Income Tax Appellate Tribunal - Mumbai
Reliance Industries Limited, Mumbai vs Assessee on 24 April, 2015
आयकर अपील य अ धकरण, मुंबई यायपीठ "डी " मुंबई IN THE INCOME TAX APPELLATE TRIBUNAL" D" BENCH, MUMBAI BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM) सव ी बी.आर.बा करन, लेखा सद य एवं अ मत शु ला, या यक सद य के सम आयकर अपील सं./I.T.A. No.1347/Mum/2011 ( नधारण वष / Assessment Year :2001-02) Dy. Commissioner of Income बनाम/ M/s rd Reliance Industries Ltd., Tax - LTU, 3 floor, Maker Chambers-IV, Vs. 28th floor, Centre-1, Nariman Point, Mumbai-400021 World Trade Centre, Cuffe Parade, Mumbai-400005 (अपीलाथ /Appellant) .. ( यथ / Respondent) आयकर अपील सं./I.T.A. No.1426/Mum/2011 ( नधारण वष / Assessment Year :2001-02) M/s Reliance Industries Ltd., बनाम/ Dy. Commissioner of Income 3rd floor, Maker Chambers-IV, Vs. Tax - LTU, 222,Nariman Point, 29th floor, Centre-1, Mumbai-400021 World Trade Centre, Cuffe Parade, Mumbai-400005 (अपीलाथ /Appellant) .. ( यथ / Respondent) थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AAACR5055K अपीलाथ ओर से / Revenue by Shri Arvind Sonde यथ क ओर से/Assessee by Shri Santosh Kumar सुनवाई क तार ख / Date of Hearing : 17.3.2015 घोषणा क तार ख /Date of Pronouncement : 24. 4.2015 आदे श / O R D E R PER BENCH:-
These cross-appeals are directed against the order passed by the ld. CIT(A) and they relate to the assessment years 2001-02 and 2006-07. All 2 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/2011 these appeals were heard together and are being disposed off by this common order, for the sake of convenience.
2. The assessee company was earlier known as M/s Reliance Petroleum Limited and it has since been merged with M/s Reliance Industries Ltd. We shall take up the appeal filed by the assessee for the assessment year 2001-02. Following issues are urged before us by the assessee:
a) Validity of reopening of the assessment;
b) Computation of deduction under section 80HHC of the Act; and
c) Interest chargeable u/s 234D of the Act.
3. The assessee company is engaged in the business of refining of crude oil. The original assessment u/s 143(3) of the Act was completed in the hands of the assessee for the assessment year 2001-02 on 30.1.2004 determining loss of Rs.996.74 crores under the normal provisions of Act and book profit of Rs.1580.09 crores under the provisions of section 115JB of the Act. Consequent to the order passed by the ld.CIT(A) on 24.3.2004, the assessment order was revised to give effect to the order of ld.CIT(A) which resulted into total income at NIL under the normal provisions of Act and book profit of Rs.1214 crores u/s 115JB of the Act.
4. Subsequently, the AO noticed that the income relating to the year under consideration has escaped assessment. Accordingly, he reopened the assessment by issuing notice u/s 148 of the Act on 4.8.2006. The reasons for reopening of the assessment are recorded as under:
"Assessee company filed its return of income on 31.10.01 declaring a total of Rs.NIL under the normal provisions and Rs.12,13,78,86,516 under the provisions of section 115JB of the Income Tax Act, 1961. The assessment was completed under section 143(3) of the Income Tax Act, 1961 on 30.1.2004 at a total loss of Rs.996,74,68,008 under the normal provisions and Rs.15,80,09,05,914 under the provisions of section 115JB of the Income Tax Act, 1961. The total income was revised to Rs.NIL under the normal provisions and Rs.1214,00,19,591 under the provisions of 115JB of the Income Tax Act, 1961, vide order dated 6.7.2004.3 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/2011
2. The Assessee company vide their letters dated 11.5.2006 and 12.5.2006 has stated that while passing the order u/s 143(3) dated 26.3.2004 for AY-2001-02, an amount of Rs.16,59,79,229/- had been added back being prior period income accounted in AY 2002-03, consequent to claim of reduction of prior period income of Rs.16,62,80,901/-. This amount of prior period income is said to be consisting of Rs.10,29,25,483/- in respect of Reliance Petroleum Ltd for the AY 2001-02 prior to the merger with M/s Reliance Industries Ltd.
3. As there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment, I have reason to believe that income chargeable to tax has escaped assessment for this assessment year, coming within the meaning of section 147 of the Income Tax Act, 1961. Reliance in this regard is placed on the judgments of Hon'ble Bombay High Court in the case of Dr.Amin's Pathology Laboratory 252 ITR 673, Hon'ble Gujart High Court in the case of Praful Chunilal Patel /Vasant Chunilal Patel 236 ITR 832, Hon'ble Delhi High Court in the case of Rakesh Aggarwal 225 ITR
496.
4. In view of the above, notice u/s 148 is issued."
5. In the reopened assessment proceedings, the AO determined taxable income at NIL under the normal provisions of Act and book profit at Rs.1321.27 crores under the provisions of section 115JB of the Act.
6. The appeal filed by the assessee before the ld.CIT(A) against the reassessment order was partly allowed and hence both the parties are in appeal before us.
7. The first issue contested by the assessee relates to validity of reopening of the assessment. The ld. AR submitted that the AO has computed the income at NIL in the impugned reassessment proceedings also. In the order passed to give effect to the order of ld.CIT(A) in the first round of proceedings, taxable income was determined at NIL. Accordingly, he submitted that there is no change in the total income consequent to passing of the reassessment order and hence there was no demand of any additional tax. Accordingly the ld. AR, by placing reliance on the decision of Hon'ble Delhi High Court in the case of 4 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/2011 Essex Forms (P) Ltd Vs. CIT (1986) 157 ITR 241 Delhi, submitted that the escapement of income should result in escapement of tax in order to hold the reassessment proceedings to be valid. Accordingly, he submitted that the impugned reassessment proceeding is not valid since the same has not resulted in escapement of tax. The Ld. AR further submitted that the AO has stated that he has sought necessary approval from the Commissioner of Income Tax before issuing the notice u/s 148 of the Act. The ld. AR, by placing reliance on the decision of Hon'ble Supreme Court in the case of Chhugamal Rajpal V/s S. P. Chaliha And Others 79 ITR 603(SC) and the decision of Allahabad High Court in the case of Rajkishore Prasad v. ITO (1992) 195 ITR 438 (All), submitted that the ld.CIT(A) should have given an opportunity of being heard to the assessee before granting his approval to the reopening of assessment. Accordingly, the ld.AR submitted that the approval given by the Commissioner of Income Tax without hearing the assessee is not valid and on that count also, the reassessment proceeding gets vitiated. The ld. AR further submitted that the AO has not furnished the copy of satisfaction recorded by the ld.CIT to the assessee. The ld. AR submitted that, in the absence of satisfaction note of Ld CIT, it is possible to presume that the ld.CIT has given the approval in a mechanical manner, in which case also the impugned notice issued u/s 148 of the Act is liable to be quashed.
8. The ld. D.R, however, submitted that the assessee has incurred loss and hence the tax payable was NIL under both the proceedings. He submitted that the reduction of total loss determined in the reassessment proceedings would also give rise to escapement of income. He submitted that in the impugned reassessment has resulted in reduction of loss and hence, reassessment is valid. With regard to the contention of the assessee about the satisfaction of ld. CIT and presumption about mechanical sanction of the approval, the ld. DR submitted that the assessee is making all these contentions without bringing any material on record.
5 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/20119. We heard the parties on these both issues and perused the record. We have noticed earlier that the assessee has returned NIL income under the normal provisions of Act and book profit of Rs.1213.78 crores under the provisions of section 115JB of the Act. In the assessment order dated 06.07.2004 passed to give effect to the order of Ld CIT(A), the total income was determined at NIL under normal provisions of the Act and at Rs.1214 crores u/s 115JB of the Act. Consequent to the passing of assessment order relating to the assessment year 2002-03, the assessing officer got definite information about the escapement of income of the year under consideration to the tune of Rs.10.29 crores. Hence, the assessing officer has issued notice u/s 148 of the Act after obtaining approval of the Ld CIT as per the provisions of the Act. In response to the same, the assessee furnished a return of income, wherein the assessee offered a sum of Rs.5.60 crores as additional income, i.e., the assessee itself has accepted that its income for AY 2001-02 has escaped the assessment to the tune of Rs.5.60 crores. It is a well settled proposition that the assessing officer, at the time of issuing notice u/s 148 of the Act, should have reason to believe about the escapement of income. In the instant case, the belief formed by the assessing officer got vindicated by the fact that the assessee itself has offered additional income in the return of income filed in response to the notice issued u/s 148 of the Act.
10. We have gone through the order passed by Hon'ble Delhi High Court in the case of Essex Farms (P) Ltd (supra) and we notice that the Hon'ble High Court was mainly concerned with the question as to whether there was failure on the part of the assessee to disclose material facts necessary for assessment in terms of sec. 147(a) of the Act, which existed at the relevant point of time. The Court was examining about the validity of arrangement made between the assessee therein and its sister concerns about trading transactions. According to the department, the said arrangement resulted in escapement of income in view of the failure on the part of the assessee to disclose material facts. The 6 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/2011 Hon'ble High Court noticed that the revenue could not show that the said arrangement resulted in reduction of aggregate tax payable by the assessee therein and its sister concern. Further, the High Court held that there was no failure on the part of the assessee to disclose material facts. Under these set of facts, the Hon'ble High Court held that the reassessment proceeding was not valid. However, the facts prevailing in the instant case is totally different, as discussed in the preceding paragraphs and accordingly, we are of the view that the above said case law is not applicable to the case of the assessee. Further, it is now well settled proposition of law that once the reassessment proceedings is initiated validly on compliance with various conditions prescribed in the Act, the same cannot be held to be invalid merely because the assessment order ultimately did not disclose about any escaped income. Further, under the present provisions of section 147, "re-computation of loss" is also brought within the scope of "Income escaping assessment".
11. The other contentions of the assessee that the 'Satisfaction note' of Ld CIT was not supplied to it; the Ld CIT might have given approval in a mechanical manner; the Ld CIT should have given opportunity to the assessee before granting approval etc. are also liable to be dismissed for the reason
(a) that there was definite information with the AO about the escapement of income and the assessee has also accepted the same by offering additional income.
(b) that these contentions are urged before us without bringing any material on record.
(c) that the assessee has not approached either the assessing officer or the Ld CIT seeking copies of satisfaction note/opportunity.
(d) that the assessee is raising these contentions merely on presumptions.
12. In view of the foregoing discussions, we are of the view that the Ld CIT has rightly upheld the validity of initiation of reassessment proceedings.
7 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/201113. The next issue relates to the computation of deduction u/s 80HHC of the Act for the purpose of excluding the same from the Net profit for the purpose of computation of "Book Profit" u/s 115JB of the Act. The assessing officer, while computing the "Profits of Business" for the purpose of determining the deduction u/s 80HHC of the Act reduced 90% of following items of income included in the Profit and Loss account:-
Interest received Rs.180,12,94,672/-
Profit on sale of Assets Rs. 8,35,934/-
Miscellaneous income Rs. 29,20,15,599/-
The contention of the assessee is that the explanation (baa) to section 80HHC of the Act which requires the profit of the business computed under the head "Profits and Gains of Business" is not applicable for the purpose of computing book profit eligible for deduction u/s 80HHC for computing income under section 115JB of the Act. The Ld CIT(A) rejected the said contentions, since he held that the Explanation (baa) to section 80HHC is equally applicable while computing income under section 115JB.
14. Before us the assessee reiterated the same contentions. However, in the absence of any case law to support the view taken by the assessee, we are of the view that the Ld CIT(A) is justified in applying the provisions of Explanation (baa) while computing deduction u/s 80HHC for determining the Book Profit u/s 115JB of the Act. Accordingly, we do not find any reason to hold that the provisions of Explanation (baa) to section 80HHC is not applicable while computing the deduction for the purpose of sec. 115JB of the Act.
15. The assessee has taken alternative ground that the tax authorities are not justified in excluding 90% of the Gross interest for the purpose of computing "Profits of Business". In this regard, the Ld A.R placed reliance on the decision of the Hon'ble Supreme Court rendered in the case of ACG Associated Capsules P Ltd Vs. CIT (343 ITR 89). We notice that the ld CIT(A) has followed the decision of jurisdictional Bombay High Court rendered in the case of CIT Vs. 8 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/2011 Asian star co. Ltd (326 ITR 56). However, the Hon'ble Supreme Court has also considered the decision rendered by the Hon'ble Bombay High Court referred supra in the case of ACG Associated Capsules P Ltd and expressed its view as under:-
"In other words, ninety percent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the Profits of business of the assessee as computed under the head "Profits and Gains of Business or Profession" is to be deduction under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of business."
In view of the subsequent decision of the Hon'ble Supreme Court, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to determine the interest income in terms of the decision rendered by the Hon'ble Supreme Court in the case of ACG Associated Capsules P Ltd (supra).
16. The next issue relates to the exclusion of 90% of the following Miscellaneous income while computing "Profits of business" for the purpose of computing deduction u/s 80HHC of the Act.
S. Particulars Amount
No.
