DCIT CC-38, MUMBAI V. ANSHUL CHEMICALS LTD ( NOW KNOWN AS ANSHUL SPEICALITY MOLECULES LTD), MUMBAI

ITA 1005/MUM/2010

• Counselvise Citation: 100519914 RSA 2010
• Duration Of Justice: 1 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 20-12-2011
• Assessment Year: 1998-1999
• Appeal Filed On: 08-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Assessee Lawyers: SAISUDHA MULTANI
• Keywords: Business expenditure; Tangible material; Difference of opinion; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 147; 148; 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, G, MUMBAI BEFORE SHRI R.S. SYAL (A.M.) AND SHRI D.K.AGARWAL (J M) ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) DY. COMMISSIONER OF INCOME TAX, CC-38, ROOM NO.32(1), GROUND FLOOR, AAYAKAR BHAVAN, MUMBAI-400020 M/S ANSHUL CHEMICALS LTD. NOW KNOWN AS ANSHUL SPECIALTY MOLECULES LTD., 13, ARADHANA INDUSTRIAL DEVELOPMENT CORPORATION, NEAR VIRWANI INDUSTRIAL ESTATE, GOREGAON (E), MUMBAI-400063 PAN: AABCA4003H APPELLANT V/S RESPONDENT DATE OF HEARING : 20.12.2011 DATE OF PRONOUNCEMENT : 23.12.2011 APPELLANT BY : SHRI V.V.SHASTRI RESPONDENT BY : MS.SAISUDHA MULTANI O R D E R PER D.K.AGARWAL (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 5.11.2009 PASSED BY THE LD . CIT(A) FOR THE ASSESSMENT YEAR 1998-1999. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURI NG AND SALE OF CHEMICALS. IN THIS CASE THE AO ISSUED NOTICE U/S 148 DATED 18.3.2005 AFTER RECORDING THE FOLLOWING REASONS :- ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 2 THE ASSESSEE FILED RETURN OF INCOME ON 30.11.98 DECLARING A TOTAL LOSS OF (-)RS.14,29,624/-. ASSESSMENT WAS COMPLETED U/S 143(3) ON 2.3.2001 AT A TOTAL INCOME OF RS.10,61,145/-. PERUSAL OF THE RECORD REVEALS THAT THE APPLICATION OF THE BORROWED FUNDS ON WHICH INTEREST OF RS.97,52,449/- HAD BEEN INCURRED, HAD NOT BEEN EXAMINED BY THE A.O. AND THE ASSESSEE HAD ALSO NOT FILED ANY MATERIAL FACTS WHICH WOULD REVEAL THE APPLICATION OF THE BORROWED FUNDS. THE BALANCE-SHEET FOR THE PREVIOUS YEAR RELEVANT TO A.YR.1998-99 REFLECTS CAPITAL WORK-IN-PROGRESS OF RS.25,25,658/-. THIS CAPITAL WORK-IN-PROGRESS WAS FUNDED BY INTEREST BEARING BORROWINGS. SINCE THE BORROWINGS HAVE BEEN USED FOR EXPANSION OF THE INCOME GENERATING APPARATUS OF THE COMPANY AND NOT FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE, THE INTEREST ON THE BORROWINGS TO THE EXTENT THE SAME HAVE BEEN APPLIED FOR INVESTMENT IN CAPITAL WORK-IN-PROGRESS, IS NOT ALLOWABLE U/S.36(1)(III). THE INTEREST WOULD ALSO BE DISALLOWABLE IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION (225 ITR 792) AND IN VIEW OF EXPLANATION 8 TO SECTION 43(1). THE INTEREST HAS NOT BEEN DISALLOWED DURING THE COURSE OF ORIGINAL ASSESSMENT AS THE ASSESSEE DID NOT FIL E ANY MATERIAL FACTS WHICH WOULD REVEAL THE APPLICATION OF THE BORROWED FUNDS AND THEREFORE, THERE HAS BEEN A FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR ASSESSMENT. IN VIEW OF THE PROVISIONS OF THE PROVISO TO SECTION 147 AND EXPLANATION 1 TO SECTION 147, AND EXPLANATION 2(C)(I) TO SECTION 147, I HAVE REASONS TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT AS THE INCOME CHARGEABLE TO TAX HAS BEEN UNDERASSESSED DUE TO ALLOWANCE OF THE INTEREST WHICH WAS NOT ALLOWABLE U/S 36(1)(III). REASSESSMENT PROCEEDINGS ARE INITIATED AND NOTICE U/S 148 IS ISSUED. ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 3 3. IN RESPONSE TO THE NOTICE THE ASSESSEE FILED RETURN OF INCOME DECLARING THE LOSS OF RS.14,39,62 4/- AND ALSO FILED OBJECTIONS TO THE ISSUANCE OF THE NO TICE U/S 148. THE AO AFTER CONSIDERING THE SAME AND THE EXPLANATION OF THE ASSESSEE THAT THE SAME IS ALLOWA BLE U/S 36(1)(III) OF THE ACT HELD THAT SINCE BORROWIN G HAS BEEN USED FOR THE EXPANSION OF THE INCOME GENERATING APPARATUS OF THE COMPANY AND NOT FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE, THE INTE REST ON THE BORROWINGS TO THE EXTENT THE SAME HAVE BEEN APPLIED FOR INVESTMENT IN CAPITAL WORK-IN-PROGRESS IS NOT ALLOWABLE U/S 36(1)(III) AND ACCORDINGLY, HE DISALLOWED THE INTEREST ON CAPITAL WORK-IN-PROGRESS RS.4,54,618/-. APART FROM THIS, THE AO ALSO MADE DISALLOWANCE U/S 14A OF RS.16,18,662/- AND THEREBY COMPLETED THE ASSESSMENT AT AN INCOME OF RS.6,33,652/- VIDE ORDER DATED 25.11.2005 PASSED U/ S 143(3) R.W.S.147 OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 4. ON APPEAL, THE LD.CIT(A), WHILE HOLDING THAT THE REOPENING OF THE ASSESSMENT U/S 148 WAS BEYOND THE PERIOD OF 4 YEARS AND IT COULD NOT BE ESTABLISHED T HAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE TO ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 4 DISCLOSE FULLY AND TRULY MATERIAL FACTS AND HENCE THE RE-OPENING OF ASSESSMENT IS BAD-IN-LAW, FURTHER HE LD THAT THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 36(1)(III) IN VIEW OF THE DECISION IN DCIT VS. COR E HEALTH CARE LTD.(298 ITR 194)(SC) AND ACCORDINGLY, ALLOWED THE APPEAL. 5. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US TAKING THE FOLLO WING GROUNDS : REVISED GROUNDS OF APPEAL 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN HOLDING THAT THERE WAS NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS INSPITE OF THE FACT THAT THE ASSESSEE HAD NOT DISCLOSED THAT BORROWINGS HAD BEEN UTILIZED TO FINANCE CAPITAL WORK IN PROGRESS. 2. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT IT WAS MERE CHANGE OF OPINION BY ASSESSING OFFICER AND THEREBY CANCELING THE NOTICE ISSUED U/S. 148. 3. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN DELETING DISALLOWANCE OF RS.16,18,662/- MADE U/S 14A OF THE INCOME TAX ACT, ON THE GROUND THAT DISALLOWANCE CANNOT BE MADE U/S.14A IN RE- ASSESSMENT PROCEEDINGS, WITHOUT NOTICING THAT THE CASE OF THE ASSESSEE WAS RE-OPENED ON OTHER ISSUES. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) ERRED IN DELETING ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 5 DISALLOWANCE OF RS.4,54,618/- BEING INTEREST ATTRIBUTED TO CAPITAL WORK IN PROGRESS BY FOLLOWING DECISION OF SUPREME COURT IN DCIT VS. CORE HEALTH CARE LTD. 298 ITR 194). 5. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN ALLOWING OTHER GROUNDS OF APPEAL ON THE GROUND THAT SINCE RE- OPENING OF ASSESSMENT IS INVALID, CONSEQUENTLY ADDITIONS MADE ARE ALSO HELD TO BE BAD IN LAW. THE APPELLANT PRAYS THAT THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEAL) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUNDS OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 6. AT THE TIME OF HEARING, THE LD. DR SUBMITS THAT FOR THE REASONS AS MENTIONED IN THE ASSESSMENT ORDER, THE LD. CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT THERE WAS NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS AND ALS O IN HOLDING THAT IT WAS MERE CHANGE OF OPINION AND THEREBY CANCELLING THE ASSESSMENT. THE RELIANCE WAS ALSO PLACED ON THE DECISION IN GEEP INDUSTRIAL SYNDICATE LTD. V/S CIT (1998) 98 TAXMAN 163 (ALL.); (1998) 232 ITR 456(ALL.) 7. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE WHILE RELYING ON THE ORDER OF THE LD. CIT (A) ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 6 FURTHER SUBMITS THAT THERE IS NO FAILURE ON THE PAR T OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERI AL FACTS AND IN SUPPORT, THE REFERENCE WAS ALSO MADE TO THE LETTER DATED 28.2.2001 GIVING DETAILS OF WORK-I N- PROGRESS AND SUBMISSION OF ALLOWABILITY OF THE INT EREST PAID ON BORROWINGS APPEARING AT PAGES 13 TO 17 OF T HE ASSESSEES PAPER BOOK. SHE FURTHER SUBMITS THAT T HE ASSESSEE HAS FILED BALANCE-SHEET AND ALL THE FINANC IAL STATEMENTS INCLUDING PRIMARY FACTS AT THE TIME OF ORIGINAL ASSESSMENT THEREFORE, THERE IS NO ESCAPEME NT ON THE PART OF THE ASSESSEE AND THEREFORE, THE NOTI CE ISSUED BY THE AO U/S 148 WHICH IS ALSO BEYOND FOUR YEARS IS NOT SUSTAINABLE IN LAW. THE RELIANCE WAS ALSO PLACED ON THE DECISION OF THE HONBLE JURISDICTIONA L HIGH COURT IN IL AND FS INVESTMENT MANAGERS LTD. V/S ITO (2008) 298 ITR 32(BOM). ON THE ALLOWABILIT Y OF THE INTEREST U/S 36(1)(III) SHE SUBMITS THAT THE ISSUE IS COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF DCIT V/S CORE HEALTH CARE LTD.(2008) 298 ITR 194 (SC). SHE THEREFORE SUBMITS THAT THE ORDER PASSED BY THE LD. CIT(A) BE UPHELD. ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 7 8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABL E ON RECORD. WE FIND THAT THERE IS NO DISPUTE THAT DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS FILED LETTER DATED 28.2.2001 GIVING DETAILS OF WORK- IN-PROGRESS WHICH READS AS UNDER : DEAR SIR, AS REGARDS YOUR QUERY REGARDING DEDUCTIBILITY OF INTEREST ON UNSECURED LOAN, WE HAVE TO SUBMIT AS UNDER : THE BORROWINGS UNDER UNSECURED LOANS, APART FROM FUNDING BUSINESS ACTIVITIES HAVE GONE FOR FUNDING 17% CONVERTIBLE DEBENTURES AS WELL AS INTEREST BEARING SHORT TERM LOANS IN FINANCIAL YEAR 1996-97 RELEVANT TO ASSESSMENT YEAR 