The ACIT, Circle -5, Ahmedabad V. P.G. Foils Ltd., Ahmedabad

ITA 1713/AHD/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62967 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 03-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAHUL KUMAR
• Keywords: Business income; Earning of tax free income; Difference of opinion; Assessment record; Reason to believe; Change of opinion
• Section: 143(3); 80HHC; 133A; 14A; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD A BENCH BEFORE: SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 THE A.C.I.T., CIRCLE-5, AHMEDABAD APPELLANTS VS. P.G. FOILS LTD., 6, NEPTUNE TOWER, ASHRAM ROAD, AHMEDABAD-380009 PAN-AAACP9274C RESPONDENTS DEPARTMENT BY : SHRI RAHUL KUMAR, SR. D.R. ASSESSEE BY : SHRI GAURAV NAHTA, A.R. DATE OF HEARING : 28.09.2012 DATE OF PRONOUNCEMENT 05.10.2012 / ORDER PER : A.K. GARODIA, ACCOUNTANT MEMBER BOTH THESE APPEALS ARE FILED BY THE REVENUE WHICH A RE DIRECTED AGAINST TWO SEPARATE ORDERS OF LD. CIT(A)-XI, AHMEDABAD DATED 1 1.05.2012 FOR A.Y. 2007-08 AND DATED 15.05.2012 FOR A.Y. 2008-09. BOTH THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE TAKE UP THE APPEAL OF A.Y. 2007-08 I.E. I.T.A. NO.1713/AHD/2012. THE GROUNDS RAISED BY THE REVENUE IN THIS YEAR ARE AS UNDER:- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.35,84,595/- MADE U/S 14A. I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 2 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE A.O. 3. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE L D. CIT(A) MAY BE SET ASIDE AND THAT OF THE A.O. BE RESTORED. 3. BRIEF FACTS OF THE CASE TILL ASSESSMENT STAGE AR E NOTED BY LD. CIT(A) IN PARA NO.3 OF HIS ORDER WHICH IS REPRODUCED BELOW:- 3. IN RESPONSE TO THIS NOTICE, THE ASSESSEE HAS FI LED REPLY DATED 09.06.2011 AND REQUESTED TO SUPPLY THE REASON RECOR DED. THE REASON RECORDED WAS SUPPLIED VIDE THIS OFFICE LETTER DATED 09.06.2011. THE ASSESSEE WAS ALSO GIVEN ANOTHER OPPORTUNITY OF BEIN G HEARD IN THE MATTER VIDE THIS OFFICE LETTER DATED 28.09.2011. 3.1 IN THIS CONNECTION, THE ASSESSEE HAS FILED REPL Y DATED 10.10.2011, CONTENDING AS UNDER:- TAX FREE INCOME OF RS.13824412/- RECEIVED DURING T HE YEAR ON UTI TAX FREE BOND RS.2200129, MUTUAL FUND DIVIDEND RS.55410 4/- & ON SALE OF MUTUAL FUND RS.11070179. COMPANY HAD PURCHASED 6.5% TAX FREE UTI BOND OF RS. 30865300 IN MANY LOST DURING THE PERIOD JULY 2003 TO MARCH 2006 AS A LONG TERM INVESTMENT. DURING THE YEAR COMPANY SOLD MUTUAL FU ND UNITS WHICH PURCHASED IN LAST YEAR FOR RS.7.25 CRORE OUT OF RES ERVE AND SURPLUS AVAILABLE FOR RS.48.89 CRORE AS ON 1.4.2006. COMPA NY IS MAKING PROFIT SINCE 1990 AND ALSO MAKING INVESTMENTS ON TIME TO T IME IN VIEW OF POLICY OF MANAGEMENT TO KEEP EARNED PROFIT SEPARATE LY IN LONG TERM INVESTMENT AND TO RUN DAY TO DAY MANUFACTURING AND BUSINESS ACTIVITY BY BORROWED FUND TO ENSURE STRICT CONTROL ON DEBTOR S REALIZATION AND LEVEL OF STOCK INVENTORY AND ALSO TO ASCERTAIN THE ACTUAL PROFITABILITY OF MANUFACTURING ACTIVITY. DURING THE YEAR COMPANY SO LD INVESTMENT IN NET RS.3.68 CRORES, SO NO QUESTION OF UTILIZATION OF BO RROWED FUND FOR EARNING INTEREST FREE INCOME AND GAIN ON MUTUAL FUN D. COMPANY LIMIT TAKEN FROM IDBI BANK LTD. ON RAW MATE RIAL, WIP, FINISHED STOCK & DEBTORS FOR DAY TO DAY BUSINESS AC TIVITY AND NOT FOR PURCHASE OF MUTUAL FUND AND OTHER INVESTMENT. AS O N 31.3.2007 COMPANY HAS RESERVE AND SURPLUS OF RS.42,70,70,731/ - WHICH IS QUITE MORE THAN THE VALUE OF INVESTMENT AS ON 31.3.2007. COMPANY PAID INTEREST TO BANK FOR AVAILING LIMIT TO FINANCE DEBTORS & STOCKS INVENTORY ONLY. AVERAGE UTILIZATION OF OVER DRAFT LIMIT WAS RS.20 I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 