Sandvik Mining and Construction Tools [ I ] P.Ltd ( merged with Sandvik Asia P.Ltd ), Pune V. Dy. CIT, Pune

ITA 1425/PUN/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88984 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 16-12-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 05-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Reopening of assessment; Valuation report; Capital receipt; Reassessment proceedings
• Section: 143(3); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.1425/PN/2013 (ASSESSMENT YEAR : 2005-06) SANDVIK MINING AND CONSTRUCTION TOOLS INDIA PRIVATE LIMITED ( MERGED WITH SANDVIK ASIA PRIVATE LIMITED ), MUMBAI-PUNE ROAD, DAPODI, PUNE 411 012. PAN : AAHCS9249R . APPELLANT VS. INCOME TAX OFFICER, WARD 10(4), PUNE. . RESPONDENT ASSESSEE BY : MR. DHANESH BAFNA DEPARTMENT BY : MR. RAJESH DAMOR DATE OF HEARING : 16-12-2014 DATE OF PRONOUNCEMENT : 20-02-2015 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL BY THE ASSESSEE IS DIRECTED AG AINST AN ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-V, PUNE DA TED 16.04.2013 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 22.12.2011 PASSED BY THE ASSESSING OFFICER U/S 143(3) R.W.S. 147 OF THE INCOME-TAX ACT , 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2005-06. 2. IN THIS APPEAL, ASSESSEE HAS RAISED THE FOLLOWIN G GROUNDS OF APPEAL :- GROUND 1: THE LD. COMMISSIONER OF INCOME TAX (APPEALS)- V, PU NE {LD. 'CIT(A)'} HAS ERRED IN UPHOLDING THE REOPENING OF ASSESSMENT UNDE R SECTION 148 OF THE INCOME-TAX ACT, 1961 FOR THE FOLLOWING REASONS: I. THE LD. CIT(A) ERRED IN UPHOLDING THE REASSESSME NT PROCEEDINGS INITIATED BY THE ASSESSING OFFICER WITHOUT APPRECIA TING THE FACT THAT THE APPELLANT HAD MADE A FULL AND TRUE DISCLOSURE OF TH E MATERIAL FACTS BEFORE THE ASSESSING OFFICER AT THE TIME OF ORIGINA L ASSESSMENT UNDER SECTION 143(3). ITA NO.1425/PN/2013 II. THE LD. CIT(A) ERRED IN UPHOLDING THE INITIATIO N OF REASSESSMENT PROCEEDINGS WHICH WAS BASED ON MERE CHANGE OF OPINI ON; III. THE LD. CIT(A) ERRED IN UPHOLDING THE INITIATI ON OF REASSESSMENT PROCEEDINGS IN ABSENCE OF ADDITIONAL FACTS OR 'TANG IBLE MATERIAL'. YOUR APPELLANT PRAYS THAT SUCH REASSESSMENT PROCEED INGS BE TREATED NULL AND VOID. GROUND 2: WITHOUT PREJUDICE TO GROUND 1, THE LD. CIT(A) HAS E RRED IN CONFIRMING THE AO'S RE-ASSESSMENT ORDER TAXING THE RECEIPT OF INR 21,13 8,400 AS REVENUE RECEIPT. YOUR APPELLANT PRAYS THAT SUCH ADDITION BE DELETED. THE APPELLANT CRAVES LEAVE TO ADD, TO AMEND, TO ALT ER, TO SUBSTITUTE, AND TO WITHDRAW THE ABOVE GROUNDS OF APPEAL. 3. IN BRIEF, THE RELEVANT FACTS ARE THAT THE APPELL ANT IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS, INTER- ALIA, ENGAGED IN THE DESIGNING, MANUFACTURING AND D ISTRIBUTION OF CUTTING AND DRILLING PRODUCTS. FOR THE ASSESSMENT YEAR 2005-06 , IT FILED A RETURN OF INCOME DECLARING A LOSS OF RS.2,19,20,880/-. THE RETURN O F INCOME WAS SUBJECT TO SCRUTINY ASSESSMENT U/S 143(3) OF THE ACT DATED 31. 12.2006 WHEREBY THE RETURNED LOSS WAS REDUCED TO RS.2,17,09,200/-. SUB SEQUENTLY, THE ASSESSING OFFICER ISSUED A NOTICE U/S 148 OF THE ACT DATED 25 .03.2011 RE-OPENING THE ASSESSMENT ON THE GROUND THAT CERTAIN INCOME CHARGE ABLE TO TAX HAS ESCAPED ASSESSMENT. IN THE SUBSEQUENT ASSESSMENT FINALIZED U/S 143(3) R.W.S. 147 OF THE ACT DATED 22.12.2011, THE ASSESSING OFFICER HAS ASSESSED LOSS AT RS.5,70,800/-. THE ADDITION OF RS.2,11,38,400/- MA DE BY THE ASSESSING OFFICER IS THE SUBJECT-MATTER OF THE DISPUTE BEFORE US, AS THE SAID ACTION OF THE ASSESSING OFFICER HAS ALSO BEEN SUSTAINED BY THE CI T(A). 4. BRIEF FACTS WITH RESPECT TO THE IMPUGNED DISPUTE CAN BE UNDERSTOOD AS FOLLOWS. IN THE PRECEDING ASSESSMENT YEAR OF 2004- 05, ASSESSEE HAD ACQUIRED THE MINING AND CONSTRUCTION BUSINESS OF KENNAMETAL WIDIA INDIA LIMITED (KWIL) FOR A CONSIDERATION OF RS.64.40 CRORES. THE SAID ACQUISITION WAS IN TERMS OF A BUSINESS PURCHASE AGREEMENT DATED 20.02. 2004 AND IT WAS A SLUMP SALE WHEREBY ASSESSEE PAID A LUMP-SUM OF RS.6 4.40 CRORES WITHOUT ITA NO.1425/PN/2013 VALUES BEING ASSIGNED TO INDIVIDUAL ASSETS AND LIAB ILITIES. IN THE ASSESSMENT YEAR 2004-05, THE LUMP-SUM CONSIDERATION OF RS.64.4 0 CRORES WAS ALLOCATED BY ASSESSEE TO VARIOUS ASSETS ON THE BASIS OF THE V ALUATION REPORT FROM INDEPENDENT VALUERS AND THE EXCESS OF PURCHASE CONS IDERATION OVER AND ABOVE THE NET VALUE OF ASSETS (I.E. AFTER NETTING O F LIABILITIES) TAKEN OVER FROM KWIL WAS TREATED AS GOODWILL. ON THESE FACTS, THER E IS NO DISPUTE. SUBSEQUENTLY, IT TRANSPIRES THAT THE ASSESSEE RAISE D CERTAIN OBJECTIONS WITH KWIL AND SOUGHT REDUCTION IN THE VALUE OF PURCHASE CONSIDERATION. AS A CONSEQUENCE, ASSESSEE AND KWIL REACHED A SETTLEMENT VIDE A SETTLEMENT AGREEMENT DATED 09.03.2005 BY VIRTUE OF WHICH THE T OTAL PURCHASE CONSIDERATION PAYABLE BY THE ASSESSEE FOR ACQUISITI ON OF THE MINING AND CONSTRUCTION BUSINESS OF KWIL WAS REDUCED BY RS.2,1 1,38,400/-. KWIL REFUNDED THE AFORESAID SUM OF RS.2,11,38,400/- TO T HE ASSESSEE AS FULL AND FINAL SETTLEMENT OF THE DISPUTE BY VIRTUE OF THE SE TTLEMENT AGREEMENT DATED 09.03.2005. 5. THE TREATMENT OF THE AFORESAID REDUCTION IN TOTA L PURCHASE CONSIDERATION PAYABLE BY THE ASSESSEE FOR ACQUISITION OF THE MINI NG AND CONSTRUCTION OF BUSINESS OF KWIL IS THE SUBJECT-MATTER OF DISPUTE B ETWEEN THE ASSESSEE AND THE REVENUE. CONSEQUENT TO THE RECEIPT OF THE REFU ND OF RS.2,11,38,400/- IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER CONSIDERATION, ASSESSEE REDUCED IT FROM THE AMOUNT OF GOODWILL ALR EADY RECORDED EARLIER. AS PER THE ASSESSEE, BY VIRTUE OF THE SETTLEMENT AGREE MENT DATED 09.03.2005 THE PURCHASE CONSIDERATION WAS REDUCED AND, THEREFORE I TS REDUCTION FROM THE AMOUNT OF GOODWILL RECORDED IN THE ACCOUNT BOOKS EA RLIER WAS JUSTIFIED. THE ASSESSEE HAD TREATED THE REFUND OF RS.2,11,38,400/- AS A CAPITAL RECEIPT. ITA NO.1425/PN/2013 6. HOWEVER, THE ASSESSING OFFICER NOTED FROM THE SE TTLEMENT AGREEMENT DATED 09.03.2005 THAT ASSESSEE COMPANY HAD RAISED T HE DISPUTE ON THE FOLLOWING ITEMS OF THE BUSINESS PURCHASE AGREEMENT :- STOCK OBSOLESCENCE (INR) 5,625,000 DOUBTFUL A/C RECEIVABLE (INR) 3,363,000 EMI (INR) 3,396,877 EXPORT INCENTIVE (INR) 25,884,348 EXPORT DUTY CLAIM (INR) 14,631,201 WARRANTY RESERVE (INR) 29,185,888 IMMOVABLE PROPERTY (NOT USABLE) (INR) 740,000 7. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE C OMPENSATION RECEIVED BY THE ASSESSEE I.E. RS.2,11,38,400/- REPRESENTED R EDUCTION IN THE PURCHASE CONSIDERATION WAS A REVENUE RECEIPT AND THAT THE AC TION OF THE ASSESSEE IN REDUCING IT FROM THE AMOUNT OF GOODWILL RECORDED IS NOT IN ORDER. 8. BEFORE THE ASSESSING OFFICER, THE ASSESSEE SUBMI TTED THAT THE SETTLEMENT AGREEMENT WAS ENTERED IN PURSUANCE TO A CLAUSE EXISTING IN THE BUSINESS PURCHASE AGREEMENT AND THE TERMS OF THE SE TTLEMENT AGREEMENT DATED 09.03.2005 WERE A PART AND PARCEL OF THE BUSI NESS PURCHASE AGREEMENT. THEREFORE, ANY REDUCTION IN THE PURCHAS E CONSIDERATION WAS TO BE UNDERSTOOD AS A CAPITAL RECEIPT, I.E. A REDUCTION I N THE CAPITAL OUTLAY. THE ASSESSING OFFICER, HOWEVER, HAS DIFFERED WITH THE A SSESSEE BY MAKING THE FOLLOWING DISCUSSION :- THE SUBMISSION MADE BY THE ASSESSEE COMPANY HAS BE EN CAREFULLY CONSIDERED, THE FACTS RELATING TO THE SETTLEMENT AG REEMENT AND BUSINESS PURCHASE. THE CONTENTION THAT COMPENSATION RECEIVE D BY THE ASSESSEE COMPANY AGAINST THE VALUE OF ASSETS DISPUTED VIDE T HE SETTLEMENT AGREEMENT WOULD NOT IMPACT THE PROFITS OF THE COMPANY IS NOT ACCEPTABLE. AS MENTIONED IN THE REASONS RECORDED FOR ISSUE OF NOTICE, IT IS CLEAR THAT COMPENSATION RECEIVED TOTALING TO RS.2,11,38,400/- IS OF REVENUE NATURE. THEREFORE, REDUCTION OF THE SAME FROM GOODWILL IS NOT IN ORDER . THEREFORE, THE SAME DISALLOWED AND ADDED TO THE INCOME. ITA NO.1425/PN/2013 9. THE CIT(A) HAS ALSO AFFIRMED THE STAND OF THE AS SESSING OFFICER ON THE GROUND THAT THE IMPUGNED AMOUNT WAS WITH RESPECT TO REVENUE ASSETS AND THEREFORE THE IMPUGNED SUM IS A REVENUE RECEIPT. A GAINST THE AFORESAID DECISION OF THE CIT(A), ASSESSEE IS IN FURTHER APPE AL BEFORE US. 10. AT THE TIME OF HEARING, THE LD. REPRESENTATIVE FOR THE ASSESSEE VEHEMENTLY POINTED OUT THAT THE SETTLEMENT AGREEMEN T WAS ENTERED INTO ON THE BASIS OF CLAUSE 2.2.2 OF THE ORIGINAL BUSINESS PURC HASE AGREEMENT. THE SAID CLAUSE PROVIDED THAT THE ASSESSEE COULD REVIEW AND RAISE OBJECTIONS WITH THE SELLER ON THE PURCHASE CONSIDERATION WITHIN A SPECI FIED PERIOD. IN TERMS OF THE SAID CLAUSE, ASSESSEE HAD POINTED OUT TO THE SELLER I.E. KWIL, ITS OBJECTION WITH REGARD TO THE VARIOUS ITEMS AND SOUGHT A REDUCTION IN THE PURCHASE CONSIDERATION. AS A CONSEQUENCE, BY SETTLEMENT AGR EEMENT DATED 09.03.2005, BOTH THE PARTIES AGREED THAT THE ORIGIN ALLY AGREED PURCHASE PRICE OF RS.64.40 CRORES WAS LIABLE TO BE ADJUSTED ON ACC OUNT OF THE OBJECTION RAISED BY THE ASSESSEE AND AS A CONSEQUENCE ASSESSEE RECEI VED A REFUND OF RS.2,11,38,400/- FROM KWIL. THE LD. REPRESENTATIVE POINTED OUT THAT THE SAID ITEM WAS A CAPITAL RECEIPT INASMUCH THE ORIGINAL AM OUNT OF LUMP-SUM CONSIDERATION OF RS.64.40 CRORES WAS INDEED CAPITAL IZED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THEREFORE, ANY REDUCTION IN THE VALUE OF ACQUISITION OF BUSINESS WOULD NOT TANTAMOUNT TO BE A REVENUE RECEI PT. 11. ON THE OTHER HAND, THE LD. CIT-DR HAS MERELY RE LIED ON THE REASONING CONTAINED IN THE ORDERS OF THE AUTHORITIES BELOW, W HICH WE HAVE ALREADY NOTED EARLIER AND IS NOT BEING REPEATED FOR THE SAKE BREV ITY. 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. UNDENIABLY, BY WAY OF A BUSINESS PURCHASE AGREEMENT DATED 20.02.20 04, ASSESSEE ACQUIRED THE MINING AND CONSTRUCTION BUSINESS OF KWIL FOR A LUMP-SUM CONSIDERATION OF ITA NO.1425/PN/2013 RS.64.40 CRORES WITHOUT VALUES BEING ASSIGNED TO IN DIVIDUAL ASSETS AND LIABILITIES. IT IS ALSO NOT IN DISPUTE THAT IN THE PREVIOUS YEAR RELEVANT TO THE PRECEDING ASSESSMENT YEAR OF 2004-05, ASSESSEE ALLO CATED THE AFORESAID LUMP-SUM CONSIDERATION OF RS.64.40 CRORES TO VARIOU S ASSETS ON THE BASIS OF THE VALUATION REPORT FROM THE INDEPENDENT VALUER. THE EXCESS OF PURCHASE CONSIDERATION OVER AND ABOVE THE NET VALUES OF ASSE TS (I.E. AFTER NETTING OF LIABILITIES) TAKEN OVER FROM KWIL WAS TREATED AS GO ODWILL, AND CAPITALIZED IN THE BALANCE SHEET. THERE IS NO DENYING THE FACT TH AT NONE OF THE ASSETS COMPRISED IN THE SLUMP SALE ACQUISITION FROM KWIL F ORMED A PART OF THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE. SUBSEQUENTLY, IN T HE CURRENT ASSESSMENT YEAR, ASSESSEE RECEIVED A SUM OF RS.2,11,38,400/- A S A PARTIAL REFUND OF THE BUSINESS PURCHASE CONSIDERATION ON ACCOUNT OF CERTA IN OBJECTIONS RAISED BY THE ASSESSEE. THE AFORESAID AMOUNT WAS ACCORDINGLY REDUCED BY THE ASSESSEE FROM THE AMOUNT OF GOODWILL RECORDED IN TH E BOOKS OF ACCOUNT. THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERED WITH THE ASSESSEE AS ACCORDING TO THEM THE SAID REFUND WAS REVENUE IN NA TURE AND THEREFORE IT WAS TO BE ASSESSED AS A REVENUE RECEIPT. WE ARE UNABLE TO APPRECIATE THE AFORESAID STAND OF THE INCOME-TAX AUTHORITIES. IT IS QUITE CLEAR THAT UPON ACQUISITION OF THE MINING AND CONSTRUCTION BUSINESS OF KWIL, THE TOTAL CONSIDERATION PAID WAS CAPITALIZED. THEREFORE, ANY REDUCTION IN THE PURCHASE CONSIDERATION BY WAY OF THE IMPUGNED REFUND WOULD R ETAIN THE SAME CHARACTER AS THE ORIGINAL AMOUNT. THEREFORE, WE FIND NO JUST IFICATION ON THE PART OF THE ASSESSING OFFICER TO TREAT THE SAID SUM AS A REVENU E RECEIPT. THE PLEA SETUP BY THE REVENUE IS THAT THE AFORESAID REFUND WAS ON ACCOUNT OF CERTAIN ITEMS, NAMELY, STOCK OBSOLESCENCE; DOUBTFUL ACCOUNT RECEIV ABLE; EMI; EXPORT INCENTIVE; WARRANTY RESERVE; AND, IMMOVABLE PROPERT Y (NOT USABLE), ETC. WHICH ARE REVENUE ASSETS. ACCORDING TO THE ASSESSING OFF ICER, SUCH ITEMS ARE REVENUE ASSETS AND THEREFORE, ANY RECEIPT THEREFROM IS TO BE UNDERSTOOD AS A REVENUE RECEIPT. WE ARE UNABLE TO APPRECIATE THE A FORESAID REASONING OF THE ITA NO.1425/PN/2013 REVENUE BECAUSE THE AFORESAID ITEMS HAVE NOT BEEN E NTERED THE REVENUE ACCOUNT OF THE ASSESSEE, NAMELY, PROFIT & LOSS ACCO UNT INASMUCH AS THEY HAVE NOT BEEN CONSIDERED AS AN ITEM OF EXPENSE IN T HE PRECEDING ASSESSMENT YEAR OF 2004-05. THEREFORE, ANY REFUND OR ADJUSTME NT IN PURCHASE CONSIDERATION, EVEN IF IN RELATION TO THE AFORESAID ASSETS, WOULD NOT BE AN ITEM OF THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE. THUS , ACTION OF THE ASSESSEE IN TREATING THE SAME AS A CAPITAL RECEIPT AND REDUCING IT FROM THE AMOUNT RECORDED AS GOODWILL EARLIER IS IN ORDER. THUS, WE SET-ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE T HE ADDITION OF RS.2,11,38,400/-. THUS, ON THIS ASPECT ASSESSEE SU CCEEDS. 13. THE ONLY OTHER PLEA OF THE ASSESSEE IS BY WAY O F CHALLENGE TO THE PROCEEDINGS INITIATED BY THE ASSESSING OFFICER BY I SSUANCE OF A NOTICE U/S 147/148 OF THE ACT. AS PER THE ASSESSEE, THE INITI ATION OF RE-ASSESSMENT PROCEEDINGS WAS INVALID AND THUS THE ASSESSMENT ITS ELF IS LIABLE TO BE QUASHED. SINCE ASSESSEE HAS ALREADY SUCCEEDED ON T HE MERITS OF THE ISSUE, THE AFORESAID GROUND OF THE ASSESSEE IS RENDERED AC ADEMIC AND IS NOT ADJUDICATED FOR THE PRESENT. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED, AS ABOVE. ORDER PRONOUNCED ON 20 TH FEBRUARY, 2015. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 20 TH FEBRUARY, 2015. SUJEET ITA NO.1425/PN/2013 COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-V, PUNE; 4) THE CIT-V, PUNE; 5) THE DR A BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE