Income Tax Appellate Tribunal - Pune
Ahmednagar Forgings Ltd. vs Assistant Commissioner Of Income Tax on 9 June, 2006
Equivalent citations: (2007)107TTJ(PUNE)129
ORDER
K.G. Bansal, A.M.
1. These three appeals of the assessee were argued in a consolidated manner by the learned Counsel of the assessee and the learned Departmental Representative. Therefore, we find it convenient to pass a consolidated order.
ITA No. 503/Pune/2003 for asst. yr. 1995-962.1 In this case, original assessment under Section 143(3) was made by the AO on 20th Sept., 1999, determining the total income of the assessee at Rs. 1,39,90,713. Thereafter, a notice under Section 148 of the IT Act, 1961, (the Act), was served on the assessee on 19th March, 2001. The assessee stated that original return filed under Section 139(1) on 29th Nov., 1995 may be treated as the return in response to the aforesaid notice under Section 148. The impugned notice was issued as the assessee had been allowed share capital issue expenses as the revenue expenses rather than treating them as capital expenses. The reassessment proceedings were completed on 11th March, 2002 at total income of Rs. 1,81,29,160.
2.2 Aggrieved by this order, the assessee moved an appeal before the CIT(A)-I, Pune. One of the grounds taken before him was that initiation of proceedings under Section 148 was bad in law in terms of proviso to Section 147. In the course of hearing before him it was pointed out that the notice under Section 148 was issued on 12th March, 2001, after lapse of four years from the end of the relevant assessment year. The learned CIT(A) pointed out that the said notice was issued after obtaining approval of the CIT, Nashik, in accordance with the provisions of Section 151 of the Act. The AO had recorded reasons on 7th March, 2001, which are also on record. The learned CIT(A) also referred to the letter of the assessee filed in response to the notice under Section 148, in which it was inter alia informed that the return of income was filed on 29th Nov., 1995 in the prescribed form and according to the assessee's view no income had escaped assessment. Thereafter, it was mentioned that the original return may be treated as a return filed under Section 148 of the Act. The assessee had also placed reliance on the decision of Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO and Ors. (2003) 179 CTR (SC) 11 : (2003) 259 ITR 19 (SC), in which it was inter alia pointed out that the AO is bound to furnish reasons to the assessee for reopening an assessment within reasonable time. Thereafter, on receipt of such reasons, the assessee can file objections to the issue of notice. In the light of the, assessee's submissions and the decision of the Hon'ble Supreme Court in the aforesaid case of GKN Driveshafts (India) Ltd. (supra), the learned CIT(A) pointed out that the assessee had not taken any objections to the reasons recorded by the AO. Therefore, the issue was decided against the assessee. Thereafter, the case was heard on merits and the appeal of the assessee was partly allowed.
3.1 Aggrieved by this order, the assessee is in appeal before us. Ground No. 1 is preliminary in nature to the effect that the notice under Section 148 was without authority and, therefore, it was bad in law. Consequently, reassessment proceedings were also bad in law.
3.2 The learned Counsel referred to p. 36 of the paper book, being a letter dt. 5th Feb., 2002, addressed to the AO in the course of reassessment proceedings, in which it was pointed out that notice under Section 148 is void because it was issued after four years from the end of the relevant assessment year. The case of the learned Counsel was that in such a situation, jurisdiction to issue notice for reassessment can be assumed only if it is shown that income chargeable to tax had escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. While it was admitted by him that expenditure incurred for raising capital has been held now to be capital expenditure, yet, the fact stays that the assessee had furnished all material facts for assessment of his income. In this connection, he referred to para 9 of the original assessment order, in which it was noted by the AO that the company issued 9.60 lakh equity shares at a premium of Rs. 165 per share. The premium amount was transferred to reserve and surplus account. The company incurred expenses for raising the capital, the details of which are given on p. 27. These expenses are fees paid to Registrar-Rs. 3 lakhs, stamp duty-Rs. 1.68 lakhs, and professional fees-Rs. 50.40 lakhs. It is further mentioned that these expenses have been partly debited to P&L a/c. The remaining amount has been claimed while computing the income of this year. It is also mentioned that the computation of the assessee in this regard is accepted, i.e., over and above a sum of Rs. 10,70,800 debited to P&L a/c, a further sum of Rs. 45.36 lakh is allowed as deduction in computation of income. Thus, it was the case of the learned Counsel that since all the details necessary for computation of income had been furnished in original assessment proceedings, the reopening of the assessment was bad.
3.3 In this connection, he relied on a number of decisions, which may be summarized below:
1. Chandan Metal Products (P) Ltd. v. Dy. CIT (2002) 76 TTJ (Pune) 201 : (2002) 81 ITD 366 (Pune);
2. Asstt. CIT v. Gujarat Flurochemicals (2006) 6 SOT 264 (Ahd);
3. Capiihans India Ltd. v. Taiun Seem, Dy. CIT ;
4. ICICI Bank Ltd. v. K.J. Rao, Dy. CIT .
3.4 As against the aforesaid, the case of the learned Departmental Representative was that as per various decisions of Hon'ble Supreme Court including in the case of Brooke Bond India Ltd. v. CIT (1997) 140 CTR (SC) 598, the expenses incurred for raising capital are not revenue but capital expenditure. Therefore, the claim of the assessee in deducting such expenditure was wrong.
4. We have considered the facts of the case and rival submissions. The facts in the case of ICICI Bank Ltd. (supra) were that the assessee claimed deduction of depreciation at different rates for different vehicles. The depreciation on leased vehicle was deducted @ 40 per cent. The AO after scrutinizing the documents furnished, by the assessee and making further investigation found that the aforesaid rate of depreciation @ 40 per cent was proper. Thereafter, the assessment was reopened on the ground that the aforesaid deduction ought to have been allowed only @ 20 per cent and not @ 40 per cent as allowed in the original assessment. The Hon'ble Court came to the conclusion that having furnished all material facts, the case will not be covered under Section 148 as there was no failure to disclose fully and truly all material facts even if legal inference drawn is erroneous. The Hon'ble Court pointed out that it was not the case of the Revenue that facts disclosed by the assessee were incorrect or that there were any other material facts which had not been disclosed. Thus, the assessment could not have been reopened after four years from the end of the relevant assessment year. We find that provision contained in proviso to Section 147 is quite clear on this issue, the import of which has also been explained by the Hon'ble Bombay High Court in the case of aforesaid ICICI Bank. We have also seen that the assessee had disclosed all material facts to the AO in the original proceedings, as discussed in para 9 of the assessment order. Even if the decision of the AO was erroneous on the facts, the case is not covered under Section 148 because it is not shown to us that there was any error or omission in the facts disclosed by the assessee or any material facts had not been disclosed by the assessee. Therefore, we are in agreement with the learned Counsel that in such a situation, the assessment could not have been reopened after lapse of four years from the end of the assessment year, as has been done in this case. Thus, we set aside the order of the learned CiT(A) in this behalf.
5. The other grounds related to deduction of share capital issue expenses and deduction under Section 80HHC. As the order of assessment has been set aside on the ground of lack of jurisdiction under Section 148, we do not think it necessary to go into these grounds and give a finding on them on merits.
6. In result, the appeal of the assessee is allowed.ITA No. 504/Pune/2003 for asst. yr. 1996-97
7.1 The assessee had filed return of income on 27th Nov., 1996 disclosing total income of Rs. 94,06,186. The assessment was completed at total income of Rs. 1,04,77,580 on 22nd March, 2002, The assessee had claimed deduction under Section 80HHC. While considering the aforesaid claim, the AO inter alia dealt with processing charges amounting to Rs. 8,44,104. It was pointed out that the company had done job work as well as engineering processing work for third parties. This activity is connected with production activities of the assessee. Therefore, it was pointed out that such processing charges should be included in total turnover for the purpose of computing the aforesaid deduction.
