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TMI Blog2010 (2) TMI 763X X X X Extracts X X X X X X X X Extracts X X X X ..... he original grounds raised in Form No.36 which was furnished on 20.1.2004. In fact, the furnishing of a revised Form was necessitated to cure certain technical flaws which have crept in, in the Form No.36 originally filed. The same was ordered to be placed on record. The assessee vides its application dated 9.9.2008 had prayed for admission of additional grounds which are as under: "1. the appellant submits that on the facts and in the circumstances of the case, the conditions precedent being absent, the re-opening of the assessment u/s. 147 of the Act was without jurisdiction and thus the reassessment was invalid and liable to be cancelled. 2. The authorities below ought to have appreciated that there being no escapement of income in the original assessment as made the re-opening of the assessment is liable to be set aside." (ii) ITA No. 90/B/2004 - By the Revenue. Out of five grounds raised by the Revenue, ground Nos.1, 4 and 5 being general and no specific issues involved, they have become non-consequential. In the remaining grounds, the cruxes of the issues are that- (i) the CIT(A) had erred in allowing the expenditure of Rs.5.44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company. During the course of hearing of appeals, the Ld. AR submitted that on receipt of appellate order for the assessment year in question, the previous counsel was instructed to prefer an appeal against the said order before this Hon'ble Bench. Due to lacklustre approach on the part of the said counsel, it was submitted, there was a delay of 113 days in preferring this appeal which may be condoned and the appeal be admitted for adjudication. An affidavit was furnished to substantiate the claim. 5.1. After due consideration of the Ld. Counsel's plea and also perusal of the affidavit, we are of the unanimous view that the assessee company was prevented by a reasonable cause in not preferring the appeal in time and, thus, the delay in question was condoned and the Registry was directed to take the appeal on record. 6. Common Order: As the issues raised by the both parties are common and inter-linked, all these five appeals are considered together and disposed off, for the sake of convenience, in this common order. I. Let us now address to the grievances of the assessee company. 7. A.Y 1997-1998: To familiarize with the issues, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also no documentary evidence to prove that the SGCI rolls were transported from the suppliers to the factory premises. The assessee had substantial creditors under the head 'advance against sales' sundry creditors and those parties did not have any independent sources to advance to the assessee. On an inquiry, it was found that the IDBI had purchased only the used SGCI Rolls from the assessee and leased back the same assets to the assessee without effecting any physical movement of the assets, as a result, the SGCI rolls which were purchased by the assessee in 1993 were sold to IDBI after getting 100% depreciation on SGCI Rolls. The assessee claimed to have entered into a lease agreement with IDBI to lease the said asset by the assessee by paying lease rent and also reserving one clause for transfer of this asset after the lease period by paying only 1% of the cost which shows that the assessee had already claimed 100% depreciation was transferred to IDBI by way of book entry effecting as sales and getting back the same asset for its use by way of entering to a lease agreement and paying lease rent. By such adjustments, the assessee had indirectly helped the IDBI to cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the ruling of the Hon'ble Apex Court in the case of GKN Driveshaft (I) Ltd. vs. ITO and Others (259 ITR 19), the CIT(A) opined that the assessee was rightly aggrieved on the technical issue of its right of being informed regarding the reasons behind re-opening of the assessment. However, consequent on survey operation, opportunity afforded during the assessment proceedings on the issue of disallowance of lease rentals etc, the CIT(A) had rejected the assessee's plea to quash the re-assessment proceedings merely on technical ground of non-intimation of reasons behind re-opening of assessment. (ii) Lease rents: After considering the rival submissions, the CIT(A) was of the view that the assets in question were SGCI Rolls which enjoy 100% depreciation under the I.T.Rules. The fact of sale of SGCI rolls to IDBI after availing of 100% depreciation by the assessee for enabling the IDBI to again claim the benefit of depreciation clearly raises the doubts as to the motives behind the sale and lease back transaction. There was no physical movement of transfer of assets. In view of non-acquisition of assets in question physically, it