1 Income-Deployment of P&M-Hire Charges 3,79,21,888
2 Income from Time Charter 2,24,18,334
3 Income-Commission 6,02,32,985
4 Sale of Scrap 5,28,91,236
5 Excise duty recovered (Scrap Sales) 30,34,885
6 Sales Tax Recovered (Scrap Sales) 28,41,252
7 Rent Received 2,17,62,000
8 Penalty Recovered from Contractors 40,02,378
9 Insurance Claims Received 6,52,333
10 Cash Discount Received 18,77,219
11 Miscellaneous Recoveries 2,87,87,786
12 Miscellaneous Income-Others 5,55,93,304
Total 29,20,15,599
9 I.T.A. No.1347/Mum/2011,
& ITA No.1426/Mum/2011
In the grounds of appeal, the assessee itself admitted that the Commission income (Item no.3) and Rent (Item No.7) are not in the nature of business income, meaning thereby the assessee does not object to exclusion of 90% of the same.
17. We heard the parties on this issue. We are of the view that the Ld CIT(A) was justified in holding that the following income also represents independent source of income unconnected with the business activity of the assessee and hence 90% of the same is required to be excluded for arriving at the Profits of Business:-
a. Income - Deployment of P&M - Hire charges - 3,79,21,888 b. Income from Time charter - 2,24,18,334 c. Income - commission - 6,02,32,985 d. Rent received - 2,17,62,000
18. In respect of remaining items of receipts, we notice that the following receipts arise out of business activities carried on by the assessee, i.e., they are not independent source of income and hence 90% thereof are not required to be excluded from the net profit in order to compute "Profits of business" in terms of Explanation (baa) to Sec. 80HHC of the Act.
(a) Sale of scrap, Excise duty recovered (Scrap Sales), Sales tax recovered (Scrap sales). The scrap sales is held to be part of business activities carried on by the assessee by Hon'ble Kerala High Court in the case of CIT Vs. Kar Mobiles Ltd (Laws (Ker) 2010-1-134).
(b) The penalty recovered from Contractors, Insurance claim received, Cash discount received, in our view, cannot be considered as independent sources of income, since they arise out of business operations carried on by the assessee. In respect of insurance claims, we derive support from the decision of jurisdictional Hon'ble Bombay High Court in the case of CIT Vs. Pfizer Ltd (330 ITR 62)(Bom).
10 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/201119. The remaining two items are Miscellaneous recoveries and Miscellaneous Income. We do not find the details relating to these two receipts. In the absence of the same, we are unable to express any opinion on the same. However, if the receipts are arising out of carrying on of business operations, i.e., if it is intricately connected with the business activities, then they cannot be considered to be an independent source of income warranting exclusion of 90% thereof. Hence, these two receipts require fresh examination in the light of above said discussion. Accordingly we restore examination of these two items to the file of the assessing officer.
20. The order of Ld CIT(A) on the above said issue stands modified accordingly.
21. The next issue urged by the assessee relates to charging of interest u/s 234D of the Act. The Ld A.R admitted that this issue is consequential in nature and hence we decline to address this issue.
22. We shall now take up the appeal filed by the revenue for AY 2001-02, wherein the revenue is contesting the decision of Ld CIT(A) in deleting the addition relating to alleged Commission/surcharge paid to State Oil marketing Organisation (SOMO) of Iraqi Government Agency.
23. The facts relating to the above said issue are set out in brief. Consequent to the invasion of Iraq into Kuwait, UN Security Council imposed economic sanctions on Iraq Government. However, on humanitarian grounds, a scheme called "Oil for Food Programme" (OFFP) was introduced, whereby the Iraq was permitted to export oil and use the proceeds thereof to buy basic goods from other countries. The Iraq Government ordered its Ministry to collect "Surcharge" on the sale price of the Oil. The Iraqi State Oil Marketing Organisation (SOMO) ran a highly organized system to collect oil surcharges and maintained an extensive data base to keep track of the payments. This collection appears to have been viewed by UN as irregular. Hence the UN 11 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/2011 Security General appointed an independent Enquiry Committee (called Volcker Committee) to investigate the administration and management of "Oil for Food"
programme. The Volckar Committee Report observed that the Iraqi official awarded the contract to various companies to favour them by making illicit payment of surcharge. According to the AO, the name of the assessee herein, viz., M/s Reliance Petroleum Ltd figured as one of the beneficiaries in Volcker committee Report. It was stated that 19 million barrels of oil was allotted, of which 15.7 million barrels were lifted by Alcon Petroleum Ltd, a Liechtenstein based energy trading company. Accordingly, the AO took the view that the assessee would have paid commission/surcharge during the year under consideration and estimated the same at Rs.8,89,36,380/-. Accordingly he added the same to the total income of the assessee.
24. The Ld CIT(A), however, deleted the same with the following observations:-
"3.6. I have considered the facts of the case, order of the AO and the submissions made by the appellant and I do not find enough reasons or justification for the addition made by the AO. Whereas the mention as a non-contractual beneficiary in the Volcker Committee Report is the only reason for the addition, following important aspects related to the issue in question supports appellant's case:-
(i). The observation in Volcker Committee Report is the only material or evidence for making the addition in the assessment order to the effect that assessee is a non-contractual beneficiary and paid part of the purchase consideration as surcharge to Iraqi Government in violation of UN Resolution. There is no other material/evidence/ reason mentioned by the AO for addition. Such general observation by an outside agency, how much respectable it may be, cannot in itself be sole reason for disallowance/addition to the income under Indian law.
(ii). The Volcker Committee Report also does not refer to any specific evidence against the appellant and states that the commission/ surcharge has been paid by Alcon to the credit of Iraqi government and referred the Appellant as non-contractual beneficiary as it had received the supply of goods from Alcon. There is no evidence on' record which is referred in Volcker Committee Report to suggest 12 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/2011 that the appellant has paid the purchase price inclusive of a part of it as onwards payment of illicit commission/surcharge to Iraqi government. The AO has also not brought on record any evidence or material in support of the alleged payment of illicit commission forming part of the purchase price. Even the Volcker Committee has not referred the appellant as payer of illicit commission.
iii). Assessee purchased .lraqi crude oil from Alcon Petroleum Ltd.
(Alcon), Leichtenstein company based in Europe, a UN approved company for dealing in crude in "oil and food-programme". The contract was signed with Alcon (and not with Iraqi Government) for supply of crude at an agreed price per barrel at the prevailing international market rate. There was no purchase from Iraqi Government or any Iraq Government agency and the contract signed between Alcon and assessee categorically states that Alcon has not paid any surcharge to Government or their agency for procuring the crude.
(iv) The price paid by assessee to Alcon is the consolidated price for the goods purchased and cannot be split for part of it as representing surcharged alleged to have been paid by Alcon to Iraqi Government. For assessee, it is the 'cost' of goods for computing taxable income.
(v) There is no privacy of contract between assessee and Iraqi Government or any evidence direct or indirect confirming payment of surcharge by assessee to Iraqi Government. Even if it is accepted that Alcon paid any surcharge Government, it cannot in any view of the matter be said that a part of payment made by assessee to Alcon constitutes surcharge paid by assessee to Government 3.7. In view of the above, I hold that the addition made by the AO. is not in accordance with the provisions of law and it is cancelled. The ground of appeal is allowed."
25. The Ld A.R submitted that identical disallowances made in the following cases have been deleted by the Tribunal:-
(a) Air Pac Exports Vs. ACIT (ITA No.2981-2983/M/12 dated 11.6.14)
(b) TIL Ltd Vs. ACIT (16 SOT 33)(Kol)
(c) DCIT Vs. Rajrani Exports (P) Ltd (22 taxmann.com)(Kol).13 I.T.A. No.1347/Mum/2011, & ITA No.1426/Mum/2011
26. The facts prevailing in the instant case show that the assessee has not made any payment directly to Iraqi Government. It has paid purchase price to its supplier M/s Alcon Petroleum Ltd. The Ld CIT(A) has given a categorical finding that there is no evidence or material to support the alleged payment of illicit commission/surcharge over and above the purchase price by the assessee to the Iraq Government. Further, as per the contract signed between the assessee and M/s Alcon Petroleum Ltd, M/s Alcon has also not paid any surcharge to Iraqi Government or their agency for procuring the crude oil. Hence, we are of the view that the Ld CIT(A) was justified in deleting this addition by holding that there is no material to support this addition.
27. In the result, the appeal filed by the assessee is partly allowed and the appeal of the revenue is dismissed.
The above order was pronounced in the open court on 24th April 2015. घोषणा खल ु े यायालय म दनांकः 24th April, 2015 को क गई ।
Sd sd
(अ मत शु ला / AMIT SHUKLA) (बी.आर.बा करन / B.R. BASKARAN)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मुंबई Mumbai: 24th April,2015.
व. न.स./ SRL , Sr. PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु त(अपील) / The CIT(A)- concerned
4. आयकर आयु त / CIT concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई /
DR, ITAT, Mumbai concerned
6. गाड फाईल / Guard file.
आदे शानस
ु ार/ BY ORDER,
सहायक पंजीकार (Asstt. Registrar)
14 I.T.A. No.1347/Mum/2011,
& ITA No.1426/Mum/2011
आयकर अपील य अ धकरण, मुंबई /ITAT, Mumbai