Income Tax Appellate Tribunal - Mumbai
Aditya Birla Power Company Ltd , Mumbai vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL "A" Bench, Mumbai Before Shri D. K.Agarwal (JM) and Shri Rajendra Singh(AM) ITA No.1581/M/2008 ITA No.2521/M/2010 Assessment Year 2004-05 M/s.Aditya Birla Power Co.Ltd. The ACIT Range 8(1), Mumbai Formerly known as Birla Project Development Co. Ltd. Aditya Birla Centre S.K.Ahire Marg, Worli Mumbai 400 030. PAN : AABCB 7067 N Appellant Respondent Assessee by : Shri Yogesh Thar Revenue by : Shri S.K.Pahwa & Shri Sumeet Kumar ORDER
PER RAJENDRA SINGH (AM) These appeals by the assessee are directed against the order dated 27.7.2007 and 18.02.2009 of CIT(A) for the assessment year 2004-05 in relation to quantum appeal and penalty appeal respectively. As these appeals were heard together, these are being disposed off by a single consolidated order for the sake of convenience.
2. We first take up the quantum appeal of the assessee in ITA No.1581/M/2008. In this appeal the assessee has raised disputes on two different grounds.
2.1 The first dispute is regarding estimation of profit on transfer of BPO business amounting to Rs. 1,01,47,914/-. The facts in brief are that the assessee which was earlier known as Hotgi Fibres Ltd changed its objects vide special resolution dated 6.11.2000 and the name of the company thereafter was also changed to Birla Project Development Co. Ltd. The object of the new company was to develop power and other projects. The assessee had taken up a BPO project in assessment year 2003-04 which was completed in assessment year 2004-05 which is under consideration. The expenditure incurred in relation to project till 31.3.2003 had been shown by the assessee as work in progress (WIP). The project was completed during the year and handed over to a group company M/s.Indo P.T.Rayon Ltd. (IPRL) The total expenditure incurred by the assessee on the project was Rs.10,43,64,,821/- which was recovered from the group company as professional charges. In addition the assessee had also issued a bill of Rs.430.18 lacs including the service tax of Rs.31.86 lacs to the group company. The AO asked the assessee as to why the professional charges should not be treated as income and also asked the assessee to explain as to why the project was transferred at cost price when the assessee was doing business of development project to earn profit. The AO observed that the project development activity as well as the professional services rendered were part of its business activities. The assessee explained that the professional fees billed to the sister concern may be considered as income but short reimbursement received from the group company may be allowed. It was pointed out that the BPO project was in loss. The assessee argued that had it sold the project to some other company, it would have resulted into loss. AO therefore asked the assessee to explain the reasons for such presumption that the BPO project would have given loss. The assessee company however did not gave any explanation. The assessee however submitted that in case the professional fees of Rs.430.19 lacs was treated as income the following expenses should be allowed against said income:
Sr. Description To be allowed as expenses (Rs in lacs) 1 Expense of Rs.430.19 lacs which was incurred for developing BPO business and the same were shown as amount recoverable in our balance sheet as on 31.03.2003 430.19
2. Interest of Rs.45,29,236/- which was disallowed in the assessment order for A.Y.2003-04 on the ground that this relates to funds used for BPO business 45.29 3 Legal & Professional fee relating to BPO business as mentioned in para 10 of assessment order for A.Y.2003-04.
38.61 TOTAL 514.09 2.1.1 The assessee also submitted that profit and loss account arising from the business of developing the BPO project should be determined as under :
Opening work in progress of BPO business (determined as closing work in progress as on 31.3.2003 as per your assessment order for AY 2003-04 para 10 (page 8 of the order) 10,61,06,448 Less: recovering made during the year
(a) Credited to P&L account 3,98,32,100
(b) Expenses recovered and credited to amount recoverable (received from M/s. Indian Rayon 4,46,69,000
(c) Expenses recovered and credited to amount recoverable (received from M/s. Transworks) 2,04,30,000 10,49,31,100 Loss from BPO business to be allowed in addition to loss AY 2004-05 on the basis of your views for AY 03-04 11,75,348 2.1.2 The AO however observed that the assessee should have charged the re-imbursement amount to the sister concern and over and above should have billed the professional fees. No prudent businessman would spend money from his pocket on behalf of others. Both the companies were under same management. The assessee had also not given the basis for charging the professional fees of Rs.430.18 lacs. The AO also observed that the assessee had followed a colorable devise to help the group companies avoid taxes as the group company to which the project was transferred had claimed the professional fees as well as reimbursed expenses along with depreciation as deduction and the assessee was not showing any income by transferring the project at cost price and not showing any income from the professional fees. AO therefore considered the transaction as colourable and reliable and estimated the income from BPO project at 10% of the cost. The AO followed the judgment of Hon'ble Supreme Court in case of Mc Dowel & Co. (154 ITR 148) The cost of the project was computed as under :
Total expenses incurred by the assessee as per its statement 10,43,64,821 Add : Amount loaded to BPO project (as per asstt.order for AY 03-04
1. Interest on loans 45,29,236
2. Legal & Professional Fees 38,60,542 83,89,778 Total 11,27,54,599 Thus the estimated fees from the project @ 10% was computed at Rs.11275460/- and after deducting the expenses estimated at 10% of the said fees the total income was computed at Rs.10137910/-.