3 CRORE APPROXIMATELY, WHICH MEANS THAT EVEN DEBTORS AND INVENTORY WERE ALSO FINANCE BY OUR OWN FUNDS. AS PER NORMS AND CMA, BANK ALLOWS LIMIT ONLY FOR WO RKING CAPITAL PURPOSE I.E. DEBTORS STOCK ETC. AND NOT FOR MAKING INVESTMENT, WHICH WE SOLELY USED FOR DAY TO DAY BUSINESS ACTIVITY ONLY A ND INVESTMENT IN MUTUAL FUND AND OTHER SECURITIES WERE MADE OUT OF P ROFIT, RESERVE AND SURPLUS AND CAPITAL. WE HAVE PURCHASED THE UTI BONDS IN THE YEAR 2004-05 AGAINST REDEMPTION OF TATA MUTUAL INCOME FUND ON 12.02.2005 FOR RS.10431944.85 AND HDFC INCOME FUND ON 25.07.2009 F OR RS.2,50,00,000. FURTHER PROFIT/GAIN ON SALE OF MUTU AL FUND UNITS FOR RS.11070179 HAS NO CONNECTION WITH INTEREST BECAUSE WITH EXTRA ORDINARY GAIN IS DUE TO INCREASE IN SALE UNIT PRICE DUE TO APPRECIATION IN PORTFOLIO AND UPTREND IN SHARE MARKET. EXEMPTION C LAIMED FOR LONG TERM GAIN ON SALE OF MUTUAL FUND UNDER SECTION 10(33) AS PROVIDED IN INCOME TAX ACT. 3.2 THE CASE WAS DISCUSSED. THE SUBMISSION OF THE ASSESSEE IS CONSIDERED. HOWEVER, THE SAME IS NOT ACCEPTABLE FO R THE REASON THAT THE ASSESSEE HAD EARNED EXEMPT INCOME OF RS.1,38,24 ,412 FROM DIVIDEND AND BONDS. DURING THE YEAR ASSESSEE HAS P AID BANK INTEREST AMOUNTING TO RS.2,42,71,763/- AND EARNED INTEREST I NCOME AMOUNTING TO RS.1,20,19,602/- ONLY. THE INTEREST PAYMENT IS HIGHER THAN INTEREST INCOME. THE CONTENTION OF THE ASSESSEE THAT THE COM PANY HAD OWN FUND AND THE SAME AMOUNT WAS INVESTED IN VARIOUS MUTUAL FUNDS UTI TAX FREE BOND IS NOT ACCEPTABLE BECAUSE ASSESSEE WAS TAKEN H UGE LOAN FROM BANK AND HUGE INTEREST AMOUNT PAID THEREON. IN THIS REGARD, THE CBDT HAS ISSUED NOTIFICATION NO .45/2008 DATED 24 TH MARCH, 2008 PRESCRIBING THE RULES FOR CALCULATION O F DISALLOWANCE UNDER SECTION 14A. AS PER PARA-2(2)(II) AND 2(2)(III) OF THE SAID NOTIFICATION, IN CASE WHERE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST AND OTHER EXPENSES, WHICH ARE NOT DIRECTLY ATTRIBUTABLE TO A PARTICULAR INCOME OR RECEIPT OF AMOUNT, SHOULD BE COMPUTED AS PER THE FOLLOWING FORMULA, VIZ:- A=THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST RS. 2,44,05,797 B=AVERAGE VALUE OF INVESTMENT OF WHICH INCOME DOES NOT FORM PART OF THE INCOME RS.10,19,51,944 C=AVERAGE VALUE OF TOTAL ASSETS AS PER THE BALANCE SHEET RS.80,92,20,250 AS ON THE FIRST DAY AND LAST DAY OF THE PREVIOUS YEAR. A X B + 0.5% OF AVERAGE INVESTMENT. I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 4 = RS.2,44,05,797 X RS.10,19,51,944 + 0.5% OF 10,19,51,944 RS.80,92,20,250 = RS.30,74,835 + RS.5,09,760 =RS.35,84,595/- ON THE BASIS OF ABOVE FACTS AND CALCULATION AN AMOU NT OF RS.35,84,595/- IS DISALLOWED U/S 14A OF THE ACT AND ADDED TO THE T OTAL INCOME OF THE ASSESSEE COMPANY. PENALTY PROCEEDINGS U/S 271(1) OF THE ACT ARE INITIATED SEPARATELY ON THIS ISSUE FOR CONCEALING T HE PARTICULARS OF INCOME BY WAY OF NON-DISALLOWANCE OF INTEREST ON EXEMPT IN COME U/S 14A OF THE I.T. ACT, 1961. 4. BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE LD. CIT(A) WHO DELETED THE DISALLOWANCE AND NOW THE REVENUE IS IN APPEAL BEFORE US. 5. LD. D.R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LD. A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF LD. CIT(A). HE ALSO SUBMITTED THAT IT IS NOTED BY LD. CIT(A) AT PAGE 13 OF HIS ORDER THAT OW N FUND OF THE ASSESSEE DURING THE RELEVANT YEAR WERE OF RS. 4890.03 LACS ON 01.04 .2006 AND OF RS.4979.32/- LACS ON 31.03.2007 WHEREAS THE INVESTMENT MADE BY T HE ASSESSEE IS ONLY OF RS.835.90/- LACS AND THEREFORE, IT IS CLEAR THAT OW N FUNDS WERE MUCH MORE THAN THE AMOUNT OF INVESTMENT. HE ALSO POINTED OUT THAT LD. CIT(A) HAS FOLLOWED THE JUDGMENT OF HONBLE BOMBAY HIGH COURT RENDERED IN T HE CASE OF RELIANCE UTILITIES AND POWER LTD. REPORTED IN 319 ITR 340 IN WHICH IT IS HELD THAT IF THE ASSESSEE IS HAVING MIXED FUNDS AND OWN FUNDS ARE MORE THAN INVE STMENT THEN IT SHOULD BE ACCEPTED THAT THE ENTIRE INVESTMENT IS OUT OF OWN F UNDS AND NO DISALLOWANCE OF INTEREST IS CALLED FOR U/S 14A. HE ALSO SUBMITTED THAT IN THE PRESENT YEAR, RULE 8D IS NOT APPLICABLE AND HENCE, ORDER OF LD. CIT(A) SHOULD BE CONFIRMED. I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 5 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSE D THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDER OF THE AUTHORI TIES BELOW. WE FIND THAT LD. CIT(A) HAS DEALT THE ISSUE IN PARA 3.4 AND 3.5 OF H IS ORDER AND FOR THE SAKE OF READY REFERENCE, THE SAME ARE REPRODUCED BELOW:- 3.4 DURING THE APPELLATE PROCEEDINGS, THE APPELL ANT WAS ASKED TO PREPARE AVAILABILITY OF INTEREST FREE FUNDS AN D THE QUANTUM OF INVESTMENTS IN EARLIER YEARS. THE APPELLANT HAD S UBMITTED RELEVANT DETAILS AND SAME ARE REPRODUCED AS UNDER:- PG FOILS LIMITED STATEMENT OF INVESTMENT MADE OUT OF CAPITAL RESERVE AND SURPLUS DURING LAST TEN YEARS RS. IN LACS FINANCIA L YEAR CAPITAL RESERVE AND SURPLUS TOTAL INVESMEN T SECURED LOAN UNSECURE D LOAN 1996- 1997 708.60 2425.80 3134.4 0 D.OO 241.39 2.58 1997- 1998 708.61 2443.06 3151.6 7 0.00 395.10 2.31 1998- 1999 708.61 2588.70 3297.3 1 93.12 353.09 2.00 1999- 2000 708.61 3027.31 3735.9 2 256.41 597.46 0.00 2000- 2001 708.61 3147.43 3856.0 4 70.00 615.45 0.00 2001- 2002 708.61 3595.56 4304.1 7 319.20 539.77 0.00 I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 6 2002- 2003 708.61 3703.21 4411.8 2 1020.00 457.05 0.00 2003- 2004 708.61 3951.18 4659.7 9 710.67 1853.56 0.00 2004- 2005 708.61 4016.92 4725.5 3 897.25 1513.53 30.84 2005- 2006 708.61 4181.42 4890.0 3 1203.54 3194.31 18.90 2006- 2007 708.61 4270.71 4979.3 2 835.49 1077.08 297.72 IT IS SEEN THAT THE APPELLANT HAD STARTED MAKING IN VESTMENTS IN SECURITIES AND MUTUAL FUNDS FROM F.Y. 1998-99 ONWAR DS. IT IS EVIDENT FROM ABOVE TABLE THAT THE APPELLANT WAS HAVING MUCH MORE INTEREST FREE FUNDS THAN THE INVESTMENTS IN SECURITIES AND M UTUAL FUNDS IN THE EARLIER YEAR. ACCORDINGLY, THE PRE-ASSUMPTION THAT INVESTMENTS ARE MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT WILL GO IN FAVOUR OF THE APPELLANT. RELIANCE IN THIS REGARD IS PLACED ON RELIANCE UTILITIES AND POWER LTD., 319 ITR 340 (MUMBAI). IN VIEW OF ABOVE FACTS, I AM OF THE CONSIDERED VIEW THAT NO DISALLOW ANCE OF INTEREST IS REQUIRED TO BE MADE IN THIS CASE. IT IS ALSO NOTICE D THAT THE A.O. HAD DISALLOWED A SUM OF RS. 5,09,760/- AGAINST ADMINIST RATIVE EXPENSES. THE A.O. HAD APPLIED PROVISIONS OF RULE 8D ON THIS ISSUE ALSO WITHOUT BRINGING ANY FACTS ON RECORD TO PROVE THE FACT OF P ROXIMITY OF THESE EXPENSES WITH THE EXEMPT INCOME. ALTHOUGH DISALLOWA NCE ON THIS ACCOUNT IS UNWARRANTED, HOWEVER, LOOKING INTO THE Q UANTUM OF EXEMPT INCOME I.E. RS. 1,38,24,412/-, POSSIBILITY OF ADMIN ISTRATIVE EXPENSES INCURRED TO EARN THIS INCOME CANNOT BE RULED OUT. I N MY CONSIDERED VIEW THE END OF THE JUSTICE WILL MEET IF A DISALLOW ANCE OF RS.20,000/- IS MADE IN RESPECT OF ADMINISTRATIVE EXPENSES. 3.5 IN VIEW OF ABOVE DISCUSSION, DISALLOWANCE U/SJ4 A TO THE EXTENT OF RS.20,000/- IS CONFIRMED. THE APPELLANT WILL GET A RELIEF OF RS.35,64,595/- (RS. 35,84,595 - RS/20,000). THESE G ROUND OF APPEALS ARE PARTLY ALLOWED. 7. IN VIEW OF THIS FACTUAL POSITION THAT OWN FUNDS WERE MANY TIMES MORE THAN THE AMOUNT OF INVESTMENT AND IN VIEW OF THE JUDGMEN T OF HONBLE BOMBAY HIGH COURT RENDERED IN THE CASE OF RELIANE UTILITIES AND POWER LTD. (SUPRA) AND ALSO IN I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 7 VIEW OF THE FACT THAT RULE 8D IS NOT APPLICABLE IN THE PRESENT YEAR, WE ARE OF THE CONSIDERED OPINION THAT NO INTERFERENCE IS CALLED F OR IN THE ORDER OF LD. CIT(A) ON THIS ISSUE. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. 9. NOW WE TAKE UP THE APPEAL FOR A.Y. 2008-09 I.E. I.T.A. NO.1714/AHD/2012. THE GROUNDS RAISED BY THE REVENUE IN THIS YEAR ARE AS UNDER:- I) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT THE NOTICE ISSUED U/S 148 OF THE ACT AFTER PROPER RECOR DING OF REASONS, WAS INVALID. II) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN QUASHING THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 147 OF TH E I.T. AT. III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE A.O. IV) IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE SET ASIDE AND THAT OF THE A.O. BE RESTORED. 10. LD. D.R. OF THE REVENUE SUPPORTED THE ASSESSMEN T ORDER WHEREAS LD. A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF LD. CIT(A). HE ALSO PLACED RELIANCE ON THE TRIBUNALS DECISION RENDERED IN THE CASE OF M/S APU RVA CHEMICALS VS. ITO IN ITA NO.2486/AHD/2007 DATED 09.04.2010 AND HE SUBMITTED COPY OF THE TRIBUNALS DECISION. HE FURTHER SUBMITTED THAT ON PAGE NO.11 OF THE PAPER BOOK, THE REASONS RECORDED BY THE A.O. FOR REOPENING IS THERE . HE FURTHER SUBMITTED THAT ON PAGE NO.33 OF THE PAPER BOOK IS THE QUERY RAISED BY THE A.O. IN COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS AND IN PARTICULAR O UR ATTENTION WAS DRAWN TO QUESTION NO.11 OF THIS QUESTIONNAIRE ON PAGE NO.33 OF THE PAPER BOOK AS PER WHICH A QUERY WAS RAISED AND ASSESSEE WAS ASKED TO SUBMIT WORKING OF DISALLOWANCE U/S.14A R.W. RULE 8D. HE ALSO SUBMITT ED THAT AS PER QUESTION NO.25 I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 8 THE ASSESSEE WAS ASKED TO SUBMIT DETAILS OF INVENTO RY WITH BASIS OF VALUATION AND HENCE, QUESTION NO.1 AND 2 RAISED BY THE A.O. IN TH E REASONS RECORDED WERE DULY ENQUIRED BY THE A.O. AS PER THIS LETTER. HE FURTHE R DRAWN OUR ATTENTION TO PAGE NO.35 AND 36 OF THE PAPER BOOK CONTAINING THE REPLY SUBMITTED BY ASSESSEE IN RESPONSE TO METHOD OF VALUATION OF INVENTORY. HE FU RTHER SUBMITTED THAT ON PAGE NO.37 OF THE PAPER BOOK IS ANOTHER QUERY ISSUED BY THE A.O. DATED 2.3.10 IN WHICH THE A.O. ASKED THE ASSESSEE TO EXPLAIN THE ME THOD OF VIOLATION OF CLOSING STOCK. HE FURTHER SUBMITTED THAT REPLY OF THIS QUE RY WAS ALSO SUBMITTED TO THE A.O. AS PER LETTER DATED 16.03.2010 COPY OF WHICH I S AVAILABLE ON PAGE NO.40 AND 41 OF THE PAPER BOOK. REGARDING THE QUERY OF A.O. IN RESPECT OF DISALLOWANCE U/S 14A, IT WAS SUBMITTED THAT REPLY WAS SUBMITTED TO T HE A.O. AS PER LETTER DATED 16.12.2009, COPY OF WHICH IS AVAILABLE ON PAGE NO.4 4 OF THE PAPER BOOK. RECORDING THE THIRD OBJECTION OF THE A.O. IN THE RE ASONS RECORDED ON PAGE -11, IT WAS SUBMITTED THAT REGARDING THE ISSUE OF FBT I.E. FRINGE BENEFIT TAX, NOTICE HAS TO BE ISSUED U/S 115 WG. AND NOT U/S 148 OF THE I.T . ACT AND THEREFORE, THE THIRD OBJECTION OF THE A.O. IS NOT A VALID OBJECTION FOR ISSUING NOTICE TO THE ASSESSEE U/S 148. HE ALSO SUBMITTED THAT IN THE FACTS OF THE PR ESENT CASE, THE NOTICE ISSUED BY THE A.O. U/S 148 IS ON A MERE CHANGE OF OPINION AND THEREFORE, THE SAME IS NOT VALID. HE SUBMITTED THAT UNDER THESE FACTS, THE IS SUE INVOLVED IN THE PRESENT CASE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNALS DECISION CITED BY HIM. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUS ED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDER OF THE AUTHORI TIES BELOW. WE FIND THAT THE REASONS RECORDED BY THE A.O. FOR ISSUING NOTICE TO THE ASSESSEE U/S 148 ARE I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 9 AVAILABLE ON PAGE NO.11 OF THE PAPER BOOK AND FOR T HE SAKE OF READY REFERENCE, THE SAME ARE REPRODUCED BELOW:- REASONS FOR RE-OPENING ASSESSMENT U/S 147 OF THE I .T.ACT, 1961 REG.: M/S P.G. FOILS LTD. A.Y. 2008-09 THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF MANUFACTURE, LAMINATION AND TRADING OF ALUMINUM FOILS, WIRES, RO DS, INGOTS, ETC. AND FILED ITS RETURN OF INCOME ON 18.09.2008, DECLARING TOTAL INCOME OF RS.11,47,01,730/-. THE ASSESSMENT WAS FINALIZED U/ S 143(3) OF THE ACT ON 26.03.2010 DETERMINING TOTAL INCOME AT RS.15 ,62,21,730/-. IT IS SEEN THAT FROM THE ASSESSMENT RECORDS THE FOL LOWING DISCREPANCIES WERE FOUND:- (I) THE ASSESSEE HAD EARNED EXEMPT INCOME OF RS.60,95,3 80/- FROM DIVIDEND AND BONDS. HOWEVER, THE EXPENDITURE INCURRED FOR EARNING SUCH EXEMPT INCOME WAS NOT DISALLOWED I N ACCORDANCE WITH THE PROVISIONS OF SECTION 14A OF TH E AT. EXPENSE TO THE EXTENT OF RS.43,50,012/- WAS INADMIS SIBLE BUT WAS NOT DISALLOWED IN THE ORDERS PASSED U/S 143(3). (II) THE ASSESSEE HAD FOLLOWED THE METHOD OF ACCOUNTING CENVAT/MODVAT, AS DERIVED FROM ITEM 12(B) AND 22(A) OF FORM 3CD. AT THE END OF THE PREVIOUS YEAR ENDING O N 31.03.2008, IT HAD UNUTILIZED CENVAT CREDIT OF RS.1,37,26,921. THE OPENING BALANCE OF UNUTILIZED CENVAT CREDIT WAS RS.38,98,982 ONLY. THUS, THE INCREASE I N UNUTILIZED CENVAT CREDIT AT THE END OF THE PREVIOUS YEAR 2007-08 WAS RS.98,27,939. THE UNUTILIZED CENVAT CR EDIT REQUIRED TO BE INCLUDED IN THE CLOSING STOCK OF RAW MATERIAL AND WORK IN PROGRESS THUS REDUCING THE COST OF GOOD S MANUFACTURED, WHICH WAS DONE. THUS, IN VIEW OF THE PROVISIONS OF SECTION 145A OF THE ACT, WHICH MANDAT E INCLUSIVE METHOD OF ACCOUNTING, TOTAL INCOME WAS TO BE ENHANCED TO THE EXTENT OF UNUTILIZED CENVAT CREDIT. (III) ASSESSEE DECLARED FRINGE BENEFIT VALUE (FBV) OF RS.8000848/- IN THE FBT RETURN FILED ON 18.09.2008. THE ASSESSMENT U/S 143(3) WAS COMPLETED ON 26.03.2010, HOWEVER, ASSESSMENT OF FRINGE BENEFIT TAX WAS NOT M ADE. AS PER ANNEXURE II OF FORM 3CD GIVING THE DETAILED BRE AK-UP OF THE ASSESSEES LIABILITY OF FBT UNDER DIFFERENT HEA DS, THAT RS.5,68,857 WAS SHOWN AS THE EXPENDITURE INCURRED F OR STAFF WELFARE AND ACCORDINGLY FBV OF RS.1,13,771 WAS DETE RMINED I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 10 ON SUCH EXPENSE. HOWEVER, ON PERUSAL OF PROFIT AND LOSS ACCOUNT, UNDER THE HEAD PAYMENT AND PROVISIONS TO EXPLOYEES EXPENDITURE OF RS.7,22,243 WAS DEBITED A S SERVICE AWARD AS DISCUSSED ABOVE, THE DISALLOWABLE EXPENSES U/S 1 4A OF RS.43,50,012/-, UNUTILIZED CENVAT CREDIT OF RS.98,2 7,939 WHICH IS NOT INCLUDED IN CLOSING STOCK AND NON CHARGING OF FBV O N EXPENDITURE OF RS.7,22,243/- RESULTED IN UNDER ASSESSMENT AND TAX HAS ESCAPED ASSESSMENT FOR A.Y. 2008-09 AND ACCORDINGLY IT IS T HE FIT CASE FOR REOPENING THE ASSESSMENT U/S 147 FOR THE A.Y. 2008- 09. HENCE NOTICE U/S 148 IS ISSUED ACCORDINGLY. 12. AS PER VARIOUS QUERIES MADE BY THE A.O. IN COUR SE OF ORIGINAL ASSESSMENT PROCEEDINGS AND ITS REPLY SUBMITTED BY THE ASSESSEE TO THE A.O. WHICH ARE AVAILABLE IN THE PAPER BOOK AND TO WHICH, OUR ATTEN TION WAS DRAWN BY LD. A.R. OF THE ASSESSEE, WE FIND THAT OUT OF (3) OBJECTIONS OF THE A.O. AS NOTICED IN THE REASONS RECORDED BY THE A.O., AS REPRODUCED ABOVE, PROPER QUERIES WERE MADE BY THE A.O. IN COURSE OF ORIGINAL ASSESSMENT PROCEE DINGS AND ITS REPLY WERE ALSO SUBMITTED TO THE A.O. BY THE ASSESSEE AS PER VARIOU S NOTICES AND ITS REPLY AVAILABLE IN THE PAPER BOOK TO WHICH OUR ATTENTION WAS DRAWN BY LD. A.R. OF THE ASSESSEE. NOW, IN THE LIGHT OF THESE FACTS, WE EXA MINE THE APPLICABILITY OF THE TRIBUNALS DECISION CITED BY LD. A.R. OF THE ASSESS EE. THE RELEVANT PARAS OF THE TRIBUNAL DECISION ARE PARA NO.5.1 TO 5.5 AND PARA 6 AND THE SAME ARE REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE:- 5.1 HOWEVER, WHILE COMPLETING ASSESSMENT THE AO HAS ALLOWED DEDUCTION U/S 80HHC ON THE AMOUNT OF STOCK AND ADVA NCES RECEIVABLE OF RS.51,75,000/- DISCLOSED U/S 133A OF THE ACT. SU CH STOCK AND RECEIVABLE CAN NOT BE SAID TO BE DERIVED FROM THE B USINESS TO BE INCLUDED IN THE PROFIT OF BUSINESS FOR THE PURPOSE OF DEDUCTION U/S.80HHC FOR THE FOLLOWING REASONS. I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 11 (A) IN ANY CASE WHERE INCOME IS DISCLOSED U/S.1 33A OF THE ACT, THE SAME TO BE TAKEN SEPARATELY UNDER THE HEAD INCOME F ROM OTHER SOURCES BECAUSE THE INCOME DISCLOSED PARTAKES THE C HARACTER ON UNDISCLOSED INCOME. (B) IN CASE OF ADVANCES RECEIVED, THE ACCOUNTI NG TREATMENT FOR THE SAME TRANSACTION DOES NOT PARTAKES THE CHARACTER OF INCOME BECAUSE IN SUCH A SITUATION PARTY'S ACCOUNT WILL BE CREDITE D AND CASH/BANK ACCOUNT WILL BE DEBITED. THEREFORE, THE TRANSACTION I DOES RESULT INTO ANY INCOME. IF THE ASSESSEE INTENDS TO TREAT THIS T RANSACTION AS AN INCOME GENERATING TRANSACTION, IN NO WAY IT CAN BE CONSIDERED AS BUSINESS INCOME. (C) WHERE THE DISCLOSURE IS MADE U/S 133A, TH E INCOME DISCLOSED PERTAINS TO THE YEAR WHEN SURVEYS IS CARRIED OUT. C ONSIDERING THE SHELTER TAKEN BY THE ASSESSEE THAT THE INCOME DISCL OSED REPRESENTS RECEIVABLES RECOVERED, IT TAKES THE CHARACTER OF CU RRENT YEAR'S INCOME WHICH HAS NOT BEEN RECORDED PRIOR TO THE ACTION U/S 133A. HOWEVER, IN THIS SITUATION, THE TRANSACTIONS HAVE TO BE ROUTED THROUGH THE BOOKING ON SALES FOR THE CURRENT YEAR. THIS HAS NOT BEEN DO NE IN THE PRESENT CASE. VERIFICATION SALES RECORD ALSO BECOME MORE SI GNIFICANT. IN THE INSTANT CASE, ADVANCES / RECEIVABLES WERE RECORDED IN A DIARY WHICH WAS FOUND DURING THE COURSE OF SURVEY. THE AMOUNT W AS DISCLOSED AS RECEIVABLE. IT IS NOT SPECIFIED AS TO WHICH TRANSAC TION THESE RECEIVABLES PERTAINED TO IT. IT MAY BE THE CASE THAT ADVANCES W ERE MADE BY THE ASSESSEE AND SUBSEQUENTLY RECOVERED, IN SUCH CASE T HE TRANSACTIONS HAVING NOT BEEN RECORDED IN THE REGULAR BOOKS. IN T HIS CONTEXT THE NATURE OF TRANSACTION PARTAKES THE CHARACTER OF UND ISCLOSED INCOME. GRANTING DEDUCTION ON SUCH INCOME DEFEATS THE VERY PURPOSE OF LEGISLATIVE INTENTION. 5.2 THE CASE OF THE ASSESSEE IS SUCH THAT THE ASSES SEE HAS BEEN ALLOWED EXCESS ALLOWANCE OF DEDUCTION U/S.80HHC OF THE ACT ON THE DISCLOSURE MADE DURING THE COURSE OF SURVEY PROCEED INGS. OF COURSE WHILE FILING THE RETURN OF INCOME, THE ASSESSEE HAS ACCOUNTED FOR SUCH DISCLOSURE IN THE BOOKS OF ACCOUNTS, BUT IT WAS NOT ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS IN THE REGULAR COURSE OF ACCOUNTI NG. IN THE P&L A/C., SUCH DISCLOSURE HAS BEEN REFLECTED IN THE INCOME SI DE, OVER AND ABOVE THE INCOME EARNED BY THE ASSESSEE DURING THE REGULA R COURSE OF BUSINESS. THUS IT IS VERY CLEAR THAT THE INCOME DIS CLOSED DURING THE COURSE OF SURVEY PROCEEDINGS ARE DISCLOSED AS INCOM E FROM OTHER SOURCES. THE MAIN CONTENTION OF THE ASSESSEE BASED ON THE JUDICIAL PRONUNCIATION OF JUDICIAL REFERRING IN THE CASES OF BHANHJI LAVJI (1971) 79 ITR 582 (HC) AND SIRPUR PAPER MILLS (1978) 114 I TR 404 (AP) IS THAT ON ACCOUNT OF A MERE CHANGE IN OPINION WILL NO T EMPOWER THE ASSESSING OFFICER TO REOPEN THE ASSESSMENT. I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 12 5.3 I HAVE CAREFULLY GONE THROUGH THE ARGUMENTS MAD E BY THE ASSESSEE REGARDING RE-OPENING THE ASSESSMENT WHICH ARE NOT ACCEPTABLE AS PER THE FACTS OF THE CASE AS WELL AS ON MERITS. IT IS TO BE STATED THAT THE COMPLETED ASSESSMENT CAN BE OPENED EITHER WHEN THERE IS OMISSION OR FAILURE ON THE PART OF THE ASS ESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL AND RELEVANT FACT OR EVEN IF THERE IS NO OMISSION OR FAILURE ON THE PART OF THE ASSESSEE BUT THE INCO ME IS DEEMED TO HAVE BEEN ESCAPED AS PER THE PROVISIONS OF SECTION 147 OF THE ACT. RELIANCE IS PLACED ON THE DECISION OF PHOOLCHAND BA JRANG LAL VS. ITO 2O3 ITR 4S6 WHEREIN THE HON'BLE SUPREME COURT HAS H ELD THAT SINCE FOR THE PURPOSE OF REOPENING THE BELIEF IS THAT OF THE ITO, THE SUFFICIENCY OF REASONS FOR FORMING THE BELIEF IS NO T FOR THE COURT TO JUDGE BUT IT IS OPEN TO AN ASSESSEE TO ESTABLISH TH AT THERE IN FACT EXISTED NO BELIEF OR THAT BELIEF WAS NOT BONAFIDE. THE COURT CAN ONLY LOOK INTO THE REASONS TO THAT LIMITED EXTENT. 5.4 WITH RESPECT TO THE ARGUMENT THAT SINCE ALL THE INFORMATION WAS GIVEN RETURN, IT IS TO BE STATED THAT AS DELIVERED IN THE JUDGEMENT IN THE CASE RAKESH AGRAWAL VS. ACIT, BY THE HON'BLE DE LHI HIGH COURT THAT SECTION 147 ACT AS AMENDED WITH EFFECT FROM 01 .04.89 PROVIDES THAT IF THE AO HAS TO BELIEVE THAT ANY INCOME CHARG EABLE TO TAX HAS ESCAPED ASSESSMENT FOR ASSESSMENT YEAR, HE MAY SUBJ ECT TO THE PROVISIONS OF SECTION 148 TO 153 ASSESS OR REASSESS SUCH INCOME AND ALSO ANY OTHER INCOME CHARGEABLE TO TAX WHICH HAS E SCAPED ASSESSMENT. THE COURT OBSERVED THAT THE SECTION NOT ONLY MERGES CLAUSE (A) AND (B) OF THE PRE-AMENDED SECTION 147 O F THE ACT BUT ALSO BRINGS ABOUT A SIGNIFICANT CHANGE IN THE PRELIMINAR Y REQUIREMENT OF CERTAIN MANDATORY CONDITIONS BEFORE ASSESSMENT PROC EEDINGS COULD BE INITIATED UNDER THE OLD SECTION. THE HON'BLE COURT OBSERVED THAT IN THE AMENDED SECTION, THE ONLY CONDITION FOR ACTION NOW IS THAT THE AO SHOULD HAVE REASON TO BELIEVE THAT INCOME HAS ESCAP ED ASSESSMENT WHICH BELIEF CAN BE REACHED IN ANY MANNER AND IS NO T QUALIFIED BY THE PROCEEDINGS OF FAILURE BY THE ASSESSEE TO MAKE FULL AND TRUE DISCLOSURE OF MATERIAL FACTS, AS CONTEMPLATED UNDER THE UN-AME NDED SECTION 147(A). THE HON'BLE COURT STATED THE AO CAN NOW LEG ITIMATELY REOPEN THE ASSESSMENT IN RESPECT OF AN INCOME WHICH HAS ES CAPED ASSESSMENT. IT WAS OBSERVED BY THE HON'BLE COURT TH AT UNDOUBTEDLY UNDER THE AMENDED SECTION, POWER TO REOPEN ASSESSME NT IS MUCH WIDER AND CAN BE EXERCISED EVEN IF AN ASSESSEE HAD DISCLOSED FULLY AND TRULY ALL MATERIAL FACTS. IN THE CASE OF CIT VS. AB AD FISHERIES 258 ITR 641, THE HON'BLE KERALA HIGH COURT STATED THAT SO L ONG AS THE INGREDIENTS OF SECTION 147 ARE FULFILLED, THE AO IS FREE TO INITIATE PROCEEDINGS U/S.147 AND FAILURE TO TAKE STEPS U/S. 143(3) WILL NOT RENDER THE AO POWERLESS TO INITIATE ASSESSMENT PROC EEDINGS. 5.5 IN VIEW OF THE ABOVE TWO DECISIONS, ALL THE ARG UMENTS OF THE ASSESSEE HAVE BECOME INVALID AND THERE IS NO CHANGE OF OPINION, AND I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 13 RESPECTFULLY FOLLOWING THE DIRECTIONS GIVEN IN THE CASE OF GKN DRIVESHAFT LTD. (2003) 259 ITR 19, THE OBJECTIONS R AISED BY THE ASSESSEE FOR REOPENING OF THE ASSESSMENT HAS BEEN R EJECTED. 6. VIDE LETTER 21/9/2006, THE ASSESSEE HAS AGAIN OB JECTED TO THE REOPENING OF THE ASSESSMENT AND REQUESTED TO GRANT DEDUCTION U/S 80HHC ON THE DISCLOSED AMOUNT OF RS.51,75,000/-. ON PERUSAL OF THE ASSESSMENT ORDER MADE U/S 143(3) OF THE ACT, DATED 22/1/2003, P&L A/C., OF THE ASSESSEE AND FACTS OF THE CASE AND FIN DING OF THE SURVEY TEAM, THE ASSESSEE ITSELF HAS TAKEN THE DISCLOSURE AMOUNT OF RS.51,75,OOO/- SEPARATELY UNDER THE HEAD INCOME FRO M OTHER SOURCES AS REFLECTED IN THE P&L A/C., BECAUSE THE INCOME DI SCLOSED PARTAKES THE CHARACTER OF UNDISCLOSED INCOME. IN VIEW OF THE DISCUSSION MADE ABOVE, THE INCOME DISCLOSED DURING THE COURSE OF SU RVEY OPERATION U/S 133A, IS HAVING DOES NOT PARTAKES THE CHARACTER OF INCOME GENERATED DURING THE REGULAR COURSE OF BUSINESS AND CANNOT BE CONSIDERED AS BUSINESS INCOME WITHIN THE MEANING OF SECTION 80HHC OF THE ACT. THUS THE DEDUCTION CLAIMED BY THE ASSESSEE AND ALLOWED U /S 80HHC WHILE PASSING THE ORDER U/S 143(3) DATED 22-1-2003, REQUI RES TO BE RECALCULATED AND TO BE ALLOWED ONLY ON THE PROFIT O F RS.52,35,022/-, EXCLUDING THE DISCLOSURE MADE OF RS.51,75,OOO/-, OU T OF THE PROFIT DISCLOSED BY THE ASSESSEE IN THE P&L ACCOUNT OF RS. 1,04,10,022/-.' 13. FROM THE ABOVE PARAS OF THE TRIBUNALS DECISION , WE FIND THAT IN THAT CASE IT WAS HELD BY THE TRIBUNAL THAT IF NO FRESH FACT HAS COME TO THE KNOWLEDGE OF THE A.O. BETWEEN THE DATE OF ORDER OF THE ASSESSMENT SO UGHT TO BE REOPENED AND THE DATE OF FORMING OPINION BY THE A.O., THEN IT IS MER E CHANGE OF OPINION AND ON THAT BASIS, REOPENING IS NOT JUSTIFIED. THE TRIBUN AL CONSIDERED VARIOUS JUDGMENTS OF VARIOUS HIGH COURTS INCLUDING THE JUDGMENT OF HO NBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF GARDEN SILK MILLS PVT. LTD. , 237 ITR 668 AND ALSO THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF CIT VS. KELVINATOR OF INDIA 320 ITR 561 (SC). IN THE PRESENT CASE ALSO, WE FIND THAT THERE ARE ONLY THREE OBJECTIONS OF THE A.O. FROM THE REASONS RECOR DED BY HIM FOR REOPENING OUT OF WHICH, THE THIRD OBJECTION IS REGARDING FBT WHIC H CANNOT BE THE GROUND FOR ISSUING NOTICE U/S 148 BECAUSE FOR ISSUING NOTICE I N RESPECT OF ESCAPING OF FBT, I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 14 THERE IS A SEPARATE SECTION 115 WG IN THE I.T. ACT AND THEREFORE, NO NOTICE CAN BE ISSUED U/S 148 OF THE I.T. ACT. REGARDING THE FIRS T TWO OBJECTIONS, WE FIND THAT IN THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS, THE A.O. HAS MADE PROPER QUERIES REGARDING VALUATION OF CLOSING STOCK AS WELL AS REG ARDING DISALLOWANCE TO BE MADE U/S 14A AND ON BOTH THE COUNTS, REPLY WERE SUBMITTE D BY THE ASSESSEE BEFORE THE A.O. IN COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS A ND THEREAFTER, THE ASSESSMENT WAS COMPLETED BY THE A.O. U/S 143(3) AND THEREFORE, IT IS ABUNDANTLY CLEAR THAT OPINION WAS MADE BY THE A.O. IN COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS ON THE BASIS OF QUERIES AND ITS REPLY AND NO NEW MATER IAL HAS BEEN INDICATED WHICH HAS COME TO THE NOTICE OF THE A.O. FOR REOPENING. HENCE, IN OUR CONSIDERED OPINION, IN THE FACTS OF THE PRESENT CASE, THE REOP ENING IS ON THE BASIS OF MERE CHANGE OF OPINION WHICH IS NOT PERMISSIBLE AS PER L AW. IT HAS BEEN SO HELD BY HONBLE APEX COURT IN THE CASE OF CIT VS. KELVINATO R OF INDIA LTD. (SUPRA). IT IS HELD BY HONBLE APEX COURT IN THAT CASE THAT IF THE CONCEPT OF CHANGE OF OPINION IS REMOVED AS CONTENDED ON BEHALF OF DEPARTMENT, THEN, IN THE GARB OF REOPENING THE ASSESSMENT, THE REVIEW WOULD TAKE PLACE BUT THE A.O. HAS NO POWER TO REVIEW AND THEREFORE, BY RESPECTFULLY FOLLOWING THI S JUDGMENT OF HONBLE APEX COURT AND ALSO THE TRIBUNAL DECISION CITED BY LD. A .R., WE DECLINE TO INTERFERE IN THE ORDER OF LD. CIT(A) CONSIDERING THE FACTS OF TH E PRESENT CASE. ACCORDINGLY, WE QUASH THE RE-ASSESSMENT ORDER. THE REOPENING IS HE LD TO BE NOT VALID. 14. IN THE RESULT, THIS APPEAL OF THE REVENUE IS AL SO DISMISSED. 15. IN THE COMBINED RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 05.10.20 12 I.T.A. NOS. 1713 & 1714/AHD/2012 A. Y. 2007-08 & 08-09 15 SD/- SD/- (KUL BHARAT) (A.K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER TRUE COPY N.K. CHAUDHARY, SR. P.S. / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT 2. / RESPONDENT 3. / CONCERNED CIT 4. - / CIT (A) 5. , ! , '# / DR, ITAT, AHMEDABAD 6. $% &' / GUARD FILE. BY ORDER/ , ( / ' ) ! , '# *