Abdul Hamid Haji Abdul Karim Shaikh, ... vs Assessee

आयकर अपील य अ धकरण, मंब ु ई IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES 'A' MUMBAI सव ी आय.पी. बंसल, या यक सद य एवं बी.आर. बा करन, लेखा सद य के सम । BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND

SHRI B.R.BASKARAN, ACCOUNTANT MEMBER

आयकर अपील सं. / ITA No. 2014/MUM/2013 नधा रण वष /Assessment Year 2005-06 Mr.Abdul Hamid Haji Abdul बनाम/ The Asstt. Commissioner of Karim Shaikh, Vs. Income Tax -25(3), Universal Trade Consultant, C-11, Pratyakshakar Bhavan, Office No.68, Ashoka Shopping Bandra Kurla Complex, Center, GT Hospital Complex, Mumbai 400 051. LT Marg, Mumbai 400 051.

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAEPS 5727K

(अपीलाथ /Appellant) .. ( यथ / Respondent)

Appellant by Shri Jitendra Jain Respondent by : Asghar Zain सन ु वाई क# तार%ख / Date of Hearing : 30/06/2015 घोषणा क# तार%ख /Date of Pronouncement : 03/07/2015 आदे श / O R D E R

PER I.P.BANSAL, JM:

This is an appeal filed by the assessee and it is directed against order passed by Ld. CIT(A)-35, Mumbai dated 20/12/2012 for assessment year 2005-06 Grounds of appeal read as under:

"1. The Commissioner of income Tax (Appeals)-35 [herein referred to as CIT(A)] erred in upholding the reopening of assessment by the AO u/s. 147 and issuing notice u/s.148 of the I.T. Act.

2. The CIT(A) erred in confirming the disallowance of compensation charges of Rs.11,00,000/- paid to Bhairav metals considering that the 2 आयकर अपील सं. / ITA No. 2014/MUM/2013 नधा रण वष /Assessment Year 2005-06

same is not an expense of current year and holding that the same could be an advance or debit.

Yours appellant submits that on the facts and circumstances of the case and in law compensation paid to Bhairav metal shall be allowed as deductible business expense.

2. Assessment in this case has been reopened vide notice under section 148 of the Income Tax Act, 1961 (the Act), which was issued and served on the assessee on 31/3/2010. Copy of reasons is filed at page 27 of the paper book, which read as under:

"On perusal of assessee's letter dated 07.07.2003 to MSTC Ltd., in the last para the assessee has stated that "As mentioned in our letter dated, July'2003 we are trying to dispose of the silicon metal to another buyer. However, as assured by the MSTC Ltd., the amount of rs.11,00,000/- paid by us towards the above mentioned amount of Rs.25,00,000/- may be returned to us as soon as the payment is received from M/s. Reliance Silicons (I) Pvt. Ltd.""

In view of the above, the assessee did receive a part consignment of silicon metal which they tried to dispose of to another buyer. In this connection, the assessee gets business clients for big companies like Haldia, Petrochemicals, Usha Ispat and MSTC etc. and in process earns income being consultancy /broker charges as evidenced from TDS certificates. Further, the Audit also pointed out that the assessee's role is only that of introducing / initiating the 2 clients for the particular transaction.

In the light of above, Rs.11 lakhs debited to P&L A/c. as "compensation charges"

should not be allowed as business expenditure.

2. In view of above, I have reason to believe that income chargeable to tax has escaped assessment in the case of the assessee and therefore, this is a fit case to reopen the assessment u/s.147 of the I.T. Act-1961.

2.1 Accordingly, addition of Rs.11.00 lacs was made in the impugned assessment order dated 16/12/2010. The assessee challenged the validity and otherwise of the reassessment proceedings as well as the addition of Rs.11.00 lacs on merits.

