Income Tax Appellate Tribunal - Chennai
Mrm Plantatiions Pvt Ltd., Madurai vs Department Of Income Tax on 18 June, 2013
IN THE INCOME-TAX APPELLATE TRIBUNAL
'D' BENCH, CHENNAI.
Before Shri Abraham P. George, Accountant Member &
Shri V. Durga Rao, Judicial Member
ITA No. 2326/Mds/2012
Assessment year : 2004-05
M/s. MRM Plantations Pvt. Ltd., Vs. The Income Tax Officer,
C/o Sri T.N. Seetharaman, Ward IV(1),
Advocate, # 384 (Old No. 196), Chennai.
Lloyds Road, Chennai 600 086.
[PAN:AACCM9058R]
(Appellant) (Respondent)
ITA No. 233/Mds/2013
Assessment year : 2004-05
The Assistant Commissioner of M/s.MRM Plantations Pvt. Ltd.,
Income Tax, Circle II, No. 40, MRM Arcade, Amman
Vs.
Madurai. Sannathi Street, Karaikudi.
(Appellant) (Respondent)
Assessee by : Shri R. Kumar, Advocate
Department by : Shri S. Dasgupta, JCIT
Date of Hearing : 18.06.2013
Date of pronouncement : 05.07.2013
ORDER
PER V. DURGA RAO, JUDICIAL MEMBER:
These cross appeals filed by the assessee and the Revenue are directed against the order of the Commissioner of Income Tax (Appeals)- V, Chennai dated 31.10.2012 relevant to the assessment year 2004-05.
2 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13
2. Brief facts of the case are that the assessee is a private limited company registered under the Companies Act, 1956, together with a branch in Penang, Malaysia. The assessee derived income from property, interest on loans and bank deposits and dividends on joint stock companies and investments in mutual funds in India and also derived income from property and income from rubber estates in Penang, Malaysia. The assessee filed its return admitting total income of `.1,03,890/-, the same was processed under section 143(1)(a) of the Act and subsequently, assessment was completed under section 143(3) of the Act on 29.12.2006 assessing income of the assessee at `.20,73,885/-. Thereafter, the Assessing Officer has issued notice under section 148 dated 24.03.2011 and reopened assessment on the ground that there is reason to believe that income has escaped assessment for the following reasons:
"During the course of assessment proceedings for the asst. year 2007-08, the expenditure claimed against the interest income was disallowed on the ground that the interest income had to be assessed under the head "Income from other Sources". Since the assessee company did not have any other business income the expenditure did not qualify for deduction under Sec 57.
Similarly, on verification of miscellaneous records for the asst. year 2004- 05, it has been found that the assessee is in receipt of only interest income against which they have claimed expenditure of Rs.15,34,428/- which is not allowable.
Apart from the above, the assessee had claimed loss on sale of car amounting to Rs.19,749 and income tax paid for earlier years amounting to Rs.8,50,444 which are not allowable expenses.
Further, on verification of statement of income, it has been found that the income from Malaysian Branch is not included in the total income for the purpose of taxation in India. The case law CIT Vs PVRM Kulandayan Chettiar (267 ITR 657) is not applicable in the instant case for the following reasons:
3 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 (1) The assessee is a company registered in India under the Companies Act and is therefore, a resident, as per section 6(3). (2) Annual report and Directors report stated that the assessee company has its branch in Malaysia and the control and management of the affairs of the Malaysian Branch is situated in India as the Share Holders and Annual General Meeting were conducted in India.
(3) The income of the Malaysian Branch is included in the accounts of the company and the profits appropriated."
3. In response to the notice issued by the Assessing Officer, the assessee has submitted vide letters dated 26.09.2011, 03.12.2011 and 06.12.2011 and submitted that the notice issued after four years is not sustainable under law and requested to drop the proceedings. However, the Assessing Officer, after considering the explanation of the assessee has completed the assessment under section 143(3) r.w.s. 147 of the Act by making addition in respect of profit from Penang branch of `. 47,30,169/- and interest expenses of `.15,34,428/-.
4. On being aggrieved, the assessee carried the matter in appeal before the ld. CIT(Appeals). It was submitted before the ld. CIT(Appeals) that since the assessee has filed all the details and necessary information to complete the assessment and the Assessing Officer by considering entire materials filed by the assessee completed the assessment under section 143(3) of the Act on 29.12.2006, the 4 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 notice issued by the Assessing Officer after four years is not valid. He further submitted before the ld. CIT(Appeals) that during the course of assessment proceedings, the Assessing Officer has considered the interest income and disallowed the same and added to the income of the assessee. Having applied his mind with regard to the interest income, reopening on the same subject matter is amounting to mere change of opinion and reopening is not valid.
5. The ld. CIT(Appeals), after considering the explanation of the assessee has observed that "action under section 147 of the Act is permissible even after the Assessing Officer gather reasons to believe from the very same record as had been the subject matter of the completed assessment proceedings. The proviso to section 147 envisages action in the ordinary course within a period of four years from the end of the relevant assessment year. That limitation does not, however, apply to the cases where income chargeable to tax has escaped assessment on account, inter alia, of the failure of the assessee to disclose fully and truly all material facts. The contention on behalf of the assessee that production of the account books and other documentary evidence relevant for assessment before the Assessing Officer in the course of original assessment imply a full and true 5 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 disclosure of all material facts is not acceptable and is rejected out of hand in the light of the provisions of Explanation (1), according to which mere production of the books of account or other evidence from which the Assessing Officer could have, with due diligence, discovered the material" evidence does not necessarily amount to a disclosure within the meaning of the proviso. Therefore, the ld. CIT(Appeals) has held that the action initiated by the Assessing Officer does not suffer from any error of jurisdiction to warrant any interference on this count.
6. He further observed that in the instant case, the Assessing Officer has passed the reasoned order indicating the basis on which it has been concluded that the plantation income of the assessee in Malaysia was liable to taxation in India and that the expenses claimed by the assessee claimed against the interest income being income from other sources are not allowable expenses. In the absence of any explicit opinion, the original order of assessment, on the aspects sought to be examined in the reopened assessment, cannot be presumed that those aspects were present in the mind of the Assessing Officer and the ld. CIT(Appeals) had justified reopening and dismissed the ground raised by the assessee.
6 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13
7. Aggrieved, the assessee preferred an appeal before the Tribunal.
8. While reiterating the submissions as made before the lower authorities, the ld. Counsel for the assessee has submitted that in the course of original assessment proceedings, the assessee had filed all the details and the Assessing Officer, after considering entire materials completed the assessment under section 143(3) of the Act. Therefore, the notice issued under section 148 on 24.03.2011 i.e. after fours is not valid. He further submitted hat in the original assessment order passed by the Assessing Officer under section 143(3) on 29.12.2006, the Assessing Officer has already considered the interest income and the same was added to the total income of the assessee. Therefore, the Assessing Officer, after having applied his mind with regard to the interest and disallowance the expenses, issuance of notice under section 148 is amounting to change of opinion, which is not permissible under law. In so far as income from Malaysian branch is concerned, in the original assessment under section 143(3), the Assessing Officer has applied his mind and observed that the payment of commission to the Managing Director is based on business income at Malaysia, which, the assessee claims as an exempt income, commission payable with reference to an exempt income is not allowable expenditure under 7 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 section 14A of the Act. The Assessing Officer, having applied his mind with regard to the income of the assessee at Malaysia, the Assessing Officer again reopened the assessment on the ground that the Malaysian Branch income has not included in the total income of the assessee. He has relied on the decision of the CIT vs. Kelvinator of India Ltd. [320 ITR 561 (SC)] and submitted that the notice issued by the Assessing Officer under section 148 is not valid and it is amounting to change of opinion not permissible under the law.
9. On the other hand, the ld. DR has submitted that though the Assessing Officer, at the time of original assessment under section 143(3), has considered the payment to Managing Director of Malaysian Branch of interest income, he has not directly dealt with the issue and it cannot be said that the Assessing Officer has applied his mind to the subject matter of the issue. He further submitted that when the assessee has not submitted full details and particulars, the Assessing officer is justified in issuing notice under section 148 and submitted that the reopening is valid.
