2015 (9) TMI 900 - AT - Income Tax

Reopening of assessment - payment made to M/s Mahindra & Mahindra for the purpose of obtaining exclusive vendor status - Held that - From the explanation furnished during the course of original assessments it is clear that the assessee company was harping on that it is nothing but volume discount by the appellant to the M/s Mahindra and Mahindra. There is no evidence on record to indicate that the agreement entered into by the assessee company with M/s Mahindra & Mahindra dated 11th January 1998 was filed before the Assessing Officer. Therefore the Assessing Officer had no opportunity to peruse and draw any kind of inference about the nature of agreement or the right acquired pursuant to that agreement. Hence it cannot be said that the Assessing Officer at the time of framing the original assessment formed any opinion on this issue. Therefore the contentions raised by the appellant that the reassessment proceedings were initiated based on the mere change of opinion is devoid of merit. The case-laws relied upon by the appellant do not come to the rescue of the appellant as the ratio laid down on those cases are that the reassessment proceedings are invalid in law when prompted by a change of opinion. Accordingly we hold that the reassessment proceedings initiated by the Assessing Officer are valid in law. - Decided against assessee. Disallowance on the ground that the expenditure incurred to obtain exclusive vendor status was in the nature of capital expenditure - Held that - In this case also the assessee company acquired a right to carry on its business unfettered by any competition from outsiders within India. It was a protection acquired by the company for its business as a whole. As a result of this the capital value of the business goes to appreciate and make it more profit yielding. Therefore the expenditure incurred in acquiring this right is nothing but a capital expenditure which cannot be allowed as a deduction under Section 37(1) of the Act. The fact that the appellant company paid consideration by way of reduction from the invoice value does not make any difference because what has to be looked to is the character of the payment. A capital expenditure may as well be spread over for a number of years and had retained his character as a capital expenditure. We place reliance on the decision of CIT Vs. Piggot Champman & Co. (1949 (2) TMI 8 - CALCUTTA HIGH COURT) and further the fact that in the books of account this item was treated as a volume trade discount cannot determine the true nature of the transaction. Nomenclature of a transaction is immaterial while deciding the true nature of the transaction. Thus no hesitation to hold that the expenditure incurred by the assessee company in acquiring exclusive vendor status in terms of the agreement entered into by it is nothing but capital expenditure and hence this ground of appeal is also dismissed.- Decided against assessee. Disallowance without appreciating the fact that during the year the total expenditure incurred and claimed on account of trade/volume discount was only Rs. 9, 23, 23, 607/- - Held that - As held that the entire expenditure is capital in nature and mere fact that the capital expenditure is spread over period of time does not make any difference. Therefore the argument that the expenditure incurred during the year under consideration was only Rs. 9, 23, 23, 607/- does not hold any water.- Decided against assessee.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 147/148 of the Income Tax Act.
2. Nature of expenditure incurred for obtaining exclusive vendor status-whether capital or revenue.
3. Correctness of the disallowance amount computed by the Assessing Officer.
4. Levy of interest under Section 234B of the Act.
5. Levy of interest under Section 234D of the Act.
6. Initiation of penalty proceedings under Section 271(1)(c) of the Act.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The appellant contended that the reassessment proceedings initiated under Section 147/148 were based on a mere change of opinion, which is not permissible as per the Supreme Court's ruling in 'CIT v. Kelvinator of India Ltd.' The original assessment was completed under Section 143(3), where the issue of allowability of payment for exclusive vendor status was examined and allowed. However, it was found that there was no evidence indicating that the agreement with M/s Mahindra & Mahindra was presented during the original assessment. Therefore, the Assessing Officer had no opportunity to form an opinion on the nature of the agreement. Hence, the reassessment proceedings were deemed valid as they were not based on a mere change of opinion.

2. Nature of Expenditure:
The appellant argued that the payment to M/s Mahindra & Mahindra for obtaining exclusive vendor status was a normal trade/volume discount and should be allowed as a revenue expenditure under Section 37(1) read with Section 28 of the Act. However, the agreement indicated that the appellant acquired an exclusive right to supply seating systems, which provided an enduring benefit to the business. Applying the principles from the Supreme Court's decision in Assam Bengal Cement Vs. CIT, the expenditure was deemed to be capital in nature, as it was a protection acquired for the business as a whole, enhancing the capital value of the business.

3. Correctness of Disallowance Amount:
The appellant contended that the total expenditure incurred and claimed during the year was only INR 92,323,607, not INR 140,899,500 as computed by the Assessing Officer. However, since the expenditure was held to be capital in nature, the manner of its spread over time did not alter its character. The CIT(A) also did not admit additional evidence on this issue, as there was no sufficient cause for not presenting it during the assessment proceedings. Consequently, the disallowance amount computed by the Assessing Officer was upheld.

4. Levy of Interest under Section 234B:
The appellant challenged the levy of interest under Section 234B. However, as this issue was consequential to the primary findings, it did not require separate adjudication.

5. Levy of Interest under Section 234D:
Similar to the issue under Section 234B, the levy of interest under Section 234D was also consequential and did not require separate adjudication.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant challenged the initiation of penalty proceedings for furnishing inaccurate particulars of income. As this issue was also consequential to the primary findings, it did not require separate adjudication.

Conclusion:
The appeal filed by the assessee was dismissed, and the reassessment proceedings, disallowance of expenditure, and consequential levies of interest and initiation of penalty proceedings were upheld. The decision was pronounced in the open court on 9th September 2015.