2.1.3 In appeal the assessee submitted before CIT(A) that no notional income could be computed from the project as the assessee did not make any profit from the transaction. The project had been sold at cost price as no other party was interested in buying the project. The assessee had sold the project to the group company out of commercial expediency. It was also submitted that there was no formal agreement with IRIL but there was an understanding that the assessee would be reimbursed the actual expenses and a reasonable profit as mutually agreed on a later date. However later IRIL agreed only to reimburse the actual expenses. CIT(A) was however not convinced by the argument advanced. It was observed by him that it was not believable that the project was launched without any commercial consideration. In fact as per assessee's own admission IPRL had agreed to give a reasonable profit on the project. However the assessee voluntarily agreed not to receive the said profit which was highly abnormal. He therefore further observed that the transaction was a collusive transaction. CIT(A) also noted that there was nothing on record which could show that any attempt had been made by the assessee to sell the project in the market. Considering all these factors CIT(A) agreed with the finding of the AO and upheld the addition made aggrieved by which the assessee is in appeal before the tribunal.
2.1.4 Before us the Learned AR for the assessee submitted that the assessee was in the business of development of projects, mainly power projects. The assessee was developing the project only upto the stage of financial closure and selling it in the open market. The assessee had sold the BPO project to the group company at cost as there were no buyers. It was also submitted that there was no agreement for sale and the project had been transferred as per understanding. There was therefore neither accrual of income or any receipt of income and therefore no income could be taxed there being no real income. Reliance was placed on the following judgments in support of the argument:
46 ITR 144 (SC) CIT Vs Shoorji Vallabhdas & Co.
199 ITR 702 (Guw) Highways Construction Co. Vs CIT 67 Taxman 326 (Bom) India Finance & Construction Co.Pvt.Ltd Vs DCIT.
2.1.5 The Learned AR also argued that there were no statutory provisions for charging notional income on transactions with a related party though there were provisions of disallowance of expenditure under section 40A(2)(b) in respect of expenditure incurred in relation to related party. It was pointed out that whenever the legislature wanted that income should be charged notionally, there were specific provisions in the statute. Reference was made to the provisions relating to computation of house property income which was based on notional theory. Reference was also made to section 50C in which sale value for the purpose of stamp duty could be taken as the value of actual sale. But there were no provisions for taking notional profit from the transaction with the related party in relation to domestic transaction though there was provision in section 92 in relation to international transactions. The Learned AR however admitted that some of the projects sold in the subsequent year to Reliance and JP group had resulted into profit. It was also admitted that this was only transaction with a group concern and it had resulted into loss.
2.1.6 The Learned DR on the other hand strongly supported the orders of authorities below. It was submitted that income if not earned could not be taxed but in this case income had been earned which had been given up by the assessee adopting a colourable devise. The income had accrued at the time of transfer of project and the issue was only quantification. He supported the decision of the AO to estimate profit which he said was justified on the facts and circumstances of the case.
2.1.7 We have perused the records and considered the rival contentions carefully. The dispute is regarding estimation of profit on transfer of BPO business by the assessee by the AO at Rs.1,01,47,914/-. The assessee was in the business of development of projects, mainly the power projects. The assessee was developing the projects till the stage of financial closure and thereafter was selling it in the market. The assessee had acquired certain power projects from group companies for doing the business. The assessee had also taken up a BPO project in the assessment year 2003-04 and the financial closure was completed in the assessment year 2004-05. The total cost of the project was Rs.10,43,64,821/-. The project was transferred to a group company IPRL at cost price. The assessee had also billed Rs.430.18 lacs to IPRL as professional charges relating to the project on which tax was also deducted. But no income was shown by the assessee. The case of the assessee is that there were no buyers for the project in the market and had it been sold in the market there would have been loss. However when asked by the AO the assessee could not explain such a presumption that there would have been a loss. Considering the transaction was with the group company the AO rejected the same as not genuine and treated it as a colorable devise to evade tax as the assessee did not pay any tax whereas the transferee company was claiming deduction on account of professional charges as well as depreciation on the cost of purchase. The AO therefore rejected the claim of no profit on the transaction by the assessee and estimated the profit @ 10% of the cost incurred by the assessee resulting into addition of Rs.1,01,37,910/-.
2.1.8 In appeal the assessee admitted before CIT(A) that there was no formal agreement with IPRL but there was understanding that the assessee would be reimbursed expenses and a reasonable profit to be worked out later. However IPRL only paid the cost and the assessee accepted the same without any protest. CIT(A) has given a finding that there was nothing produced in record to show that any attempt had been made by the assessee to sell the project in the market. He therefore agreed with the AO that the transaction was collusive to evade tax. Accordingly he confirmed the order of AO.
2.1.9 On careful consideration of all the aspects of the matter we see no infirmity in the order of CIT(A). The assessee itself admitted that there was understanding with the group company to reimburse the cost and pay some reasonable profit but no profit was charged by the assessee. No explanation has been given for not claiming the profit. The claim of the assessee that there were no buyers in the market and by selling it in the market the assessee would have incurred loss is not supported by any evidence. The assessee produced no evidence to show that it had made any effort to sell the project in the market. No correspondence entered into with the group company produced by the assessee to show that it was finding it difficult to sell the project in the market and requested the latter to purchase it at cost price. Even the service charges of Rs.430.19 lacs charged by the assessee from the sister concern have not been shown as income. The group company had reduced tax liability by claiming professional charges as well as depreciation on the cost of purchase and the assessee was paying no income tax on the transaction. It was admitted by the Learned AR that in the subsequent years the assessee had sold projects to other parties on which profit had been earned and this is the only project sold to a group company and price charged was only cost price. Considering the close relationship between the two parties and the facts and circumstances of the case we agree with the conclusion drawn by the lower authorities that it was a collusive transaction and the parties had used a colorable devise to reduce the tax liability. The reliance by the authorities below on the judgment of Hon'ble Supreme Court in case of McDowell & Co (supra) on the facts of the case is justified. The transaction had been rightly considered as collusive and estimation of profit @ 10% of the cost of the project is justified and the same is upheld.
2.1.10 The Learned AR for the assessee argued that there was no provision for charging notional income on the transaction. He has placed reliance on certain judgments as mentioned in para 2.1.4 earlier. In our view the said judgments are not applicable to the facts of the present case as this is not a case of charging of notional income on a transaction like loan etc. This is a case of estimation of profit. The assessee was doing the business of development of project and sale thereof. The assessee had shown certain sale price from the BPO transaction showing no income. For the various reasons given earlier the transaction has been found to be collusive and the same has been disregarded and income has been estimated @ 10% of cost. It is a settled legal position that when the accounts are not found reliable the same can be rejected and profit can be estimated. This is a case of rejection of accounts and estimation of profit which is legally in order. The cases cited have no application to the facts of the present case and the same are rejected as distinguishable.
2.1.11 In view of the foregoing discussion the estimation of profit is held appropriate and the order of CIT(A) is upheld.
2.2. The second dispute is regarding the disallowance of business loss of Rs.5,89,60,444/- including the loss of Rs.11,75,348/- on transfer of BPO business. The assessee as discussed earlier had been set up to develop projects upto the stage of financial closure and thereafter transferring the same to others. The assessee had taken over bio technology, CPP and MRPL power projects from group companies. The expenses incurred in respect of said project till take over by the assessee and further expenses incurred during the year under consideration were charged by the assessee to the profit and loss account. The total expenses debited were as under :
Salary Wages Rs.16985776 Other expenses Rs. 6867201 Interest expenses Rs.25942761 Depreciation Rs. 291038 Preliminary expenses w/off Rs. 10280 TOTAL Rs.5,00,97,038
2.2.1 The assessee had claimed total loss of Rs.5,89,60,444/- from the said project. The AO observed that the assessee was developing the projects till the stage of financial closure and therefore the assessee could receive fees only on financial closure of the project. Therefore till the financial closure of the project the expenses incurred would constitute work in progress. The income from the project could be computed only on completion and the assessee should have therefore carried forward the work in progress. He therefore treated the expenditure incurred as work in progress to be carried forward to the next year and disallowed the claim of loss. In appeal CIT(A) following the decision in assessment year 2003-04 on the same issue confirmed the order of AO aggrieved by which the assessee is in appeal before the tribunal.
2.2.2 We have heard both the parties. The Learned AR for the assessee at the outset conceded that the issue was covered against the assessee by the decision of the tribunal in assessee's own case in A.Y.2003-04 in ITA No.7058/M/2007. We have gone through the said decision of the tribunal in assessment year 2003-04. The tribunal in the said year observed that there was no dispute that till financial closure the expenditure incurred was shown by the assessee in the balance sheet as advance recoverable. However in the profit and loss account the same was claimed as revenue expenditure. The tribunal therefore held that the expenses had been rightly treated by the authorities below as work in progress. The tribunal also observed that as and when the project came to financial closure and the revenue was realized from the project, the expenses could be allocated on pro-rata basis depending upon the volume of revenue and other financial parameters. The tribunal accordingly confirmed the order of CIT(A). The facts this year admittedly the same. We therefore respectfully following the decision of the tribunal in assessee's own case in assessment year 2003-04 (supra) confirm the order of CIT(A).
3. The appeal of the assessee in ITA No.2521/M/2010. In this appeal only dispute raised by the assessee is regarding levy of penalty under section 271(1)(c). As discussed while dealing with the quantum appeal of the assessee earlier, the AO had estimated income from the BPO project at Rs.1,01,47,914/- which was confirmed by the CIT(A). The AO had also disallowed loss in respect of other power projects and capitalized the expenditure as work in progress. The order of AO on this point has already been upheld by the tribunal. The AO had also initiated penalty proceedings under section 271(1)(c) in respect of the addition of Rs.1,01,47,914/-. In response to the show-cause notice at the time of imposing penalty, the assessee did not file any submission before the AO. AO therefore held that penalty under section 271(1)(c) was leviable as the same was only a civil liability as held by Hon'ble Supreme Court in case of Dharmendra Textile Processors & Others (306 ITR 277) and willful concealment was therefore not required to proved by the revenue. He therefore levied the penalty @ 100% of tax sought to be evaded which was computed at Rs.36,40,563/-. In appeal the assessee submitted that the judgment of Hon'ble Supreme Court in case of Dharmendra Textile & Processors (supra) was in conflict with the earlier judgments of Supreme Court and therefore it could not be followed. CIT(A) however did not accept the contentions raised. It was observed by him that the Hon'ble Supreme Court in case of Dharmendra Textile & Processors (supra) had clearly held that section 271(1)(c) had been incorporated to provide for remedy for loss of revenue and penalty was only a civil liability and that willful concealment was not required to be proved by the department. He accordingly confirmed the penalty imposed aggrieved by which the assessee is in appeal before the tribunal.
3.1 Before us the Learned AR for the assessee argued that it was a settled legal position by several judgments that notional income could not be taxed and the issue was highly debatable and in such cases penalty could not b e levied. It was also argued that no penalty could be levied in case of estimated additions. He placed reliance on the judgment of Hon'ble High Court of Punjab & Hariyana in case of CIT Vs Sangrur Vanaspati Mills Ltd. (303 ITR 53) and several other judgments for the proposition that no penalty could be imposed in respect of estimated additions. He also referred to the decision of tribunal in case of LM Patel & BM Patel HUF (106 Taxman 37) for the proposition that no penalty could be imposed on debatable issues. Learned AR further argued that judgment of Hon'ble Supreme Court in case of Dharmendra Textile & Processors (supra) was not applicable when the issue was debatable or when disclosure had been made by the assessee. He also placed reliance on the judgment of Hon'ble Supreme Court in case of CIT Vs Reliance Petro Products Pvt. Ltd. (322 ITR 158) The Learned AR also submitted that the assessee had given complete information in relation to the claim of expenditure as was clear from auditors note placed at page 11 of the paper book. Therefore it was urged that no penalty should be levied.
3.2 The Learned DR on the other hand submitted that the penalty had been correctly levied in this case by the AO and upheld by the CIT(A). It was argued that penalty could be levied even in respect of estimated additions. He placed reliance in this regard on the judgment of Hon'ble High Court of P& H in case of CIT Vs Warasat Hussain (171 ITR 405) and on the judgment of Hon'ble High Court of Gujarat in case of Addl.CIT Vs Chandravilas Patel (165 ITR 300).
3.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding levy of penalty in relation to the estimation of profit from sale of BPO project. As mentioned earlier the assessee was in the business of development and sale of different projects and during the year it had sold the project at cost price to its group company. The AO had rejected the accounts given by the assessee and estimated the profit from the sale of project at Rs.1,01,47,914/-. We have already upheld the estimation of profit from the BPO project vide para 2.1.11 of this order. The AO had initiated penalty proceedings in respect of the said addition to income. The assessee in response to show-cause notice issued by AO did not file any explanation as to why penalty should not be levied. AO therefore levied penalty @ 100% of tax sought to be evaded. The AO followed the judgment of Hon'ble Supreme Court in case of Dharmendra Textiles & Processors (supra) in which it was held that penalty under section 271(1)(c) was only a civil liability. CIT(A) has confirmed the order of the Assessing Officer. Before us the Learned AR for the assessee has argued that no penalty could be imposed in case of estimated addition or in cases where the issue is debatable.
3.4 We have carefully considered the various aspects of the matter. The penalty under section 271(1)(c) is a civil liability and willful concealment is not required to be proved by the department as held by the Hon'ble Supreme Court in case of Dharmendra Textiles & Processors (supra). However penalty cannot be imposed in each and every case of addition. A case for penalty has to be evaluated in terms of provisions of Explanation 1 to section 271(1)(c). As per the said Explanation if in relation to any addition to total income the assessee offers no explanation or offers and explanation which is found to be false, it will be a case of concealment of particulars of income. Further in case the assessee offers an explanation which it is able to substantiate and the assessee is also not able to prove that the explanation is bonafide and has not furnished all factual details in relation thereto penalty would be leviable. Therefore penalty can be levied even in case of estimated addition if the case is covered by the Explanation 1 to section 271(1)(c). In this case the explanation offered by the assessee was that there were no buyers in the market and the assessee had to sell the project at cost to the group concern but the assessee was not able to substantiate the said explanation. The assessee could also not file any details to show that the assessee had tried to sell the project in the market nor any correspondence with the group concern had been filed to show that the latter was purchasing the project as a distressed sale by the assessee. Under these circumstances the explanation of the assessee cannot be considered as bonafide. The case is therefore covered by the provisions of Explanation 1 to section 271(1)(c) and the penalty is leviable. The plea of the Learned AR that the addition involved a debatable issue is not acceptable as there is no legally debatable issue involved. It was only a question of computation of profit from the sale of the project which involved a finding of fact as to whether the accounts were reliable. The accounts in this case were held not reliable and profit had been estimated resulting into addition to total income which has been upheld by the tribunal. Such addition is covered by the Explanation 1 to section 271(1)(c) as we have seen earlier. Therefore in our view on the facts of the case penalty levied is leviable and the cases cited by the Learned AR are not applicable to the facts of the present case. The order of CIT(A) is accordingly upheld.
3.5 The Learned AR has also placed reliance on the judgment of Hon'ble Supreme Court in case of CIT Vs Reliance Petro Products Ltd. (supra). The said case is found to be distinguishable. In that case the Hon'ble Supreme Court held that disallowance of the claim made in the return of income did not tantamount to furnishing inaccurate particulars of income if the particulars of claim given in the return are not found to be incorrect. In the present case there is no disallowance of any claim made by the assessee. It is a case of estimation of income and addition to total income. Such addition as we have held earlier is covered by the provisions of Explanation 1 to section 271(1)(c) and penalty is leviable. Even the Hon'ble Supreme Court in case of Reliance Petro Products Ltd. have held that for levy of penalty it has to be seen that conditions of section 271(1)(c) are applicable. In the present case we have held that the provisions of Explanation 1 are applicable and penalty is leviable. The judgment cited therefore does not help the assessee.
3.6 In view of the foregoing decision we see no infirmity in the order of CIT(A) confirming the penalty and the same is upheld.
4. In the result both the appeals of the assessee are dismissed.
The decision was pronounced in the open court on 23.12.2010.
Sd/- Sd/-
( D. K. AGARWAL ) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date : 23.12.2010
At :Mumbai
Copy to :
The Appellant
The Respondent
The CIT(A), Mumbai concerned
The CIT, Mumbai City concerned
The DR "A" Bench, ITAT, Mumbai
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
Alk
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