1997-98. THIS CAN BE OBSERVED FROM INTEREST RECEIPT FOR THE YEAR ENDED MARCH, 1998 RELEVANT TO ASSESSMENT YEAR 1998-99 OF RS.84,79,944/- AND RS.50,83,030/- IN THE FINANCIAL YEAR 1996-97 RELEVANT TO ASSESSMENT YEAR 1997-98 AS COMPARED TO RS.44,478/- FOR THE FINANCIAL YEAR 1995-96 RELEVANT TO ASSESSMENT YEAR 1996-97 THE SAID INTEREST INCOME IS INCLUDED IN TOTAL INCOME FOR THE RELEVANT YEARS AND OFFERED FOR TAX. IN VIEW OF THE ABOVE, ENTIRE INTEREST AS BORROWING ARE UTILIZED FOR THE PURPOSES OF BUSINESS AND AS SUCH ALLOWABLE EXPENSES. WE FURTHER FIND THAT APART FROM THIS THE ASSESSEE H AS ALSO FILED BALANCE-SHEET AND OTHER FINANCIAL STATEMENTS. IN THE ORIGINAL ASSESSMENT, THE AO AF TER ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 8 CONSIDERING THE SAME HAS ALLOWED THE CLAIM OF INTEREST. 9. IN VIEW OF THE ABOVE FACTUAL MATRIX OF THE CASE WE OBSERVE FROM THE REASONS RECORDED WHICH HAVE BEEN EXTRACTED IN PARA 2 OF THIS ORDER, WE FIND T HAT NOWHERE IN THE REASONS RECORDED FOR RE-OPENING OF THE ASSESSMENT, THE AO HAS MENTIONED THAT THERE WAS ANY FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FU LLY AND TRULY ALL THE MATERIAL FACTS NECESSARY FOR THE ASSESSMENT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. AS A MATTER OF FACT, WE OBSERVE THAT THE REOPENING HAS BEEN SOUGHT TO BE DONE ON THE BASIS O F THE MATERIAL ALREADY AVAILABLE AT THE TIME OF ORIGI NAL ASSESSMENT U/S 143(3). THUS ON THE SAME SET OF FACT S IT IS A CASE OF CHANGE OF OPINION ON THE PART OF TH E AO AND A DIFFERENT VIEW IS NOW SOUGHT TO BE TAKEN BY T HE AO ON THE SAME SET OF FACTS IS NOT PERMISSIBLE U/S 148 OF THE ACT. 10. IN KELVINATOR OF INDIA LTD. (2010) 320 ITR 561 (SC), IT HAS BEEN HELD (PAGE 562 HEAD NOTE): ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 9 THE CONCEPT OF CHANGE OF OPINION ON THE PART OF THE ASSESSING OFFICER TO REOPEN AN ASSESSMENT DOES NOT STAND OBLITERATED AFTER THE SUBSTITUTION O F SECTION 147 OF THE INCOME-TAX ACT, 1961, BY THE DIRECT TAX LAWS (AMENDMENT) ACTS, 1987 AND 1989. AFTER THE AMENDMENT, THE ASSESSING OFFICER HAS TO HAVE REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT, BUT THIS DOES NOT IMPLY THAT THE ASSESSING OFFICER CAN REOPEN AN ASSESSMENT ON MERE CHANGE OF OPINION. THE CONCEPT OF CHANGE OF OPINION MUST BE TREATED AS AN IN-BUILT TEST TO CHECK THE ABUSE OF POWER. HENCE AFTER APRIL 1, 1989, THE ASSESSING OFFICER HAS POWER TO REOPEN AN ASSESSMENT, PROVIDED THERE IS TANGIBLE MATERIAL TO COME TO THE CONCLUSION THAT THERE WAS ESCAPEMENT OF INCOME FROM ASSESSMENT. REASON MUST HAVE A LINK WITH THE FORMATION OF THE BELIEF. 11. IN GEEP INDUSTRIAL SYNDICATE LTD.(SUPRA), RELI ED ON BY THE ID. DR, IT HAS BEEN HELD THAT IN THE REAS ONS RECORDED BY THE INCOME-TAX OFFICER FOR INITIATION O F THE REASSESSMENT PROCEEDINGS, IT IS CLEARLY STATED THAT IT WAS DURING THE COURSE OF THE SUBSEQUENT ASSESSMENT YEAR THAT IT WAS DISCOVERED THAT MAJOR PART OF THE GUEST HOUSE EXPENSES AT ALLAHABAD WERE NON-BUSINESS EXPENDITURE. FURTHER, IT WAS ON ACCOUNT OF THE FAIL URE AND OMISSION ON THE PART OF THE ASSESSEE TO DISCLOS E PRIMARY FACTS THAT THE INCOME SOUGHT TO BE TAXED, H AD ESCAPED ASSESSMENT. IT IS SETTLED POSITION IN LAW T HAT REOPENING OF AN ASSESSMENT ON THE BASIS OF SUBSEQUENT DISCOVERY AND OBJECTIVE BELIEF OF THE ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 10 INCOME-TAX OFFICER THAT IN THE ORIGINAL ASSESSMENT, THE INCOME HAD ESCAPED ASSESSMENT FOR NON-DISCLOSURE OF TRUE FACTS, WOULD JUSTIFY AN ACTION UNDER SECTION 147(A) OF THE ACT. 12. WHEREAS IN THE CASE BEFORE US, IT IS NOT THE CA SE OF THE REVENUE THAT THERE WAS ANY FAILURE ON THE PA RT OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MAT ERIAL FACTS NECESSARY FOR THE ASSESSMENT. INASMUCH AS, TH E REOPENING HAS BEEN SOUGHT TO BE DONE ON THE BASIS O F THE MATERIAL ALREADY AVAILABLE ON RECORD AT THE TIM E OF COMPLETING THE ORIGINAL ASSESSMENT U/S 143(3). THEREFORE, THE DECISION RELIED UPON BY THE LD.DR IS DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 13. ON MERITS, WE FIND THAT LD. CIT(A), WITH REGAR D TO DISALLOWANCE OF INTEREST ON CAPITAL WORK-IN- PROGRESS, OBSERVED .. THAT THE AR SUBMITS THAT NO PART OF INTEREST IS DISALLOWABLE SINCE INTEREST WAS INCURRED IN CONNECTION WITH EXISTING BUSINESS AND A LSO THAT ADDITION TO CAPITAL WORK-IN-PROGRESS WERE OUT OF INTERNAL ACCRUALS. THE APPELLANT HAS ALSO PLACED RELIANCE ON THE DECISION OF THE SUPREME COURT IN DC IT ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 11 V/S CORE HEALTH CARE LTD. (298 ITR 194) WHEREIN IT HAS BEEN HELD THAT IF CAPITAL IS BORROWED FOR THE PURPOSE OF BUSINESS, THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION UNDER S.36(1)(III). I FIND THAT THE APPEL LANTS CASE IS COVERED BY THE ABOVE CITED DECISION OF THE HON. APEX COURT. 14. IN THIS VIEW OF THE MATTER, WE RESPECTFULLY FOLLOWING THE ABOVE DECISIONS OF THE HONBLE APEX COURT HOLD THAT IT IS A CASE OF MERE CHANGE OF OPIN ION AS TO THE TRUE CONSTRUCTION OF THE PROVISIONS COULD NOT GIVE RISE TO REASON TO BELIEVE THAT INCOME HAD ESCAPED ASSESSMENT, AND, THEREFORE, THE PROCEEDINGS INITIATED UNDER SECTIONS 147/148 OF THE ACT ARE INV ALID AND CONSEQUENTLY THE ORDER OF THE RE-ASSESSMENT PASSED BY THE AO IS ANNULLED AND ACCORDINGLY, WE AR E INCLINED TO UPHOLD THE ORDER OF THE LD.CIT(A) IN QUASHING THE PROCEEDINGS U/S 148 OF THE ACT AND IN ALLOWING THE INTEREST U/S 36(1)(III) OF THE ACT AND IN NOT ADJUDICATING THE OTHER GROUNDS OF APPEAL. THE GROUNDS TAKEN BY THE REVENUE ARE, THEREFORE, REJECTED. ITA NO.1005/MUM/2010 (ASSESSMENT YEAR: 1998-99) 12 15. IN THE RESULT, THE REVENUES APPEAL STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD DEC.2011. SD SD ( R.S. SYAL) (D.K.AGARWAL) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, 23RD DECEMBER, 2011 SRL: COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH 6. GUARD FILE. BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI