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2016 (5) TMI 1177

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..... iated by AO are illegal and cannot be sustained in law. - Decided in favour of assessee - ITA No. 1352/Bang/2014 - - - Dated:- 10-2-2016 - SHRI VIJAYPAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Shri Nageswar Rao, Advocate For The Respondent : Smt.Neera Malhotra, CIT(DR) ORDER Per INTURI RAMA RAO, AM : This is an appeal filed by the assessee-company, directed against the order of the learned Commissioner of Income-tax (Appeals)-I [ CIT(A) ], Bangalore, dated 1/8/2014 for the assessment year 2005-06. 2. The assessee-company raised the following grounds: Based on the facts and circumstances of the case, Fibres and Fabrics International Private Limited [the Appellant ] respectfully prefers an appeal under Section 253 of the Income-tax Act. 1961 ['the Act ], against the Order ( impugned order ) passed by the Commissioner of Income- tax (Appeals)-I, Bangalore [ learned CIT(A) ] dated 01 August 2014 (received on 09 October 2014), on the following grounds, which may kindly be considered without prejudice to one another Ground 1: Order contrary to law, facts and is violative of principles of natural justic .....

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..... ficer (learned AO ), but also goes to the very basis of the dispute and which positively establishes the service received. 3.3 The learned CIT(A) has erred in accepting the disallowance of the Appellant's valid business expenditure without citing any valid basis and/ or on irrelevant and vague considerations. The CIT(A) has erred in routinely accepting the allegation of the learned AO that there was no proper documentary evidence while failing to even consider the material produced on record and citing extraneous and irrelevant reasons. Ground 4: Disallowance of depreciation on Goodwill 4.1 Without prejudice to the Appellant's contention that if the disallowance of expenditure towards sales commission is deleted on merits or exercise of jurisdiction under Section 147 of the Act is held to be invalid, the disallowance of depreciation on Goodwill requires to be deleted, the learned CIT(A) has erred in not appreciating that the Appellant's claim of depreciation on Goodwill amounting to ₹ 6,56,25,000 is as per provisions of Section 32(1)(ii) of the Act is therefore, fully justified in law. 4.2 The learned CIT(A) has erred in not following Court decisio .....

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..... d u/s 143(3) on 31.12.2008 determining a total income of ₹ 31,04,68,3881-. In this case a survey u/s 133A was conducted on 5. 11.2009 and during the course of survey, along with other issues, expenses debited to the P L A/c were verified and it was found that the assessee has incurred huge expenses in the nature of Info Tracking and Delivery schedule which is paid to a foreign company namely M/s South Elegant Limited, Hong Kong as per the Service Agreement entered into between the assessee company and M/s South Elegant Limited dated 1.7.2002. During the course of post survey proceedings statement of the Managing Director of the company Shri Anupam Kothari was recorded and was asked to substantiate this agreement and payments made in pursuance to this agreement and it is found that the reply of the Managing Director to most of the queries were evasive in nature and surprisingly, to quote a few, he could not substantiate with whom from South Elegant he had interacted or even to say where this deal was entered into and when. Surprisingly this agreement was cancelled on 26.10.2005 though it was made for a period up to 2012 and the so called termination is done again through a .....

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..... by these parties outside India and therefore, no tax deduction was required to be made, the payments were made through banking channels and therefore, the expenditure has been incurred wholly and exclusively for the purpose of business and should be allowed as deduction. In respect of nature of services rendered, it was stated as follows: The assessee company is involved in the manufacture of various types of woven garments and export the same to European markets. As European markets are highly fashion driven and difficult to penetrate. India caters to US markets and other markets as well. To penetrate European markets and in order to boost the penetration of various segments of European markets it is inevitable and it needs to obtain the services of external agencies who have thorough product knowledge of segment. Hence, the assessee company has availed the services of South Elegant Limited Hongkong. It is claimed that sales are the backbone of any business and the south Elegant Limited track the requirement of the customers and ensure that the assessee company get orders. The transactions are all entered in the assessee's books. The payments to the parties are through ban .....

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..... #8377; 16,93,91,847/- are to South Elegant Ltd., of Hong Kong and Gruyters Agenturen B.V.. The various terms of agreement with the South Elegant Limited gave rise to a doubt as to the genuineness of the very document. The discreet enquiries caused revealed that the South Elegant of Hong Kong is likely to be a non existent concern. Further, without accepting and for a while it is assumed that there existed a concern by said name at Hong Kong, from the explanation given by the assessee company in its various replies whether the said concern had necessary infrastructure or expertise or man power to render the required services as per the agreement in Italy is again a mute point. A survey was undertaken in the business premises of the assessee company as the assessee had made huge payments under Commission / delivery tracking charges to this foreign company during the financial years 2003-04 to 2005-06 and other payments. During the course of Survey on 5.11.2009, a statement on oath of Shri. V. Sreedhar, General Manager (Fin) of the company was recorded confronting him about the details of the above payment, genuineness thereof and the business relevance of the expenditure. Later, th .....

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..... tself could be held as an evidence that payment were for some other purpose and had not been on the basis of alleged contract or scheme of arrangement. This stand of revenue is further streghthened by the statement recorded u/s 131 from Mr. Kothari, CMD who expressed his ignorance about the existence of any such contract. Mr. Kothari is the CMD who is an all knowing person having full control over the activities of the appellant even if sitting in Italy coming to India for a few days having the knowledge of all tit bits of the company for which he is being paid a huge salary. If such a person says in clear terms that he does not remember about any agreement between SEL and the assessee, it has to be held that no agreement ever existed and the payments are not genuine. Further more even if it is agreed that there is a payment, it is necessary to examine whether the payee was capable of doing such business as to make it eligible to receive such payment. During the course of assessment proceeding the AR was asked to furnish proof as to confirm that such company own manpower, machineries and technology to provide the tracing services but no proof was furnished. It is not out of place t .....

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..... earned counsel for assessee argued that the re-assessment proceedings are initiated based on same set of facts as were available at the time of original assessment. Therefore, it is contended that the re-assessment proceedings are merely based on change of opinion of succeeding AO. The learned counsel for assessee, referring to the reasons recorded by the AO, submitted that the reasons are vague allegations which were not supported by any material on record and no reassessment proceedings can be initiated based on mere suspicion. He further submitted that the validity of reassessment proceedings has to be tested only based on the reasons recorded. In support of this proposition, he relied on the decision of the Hon ble Apex Court in the case of Sheonath vs. ACIT (82 ITR 147) and the decision of Bombay High Court in the case of Hindustan Lever Ltd. Vs. ACIT (268 ITR 332). He further submitted that based on the reasons recorded, reassessment proceedings cannot be upheld, as the reasons recorded only lead to a suspicion and not to reasons to believe. In support of this proposition, he relied on the decisions of the Hon ble Apex Court in the Sheonath (supra) and ITO vs. Lakhmani Mewal .....

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..... s Ltd. Vs Union of India [2013] 37taxmann.com 463 (Ker.) 10) CIT Vs National Tyres Rubber Co. of India Ltd. [2011]] 5 taxmann.com 3 (Ker.) 11) Smt. Jyothi Devi Vs ITO (ITA No. 1352/B/2014) (ITAT, Bang.) 11. We heard rival submissions and perused the material on record. We shall now at first instance, take up the grounds of appeal filed by the assessee challenging the validity of the reopening of assessment as they go to the very root of the matter. 12. In this case, original assessment proceedings were completed u/s 143(3) of the Act. Notice u/s 148 was issued on 12/03/2010. Undisputedly, reopening is done within four years from the end of the relevant assessment year. During the course of original assessment proceedings, the issue of commission expenditure was examined by the AO by seeking information as to the nature, name and address of the service provider and mode of payment, details of payment etc., but undisputedly the AO had not inquired into the aspect of rendering of services by the recipient of the commission payment. The AO sought to reopen the assessment on the ground that during the course of survey operations conducted on 5/11/2009, it was found that th .....

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..... ted to initiate re-assessment proceedings only because of the following: a) the expenditure incurred on info tracking and delivery was huge; b) during the course of survey proceedings, the Managing Director of the assessee-company gave evasive replies concerning this transaction/agreement. c) The agreement was subsequently cancelled on 26/10/2005 and termination fee was paid. d) The assessee-company could not prove beyond doubt the necessity of such expenditure. e) The addition was made on similar item during the assessment proceedings for the assessment year 2006- 07. f) This issue was not examined during the course of original assessment proceedings for the assessment year 2005- 06. 14. Now, we shall analyze each of the above reasons recorded by the AO from the angle whether the reasons recorded could have enabled the AO to form a belief or reason to believe that income escaped assessment . (a) The AO noticed that the expenditure incurred on info tracking and delivery, was huge. This is only an opinion or view and this cannot be treated as a tangible material which would have enabled the AO to form a belief that income escaped assessment. It is settled law t .....

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..... 19. .It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT [1951] 20 ITR 1 (SC), it was held by the Supreme Court that there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act . It was further held in this case that it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned . InCIT v. Walchand Co. (P.) Ltd. [1967] 65 ITR 381 (SC), it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that .....

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..... purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. . Having regard to the above settled principles of law, this cannot be a basis to form a belief income escaped assessment (e) One of the six reasons given by the AO to assume jurisdiction u/s 147, is that this item of expenditure came to be disallowed in the assessment proceedings for assessment year 2006-07. On perusal of assessment order for assessment year 2006-07, which was filed during the course of hearing of the appeal, it is noticed that addition on account of this expenditure was made by the AO on account of failure of the assesseecompany to adduce evidence in support of the services rendered by recipients of commission payment. The appeal filed by the assessee-company before the ld.CIT(A) was dismissed. On further appeal before the Hon ble Tribunal, prayer of the assessee-company for admission of additional evidence in support of services rendered by the foreign agents came to be accept .....

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..... ter into the said agreement. xi. Duration of the agreement has been mentioned as 10 years with automatic renewal for one more year after the period of 10 years. xii. The termination clause is little peculiar. It is one sided. It provides heavy penalty only to the assessee company. It mentions that the termination of contract before 01.07.2012 by the assessee company will result in payment to SEL three times the last calendar years commission which is at the outset unreasonable considering the automatic renewal clause available only for a period of one year after 01.07.2012. xiii. It is seen from the letter dated 18.10.2005 that the compensation payable for the termination of the agreement has been calculated with reference to the commission payments of the calendar year 2004 which is maximum since the agreement is entered. xiv. When there is a separate letter of arrangement dated 01.04.2005 for payment of charges for Info Tracking of Delivery Schedule to the concerned non residents the need for such an separate agreement on 01.07.2002 with SEL alone and its cancellation within a short period of less than three years is not clearly explained and this gives rise to do .....

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..... ong Kong based company is highly unreasonable. Further, the expenditure in the nature of tracking delivery charges have not been seen in any other similar export cases. (i) Without going into the correctness or otherwise of the above observations made in the assessment order for the assessment year 2006-07, we are of the opinion that the addition was made by the AO only on account of failure of the assessee to substantiate that actual services were rendered by the commission agents, not on the basis of discovery of new tangible material suggesting that no services were rendered by the recipients of the commission payment. AO proceeded to make addition only by inferences drawn, this is very clear from the perusal of the assessment order, as extracted above. (ii) The Hon ble Supreme Court in the case of Ess Ess Kay Engg. Co.(P) Ltd. Vs. CIT (247 ITR 818) and Phool Chand Bajrang Lal vs. ITO (203 ITR 456) held that information obtained in the subsequent assessment proceedings could lead to a belief that income chargeable to tax had escaped assessment even though the transaction in question had been examined during the course of original assessment proceedings. This ratio was fol .....

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..... by a letter dated 30th August, 2006 called upon the Respondent-Assessee to give details of the labour charges. The Respondent-Assessee's in its reply by letter dated 13th September, 2006 (referred in the order of CIT(A) made available details of labour charges along with the quantum of work done by each of the labour contractor, the TDS amount on the labour charges and the sample bills. It is only after Assessing Officer was satisfied with the claim of labour charges that he accepted the claim of the Respondent-Assessee in regular assessment proceedings. In the following Assessment Year i.e. A. Y. 2005-06, the labour charges has been disallowed to the extent the same were found bogus. This conclusion/opinion formed by the Assessing Officer in the subsequent Assessment Year which is treated as tangible material by the Revenue to reopen the proceedings. There can be no manner of doubt that material obtained during the assessment proceedings for another year can form the basis of re-opening of an assessment. However, the re-opening of an assessment cannot be on the basis of a material which has already been considered during the regular assessment proceedings by the Assessing Offi .....

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..... abour charges payable as was evidenced from the Respondent-Assessee's balance sheet filed along with return of income. A detailed enquiry was made into the labour charges and the same was responded by relating it to the quantum of work done. Thus, in the present facts, the Assessing Officer has considered the material available on record and formed an opinion holding that the labour charges have to be allowed. No further tangible material has been obtained in the following Assessment Year, warranting a re-opening of assessment. The ratio of the above decision is that the subsequent assessment order can be basis for re-opening of the earlier assessment order only in the event fresh tangible information was brought on record in the subsequent assessment years contrary to the material already on record in the earlier assessment year. (v) The facts of the present case are similar to the above cases dealt by the Hon ble High Court of Bombay. Therefore, in the absence of any fresh tangible information brought on record in the assessment year 2006-07, the re-assessment proceedings are vitiated by change of opinion. Even the Hon'ble Supreme Court in the case of CIT vs. Kelvi .....

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..... rbitrary powers in the Assessing Officer. Therefore, any re-assessment proceedings initiated on the basis of very same material which was before AO, without any tangible material, amounts to change of opinion. The Hon'ble Supreme Court in the case of Phool Chand Bajrang Lal v. ITO (203 ITR 456) explained the tangible material as under: Acquiring fresh information, specific in nature and reliable in character, relating to the concluded assessment which goes to expose the falsity of the statement made by the assessee at the time of original assessment is different from drawing a fresh inference from the same facts and material which was available with the ITO at the time of original assessment proceedings. The two situations are distinct and different. .. (vi) Again, the Hon'ble Supreme Court, in the case of Ram Bai vs. CIT (236 ITR 696), reiterated the above position that in absence of any fresh tangible material, subsequent assessment cannot be the basis for reopening the assessment for earlier assessment year. (vii) In the instant case, AO had drawn fresh inference on the same set of facts which were available with AO. AO had not referred to any fresh mate .....

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..... liability of the assessee, observing as under: It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else far less the assessee to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences whether of facts or law he would draw from the primary facts. The above decision was subsequently referred by the Hon'ble Supreme Court in the case of CIT vs. Burlop Dealers Ltd. AIR 1971 SC 635 and held that if the assessee disclosed primary facts relevant to assessment, he is under no obligation to instruct the ITO about the inference, which the ITO may draw from those facts. This position was again reiterated by Hon'ble Supreme Court in subsequent decision in the case of ITO vs. Madnani Engineering Works Ltd. (118 ITR 1). (iv) In the case of CIT v. Kelvinator of India Ltd (256 ITR 1)(Del), the Hon ble Delhi High Court, observed that an order that has .....

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..... n the dictates of any superior authority or on any instructions that may be issued by an authority that may have an administrative control over the AO. It is only at the sole discretion of the assessing authority, an enquiry/investigation can be started on any issue during the course of assessment proceedings. It is for the AO, whether to have an enquiry at all or not? It is for the AO where to start the enquiry and end the enquiry. It is not expected of AO to embark upon an endless enquiry on any issue. In the instant case, the AO, after considering the material produced on record, had chosen not to make any enquiry into this aspect of claim. This can be, at the most, an erroneous order which cannot confer jurisdiction of reassessment on the AO. (xi) In the case of Anirudhsinhji Jadega v. State of Gujarat (1995) 5 SCC 302, the Hon'ble Supreme Court held that once a discretion is vested with a certain authority, he alone should exercise that discretion vested under the statute and if he acts in accordance with the direction or any compliance with some higher authorities instruction it would be a case of failure to exercise discretion altogether. (xii) Therefore, this re .....

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