Income Tax Appellate Tribunal - Mumbai
Metropolitan Trading Company, Mumbai vs Assessee on 26 February, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "F",
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI PRAMOD KUMAR (A.M)
ITA NO.4349/MUM/2009(A.Y.2001-02)
Metropolitan Trading Company, The ITO 18(2)(2),
10/76, Off.Haines Road, Worli, Piramal Chambers,
Mumbai 400 018. Vs. Lalbaug, Mumbai - 13.
PAN :AAAFM 1474C
(Appellant) (Respondent)
Appellant by : Ms. Vasanti B. Patel
Respondent by : Shri Jitendra Yadav
ORDER
PER N.V.VASUDEVAN, J.M,
This is an appeal by the assessee against the order dated 26/2/2009 of CIT(A)-18, Mumbai relating to assessment year 2001-02. The assessee has projected its grievance regarding the validity of initiation of reassessment under section 147 of the Income Tax Act, 1961 (the Act) in Ground No.1 of its appeal.
2. The facts and circumstances under which the reassessment proceedings were initiated are as follows:
The assessee is engaged in the business of manufacturing and trading of garments. The assessee filed the return of income for A.Y 2001-02 on 31/10/2001. The assessee had claimed deduction under section 80 HHC of the Act at Rs. 84,72,698/-. The AO completed the assessment under section 143(3) of the Act on 23/3/2004. The AO while computing the deduction under section 80 HHC of the Act excluded 90% of the business centre 2 ITA NO.4349/MUM/2009(A.Y.2001-02) receipts , interest expenses and motor car expenses disallowed from the income from business under Explanation (baa) to section 80 HHC of the Act.
3. The Assessee had a separate unit at Koramangala, Bangalore, which was carrying on exclusive activity of stitching of garments for which it earned labour charges. Separate books of accounts are maintained for the Koramangala Unit. As per the profit and loss account as on 31.3.2001, the labour charges received by the Koramangala unit was Rs.2,79,81,165. The unit incurred a loss of Rs.12,96,655. While working the deduction u/s.80- HHC of the Act, the Assessee had added 90% of the loss of Rs.12,96,655 to the profits of the business in view of clause(a) of expln. (baa) to Section 80HHC of the Act. This computation was not disturbed by the AO when he completed the Assessment u/s.143(3) of the Act.
4. On 10/1/2005 the AO issued a notice under section 147 of the Act. We will refer to this as the 1st reassessment notice. The reasons for issue of notice under section 148 of the Act for making the assessment under section 147 of the Act was that the AO noticed that the assessee has incurred losses in the business of export and therefore, the claim of the deduction u/s. 80 HHC made by the assessee in the return was considered as wrongly made. The AO in this regard referred to the computation of profit of business as per the provisions of section 80 HHC and noticed that while working the allowability of deduction u/s. 80 HHC of Rs. 72,90,934/-, loss sustained by the assessee from trading goods of Rs. 96,00,571/- was omitted. The correct working would have resulted in a negative profit from the business of export. As a result, deduction u/s. 80 HHC should have been nil.
3 ITA NO.4349/MUM/2009(A.Y.2001-02)5. The reason so recorded by the AO was contrary to facts because the Assessee while computing profits of the business for the purpose of deduction u/s.80-HHC had in fact set off the loss from trading business. In the reassessment proceedings, the AO did not discuss anything about the loss from trading business but held that the correct computation of profit of business as per explanation (baa) to Sec.8-HHC of the Act, would be :
Business income as per original assessment order 26325532 Less: 90% of incentives 13468883 12121995
------------
14203537
Less: 90% of other receipts
Trade mark fees 4107564
Rent 1086000
Sales Tax refund 955520
Business centre receipt 2520000
Labour charges
------------------
Tie unit 2032168
Kormangala unit 27981165
38682417 3414175
Profit of the business
As per explanation baa (-) 20610638
----------------------
As the assessee had a negative profit of business as calculated above, the AO held that the assessee is not entitled for deduction u/s. 80 HHC of the I.T. Act, in view of the decision of supreme court in the case of IPCA Laboratory Ltd. and the decision of Bombay High Court in the case of Rohan Dyes Intermediary Ltd.
6. In this regard it has to be mentioned that the AO considered 90% of the labour charges received of Rs. 2,79,81,165 by the Kormangala Unit as falling within clause(a) of expln-(baa) to Section 80HHC of the Act in the reassessment proceedings as against his action in the original order passed 4 ITA NO.4349/MUM/2009(A.Y.2001-02) u/s.143(3) of the Act, in adding 90% of the loss of Rs.12,96,655 to the profits of the business in view of clause(a) of expln. (baa) to Section 80HHC of the Act.
