Gujarat High Court
Micro Inks Limited vs Principal Commissioner Of Income Tax on 21 August, 2017
Author: Akil Kureshi
Bench: Akil Kureshi, Biren Vaishnav
C/SCA/4036/2016 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 4036 of 2016
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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MICRO INKS LIMITED....Petitioner(s)
Versus
PRINCIPAL COMMISSIONER OF INCOME TAX,....Respondent(s)
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Appearance:
MR RK PATEL, ADVOCATE for the Petitioner(s) No. 1
MR MANISH BHATT, SENIOR COUNSEL WITH MRS MAUNA M BHATT,
ADVOCATE for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
Date : 21,22/08/2017
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C/SCA/4036/2016 JUDGMENT
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. The petitioner has challenged a notice dated 8.3.2016 issued by the respondent Principal Commissioner of Income Tax seeking to taking into revision an order of assessment passed by the Assessing Officer under section 143(3) read with section 144C of the Income Tax Act ("the Act" for short) on 30.1.2014.
2. Brief facts are as under. The petitioner is a company registered under the Companies Act and is engaged in manufacture and sale of printing inks and auxiliary products. For the assessment year 20092010, the petitioner had filed return of income which was taken in scrutiny by the Assessing Officer. During such scrutiny assessment, the Assessing Officer raised various queries, one of them with respect to the assessee's claim of interest expenditure in respect of loans taken from various banks. The amount so obtained was invested in preferred stock of subsidiary company Hostmann and Steinberg Inc. USA to the tune of Rs.48.81 crores. A sum of Rs. 2.36 crores (rounded off) was charged to the Profit and Loss account towards the interest and other finance charges. The Assessing Officer questioned the assessee with respect to such expenditure. In response to the queries, the assessee raised two fold contentions. First contention was that in order to expand the business in USA, the company had established a subsidiary company in USA to manufacture Page 2 of 12 HC-NIC Page 2 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT and sale the printing inks and its auxiliary products. This has resulted in multiple increase in sales of the assessee company from India. During the year under consideration, company had sold goods worth Rs.75.43 crores to the said subsidiary company. Looking to the purpose of such investment, it can be stated that the expenditure was for the purpose of business and was therefore, claimed as a business expenditure. The alternative contention of the assessee was that if this stand is not accepted, expenditure can still be allowed under section 57(iii) of the Act. Heavy reliance was placed on the decision of Supreme Court in case of CIT v. Rajendra Prasad Moody reported in (1978) 115 ITR 519(SC). While elaborating this contention, the assessee argued before the Assessing Officer that merely because during the relevant period, the assessee did not earn any income, does not mean that the expenditure would not be allowed. It was contended that for the expenditure to be allowed it was not necessary that dividend income must be received during the year itself. It was contended that dividend when earned would be chargeable to tax under the head "Income from other sources."
3. In terms of section 144C of the Act, the Assessing Officer was required to pass a draft order of assessment, invite the assessee to raise his objections and place such materials before the Dispute Resolution Panel ("DRP" for short) comprising of three Principal Commissioners or Commissioners of Incometax. The Assessing Officer accordingly passed the draft order on 30.3.2013 and supplied the copy thereof to the petitioner. In such draft Page 3 of 12 HC-NIC Page 3 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT order, the Assessing Officer had raised multiple issues. We are however, concerned with only one of them namely, of the interest and finance charge expenditure. In this respect the Assessing Officer noted at length the averments of the assessee. The Assessing Officer rejected the assessee's contention that expenditure being in the nature of business expenditure, should have been allowed as such. He however, accepted the assessee's alternative contention that, in any case, the same would be allowed under section 57(iii) of the Act. The Assessing Officer made the following observations :
"The submission of the assessee has been carefully considered undisputedly the transaction is for investment purposes but the proximate result of the said transaction is at the most dividend income/capital gains. Both do not fall under the head business or profession also and so the expense incurred is as as business expense. In view of the same, the claim of interest and finance charges for investment purposes being allowed as revenue expenses for computing business income is rejected.
(Disallowance of Rs. 2,36,18,612/ from business expense) However, the alternate claim of the assessee of these amounts being eligible for deduction under the head 'income from other sources' has been considered. The ruling of the Hon'ble Apex Court relied upon by the assessee as quoted above has also been considered. Vide this decision the Hon'ble Court has reiterated its earlier decision and ruled that such expenses are allowable under the provision of section 57(iii) of the IT Act. Since the decision of the Apex Court is binding on all lower authorities, respectfully following the same, these expenses are allowed as expenses under the head 'income from other Page 4 of 12 HC-NIC Page 4 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT sources', (Allowance of Rs.2,36,18,612/ as expenses under the head 'income from other sources )."