7.2 Aggrieved by the order, the assessee moved an appeal to the CIT(A). The claim of the assessee was that for quite sometime it had been having spare capacity, which was used for processing third party goods, leading to receipt of job work charges. Therefore, the income from this activity of processing charges was its business income. In regard to query as to why 90 per cent of the aforesaid receipt should not be reduced from the income under the provisions of Clause (baa), of the Explanation appended below Section 80HHC, it was pointed out to the learned CIT(A) that this clause speaks of reduction of 90 per cent of any sum referred to any els. (iiia), (iiib) and (iiic) of Section 28 or any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in the profits. It was pointed out that such reduction presupposes that the impugned receipts were in the nature of receipts by way of rent, interest, charges, etc., which were unrelated to the manufacturing activity. It would also mean that profit in the aforesaid activity was in the vicinity of 90 per cent, while the profit margin in the processing line was 6 per cent to 8 per cent only. The learned CIT(A) considered the explanation. He was of the view that provisions of the aforesaid Clause (baa) were applicable on the facts and in the circumstances of the case and the receipts by way of job charges were similar to the "charges" mentioned in the aforesaid clause. Therefore, he deducted 90 per cent of the receipt from the profits of business for working out the said deduction, thereby enhancing the income of the assessee, being equal to reduction in the admissible deduction.
8.1 Before us, the learned Counsel relied on the following cases:
1. Aarti Industries Ltd. v. Dy. CIT (2005) 95 TTJ (Ahd) 14;
2. Asstt. CIT v. Shamda Gums & Chemical (2000) 66 TTJ (Jd) 256 : (2001) 76 ITD 282 (Jd);
3. Asstt. CIT v. Herbal Isolates (P) Ltd. (2003) 79 TTJ (Coch) 328 : (2002) 83 ITD 310 (Coch);
4. CIT v. Bangalore Clothing Co. (2003) 180 CTR (Bom) 127 : (2003) 260 FTR 371 (Bom).
8.2 As against the aforesaid, the learned Departmental Representative pointed out that the activity of processing third parties' goods had no nexus with the export business of the assessee. Therefore, if any further enquiry is to be made in the matter to cover the case of aforesaid decision of Bangalore Clothing (supra), it may be restored to the file of the AO.
9. We have considered the facts of the case and rival submissions. The facts of the case of aforesaid Bangalore Clothing (supra) are that the assessee was doing job work apart from undertaking exports and the receipts from the job work amounted to Rs. 66,35,083. The AO relied on Clause (baa) of the Explanation and held that such amount did not form part of the total turnover. The learned CIT(A) took the view that processing of goods was part of the business activity of the assessee and receipts from job work was included in the total turnover. Therefore, the assessee was entitled to include the whole of the profit in the profits of business. The Tribunal held that job work charges were not in the nature of brokerage, commission, rent or interest and, therefore, 90 per cent of such charges could not have been excluded from the profits of business. The Hon'ble Bombay High Court pointed out that the provision of aforesaid Clause (baa) cannot be invoked in every matter involving receipt by way of brokerage, commission, etc. It has to be seen whether the receipts accrued to the assessee by way of operating income. If it is so, then, the provisions of aforesaid clause are not applicable. In view of the finding that job work was integrally connected with the manufacturing activity of the assessee, the receipts therefrom were held to be operating income, not falling within the mischief of aforesaid Clause (baa). In the instant case, the AO (has) given a finding in the assessment order itself that job work was part and parcel of the business activity of the assessee. In view thereof, he came to the conclusion that the job work has to be included in the total turnover of the assessee. In the face of this finding, it has to be concluded in the light of the decision of the jurisdictional High Court that receipts by way of job work constitute operating income of the assessee. Thus, we are unable to persuade ourselves to agree with the findings of the learned CIT(A) that job work charges have to be reduced by 90 per cent for working out profits of the business. It may also be added here that since the receipts have been held to be operating income of the assessee, the same have to be included in the total turnover also, if not done so as a consequence of the order of the learned CIT(A). We will also be well within our jurisdiction to give this direction as the question before us is whether deduction under Section 80HHC has been correctly computed or not, and not merely whether, processing charges are to be included in profits of business only. The assessee will not be worse-off after our order than what he was after the order of learned CIT(A). The learned Counsel also had no objection to such inclusion in the total turnover.
10. In result, this appeal of the assessee is allowed as indicated above. ITA No. 505/Pune/2003 for asst. yr. 1997-98
11. As the grounds of appeal for this year are identical with the grounds of appeal in ITA No. 504/Pune/2003 (supra), relying our decision in that appeal, this appeal of the assessee is treated as allowed.
12. In result, this appeal of the assessee is allowed.