3. It was submitted by Ld. AR that the initiation of re-assessment proceedings is bad in law as the same is based upon change of opinion. To support such arguments Ld. AR submitted that during the course of original 3 आयकर अपील सं. / ITA No. 2014/MUM/2013 नधा रण वष /Assessment Year 2005-06

assessment proceedings the AO had raised the query regarding the impugned addition of Rs.11.00 lacs and detailed reply was submitted by the assessee and after considering the reply and evidences filed by the assessee the AO did not make addition of Rs.11.00 lacs and completed the assessment under section 143(3) of the Act on 26/12/2007, copy of which is also filed along with the appeal papers. To further support the aforementioned arguments Ld. AR submitted that copy of notice issued by the AO during the course of original assessment proceedings is filed at page 49 to 53 of the paper book, which is a notice dated 9/1/2007. It was submitted that various queries were raised including the impugned addition and reference of this was made to query raised as per Sl.No.22, where the assessee was asked to explain the allowability or otherwise of the expenses debited to P&L Account. Query raised at sl.No.22(K) of the aforementioned notice read as under:

" 22. Details of the following expenses debited:

a. Rent rates taxes Rs.1,48,825/- with copies of the receipts in support of such expenses.

b. Electricity chgs. with copies of all the receipts. c. Telephone expenses with copies of all the bills.

d. Month wise conveyance expenses with a notice on these expenses. e. Salary Rs.7,38,000/- with names of the employees, total salary paid month wise and designation.

f. Entertainment expenses Rs.18,696/- with a detailed note on these expenses. g. Mobile expenses Rs.1,94,833/- with details of the persons in whose names the mobiles are registered.

h. Bank charges i. Bank loan interest with ledger copy of bank loan intrest. j. Travelling expenses with details of person who has travelled, dates to and fro, designation, place, purpose, amounts k. Compensation charges Rs.11,00,000/- with detailed note and copies of agreements. (Emphasis provided) l. Small balance w/off Rs.36,352/-.

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m. Month wise Misc expenses with a note on these expenses n. Proof of payment of all provision of expenses."

3.1 It was further submitted that in reply to the aforementioned query raised by the AO, the assessee had submitted a letter to AO dated 3/5/2007, copy of which is filed at pages 32 to 45 of the paper book and the reply of the assessee as well as evidences filed to explain the impugned expenses has been stated in Sl.No.7 of the Index of the paper book and the same read as under:

7 Copy of Authorized Representative's letter dt.22.10.2010 filed 28-31 with ACIT-25(3), Mumbai alongwith following enclosures:

i) Copy of Authorized Representative's letter dt.3.05.2007 filed during regular assessment before ACIT - 25(3) alongwith following enclosures:

- Note on compensation Charges Paid of Rs.11,00,000/- 34-35

- Ledger Account of compensation Charges in Assessee's 36 books of accounts.

- Assessee's letter dt. 07.07.2003 addressed to 37 M/s.MSTC Ltd. - Confirmation from M/s. Bhairav Metals for receipt of 38 Rs.25,00,000/- - Letter of M/s. Bahirav Metals to assessee for refund of 39 Rs.11,00,000/- - Letter of M/s. Bhairav Metal to assessee acknowledging 40 receipt of Rs.11,00,000/-

ii) Copy of authorized Representative's letter dt. 19.12.2007 filed during regular assessment before ACIT-25(3) alongwith following enclosures:

- Bank Statement of M/s. Bhairav Metal reflecting receipt 45 of Rs.25,00,000/-

3.1 It was submitted that note described in the aforementioned paper read as under:

Note on Compensation Charges paid of Rs.l1,OO,OOOl-

As explained earlier, the assessee mainly derives his income being consultancy charges from Metal Scrap Trading Company Ltd (MSTC) Kolkata, a Public Sector Company attached to Ministry of Steel carrying on business of imports of industrial inputs for Public and Private Sector. During the year under consideration the assessee has introduced a client. M/s. Bhairav Metals to MSTC for supply of 50 MTs of Silicon Metal. M/s. Bhairav Metals deposited Rs.25,00,000/- as advance against purchase of 50 Mf s of silicon metal. The MSTC in turn asked Reliance Silicon India Pvt. Ltd. (Reliance Silicon) for the supply of requisite material to Bhairav Metals and appropriated Rs.25,00,000/-

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received by Bhairav Metal against old outstanding dues from Reliance Silicon.

The Reliance Silicon failed to supply the goods to Bhairav Metals and as a consequence Bhairav Metals demanded refund the advance ofRs.25,00,000 given to MSTC. The assessee being a consultant, tried his best to persuade the MSTC to refund the advances to Bhairav Metal as it was his moral as well commercial obligation to resolve the dispute immediately between the parties since Bhairav was insisting for refund of advance of Rs.25,00,000 immediately. On failure of the deal the assessee, even after great persuasion, could only arrange to get Rs.14 lacs from Reliance Silicon for Bhairav. Since the assessee is a consultant of MSTC and he also introduced Bhairav Metal in this abortive deal, he had to compensate Bhairav by paying the balance amount of Rs.11 lacs for maintaining his business relation. The MSTC being a public sector company could not refund the money received as advance whereas Bhairav Metal a private Ltd. company was insisting for immediate refund. As explained earlier the assessee has been mainly earning his consultancy fees from business generated through them; hence the assessee has no option but to pay additional amount as compensation to save the situation and not to affect adversely his business. A few letters relating- to the compensation paid by the assessee are enclosed herewith for your ready reference. On plain reading of these letters it is abundantly clear that assessee had to pay Rs.11 lacs as compensation to Bhairav as MSTC did not pay the refund amount.

'While on the subject, we submit that MSTC has not paid any amount towards this deal till date and because of the business relation of the assessee with MSTC he can not take any other measure to recover the dues. Under these circumstances, H is submitted that compensation of Rs. 11 lacs paid to Bhairav by the assessee represents a business expenditure incurred ;n the I course of carrying oil the business and hence same shall be allowed as deductible expenditure.

It is respectfully submitted that the amount of Rs.11,00,000/- paid to M/s. Bhairav metal was to avoid any adverse effect on the assessee's business and goodwill. We further submit that the said payment was made. out of commercial expediency and business necessity and hence the said expenditure is allowable u/s 37(1) of the LT. Act. Section 37(1) of the I.T.Act allows an expenditure as deductible expenditure if the said expenditure is laid out or expended wholly and exclusively "for the purposes of the business". The term for the purposes of business is of wide connotation and includes all expenditure incurred for business out of commercial expediency. The term commercial expediency means everything that serves to promote commerce and includes every means suitable to that end.

Under these circumstances it is submitted that the compensation charges paid of Rs.11 lacs shall be allowed as a deductible revenue expenditure.""

3.2 Referring to the aforementioned documents it was submitted by Ld. AR that not only the detailed explanation was given but relevant evidences were also filed and upon consideration thereof the AO did not make any addition on the impugned issues.

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3.3 Referring to the reasons which have already been reproduced in the above part of this order, it was submitted by Ld. AR that reasons to reopen are based only on the letter written by the assessee dated 7/7/2003 which was addressed to M/s. MSTC Ltd., copy of which was also filed before AO during the course of original assessment proceedings. Thus, it was submitted by Ld. AR that it is a case where initiation of re- assessment proceedings is based on mere "change of opinion". It was submitted that it is now an accepted proposition of law that if there is material on record to show that certain issues were required to be explained during the course of original assessment proceedings and replies were given by the assessee then, non discussion of that issue in the assessment order will not make the assessment order vitiated as on the issues which were enquired by the AO during the course of original assessment proceedings, the AO was satisfied with the explanation of the assessee. Ld. AR referred to the recent decision of Hon'ble Bombay High Court in the case of GKN Sinter Metals Ltd. vs. ACIT, 274 CTR 0001(Bom) dated 6/1/2015. Reference was made to the following observations of their Lordships:

"14. However, Mr. Chhotrary, learned Counsel appearing for the Revenue submits that there has been no formation of opinion on allocation of expenditure amongst the three manufacturing units by the Assessing Officer as the Assessment Order dated 9th March, 2005 passed under Section 143(3) of the Act contains no discussion on the same. According to the Revenue, it could only be when the assessment order contains discussion with regard to particular claim can it be said that the Assessing Officer had formed an opinion with regard to the claim made by the assessee. This Court in Idea Cellular Ltd. v Is. Deputy Commissioner of Income Tax 301 ITR 407 has expressly negatived on identical contention on behalf of the Revenue. The Court held that once all the material was placed before the Assessing Officer and he chose not to refer to to the deduction/ claim which was being allowed in the assessment order, it could not be contended that the Assessing Officer had not applied his mind while passing the assessment order. Moreover in this case, it is evident from the letter dated 6th August, 2007 addressed by the Assessing Officer to the Petitioner containing the reasons recorded for issuing the impugned notice also record the fact that during the regular assessment proceedings, the Petitioner has been asked to furnish details in support of the claim for exemption under Section 80IA/IB of the Act. The letter further records that the details sought for were furnished and it is now observed that there has been a dis-proportionate distribution of expenses between various units belonging to the Petitioner for claiming deduction under Section 80lA/IB of the Act. This is a further indication of the fact that the Assessing Officer had during the regular assessment proceedings for Assessment Year 2002-03 sought information in respect of the allocation of expenses and the explanation offered by the Petitioner was found to be satisfactory. This is evident from query dated 27th December, 2004 and the Petitioner's response to the same on 25th January, 2005 7 आयकर अपील सं. / ITA No. 2014/MUM/2013 नधा रण वष /Assessment Year 2005-06