4. In response to the draft order of assessment, the assessee raised objections. However, with respect to the treatment that should be given to the interest and finance charge expenses, the assessee raised no dispute, presumably because the assessee's alternative contention was accepted by the Assessing Officer and the assessee was not in a mood to pursue the main contention. Be that as it may, the draft order of assessment along with the petitioner's objections were considered by the DRP as required under subsection(8) of section 144C. The Assessing Officer passed the order of assessment on 30.1.2014 as per the guidelines of DRP in which he confirmed the assessee's claim of interest and administrative charges under section 57(iii) of the Act. Since in the order of assessment, the Assessing Officer has made identical observations which he made in the draft order, we do not reproduce the same in this judgment. Suffice it to note, the Assessing Officer believed that the investment made in the subsidiary company cannot be disallowed merely because the dividend income was not earned during the year under consideration. The Assessing Officer referred to the decision of Supreme Court in case of Rajendra Prasad Moody (supra).
5. To take this order of assessment in revision, the Commissioner issued the impugned notice. He indicated his reasons why according to him, the order of assessment Page 5 of 12 HC-NIC Page 5 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT was prima facie erroneous and prejudicial to the interest of the Revenue. His observations are as under :
"3. Examination of the assessment record including scrutiny assessment order shows that the assessment passed by the Addl. CIT, Vapi Range, Vapi, suffers from following mistakes/defects rendering the order erroneous as well as prejudicial to the interest of revenue.
(a) The assessee during the year under consideration had debited interest and finance charges of Rs.2,36,18,6l2/ on account of loan taken for investment in preferred stock of step down subsidiary company. The A0 disallowed this interest from business expenses but, he accepted the contention of the assessee regarding allowability of the said interest expenditure u/s. 57(iii) of the I.T. Act. The A0 should have properly verified the nature of investment made by the assessee in subsidiary company.
(b) It is evident from the record and submissions of the assessee that the assessee company established a step down subsidiary in U.S.A. and therefore, the investment made was for the purpose of promoting the interest of its subsidiary company in, U.S.A. and hence the purpose for which the expenditure was incurred was to promote the interest of its subsidiary company and therefore cannot be equated with the promotion of the interest of the assessee company.
(c) In order to allow expenditure u/s 57(iii) of the I.T. Act, it is necessary that the primary motive of incurring the expenditure is directly to earn income falling under the head income from other sources. Therefore, the interest expenditure allowed by the A0 u/s. 57(iii) of the IT. Act is not in order."
6. This notice the petitioner has challenged in this petition Page 6 of 12 HC-NIC Page 6 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT primarily on two grounds. One, that the Assessing Officer had taken a view after proper inquiries which was a plausible view. This decision was therefore, not open to revision by the Commissioner. Second contention of the petitioner is that the order of assessment was passed after the draft order was placed along with the petitioner's objections before the DRP. The issue of interest and administrative expenditure was part of such consideration by the DRP. Final order of assessment, therefore, having been passed as per the guidelines of the DRP, was not open to revision at the hands of the Commissioner. (22.8.2017)
7. Elaborating such grounds, learned counsel for the petitioner submitted that the Assessing Officer had made proper inquiries with respect to the petitioner's claim for deduction. The petitioner had placed for consideration of the Assessing Officer full facts. According to the petitioner, the investment was made for the purpose of business since by setting up a subsidiary company in USA, the petitioner expected to expand its business. In fact, the petitioner pointed out that subsidiary company had made substantial purchases of the raw materials from the petitioner during the year under consideration. In the alternative, the petitioner pointed out that the investment would yield dividend income. Merely because no dividend was paid during the year under consideration would not disentitle the petitioner from claiming deduction under section 57(iii) of the Act on the interest expenditure. The Assessing Officer rejected the first contention but accepted the alternative ground and granted relief under section 57(iii) Page 7 of 12 HC-NIC Page 7 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT of the Act. Thus the Assessing Officer after making full inquiry, adopted the view which was entirely plausible. It was thereafter not open for the Commissioner to overrule such opinion by taking the order in revision. In this regard, heavy reliance was placed on the decision in case of Malabar Industrial Co. Ltd. v. Commissioner of Income tax reported in 243 ITR 83. Counsel further submitted that the Assessing Officer in his draft order had accepted this alternative contention. The petitioner therefore, raised no objections with respect to this proposal of the Assessing Officer in the draft order. However, since the petitioner had raised objections to the other proposed additions, the draft order was placed before the DRP. Thus the entire draft order was under consideration before the DRP. The Assessing Officer passed the order of assessment in light of the directions issued by the DRP as required under the law. Thus the final order of assessment which the Assessing Officer passed was with concurrence of the DRP and was not open to revision at the hands of the Commissioner.