was a paper transaction entered into by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant were common. Indeed the appellant company was the one which controlled the administration of both the units which supplied the staff to the both the units and which managed the whole of the business organization of both the units. It is not the case of the revenue that the production of new unit is not the production of the appellant company. In brief, there is complete interconnection, inter-lacing and inter-dependence of both the units belonging to the appellant. and as a logical corollary, I have no option but to hold that the new plant was only an establishment of a new unit of the existing business and it did not constitute a new business, as has been contemplated by the AO. thus, based on facts and circumstances of the case, the Court decision relied upon by the appellant and the decision given by my predecessor on the similar issue involved in AY 1999-2000, I have to direct the AO to allow the claim of the appellant in respect of interest and financial charges paid on term-loans at Rs.54448584/- (sic.) Rs.5,44,42,584) and upfront fee payment amounting to Rs.23100000/-, the expenditure being revenue in nature by deleting the concerned disallowances effected." &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associate, namely, M/s. Bellary Steel Rolling Mills, which was higher by Rs.135 PMT compared to other payments for similar service. As per order sheet entry dated: 29.3.01, the AO had brought to tax u/s 40A (2)(b) a sum of Rs.344925/-. 8. Aggrieved, the assessee had approached the Ld.CIT(A) for relief. (i) Lease Rent: Duly considering the forceful contentions of the assessee and the findings of the AO, the Ld.CIT(A) had observed thus- "It is not correct to say that the finding of the survey was not conveyed to the appellant. As a matter of fact the DDI and the assessing officer have given enough opportunity to the appellant. It is also a fact that the appellant has filed an affidavit through its managing Director Sri S.Madhava admitting the fact that there were no machineries installed in the assessee factory for which lease rentals were shown to have been paid. As such, the assessing officer is justified in disallowing the lease rentals debited in the P and L account. The payment of lease rentals cannot also be allowed as financial charges as the same does not tantamount to financial charges and the assessing officer has rightly held that no one should be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmon interests and share holdings. Though the assessee had entered into MOU with S.N.Projects Ltd. for generation and supply of electricity, the assessee had not advanced any documentary evidence to substantiate that the latter had undertook infrastructural works for generation of electricity and, thus, the AO was of the view that the amount of Rs.45.5 crores out of the borrowed funds from banks and financial institutions diverted and invested in various associated companies was not a genuine business transaction and, hence, proportionate interest at the prevailing rate paid by the assessee, amounting to Rs.49165609 was disallowed. Disillusioned, the assessee took up the issues before the CIT (A), as in the previous assessment years, for remedies. (i) Lease Rent: With regard to machinery (lease rent), the baffling reasoning of the Ld. CIT(A) was that "The next ground of appeal is against the disallowance of machinery rent amounting to Rs.4463063/-. The authorized representative did not press for this ground of appeal. As such this ground is dismissed as withdrawn. (ii) Diversion of funds: After considering the lengthy and vehement contentions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hemently argued that the Assessing Officer had not furnished reasons for re-opening of the assessment on the requisition letter of the A.R dated 20.3.2003, which was filed during the course of assessment proceedings on 21.3.2003. Buttress his argument; Ld. AR had placed strong reliance on the decision of the Hon'ble jurisdictional High Court in Income Tax Appeal Nos.120 to 135/2004 and c/w. I.T.A. Nos.561, 549, 559 of 2001, 90 to 98 of 2003 and 550/01 in the cases of Sri L. Sohanraj and Ors. V. Dy. CIT. 10.1.1. The Ld. D.R present was also heard. With respects, we have perused the finding of the Hon'ble Court and the relevant portion of the observations of the Hon'ble Court is reproduced here-below: "6. At the time of addressing arguments by the learned counsel for the parties, our attention was invited to the decision of the Supreme Court in the case of GKN Driveshafts (India) Ltd. referred to supra. After careful reading of the same and other judgments of the other High Courts upon which strong reliance is placed by the learned counsel on behalf of the assessees and on careful examination of Sections 140, 142, 147, 148, 148(2), we thought it fit to answer the subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of High Court and also Supreme Court to the said effect that the assessee is not entitled to a copy of the reasons recorded by the assessing officer. However, you are also informed that all the reasons would be putforth to you in the form of questionnaire after giving reasonable opportunity....." 