explaining the manner of distribution of common expenses for delaying the process of claiming deduction under Section 80IA/IB of the Act. All this would indicate that Assessing Officer had formed an opinion while passing the order dated 9th March, 2005. This Court in Aroni Commercials Ltd. v Is. Assistant Commissioner of Income Tax 367 ITR 405 had occasion to consider somewhat similar submission made by the Revenue and negatived the same by holding that when a query has been raised with regard to a particular issue during the regular assessment proceedings, it must follow that the Assessing Officer had applied his mind and taken a view in the matter as is reflected in the Assessment Order. Besides, the manner in which an Assessing Officer would draft/ frame his order is not within the control of an assessee. Moreover, if every contention raised by the assessee which even if accepted is to be reflected in the assessment order, then as observed by the Gujarat High Court in CIT vs. Nirma Chemicals Ltd. 305 ITR 607, the order would result into an epic tome. Besides, it would be impossible for the Assessing Officer to complete all the assessments which have to under gone scrutiny at its hand. In the above view, it is clear that once a query has been raised during the assessment proceedings and the Petitioner has responded to the query to the satisfaction of the Assessing Officer as is evident from the fact that the Assessment Order dated 9th March, 2005 accepts the Petitioner's claim for deduction under Section 80IA/IB of the Act. It must follow that there is due application of mind by the Assessing Officer to the issue raised. (emphasis provided)

15. Therefore, as there is a change of opinion in issuing the impugned notice having regard to the opinion formed while passing the assessment order under Section 143(3) of the Act, the Assessing Officer would cease to have any reason to believe as held by the Supreme Court in Kelvinator of India Ltd. (supra). Moreover, the power to re-assess under Section 147/148 of the Act is not a power to review an order of assessment passed under Section 143(3) of the Act."

4. On the other hand, Ld. DR relied upon the order passed by AO and Ld. CIT(A).

5. We have heard both the parties and their contentions have carefully been considered. The aforementioned evidence clearly demonstrate that the issue regarding debit of Rs.11.00 lacs to the P&L Account was duly enquired into by the AO vide notice issued to explain several expenses debited to P&L Account. The detailed reply was submitted by the assessee to the AO alongwith documentary evidences to explain that the claim of the assessee regarding Rs.11.00 lacs was legitimate claim. After considering those evidences the AO did not make any addition. In view of those evidences it can be said that AO had formed the opinion for not making addition of Rs.11.00 lacs during the course of original assessment proceedings. Subsequently, based on the same evidence, which was produced by the assessee to contend that no addition was called for, re-assessment proceedings were 8 आयकर अपील सं. / ITA No. 2014/MUM/2013 नधा रण वष /Assessment Year 2005-06

initiated, which is clearly as a result of "change of opinion" and cannot be approved in the light of aforementioned decision of Hon'ble Bombay High Court in the case of GKN Sinter Metals Ltd. vs. ACIT (supra). The relevant observations of their Lordships from the said decision have already been reproduced. Accordingly, accepting the arguments of Ld. AR that reassessment proceedings were not validly initiated, we allow Ground No.1 filed by the assesseeand quash the impugned assessment order.

6. Since re-assessment proceedings have been held to be invalid, we need not go into Ground No.2, which is challenging the addition on merit as re-assessment itself has been held to be invalid. Therefore, Ground No.2 does not survive.

7. In view of above discussion the appeal filed by the assessee is allowed in the manner aforesaid.

Order pronounced in the open court on 03/.07/2015 आदे श क# घोषणा खुले यायालय म+ ,दनांकः 03/07/2015 को क# गई । Sd/- Sd/- (बी.आर.बा करन/B.R.BASKARAN) (आय.पी.बंसल/ I.P.BANSAL) लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER मंब ु ई Mumbai; ,दनांक Dated 03/07/2015 आदे श त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. आयकर आयु0त(अपील) / The CIT(A)- 4. आयकर आयु0त / CIT 5. 1वभागीय त न3ध, आयकर अपील%य अ3धकरण, मंब ु ई / DR, ITAT, Mumbai 6. गाड फाईल / Guard file. आदे शानस ु ार/ BY ORDER, स या1पत त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai व. न.स./Vm, Sr. PS