively for the purposes of business rather it is an expenditure only to earn personal gain and the appellant has failed to establish and demonstrate that the expenditure in question was incurred purely out of business consideration and for conducting the business out of business consideration and for conducting the business out of commercial expediency. In view of the above fact, I tend to agree to the observation of the Assessing Officer and the contention raised by the appellant does not appear to be convincing and hence the same is found to be not tenable.
3.8 In view of the above facts the ground of appeal No.1 raised by the appellant is dismissed."
14. Aggrieved with such order of the CIT(A) the assessee is in appeal before us.
15. The Ld. Counsel for the assessee strongly objected to the order of the CIT(A) in confirming the disallowance made by the Assessing Officer. He submitted that the Assessing Officer rejected the claim of deduction of Rs.1,17,88,000/- as business 9 ITA No.1703/PN/2014 expenditure for 3 reasons namely, (1) Chairman of the assessee company Dr. Cyrus Poonawalla had agreed in his statement u/s.132(4) and the same has not been retracted from the disclosure made during the search action, (2) the dispute is between two brothers. Therefore, the company being an independent legal entity the expenditure cannot be allowed as allowable expenditure in the hands of the company and (3) the expenditure was not incurred for business purpose and it has nothing to do with smooth running of business. He submitted that the turnover of the assessee company has gone up to 25 times because of the settlement between the 2 warring group. This itself shows that the same would not have been possible without amicable settlement between the 2 groups.
16. Referring to page 3 to 17 of the paper book he drew the attention of the Bench to the copy of family arrangement agreement. Referring to page 2 of the settlement agreement he drew the attention of the Bench to clause 1(a) and submitted that the assessee has purchased the shares from Z.S. Poonawalla. After the said purchase Mr. Z.S. Poonawalla is now a nominal shareholder and not a substantial shareholder. Referring to page 8 of the settlement deed he drew the attention of the Bench to clause 14 which states that the Bungalow at 70, Koregaon Park, Pune will be fully constructed at Serum Institute's account except for internal furnishings.
17. Referring to page 25 of the copy of the order passed by the Hon'ble Settlement Commission he submitted that the Hon'ble Settlement Commission in the said decision has held that the said amount cannot be taxed in both the hands. Referring to the 10 ITA No.1703/PN/2014 statement recorded u/s.132(4) of Dr. Cyrus Poonawalla on 25-06-2011 copy of which is placed at pages 18 to 26 of the paper book he drew the attention of the Bench to his answer to question No.6 where Mr. Cyrus Poonawalls has stated that a total sum of Rs.9,62,00,000/- has been incurred for the repair and renovation of Bungalow at 70, Koregaon Park, Pune for which the expenses have been debited in the books of the assessee company. Referring to the copy of the statement u/s.132(4) of Zavareh Soli Poonawalla on 21-07-2011, copy of which is placed at pages 46 to 57 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the reply given by Mr. Zavareh Soli Poonawalla to question No.13 wherein he had replied as under :
"Q.No.13 SIIL has incurred Rs.9.62 crores and PIIPL has incurred Rs.7.21 crores in respect of property at 70, Koregaon Park which has not been reflected in the books of PFAPL. In his statement Dr. C.S. Poonawalla has admitted this fact and has disclosed these amounts as incomes in the hands of the respective companies in the respective years. These receipts are not to be refunded to SIIL and PIIPL. Please explain as to why these receipts should not be considered as income in the hands of PFAPL.
Ans. PFAPL owns a property at 70, Koregaon Park, Pune SIIL acquired it for its business purpose for which they have been paying PFAPL rent over the years which has been offered to tax by PFAPL. Over the years SIIL spent Rs.9.62 cr on construction and PIIPL spent Rs.7.21 cr thereon. Both these amounts are duly reflected in the books of accounts of the respective companies. PFAPL has also incurred expenditure on construction of the said property out of its own source.
SIIL and PIIPL having agreed to withdraw their claim of right to use the said property and agreed not to claim the amount spent on the said property the benefit is now availed to PFAPL in the current financial year, i.e. F.Y. 2011-12 and hence the income is being offered in the hands of PFAPL of Rs.16.83 crores for the F.Y. 2011-12 relevant to A.Y. 2012-13."
18. Referring to the decision of the Hon'ble Supreme Court in the case of Banarsidas Vs. KanshiRam reported in 1963 AIR 11 ITA No.1703/PN/2014 1165 he submitted that where there is a difference between 2 warring groups and the company pays the expenditure such expenditure is an allowable expenditure in the hands of the company. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Chemosyn Limited Vs. ACIT reported in 139 ITD 68 he submitted that the Tribunal in the said decision has held that where it is sufficient to show that the disputes between the shareholders had affected day to day business of the assessee and the settlement of the said dispute certainly helped the assessee to run its business smoothly and effectively enabling it to achieve further growth, then the expenditure incurred by the assessee company on payment of premium for purchase of its own shares from warring group of shareholders is revenue in nature and allowable as deduction. Referring to the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Chemosyn Limited reported in 371 ITR 147 he submitted that the above decision of the Tribunal has been upheld by the Hon'ble High Court. He submitted that the Bungalow does not belong to the assessee company. The ownership also does not belong to the assessee company.
19. Referring to the decision of the Hon'ble Bombay High Court in the case of CIT Vs.Pruthvi Brokers and Shareholders Pvt. Ltd. reported in 349 ITR 336 he submitted that the Hon'ble High Court in the said decision has held that even assuming that the Assessing Officer is not entitled to grant deduction on the basis of a letter requesting an amendment to the return filed, the appellate authorities are entitled to consider the claim and to adjudicate the same. It is not necessary that the deduction be allowed only if a revised return of income would have been filed. 12 ITA No.1703/PN/2014
20. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Bambino Investment & Trading Com Ltd. Vs. DCIT reported in 2 SOT 585 he submitted that the Tribunal in the said decision has held that an appeal against assessment of concession is maintainable if it later transpires that concession was given on a mistaken impression of true legal position.
21. Referring to Circular No.14 dated 11-04-1955, copy of which is placed at pages 122 to 127 of the paper book he submitted that as per the said circular the officers of the department must not take advantage of the ignorance of an assessee and to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. He submitted that admission by the Chairman of the assessee company is not binding on the assessee which was a pure question of law. This is very much an expenditure allowable as business expenditure. The assessee has not derived any benefit on capital account. The property does not belong to the assessee. By entering into the family arrangement, the shares held by other group were transferred to the CSP group and it is for the smooth running of the business. Therefore, this expenditure should be allowed as a business expenditure.
22. The Ld. Counsel for the assessee referring to the decision of the Pune Bench of the Tribunal in the case of DCIT Vs. Brahma Corp. Hotels & Resort Ltd. and batch of other appeals vide order 13 ITA No.1703/PN/2014 dated 02-12-2014 submitted that the Tribunal has upheld the decision of the CIT(A) who has allowed the claim of expenditure on account of premium paid on buyback of shares as revenue expenditure. He also relied on the decision of the Mumbai Bench of the Tribunal in the case of Echjay Industries Ltd. Vs. DCIT reported in 88 TTJ 1089 order dated 24-04-2012 where the Tribunal has allowed the claim in respect of payments made to buy out shares of certain recalcitrant shareholders for smooth running of business.
23. The Ld. Departmental Representative on the other hand heavily relied on the order of the Assessing Officer and the CIT(A). He submitted that the various decisions relied on by the Ld. Counsel for the assessee are not applicable to the facts of the present case. In all those cases, there was dispute and the settlement was under the direction of the Company Law Board or High Court. However, in the instant case it is a smooth family arrangement. Therefore, those decisions are not applicable to the facts of the present case.
24. The Ld. Counsel for the assessee in his rejoinder submitted that this is very much business expenditure in the hands of the assessee. The Department taxes both the parties which is not correct. Since ZSP has already offered the same to tax in his settlement petition and the same has been taxed, therefore, taxing the same again in the hands of the assessee without allowing it as business expenditure will amount to double taxation, which is not correct.
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25. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find during the course of search action in the case of Poonawalla group on 21-06-2011 an amount of Rs.54.44 crores was offered as unaccounted and undisclosed income by the said group for the period from A.Y. 2005-06 to A.Y. 2012-13. The above disclosure of Rs.54.44 crores includes disclosure of Rs.10.80 crores made by the assessee company for A.Y. 2005-06 to 2011-12 on the issue of expenses on Bungalow located at 70, Koregaon Park, Pune. We find the Assessing Officer reopened the assessment u/s.147 by issue of notice u/s.148 to bring to tax the amount of Rs.1,17,88,000/- out of the amount of Rs.10.80 crores pertaining to the impugned assessment year. We find the assessee during the course of assessment proceedings submitted before the Assessing Officer that although an amount of Rs.1,17,88,000/- was declared as additional income by Dr. Cyrus Poonawalla, Pune in his statement u/s.132(4), however, the same is allowable as business expenditure. It was also submitted that this amount of expenditure of Rs.1,17,88,000/- has been offered to tax by Poonawalla Finvest and Agro Ltd, a ZSP group company. Therefore, again bringing to tax the said amount will amount to double taxation. Various decisions were also cited before the Assessing Officer to justify the claim as an allowable expenditure. It was further submitted that the expenditure of Rs.1,17,88,000/- incurred for the repair and maintenance of the property at 70, Koregaon Park, Pune is a part of the family arrangement which was for smooth running of the 15 ITA No.1703/PN/2014 business of the assessee company. However, we find the Assessing Officer rejected the argument of the assessee on the ground that the chairman of the assessee company Dr. Cyrus Poonawalla had agreed this amount as additional income in his statement recorded u/s.132(4) and the same has not been retracted. Further, the settlement was between two brothers and therefore the company is not liable to incur any expenditure. The Assessing Officer was also of the opinion that there is no question of any smooth running of business for incurring of the expenditure.
26. We find the Ld.CIT(A) upheld the action of the Assessing Officer. While doing so, he noted that the arrangement between two groups did not indicate or justify the payment of Rs.1,17,88,000/- as was found recorded on the seized document. The assessee also could not justify properly that the said arrangement was for the intention to settle the dispute between the two families. Further, the assessee also could not bring any material on record to indicate that the said expenditure has been incurred for the purpose of business and that there is any commercial expediency.
27. It is the submission of the Ld. Counsel for the assessee that because of the settlement between the two groups, the turnover of the assessee company has gone up to 25 times. Further, ZSP group has already offered the same to tax in their petition before the Settlement Commission. Therefore, taxing it in the hands of the assessee company will amount to double taxation. It is also his submission that the property does not belong to the assessee company. Merely because the assessee 16 ITA No.1703/PN/2014 has made a statement u/s.132(4) by admitting the same as additional undisclosed income, the same is not binding on the assessee. It is also his case that in view of the decision of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders Ltd. an assessee can make a claim before the Assessing Officer through a letter. It is also his case that the concession given under mistaken fact or law is not binding on the assessee.
28. We find some force in the above argument of the Ld. Counsel for the assessee. We find the Hon'ble Settlement Commission in its order dated 14-12-2012 on the basis of the application made by Poonawalla group at para 6.3 to 6.5 of the order has observed as under :
"6.5 (vi) Year of Taxability of Investment made towards the construction of the Bungalow at Koregaon Park-
This issue is relevant in the case of M/s Poonawalla Finvest & Agro Pvt. Ltd. (PFAPL). It is stated by the AR that PFAPL had an old bungalow at 70 Koregaon Park, Pune which was rented out to M/s Serum Institute of India Ltd. (SIIL) (controlled by Dr. C.S. Poonawalla). There was a family arrangement between Dr. C.S. Poonawalla (CSP) and Shri Z.S. Poonawalla (ZSP) in which it was decided that a new bungalow would be constructed on the above premises and the expenditure would be incurred by SIIL. The intention was to provide for a separate office-cum-residence for Shri ZSP. Accordingly, SIIL had incurred the expenditure on construction of the bungalow amounting to Rs.1080.84 lakhs over the years and M/s Poonawalla Investment & Industries Pvt. Ltd. (PIIPL) had incurred the expenditure of Rs.721.20 lakhs. SIIL had claimed the above expenditure as a revenue expenditure in its books of account, while PIIPL. had capitalized the above expenditure and claimed depreciation thereon. The claim for the expenditure as a deduction was made by SIIL on the ground that it will have a right to use the bungalow for its business purposes as the bungalow belonged to PFAPL, the expenditure incurred-was claimed as a deduction in view of the decision of the Honble Supreme Court in the case of Associated Cement Company [172 ITR 257 (SC)] and L.H. Sugar Factory Ltd. [125 ITR 293 (SC)]. During the course of the search. Dr. CSP had agreed to withdraw the deduction claimed in the hands of SIIL and PIIPL over the years and to offer the entire investment in the hands of PFAPL for the F.Y. 2011-12, i.e, the year of search, corresponding to A.Y. 2012-13 amounting to 17 ITA No.1703/PN/2014 Rs.18,15,43,000/-. The CIT in the report under Rule 9 has proposed that the investment in respect of the above bungalow should be brought to tax for the asstt.years 2005-06 to 2011-12. In this connection, it is stated by the AR that if the CIT's proposal in the above matter is considered, then the expenditure of Rs.119.74 lakhs incurred upto 31.03.2004 would escape assessment and hence, with a view to put a quietus to the year of assessability of the above investment, the applicant has offered the entire investment for taxation in the year 2012-13 in the hands of PFAPL.
We have considered the matter. In the first place, it may be mentioned that the above issue has been resolved due to admission made by Dr. CSP for its asscssability in the hands of PFAPL during the course of a statement recorded from him by the search party, i.e. in A.Y. 2012-13. Further, if the CIT's proposal assessment year-wise investment is considered, then there would be escapement of investment to the tune of Rs.119.74 lakhs incurred upto 31.3.2004. Under the circumstances. we are of the considered opinion that the offer made by PFAPL for considering the entire investment made in the above bungalow amounting to Rs.18,15,43,000/- for the asstt. Year 2012-13, as admitted by it, in the return of income for the above assessment year is quite fair and reasonable. We, therefore, settle the issue accordingly."
29. Since the entire amount has already been offered to tax by the ZSP group and the same has been accepted by the Hon'ble Settlement Commission, therefore, taxing the same amount in the hands of the assessee will amount to double taxation. We, therefore, find merit in the submission of the Ld. Counsel for the assessee that the above amount should be allowed as a revenue expenditure in the hands of the assessee.
30. We find as per the Circular issued by CBDT No.14 dated 11-04-1955 the officers of the department must not take advantage of the ignorance of an assessee and to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. 18 ITA No.1703/PN/2014
31. We find the Hon'ble Bombay High Court in the case of CIT Vs. Pruthvi Brokers and Shareholders Ltd. (Supra) has held that the appellate authorities have power to consider claim not made in the return. The relevant observation of the Hon'ble High Court reads as under (Short notes) :
"An assessee is entitled to raise not merely additional legal submissions before the appellate authorities but is also entitled to raise additional claims before them. The appellate authorities have the discretion to permit such additional claims to be raised. The appellate authorities have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The words "could not have been raised" must be construed liberally and not strictly. There may be several factors justifying the raising of a new plea in an appeal and each case must be considered on its own facts.
Held, dismissing the appeal, that the orders of the Commissioner (Appeals) and the Tribunal clearly indicated that both the appellate authorities had exercised their jurisdiction to consider the additional claim. The conclusion that the error in not claiming the deduction in the return of income was inadvertent could not be faulted for more than one reason. It was a finding of fact which could not be termed perverse. There was nothing on record that militated against the finding. The Revenue had not suggested much less established that the omission was deliberate or mala fide. Both the appellate authorities had themselves considered the additional claim and allowed it. They had not remanded the matter to the Assessing Officer to consider it. Both the orders expressly directed the Assessing Officer to allow the deduction of Rs. 40 lakhs under section 43B of the Income-tax Act, 1961. The Assessing Officer had, therefore, now only to compute the assessee's tax liability which he must do in accordance with the orders allowing the assessee a deduction of Rs. 40 lakhs."
32. However, we find in the instant case the assessee has already made a claim before the Assessing Officer through a letter. In our opinion, the first objection of the Assessing Officer that the assessee itself has agreed in the statement recorded u/s.132(4) as additional income of the assessee for the impugned assessment year and therefore cannot be allowed as an expenditure and the same has not been reflected is misplaced. Since the issue involved is a pure question of law, a mere 19 ITA No.1703/PN/2014 admission of the assessee is not binding on him in view of the decision of the Mumbai Bench of the Tribunal in the case of Bambino Investment and Trading Company Ltd. cited (supra) where it has been held that an appeal against assessment of concession is maintainable if it later transpires that concession was given on a mistaken impression of true legal position. The relevant observation of the Tribunal reads as under :
"6. We have carefully considered the facts and the rival contentions. The question whether the interest on debentures can be considered to be interest from loans and advances within the meaning of s. 2(7) of the Interest-tax Act is a question of law and not a mere question of fact. The judgments of the High Courts and the orders of the Tribunal cited on behalf of the assessee (supra) bear out this position. The judgment of Bombay High Court in the case of Ramesh Chandra & Co. (supra) cited on behalf of the Department is a case of a statement made of a fact. Certain discrepancies in the sarki account were found by the ITO and the assessee was asked to reconcile-the same. The assessee expressed his inability to do so and agreed that the amount may be added to the income. The ITO recorded the same in the order sheet which was also signed by the partner of the assessee-firm. It was on these facts that the High Court held that the appeal to the AAC was not maintainable since the assessee had conceded before the AO that the discrepancies could not be reconciled and that the amount may be added to the income. This factual position was not resiled from by the assessee at any time thereafter before the ITO. The High Court, therefore, held that so long as the assessee's statement stood, it could not have a grievance in that behalf and was not entitled to appeal against the same. In our humble opinion, the judgment is not applicable where an admission or concession is made by the assessee on a pure question of law. No tax can be imposed or collected without the authority of law and merely because the assessee admits or concedes before the AO that a particular amount is taxable in law, there being no dispute regarding the facts, it cannot be brought to tax. If still AO has brought the same to tax based merely on concession made by the assessee, it cannot be equated to a concession as regards facts, and it cannot be said that the assessee can have no right of appeal when he is later advised or informed of the correct position in law. The AO derives the power to assess a receipt as income only from the provisions of the taxing enactment and not from the concession made by the assessee that the same is taxable under the enactment. Such a concession, on a pure question of law such as the assessability of a receipt as "interest on loans and advances" under the provisions of s. 2(7) of the Interest-tax Act! does not relieve the AO of his duty to examine whether the receipt is properly so assessable. In the judgment cited by the learned Departmental Representative (supra), the assessee admitted before the AO that he had no evidence to support his claim. There was no dispute that if there is no evidence to reconcile the discrepancies detected by the AO, the amount involved could be brought to tax. We 20 ITA No.1703/PN/2014 are not concerned with a case where the assessee agreed to an addition on grounds of lack of evidence. We are concerned with a case where the assessee conceded that in law interest from debentures could be assessed as interest on "loans and advances".
This concession is of a legal position which does not bind the assessee. If it later transpires that the concession was given under a mistaken impression of the true legal position, the assessee could file an appeal and challenge the assessment."
(emphasis supplied by us)
33. So far as the second objection of the Assessing Officer that these disputes were between the two brothers, therefore, the company need not incur the expenditure and claim the same as an allowable expenditure is concerned, we also do not find any merit in the same. The submission of the Ld. Counsel for the assessee that because of the settlement the turnover of the assessee company has increased by 25 times could not be controverted by the Ld. Departmental Representative. It has been held in various decisions that expenditure incurred for carrying on business of assessee smoothly is a deductible expenditure.
34. We find under somewhat identical circumstances the Mumbai Bench of the Tribunal in the case of Chemosyn Ltd. Vs. ACIT reported in 139 ITD 68 has held that expenditure incurred by the assessee company on payment of premium for purchase of its own shares from warring group of shareholders is revenue in nature and allowable as deduction. In that case, the shares of warring group of assessees who were creating problems in the smooth functioning of business were purchased by the assessee company at premium as per the orders of the Company Law Board and the said premium has been claimed as deductible expenditure being wholly and exclusively incurred for the purpose of business. The Assessing Officer disallowed the same. 21 ITA No.1703/PN/2014 In appeal the Ld.CIT(A) upheld the action of the Assessing Officer holding that the expenditure in question on payment of premium was incurred for the purpose of acquiring shares by a group of persons and not by the assessee company. He held that the said expenditure was of personal in nature and it cannot be said that the same was incurred for the purpose of the business of the assessee company. When the assessee challenged the order of the CIT(A) before the Tribunal the Tribunal held that the expenditure incurred for carrying on business of assessee smoothly is a deductible expenditure. On further appeal by the revenue, the Hon'ble High Court dismissed the appeal filed by the revenue by observing as under :
"9. So far as the 2nd issue as raised in question nos. 3 and 5 with regard to the nature of expenditure, the brief facts are that there was a dispute between brothers who together owned the respondent-assessee company. As a consequence of differences between the two groups, the dispute reached the Company Law Board as well as the Supreme Court of India. Thereafter, a settlement was arrived at between the two warring groups of shareholders and as per directions of the Company Law Board the assessee-company was directed to buy 34 % shareholding of one of the warring group and cancel the same. The respondent- assessee had claimed before the Assessing Officer that the amount of Rs.6.81 crores (being the difference between consideration paid and face value of the shares acquired for cancellation) was revenue expenditure. This on the basis that in view of the dispute between its shareholders, the business was adversely affected and therefore, the payment was expected to be incurred for purposes of business. However, the Assessing Officer did not accept the same and held the expenditure to be of capital nature and disallowed the claim of revenue expenditure.
10. On appeal, the CIT(A) did not accept the respondent-assessee's contention and upheld the order of the Assessing Officer. On further appeal, the Tribunal by the impugned order set aside the order of the Assessing Officer and the CIT(A)'s orders by placing reliance upon its decision in Echjay Industries Ltd vs DCIT 88 TTJ (Mumbai) 1089 and on identical facts and circumstances the expenditure incurred by the assessee company to purchase its shares was held to deductible as revenue expenditure. An appeal from the order of the Tribunal in Echjay Industries Ltd (supra) was also dismissed by this Court. Besides, the Tribunal records a finding of fact that in view of the dispute between the two warring groups of shareholders the business of respondent assessee had suffered. It records that the total sales of the respondent-assessee 22 ITA No.1703/PN/2014 which was in the range of Rs.20 to 25 crores per annum during the pre-dispute period had come down to around Rs 9 crores in the financial year 1999-2000 when dispute arose and remained in the range of Rs.10 to 14 crores during the period of litigation between its two groups of shareholders spanning over six years. It also records that after the settlement of dispute in the financial year 2005-06 there was a substantial increase in the sales touching nearly Rs.18 crores per annum. The impugned order of the Tribunal also notes that after settlement of the dispute new products were launched by the respondent-assessee-company. All this was evidence of the fact that the dispute between two groups of shareholders had affected the business of the company.
11. We find that the impugned order records a finding of fact that the amounts which were paid by the respondent assessee for the purpose of purchase of its shares, to its shareholder for subsequent cancellation was expenditure incurred only to enable smooth running of the business. Thus, the expenditure was incurred for carrying on its business smoothly and therefore, was a deductible expenditure. Thus, the impugned order of the Tribunal is essentially a finding of fact. The respondents have not been able to show that these findings are in any manner perverse or arbitrary. Therefore, questions nos. 3 to 5 does not give arise to any substantial question of law. Thus, question nos.3 to 5 are dismissed."
35. In view of the above discussion, we are of the considered opinion that the expenditure of Rs.1,17,88,000/- incurred on repairs and renovation on bungalow located at 70, Koregaon Park, Pune has to be allowed as a business expenditure in the hands of the assessee company. We therefore set aside the order of the CIT(A). The ground raised by the assessee is accordingly allowed.
36. Ground of appeal No.4 by the assessee reads as under :
"4(a) Confirming the partial disallowance u/s.14A amounting to Rs.5,38,364/- ignoring the fact that no material/papers warranting the disallowance of expenditure relating to earn exempt income is found and ignoring the decisions in the case of All Cargo Global Logistics Ltd. Vs. DCIT 147 TTJ 513 (Mum.) (SB).
(b) failed to appreciate the fact that disallowance u/s.14A by the Assessing Officer in order u/s.143(3) r.w.s.147 amounts to change of opinion.
(Refer para 7 - page 15 to 21 of order u/s.143(3) r.w.s.147 Refer para 6.8 - page 21 to 29 of the CIT(A)'s order)." 23 ITA No.1703/PN/2014
37. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings observed from the computation of income that the assessee has claimed Rs.51,51,972/- as income exempt u/s.10 which consists of interest on tax free bond Rs.47,36,986/- and dividend from domestic companies Rs.4,14,986/-. The Assessing Officer asked the assessee to explain as to why proportionate expenditure should not be disallowed u/s.14A r.w. Rule 8D. It was explained that during the course of scrutiny assessment proceedings the same question was raised by the Assessing Officer and the assessee had explained in detail and no disallowance was made. However, the Assessing Officer rejected the above contention of the assessee and made disallowance of Rs.10,53,561/- by applying provisions of section 14A r.w. Rule 8D. In appeal the Ld.CIT(A) held that although provisions of section 14A are applicable, however, provisions of Rule 8D are not applicable. Linking to the nature and amount of expenses claimed he estimated the expenditure at Rs.5,15,197/- being 10% of the except income. Thus, he sustained an amount of Rs.5,15,197/- and deleted the balance amount of Rs.5,38,364/-.
38. Aggrieved with such order of the CIT(A) the assessee is in appeal before us.
39. The Ld. Counsel for the assessee submitted that the own capital and free reserves of the assessee company are much more than the investment. Further, the Assessing Officer has not proved the nexus between the expenditure relatable to earning of exempt income. In the original assessment no disallowance was made u/s.14A. Referring to the decision of the Third Member of 24 ITA No.1703/PN/2014 the Tribunal in the case of Wimco Seedlings Ltd. Vs. DCIT reported in 107 ITD 267 (Delhi) (TM) he submitted that the Tribunal has held that only expenditure which has been proved to have been incurred in relation to earning of tax free income can be disallowed and section 14A cannot be extended to disallow such expenditure which is assumed to have been incurred for the purpose of earning tax free income. Referring to the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. he submitted that the Hon'ble High Court in the said decision has held that if there were funds available both interest free and overdraft and or loans taken, then presumption would arise that investment would be out of the interest free funds generated or available with the company. If the interest free funds were sufficient to meet the investments, then interest is deductible u/s.36(1)(iii). He submitted that since in the instant case the free reserves of the assessee company are more than the investments made and since the interest received is more than the interest paid, therefore, no disallowance is called for.
40. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A).
41. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer applying the provisions of section u/s.14A r.w. Rule 8D disallowed an amount of Rs.10,53,561/- on the income of Rs.51,51,972/- claimed as exempt u/s.10. We find in appeal the 25 ITA No.1703/PN/2014 Ld.CIT(A) held that while provisions of section 14A are applicable, however, provisions of Rule 8D are not applicable. However, considering the totality of the facts of the case he held that 10% of the exempt income received as attributable to earning such exempt income. Therefore, he sustained the disallowance at Rs.51,51,197/- and deleted the balance amount of Rs. 5,38,364/-. Revenue is not in appeal before us for the relief granted by the CIT(A).
42. It is the submission of the Ld. Counsel for the assessee that in the original assessment no disallowance was made. Further the own capital and free serves of the assessee company are more than the investments made. It is also his argument that only expenditure which has been proved to have been incurred in relation to earning of tax free income can be disallowed and section 14A cannot be extended to addition of such expenditure which is presumed to have been incurred for the purpose of earning tax free income. It is also the argument of the Ld. Counsel for the assessee that when both interest free and interest bearing funds are available, then a presumption would arise that investments would be out of the interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investments.
43. We find merit in the above argument of the Ld. Counsel for the assessee. Admittedly, no disallowance was made u/s.14A in the original assessment proceedings. The submission of the Ld. Counsel for the assessee that the share capital and reserves are much more than the investment on which tax free income has been earned could not be controverted by the Ld. Departmental 26 ITA No.1703/PN/2014 Representative. Further, the Assessing Officer has not proved any nexus between the expenditure incurred and earning of tax free dividend income. The Third Member of the Delhi Bench of the Tribunal in the case of Wimco Seedlings Ltd. (Supra) has held that only expenditure, which has been proved to have been incurred in relation to earning of tax free income can be disallowed and section 14A cannot be extended to disallow such expenditure which is assumed to have been incurred for the purpose of earning tax free income.
44. The Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (Supra) has held that if there were funds available both interest free and overdraft and or loans taken, then presumption would arise that investment would be out of the interest free funds generated or available with the company. If the interest free funds were sufficient to meet the investments. Since in the instant case admittedly reserves and surplus of the assessee company was Rs.463.58 crores as on 31-03-2005 and the investments are only Rs.200.18 crores, therefore in view of the decisions cited supra, we are of the considered opinion that no disallowance u/s.14A is called for. In this view of the matter, we set aside the order of the CIT(A) and allow the ground raised by the assessee.
45. In the result, the appeal filed by the assessee is partly allowed.
Pronounced in the open court on 30-11-2016.
Sd/- Sd/-
(VIKAS AWASTHY) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
पण
ु े Pune; दनांक Dated : 30 November, 2016.
th
सतीश
27
ITA No.1703/PN/2014
आदे श क( )"त+ल प अ,े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The CIT(A)-II, Pune
4. The CIT-II, Pune "वभागीय $त$न)ध, आयकर अपील य अ)धकरण, "A Bench"
5. पण ु े / DR, ITAT, "A Bench" Pune;
6. गाड1 फाईल / Guard file.
आदे शानस ु ार/ BY ORDER, //स या"पत $त / True Copy // // True Copy // व%र&ठ $नजी स)चव / Sr. Private Secretary आयकर अपील य अ)धकरण, पण ु े / ITAT, Pune