9. In view of the aforesaid stand taken by the assessing officer the statutory requirement of Section 148(2) of the Act has not been complied within these cases. Therefore, the observations made by the Supreme Court in GKN Driveshafts (India) Ltd.'s case, referred to supra, with all fours would be applicable to the fact situation of these cases." 10.1.2. Reverting back to the present case, after duly perusing the paper Book furnished by the Ld.A.R., we are of the considered view that the sequence of event(s) took place during the course of reassessment proceedings are very relevant which are illustrated as under for the sake of clarity and proper understanding of the issue: (a) In compliance with the issuance of Notice u/s 147, the assessee -through its AR - vide its letter dated 25/2/2003 had furnished the required information as called for. In its concludin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprises, (iii) B.H. International, who are claimed to be manufacturing concerns of SGCI Rolls. On the basis of information available, the peak credits appearing in your books in the name of these three concerns during the period relevant for the Asst. year 1997-98 works out to Rs.20,99,72,559/-. As already discussed during the survey operations, and the subsequent hearings, it was noticed that the three concerns mentioned above did not have capacity to manufacture and supply the machinery as claimed by you and these concerns have issued only the Invoices. Considering the evidences collected during survey and subsequent proceedings, these concerns have issued only the Invoices. Considering the evidences collected during survey and subsequent proceedings, these concerns did not have the financial capacity to lend such huge interest free amounts to your company. Therefore, it is proposed to tax the peak credits standing in the name of three concerns in your books of accounts amounting to Rs.20,99,72,539/- as un-explained credits during the year. You are requested to file your objections if any on the above proposition. 2) You have claimed Rs.5,44,42,584/- as Interest paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speaking order before proceeding with the assessments for those years." However, the present assessee on receipt the letter dated: 12/3/2003 from the AO had not responded. Had there been a bona fide intention of doing so, the assessee should have asked the AO to furnish the reasons recorded for reopening of the assessment. In stead, in response to the AO's queries, the AR of the assessee came up with a request for 'reasons recorded for reopening of the assessment' that too at the fag end of the month in which, the AR, if not the assessee, would have been well aware of the fact that the assessment in question was to be barred by limitation by 31.3.2003. Had the assessee's bona fide intention of finding out the reasons for such reopening of the assessment, it would have come up with such a specific request on receipt of Notice u/s 148 of the Act itself? Even on receipt of the AO's letter dated: 12/3/2003, the assessee should have immediately objected to the reopening of the assessment. Instead of doing so, the assessee's AR in its letter dated: 20/3/2003, after making a reference in its first paragraph, went on to furnishing the required details which infers even for a common man th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. With regard to the disallowance of the lease rentals for the AYs under dispute, the contentions of the Ld. Counsel, for the sake of clarity, are summarized as under: (i) the lease transactions were genuine and the lease rentals were paid in the course of business for acquiring assets on lease and put to use for the purpose of the assessee's business; (ii) the leased assets were identifiable, the lessor and lessee were also identifiable and the transactions were indeed supported by proper documents; (iii) the appellate authority ought to have appreciated that the outcome of the survey proceedings u/s 132A had not been communicated to the assessee for its rebuttal and the reliance placed on such observations were not justified and the disallowance on the basis of such observations was liable to be cancelled; (iv) without prejudice, even assuming the lease rentals as claimed by the assessee were financial charges, still such charges were revenue expenditure and thus liable to be allowed; - the appellate authority ought to have appreciated that the transfers were genuine and the