8. On the other hand, learned counsel Shri Manish Bhatt for the department opposed the petition contending that the Assessing Officer had not examined all the relevant aspects before accepting the petitioner's alternative contention. The claim of expenditure being exclusively for the purpose of business was in conflict with the petitioner's alternative contention that the investment was made for the purpose of earning income. Counsel further submitted that the assessee did not raise any objection with respect to the Assessing Officer's proposed draft order with respect to this Page 8 of 12 HC-NIC Page 8 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT issue and therefore, DRP had no occasion to examine this contentious issue. On this issue, therefore, there was no opinion by the DRP and the order passed by the Assessing Officer was not outside the purview of the revisional jurisdiction of Commissioner under section 263 of the Act.
9. From the materials on record, it can be seen that regarding the interest and other finance charges of Rs. 2.36 crores, the Assessing Officer had undertaken a detailed scrutiny during the assessment proceedings and called upon the assessee to justify the claim. The assessee's stand was two fold. Firstly, that the interest related to the borrowed amount which was invested in the stock of subsidiary company set up in USA. This company was set up to increase the assessee's sale. The expenditure was thus exclusively for the purpose of the business. In the alternative, the expenditure should be allowed under section 57(iii) of the Act since such investment would earn dividend income. Merely because no dividend was paid during the year under consideration would not be of any consequence. The Assessing Officer rejected the first contention but accepted the later. The assessee did not object to this proposal in the draft order supplied by the Assessing Officer. Consequently, the Assessing Officer passed the final order of assessment granting relief to the assessee. The Commissioner in the impugned notice cited his tentative reasons for taking the order in revision. In his opinion before granting the benefit under section 57(iii) of the Act, the Assessing Officer should have properly verified the nature of investment made by the assessee in the subsidiary company. He was of the opinion that the Page 9 of 12 HC-NIC Page 9 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT investment was made for the purpose of promoting the interest of its subsidiary company in USA. This did not satisfy the requirement of section 57(iii) of the Act since it was necessary that primary motive of incurring the expenditure should be directly to earn the income falling under the head "Income from other sources". The Commissioner did not dispute the assessee's stand that through the stocks of the subsidiary purchased by the petitioner in due course, dividend would be paid and that such dividend would be taxable as income from other sources. He however, harped upon the issue that such investment should be made with a primary motive of earning income and that such motive should have direct link with the purpose of earning income. Section 57(iii) of the Act allows deduction while computing the income chargeable under the head "Income from other sources", any other expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income. It was in this context the Assessing Officer had accepted the assessee's contention that if the investment is treated as not having been expended in the assessee's business in USA and therefore, wholly and exclusively for the purpose of business, the same should be treated as one for earning income from other sources. The Assessing Officer also accepted the assessee's reliance on the decision of the Supreme Court in case of Rajendra Prasad Moody (supra) in which it was held that the deduction under section 57(iii) of the Act, was not conditional upon actually making or earning income. It was a case where interest was paid on monies borrowed for investment in shares. On such shares, no dividend was received. When the Revenue Page 10 of 12 HC-NIC Page 10 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT objected to the interest expenditure being allowed by way of deduction on the ground that no income was generated out of such investment, Supreme Court rejected the contention. It was noted that accepting such a contention would bring out a situation that the expenditure would disqualify for deduction only if no income results from such expenditure in a particular assessment year but if there is some income howsoever small or meagre, the expenditure would be eligible for deduction. In the opinion of the Supreme Court this would bring about an anomalous result.
10. It can thus be seen that the view adopted by the Assessing Officer was after proper scrutiny of relevant facts and clearly a plausible view and therefore, not open to revision at the hands of the Commissioner. The Supreme Court in case of Malabar Industrial Co. Ltd.(supra), which has been referred to time and again, held and observed that the order of assessment would be open to revision provided twin conditions of same being erroneous and prejudicial to the interest of Revenue are satisfied. It is also well settled that if after proper inquiries, the Assessing Officer has adopted a view which is a plausible one, the view would not be open to revision by the Commissioner.
11. The additional contention of the petitioner of the very jurisdiction of the Commissioner to revise an order of assessment passed after the draft order is placed before DRP in terms of section 144C of the Act is an interesting contention. However, we do not find it necessary in the present petition to enter into such an issue, since on facts Page 11 of 12 HC-NIC Page 11 of 12 Created On Fri Aug 25 08:18:09 IST 2017 C/SCA/4036/2016 JUDGMENT we find that the Commissioner could not have invoked revisional powers.
12. In the result, notice dated 8.3.2016 is set aside. Petition is allowed and disposed of.
(AKIL KURESHI, J.) (BIREN VAISHNAV, J.) raghu Page 12 of 12 HC-NIC Page 12 of 12 Created On Fri Aug 25 08:18:09 IST 2017