10. We have heard both sides, perused the records and gone through the orders of authorities below. The assessee company filed 8 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 its return of income on 28.05.2004 by admitting total income of `.1.,03,890/-. The Assessing Officer completed the assessment under section 143(3) of the Act on 29.12.2006 and assessed total income of the assessee at `.20,73,885/-. In the assessment order, the Assessing Officer has disallowed MD's salary and commission on the ground that the payment of commission to the MD is based on business income at Malaysia, which is an exempt income and not allowable expenditure. It means, the Assessing Officer was aware that there is an income from Malaysia. Having noticed and applied his mind, the Assessing Officer disallowed the payment made to the MD of the Malaysian Branch.
11. The Assessing Officer, in the assessment order, an amount of `.15,19,959/- shown by the assessee as income from other source, the same was added to the total income of the assessee. It implies that the Assessing Officer is aware of the interest income and interest expenditure also.
12. Subsequently, on 24.03.2011 the Assessing Officer issued a notice under section 148 of the Act on the ground that there is an escapement of income and the assessment was reopened on three counts i.e. (a) the assessee is in receipt of only interest income, 9 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 against which the expenditure of which `.15,34,428/- is not allowable expenses, (b) the assessee has claimed loss of sale of car amounting to `.19,749/- and income tax paid for earlier years amounting to `.8,50,444/- which was not allowable expenses and (c) income from Malaysian Branch is not included in the total income for the purpose of taxation in India on the basis of the decision of the Hon'ble Supreme Court in the case of CIT v. PVRM Kulandayan Chettiar [267 ITR 657], this case law is not applicable in the instant case.
13. The Assessing Officer has reopened the assessment for the above reasons, whether the Assessing Officer has applied his mind with regard to the reasons given above has to be examined separately.
14. So far as interest income against which expenditure is claimed, the assessee has declared interest income of `.19,57,872/- including bank interest of `.15,19,959/- against which the assessee has claimed expenses of `.15,34,428/-. The Assessing Officer, in the original assessment order, while including the total income, he had shown interest income from other sources. The Assessing Officer, after considering the same has added the same to the total income of the assessee. Therefore, once the Assessing Officer has considered the 10 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 interest income under section 143(3) and the same was added to the total income of the assessee, it has to be understood that the Assessing Officer has formed a opinion with regard to the interest income. Therefore, issuing notice again on the same subject is amounting to change of opinion, which is not permissible under law. Therefore, on this count, the reopening of the assessment is not justified.
15. So far as expenditure claim for sale of car is concerned, no addition was made by the Assessing Officer in the assessment proceedings. This cannot be a ground for reopening the assessment.
16. So far as income from Malaysian Branch is concerned, the Assessing Officer in the assessment order has considered the MD's salary and commission of Malaysian Branch and has examined the issue and came to the conclusion that the income of Malaysian Branch is an exempt income and therefore, commission paid to the MD is not allowable and accordingly disallowed the same. It means, the Assessing Officer has examined the issue and applied his mind. Therefore, reopening of assessment again on the same issue is not permissible under law. In the case of Kelvinator of India Ltd. (supra), 11 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 the Hon'ble Supreme Court has observed that "after 1st April, 1989, the Assessing Officer has power to reopen the assessment under section 147 provided the Assessing Officer has reasons to believe that income has escaped assessment and there is no tangible material to com a conclusion that there is an escapement of income. Mere change of opinion cannot per se to be reason to reopening".
17. In the present case, the Assessing Officer, having considered entire material and after applying the mind, completed assessment under section 143(3) of the Act. Thereafter, a notice under section 148 was issued on 24.03.2011 i.e. after four years and reopened the assessment. In our opinion, the Assessing Officer has reopened the assessment is change of opinion, which is not permissible under law. Therefore, the reopening is invalid.
18. Apart from the above, in the present case, the Assessing Officer has issued a notice under section 148 after four years; therefore, proviso to section 147 is applicable to assessee's case. In this context, certain judicial precedence needs to be considered to decide the issue. In the case of Fenner (India) Ltd. v. DCIT 241 ITR 672, the Hon'ble Jurisdictional High Court has observed that in order to reopen an 12 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 assessment after expiry of four years from the end of the relevant assessment year, the Assessing Officer must summarily record his reasonable belief that income has escaped assessment, but also default on failure of the assessee to disclose fully and truly all the materials facts. Notice issued under section 148 after expiry of four years cannot be sustained as escapement of income, if any, not on account of any failure on the part of the assessee to disclose material facts fully and truly. The Hon'ble Jurisdictional High Court in the case of CIT v. Elgi Finance Ltd. [286 ITR 674] has observed that " the assessee company having truly and fully disclosed all material facts necessary for working out the quantum of depreciation, notice under section 148 issued after expiry of four years from the end of relevant assessment year to withdraw the excess depreciation allowed to the assessee is barred by limitation and illegal". The Hon'ble Jurisdictional High Court has further observed that "the law relating to reassessment has undergone to a change from 01.04.1989. The change was brought by Direct Tax Law (Amendment) Act, 1987. Two sets of provisions are available under section 147 in clause (a) and clause (b). This distinction has now been taken away by the Amendment Act. Previously, the line of distinction was a limitation period of four years 13 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 and the limitation period exceeding four years. The Assessing Officer would reopen a back assessment within a period of four years as long as he had reason to believe in consequence of any information, that income has been under assessed or income has escaped assessment. In the case of limitation, providing for a period exceeding four years, there should have been a failure on the part of the assessee to disclose fully and truly all material facts leading to the escapement of income. But, as a result of the amendment brought with effect from 01.04.1989, the above distinction had been obliterated and the Assessing Officer could reassess the income as long as he had reason to believe that income chargeable had escaped assessment. The new law has inserted a proviso to section 147 in the following words:
"Providing that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax had escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year."
14 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13
19. In addition to the time limits provided for under section 149, the law has provided another limitation of four years under the proviso to section 147. As far as the above proviso to section 147 is concerned, the law prescribes a period of four years to initiate reassessment proceedings, unless the income alleged to have escaped assessment was made out as a result of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The Hon'ble Jurisdictional High Court has further observed that in cases where the initiation of the proceedings is beyond the period of four years from the end of the assessment year, the Assessing Officer was necessarily record not only his reasonable belief that income has escaped assessment but also the default or failure on the part of the assessee. Failure to do so would vitiate the notice and the entire proceedings. Mere escape of income is insufficient to justify the initiation of action after the expiry of four years from the end of the assessment year. Such escapement must be by reason of the failure on the part of the assessee either to file a return referred to in the proviso or to truly and fully disclose the material facts necessary for the assessment.
15 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13
20. In the present case, the notice under section 148 was issued after four years. There is no specific finding by the Assessing Officer in the reasons recorded as extracted from the assessment order that the assessee failed to disclose fully and truly all the particulars required to complete the assessment. Therefore, we find that the notice issued under section 148 is not valid.
21. In similar circumstances, the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. v. ACIT (268 ITR 332) has observed that "reasons recorded by the Assessing Officer nowhere stating that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment and, reopening of assessment made under section 143(3), after expiry of four years from the end of the relevant assessment was not valid.
22. In Sadbhav Engineering Ltd. v. DCIT (333 ITR 483), the Hon'ble Gujarat High Court has observed that in the absence of any averment that the assessment is sought to be reopened by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for the relevant assessment year, the very initiation of proceedings under section 147 by issuance of notice 16 I.T.A. Nos Nos. 2326/Mds/12 & 233/Mds/13 under section 148 after expiry of four years from the end of relevant assessment year is bad and cannot be sustained.
23. In view of the above and taking into consideration of the facts and circumstances of the case, the issuance of notice under section 148 after expiry of four years from the end of relevant assessment year is bad and cannot be sustained and the ground raised by the assessee is allowed.
24. So far as Revenue's appeal is concerned, once the reopening of assessment is decided as bad and not valid, it is not necessary to decide the issues on merits. Therefore, the appeal filed by the Revenue is dismissed.
25. In the result, the appeal filed by the assessee is allowed and the appeal of the Revenue is dismissed.
Order pronounced on Friday, the 5th of July, 2013 at Chennai.
Sd/- Sd/- (ABRAHAM P. GEORGE) (V. DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 05.07.2013 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.