rents claimed as deduction were paid on acquiring assets on le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, pleaded that the finding of the lower authorities be sustained on this count. During the course of hearing, the ld. D R has furnished a paper book containing 1-80 pages which consists of, inter-alia, copies of (i) survey report; (ii) sworn statements; (iii) correspondence with various officers etc. Reliance was placed on the following case laws: (a) I.C.D.S.Ltd. vs. CIT (2007)291 ITR 18 (Kar) (b) Industrial Cables (I) Ltd. vs. CIT and Another - 272 ITR 159 (P and H) 11.2. We have carefully considered the rival submissions, perused the relevant records and also the voluminous documentary evidences advanced by either party. 11.2.1. On a careful perusal of the impugned orders of the AOs, we find that they have indeed relied solely on the survey report of the DDI, Hubli. However, no discreet inquiries have been made out by the assessing officer concerned to bring out the factual position on record with documentary evidence. On the other hand, the assessee had furnished copies of lease agreements entered into (i) M/s.Aruna Sugars Finance Limited, (ii) Associated Rubber Industries Ltd., (iii) Development Credit Bank Limited, (iv) Kotak Mahindra Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l charges', I am not impressed by the arguments of the authorized representative for the simple reason that the assessee company neither under I.T.Act nor in equity is entitled to reap the fruits of its own misdeeds. During the year under consideration, a total payment of lease rental to the tune of Rs.239948270/-was made. However, out of this, an amount of Rs.16310230/- only is debited to P and L account and the balance amount of Rs.223638040/- has been taken as closing work in progress - integrated steel plant. In view of the foregoing discussion, I make disallowance of Rs.16310230/-." 11.2.7. A plain reading of the above observations of the assessing officer would invariably suggest that the AO had in fact admitted the total payments to the tune of Rs.23.99 crores made by the assessee during the assessment year under dispute and since the assessee had debited only Rs.16310230/- in the P and L account as lease rentals, the AO had resorted to make the disallowance only to the extent of Rs.1.63 crores which in other words, he had conceded that the assessee did make payments to the extent of Rs.23.99 crores. 11.2.8. For the assessment year 99.00 under dispute, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef, was that the assessee filed its ROI claiming depreciation, and, subsequently, filed a revised statement claiming higher depreciation on the plea that certain additions were made in the AY 93-94. The AO considered the depreciation claimed according to the original return. The AO further noted that in an earlier year, the assessee had claimed depreciation on boiler plant auxiliaries from GEB and leased back to GEB. Similarly, the assessee had purchased assets from RSEB in an earlier year and leased them back to RSEB. The claim of 100% depreciation for the AY 94-95 was negated holding that the transactions were loan transactions and the claim for AY 93-94 was also negated. The claim of 100% depreciation on the assets purchased from GEB and RSEB for the AY 95-96 was also negated. On an appeal, the CIT(A) had confirmed the AO's action on the ground that the assessee was not entitled to any depreciation u/s 32 of the Act as the assets were not owned by it but were for the purpose of security against loan given to parties during the course of financing transactions. On an appeal, it was held by the Hon'ble Tribunal that "Whenever these assets were taken back they were shown as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not suffer from any error; the Hon'ble Court had declined to interfere with the finding of the Tribunal. The Hon'ble Court had further held that "the facts showed that while the Board was interested in securing financial assistance by way of loan and for the said purpose the machinery/equipment was offered as a security by creating the documents in question to assure repayment of the loan advanced, the assessee found it convenient to enter into such a transaction as a device adopted to avoid payment of tax. The Tribunal, the appellate authority and the assessing officer had recorded a finding that the transaction in question was not real and genuine; it was not in the nature of a tax planning which is within the framework of law. The finding recorded by the authorities did not suffer from any error, much less an error involving a substantial question of law......" With due regards, we would like to point out that in the above case, the Board, for the purpose of securing financial assistance by way of loan and for that purpose, the Board had offered its machinery/equipment as a security whereas in the case on hand, neither the assessing officer nor the appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. It failed to produce any evidence to show any manufacturing done by it. It has also been found as a fact that the sister concern also did not carry out any business activity after purchasing and leasing of the assets. The Tribunal has rightly held that the expenditure cannot be said to have been incurred wholly and exclusively for the purpose of the business as no connection had been established between the expenditure incurred and the activity undertaken by the assessee. Even otherwise, the findings recorded by the Tribunal are pure findings of facts. The Tribunal has taken a possible view which does not suffer from any factual or legal infirmity. We are, therefore, satisfied that no substantial question of law arises out of the order of the Tribunal warranting interference by this court. We have duly perused the finding of the Hon'ble Court wherein issue was that the assessee had sold its assets to a sister concern and on the same day took those assets on lease. After a few days, the assessee had advanced an interest free loan of Rs.50 lakhs to its sister concern and claimed as deduction of lease rent paid to its sister concern. The AO took a stand that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ash credits of Rs.7.16,30,000: (i) The advances against sales and advances for ISP were as under: 1. Scraps and SID supplies Rs. 18.53 crores 2. Creditors for expense Rs. 2.33 crores 3. Advances against sales Rs.41.33 crores 4. Advances for ISP Rs. 7.33 crores 5. Other advances Rs. 2.11 crores Total Rs. 71.63 crores 12.1. The assessee was required by the AO to furnish a list of parties with their postal addresses and confirmations so as to discharge the onus u/s 68. Accordingly, the assessee had furnished the addresses of the parties for outstanding amounts exceeding Rs.50 lakhs. No details of parties or of the amount of the alleged creditors under various heads were forth-coming, the AO considered 10%of the total advances allegedly received as not having been satisfactorily explained u/s 68, he disallowed Rs.7.16 crores out of Rs.71.63 crores as unexplained cash credits. 12.1.1. On an appeal, after considering the assessee's version, the Ld. CIT(A) was of the view that "the assessing officer has stated that no confirmation were filed before him. Even before the undersigned no confirmation were filed to substantiate the genuineness o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice/summons. The Department invoked Sec. 68 and added the credits of three persons who did not appear. After considering the issue in detail and posed a question by the Hon'ble Court that, "Whether the assessee failed to prove the capacity of creditors and whether Sec. 68 is attracted? and answered itself with a firm "No". It went on further to observe that "It was the duty of the Tribunal to look into and direct the Assessing officer to produce all the returns and verify the same. The Tribunal abdicated the power and responsibility in discharging the duty. The assessing officer had the jurisdiction to look into cash credits. The enquiry was not properly made. The assessing officer could not have come to the conclusion that the credits are fictitious when he had not looked into attendant circumstances". (b) CIT vs. Orissa Corporation Pvt. Ltd 159 ITR 78 (SC) After considering the facts of the issue, the Hon'ble Apex Court had observed thus- "In this case, the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index numbers were in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order of the AO that the disallowance was resorted to solely on the basis of "Order Sheet entry dated: 29.3.2001." The contents of the Order Sheet entry have not been brought to the reference of this Bench for consideration by either party. In the interest of justice and equity, this issue is remitted back on the file of the AO for fresh consideration. The assessee, through its Ld. Counsel, is advised to approach the AO for consideration of issue afresh to advance its contentions with proof of comparative figures, if any. It is ordered accordingly. 14. (iii) The grievance of the assessee was that the CIT (A) ought to have decided that the additional tax charged on the tax arrived at on the income computed u/s 115J shall not be leviable. 14.1. However, on a perusal of the impugned order of the CIT (A), we find that "The authorized representative also contested the computation of income u/s 115J. However, he did not press for this ground of appeal. As such, this ground of appeal is dismissed as withdrawn." 14.2. Since the assessee had conceded before the CIT(A) by not pressing the issue, the assessee should now have no grievance over the issue. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annum with Chinese technology for which a considerable power was required. It was conceived to put up a captive power plant by using the waste gas to produce captive power. Since SNPL had shown its inclination to generate power upon which a MOU was entered into between the assessee and SNPL. According to the said MOU the assessee shall allow the entire waste gas to be utilized by SNPL to produce electricity. While producing the electricity the steam which would be generated to be utilized by the assessee free of cost. Apart from the above, the assessee shall have to provide land (area) to put up the plant, funds to the tune of Rs.60 crores to SNPL till it achieve its financial closure on its own. Thus, it was argued, it was apparent that the funds provided were out of commercial expediency and for the assessee's advantage too. Thus, there was no diversion of funds as alleged by the AO. 15.1.3. We have duly considered the rival submissions. The assessee was in the process of expansion of ISP for which a considerable power was necessitated for smooth running of the said plant. Since SNPL - a sister concern - had inclined to generate the required power for the assessee for whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 72% of shares. Such being the ground realities, the AO's stand that "The entire exercise of fund flow and the ultimate destination of the funds to the assessee company, would indicate that the objective of generation of electricity and supply to the assessee company in toto, is defeated, further it is also not clear when the project of power generation will be completed or otherwise since major portion of the funds have been diverted" is lacking conviction. 15.1.7. The other allegation of the AO that "Apart from a Memorandum of Understanding, the assessee company has not produced any material evidence or other supporting documents to substantiate the claim that S.N. Project Limited have undertook infrastructural works for generation of electricity". However, the ITO, W-12(2), Bangalore, in the assessment order for the AY 99-00 in the case of SNPL had acknowledged that (at the cost of repetition) "The assessee company was incorporated on 26.8.1996. The main objective of the company as per its Memorandum of Association is generation of electricity. During the period relevant to the asst. year, as verified from the Statement, there is no business activity as such and is still ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he participating companies to siphon-off interest bearing borrowed funds for non-business purposes", and (ii) the Ld.CIT(A)'s view of "The amount advanced by M/s.Bellary Steel and Alloys Ltd. cannot be regarded for purpose of business of the appellant. As such, the assessing officer is justified in treating this transaction as diversion of funds for non-business purposes...." were without any documentary evidence to back their conclusions. It is ordered accordingly. II. Let us now proceed to look into the grievances of the Revenue. 16. A.Y 1997-98: (i) the CIT(A) had erred in allowing the expenditure of Rs.5.44 crores of financial charges and Rs.2.31 crores of upfront fee payments for the new plant under execution; and (ii) the CIT(A) had erred in directing the AO to examine lease rent paid which was disallowed by the AO and to find out the interest portion in it and to allow the same as finance charges. A.Y.99-00: (i) "the CIT(A) has erred in allowing the expenditure of Rs.436626270/-being the amount spent towards financial and upfront syndicate fees on the new project as revenue expenditure." 16.1. During the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court has, duly considering the issue at length, observed in its wisdom thus, (a) that it could not be disputed that the business organization, administration and fund of both the units of the assessee, namely, the unit at Baroda and the unit at Bangalore, were common. There was one company which controlled the administration of both the units, which supplied the staff to both the units and which managed the whole of the business organization of both the units. The production of bother the unit was considered the production of the assessee company itself. In the application for the proposed establishment of the new unit at Bangalore made by the assessee to the Government of India on December 8, 1959 and in the application for licence submitted by the assessee to the Govt. it was stated that the new Unit at Bangalore was nothing but an expansion of the existing business. Thus, there was complete inter-connection, inter-lacing and interdependence of both the units, which is the test laid down for determining whether two lines of businesses constitute the 'same business' within the meaning of section 24 (2) by the supreme Court in the case of CIT vs Prithvi Insurance co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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