7. In fact in assessment year 1999-2000 the assessee was treating the Koramangala unit as part of export unit and was including in the total turnover and profits of the business the turnover and income of the Koramangala units also. The AO while completing the assessment under section 143(3) of the Act for A.Y 1999-2000 treated the Kormangala unit as separate unit. The assessee accepted this view of the AO and from A.Y 2000-01 started treating the Koramangala unit as a separate unit.
8. In the 1st reassessment, the AO excluded 90% of the service charges received by the Koramangala unit clause(a) of expln-(baa) to Section 80HHC of the Act from the profits of the business thus considering Koramangala unit and the 80-HHC unit as one and the same unit. The AO did so in his order dated 21/2/2005 and following the ruling of the Hon'ble Supreme Court in the case of IPCA Laboratories, 251 ITR 401(SC) held that no deduction under section 80 HHC was to be allowed.
9. Against that order of the AO the assessee preferred an appeal before the CIT(A) who by an order dated 20/11/2006 held that the initiation of reassessment proceedings was bad in law. Further Sales Tax refund and labour charges paid to Kormangala unit by the export unit were held to be not excludable from profits of the business of the export unit. On the finding that Sales Tax refund and labour charges of Koramangala units were to be excluded from the profits of business of the export unit while computing deduction under section 80 HHC of the Act, the revenue filed an appeal before ITAT and the ITAT in ITA No.976/M/07 was pleased to dismiss 5 ITA NO.4349/MUM/2009(A.Y.2001-02) the appeal of the revenue. Against the order of the ITAT the revenue preferred an appeal before the Hon'ble High Court. The Hon'ble High Court by its order dated 26//6/2009 dismissed the revenue's appeal holding that the CIT(A) had held the initiation of reassessment proceedings to be invalid and the revenue did not challenge that finding before the ITAT and, therefore, the challenge to the merits of the decision by the CIT(A) could not be permitted.
10. When the aforesaid reassessment proceedings were pending the AO issued another notice under section 148 of the Act for making an assessment under section 147 of the Act. This notice is dated 29/3/2006 and will be hereinafter referred to as the second reassessment notice. The reasons recorded by the AO (on 28.3.2006) before issuing notice under section 148 of the Act reads as follows:-
"In this case, the original return was filed on 31/10/2001. The return was processed u/s. 143(1) on the same income on 26/5/2003. The assessment was subsequently completed u/s. 143(3) of the I.T. Act, on 23.3.2004. On going through the said return and also from the details filed during the course of assessment proceedings for A.Y 2002-03 and A.Y 2003-04, it is seen that the assessee is engaged in the export business and has claimed deduction u/s. 80 HHC of Rs. 84,72,698/-. It is also seen that the assessee has filed separate P&L Accounts for various units. However, the business of all units are inter-laced. The Koramangala unit of the assessee has been stated to be doing the job work of manufacturing of shirts for its own exports as well as for the other concerns associated with the assessee in terms of section 40A(2)(b). It is seen that the turnover of the Koramangala unit of Rs. 2,79,81,165/- has not been taken into account while calculating the total turnover for the calculation of deduction u/s. 80 HHC. Also the assessee has removed loss of this unit of Rs. 12,69,654/- from the calculation of the profits of the business under clause (baa) of explanation after 80 HHC (4C) . However, it is seen that the net from this Koramangala unit has shown to be a loss as the assessee is charging very nominal rate from its sister concerns and also for its exports, transfer price of shirts has been set at a very low figure.6 ITA NO.4349/MUM/2009(A.Y.2001-02)
The assessee is treating the profits / loss of the business of Koramangala unit as other income as it is treating the Koramangala unit as unit not connected with the main work of the assessee. However, this is not the case if the actual business pattern of the assessee is seen. The assessee is manufacturing and exporting shirts. The assessee is getting the goods manufactured at Koramangala unit. For all practical purposes, the Koramangala unit is manufacturing the shirts being exported. This unit can not be said to be engaged in other activities not connected with main business of the assessee of export of shirts. It has been held in several court decisions that if the activity is intimately connected with the main business of export of the assessee, the same cannot be treated as other income.
Hence, the exclusion of 90% of loss of the Koramangala unit from the profit and gains of the business and profession by the assessee is not correct. If 90% of loss of Koramangala unit is not excluded, it will decrease the profits of the business by Rs. 11,42,688/- (90% of Rs. 12,69,654/-). Further, inclusion of turnover of Koramangala unit in total turnover will decrease the deduction u/s. 80 HHC. Effect of both these factors will decrease the amount eligible for deduction u/s. 80 HHC and also decrease the deduction u/s. 80 HHC by an amount which far exceeds Rs. 1 lakh.
Further during the course of assessment proceedings for A.Y 2002-03 while verifying the purchases, notices u/s. 133(6) of the I.T. Act were sent to various parties. It was seen that in the case of Salbha Garments enquiry letter issued u/s. 133(6) of the I.T. Act was returned unserved with the remark 'Not found'. The assessee was accordingly informed that genuineness of the above purchases has not been verified and, therefore, assessee was asked to furnish the PAN or furnish the confirmation and transactions. However, the assessee failed to furnish PAN or confirmed the copy of ledger account. Since the assessee failed to discharge onus in respect of genuineness of the purchases from this party and also about the genuineness of the party, purchases from this party were held as not genuine and an addition was made. It is seen that during the assessment year also, purchases / job work above Rs. 1 lakh have been shown to be income on account of purchases / job work from this party.7 ITA NO.4349/MUM/2009(A.Y.2001-02)
In the circumstances, I have reasons to believe that income above Rs. 1 lakh chargeable to tax has escaped assessment within the meaning of section 147 of the I.T. Act."
11. On the validity of the initiation of 2nd reassessment proceedings the CIT(A) held that :
(1) The first original assessment was reopened u/s. 147 on the ground that the loss sustained by the assessee from export of Trading goods of Rs.96,00,571/- was omitted.
(2) The assessment was reopened again for the second time for altogether different reasons.i.e.
(i) For all practical purposes, the Koramangala unit is manufacturing the shirts being exported. This unit can not be said to be engaged in other activities not connected with main business of the assessee of export of shirts. It has been held in several court decisions that if the activity is intimately connected with the main business of export of the assessee, the same can not e treated as other income. Accordingly the assessee's claim of exclusion of 90% of loss of the Koramangala unit from the profits and gains of the business and profession by the assessee was nto correct.
(ii) During the course of assessment proceedings for A.Y 2002-03, while verifying the purchases, it was found that notices sent / enquiry letter issued u/s. 133(6) of the Act to M/s. Salbha Garments were returned back unserved with the remark 'Not found'. The assessee was asked to furnish the PAN or furnish the confirmations of transactions. However, assessee failed to furnish PAN or confirmed a copy of ledger account and the genuineness of the purchases / party was not established."
The CIT(A) on the above observations, upheld the initiation of the 2nd reassessment proceedings. Against the order of CIT(A), the Assessee has raised ground No.1 before the Tribunal.
8 ITA NO.4349/MUM/2009(A.Y.2001-02)12. Before us ld. D.R relied on the order of the CIT(A). The ld. Counsel for the assessee submitted that the Hon'ble Bombay High Court in the case of Metro Auto Corporation vs. ITO, 286 ITR 618(Bom) has held that when an appeal is pending from original assessment and that assessment has not become final notice for reassessment cannot be issued. It was further submitted that the second reassessment notice was also issued for identical reason as the first reassessment notice. It was also submitted that the reason regarding genuineness of the purchases from Salbha Garments cannot be the basis to form belief regarding escapement of income. In this regard it was pointed out that the addition made by the AO in assessment year 2002-03 disallowing the aforesaid payments was ultimately deleted by the Tribunal. It was thus submitted that there was no basis for formation of a belief by the AO regarding escapement of income Besides the above several judicial pronouncements were also brought to our notice.
13. We have considered the rival submissions. The first part of the reason recorded deals with the question regarding the turnover of the Koramangala unit of Rs. 2,79,81,165/- not having been taken into account while calculating the total turnover for the calculation of deduction u/s. 80 HHC. Also the assessee has removed loss of this unit of Rs. 12,69,654/- from the calculation of the profits of the business under clause (baa) of explanation after 80 HHC (4C). As already mentioned the reasons were recorded by the AO on 28.3.2006. Even as early 21/2/2005 the AO passed order of assessment u/s.143(3) read with Sec.147 of the Act, pursuant to the 1st reassessment notice, wherein the AO treated 90% of the labour charges received of Rs. 2,79,81,165 by the Kormangala Unit as falling within clause(a) of expln-(baa) to Section 80HHC of the Act in the reassessment proceedings as against his action in the original order passed u/s.143(3) of 9 ITA NO.4349/MUM/2009(A.Y.2001-02) the Act, in adding 90% of the loss of Rs.12,96,655 to the profits of the business in view of clause(a) of expln. (baa) to Section 80HHC of the Act. The fact that the service charges of Rs.2,79,81,165 received by the Koramangala Unit was not included in the total turnover is a matter which the AO ought to have considered when making the 1st reassessment. Successive reassessments cannot be done to consider different facets of the very same deduction u/s.80-HHC of the Act. In other words, the AO is deemed to have considered this aspect when he passed the original assessment order as well as the 1st reassessment order. The reopening of assessment for the 2nd time on this aspect, if permitted would amount to allowing the AO to review his own orders on a mere change of opinion. In the 1st reassessment the AO was not precluded from going into the question of what should be the total turnover for allowing deduction u/s.80-HHC of the Act. Therefore 2nd reassessment on this aspect should be held to be a initiation of reassessment on a mere change of opinion, which is not permissible. It can also be said that the reasons recorded on 28.3.2006 for the 2nd reassessment notice did not survive after the order dated 21.2.2005 passed by the AO u/s.143(3) read with Sec.147 of the Act pursuant to the 1st reassessment notice. Therefore it cannot be said that the AO entertained belief regarding escapement of income chargeable to tax. The existence of reason to believe being a condition precedent for initiation of reassessment proceedings, the initiation of reassessment proceedings on this ground was certainly not valid.
14. The second part of the reasons recorded is with regard to the genuineness of purchases by the Assessee from Salbha Garments. It is clear from the reasons recorded that the development that took place on a similar expenditure in assessment for Assessment year 02-03 wherein similar 10 ITA NO.4349/MUM/2009(A.Y.2001-02) expenditure was disallowed as not genuine. The 2nd reassessment was within 4 years from the end of the relevant Assessment year. The belief regarding escapement of income on the basis of the subsequent developments in another assessment year, in our view would justify initiating reassessment proceedings. The decision relied upon by the learned Counsel for the Assessee of the Hon'ble Bombay High Court in the case of Metro Auto Corporation (supra) will not apply to the facts of the present case for the reason that one of the reasons for reopening was not subject matter of the 1st reassessment proceedings. We therefore, uphold the validity of initiation of reassessment proceedings. Once the assessment is validly reopened, the AO is free to go into all issues where there is escapement of income. Therefore the AO would have jurisdiction to go into the issue with regard to what should be the total turnover and profits of business for computation of deduction u/s.80-HHC of the Act.
13. On merits of the deduction u/s.80-HHC of the Act,(Ground No.2) we find that the AO as well as CIT(A) have not expressed any opinion as to what should be the total turnover and the stand of the Assessee on including the turnover of the Koramangala Unit in the total turnover of the manufacturing export unit. The Assessee has relied on certain judicial pronouncements of Hon'ble High Courts and orders of Tribunal. These have been filed in the paper book filed before us. We have not gone into the merits of the submissions for the reason that neither the AO nor the CIT(A) have considered the issue in the 2nd reassessment proceedings. The two issues that the AO has to determine are as to whether the turnover of the Koramangala unit of Rs. 2,79,81,165/- has to be taken into account while calculating the total turnover for the calculation of deduction u/s. 80 HHC. Whether the Assessee is entitled to add 90% of the loss of Koramangala unit 11 ITA NO.4349/MUM/2009(A.Y.2001-02) of Rs. 12,69,654/- from the calculation of the profits of the business under clause (baa) of explanation after 80 HHC (4C). If yes, what is the quantum of that loss. We deem it fit to remand the issues to the AO for fresh consideration. The AO will afford opportunity of being heard to the Assessee before deciding the issue.
14. As far as purchases from Salbha Garments is concerned, admittedly the Tribunal has already deleted the disallowance in AY 02-03. Since the assessment in this year was based on the decision of AO in AY 02-03 which has already been deleted by the Tribunal, we are of the view that the said addition cannot be sustained. We therefore direct that the same be deleted. Ground No.3 of the Assessee is accordingly allowed.
14. The other grounds of appeal are purely consequential and the AO is directed to give consequential relief.
15. In the result, the appeal is partly allowed.
Order pronounced in the open court on the 13th day of April, 2011.
Sd/- Sd/- (PRAMOD KUMAR ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated. 13th April.2011
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"F" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
12 ITA NO.4349/MUM/2009(A.Y.2001-02)
Details Date Initials Designation
1 Draft dictated on 6/4/2011 Sr.PS/PS
2 Draft Placed before author 7/4/2011 Sr.PS/PS
3 Draft proposed & placed JM/AM
before the Second Member
4 Draft discussed/approved by JM/AM
Second Member
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS/PS
7. File sent to the Bench Clerk Sr.PS/PS
8 Date on which the file goes to
the Head clerk
9 Date of Dispatch of order