The Indian Smelting And Refining ... vs Assessee

These two appeals filed by the assessee for AY 2009-10 & 2004-05 are against two different orders of the CIT(A)-22, Mumbai both dated 24.02.2012 for AY 2009-10 & 2004-05 respectively. First of all we shall deal with appeal for AY 2009-10:

ITA No. 2942/Mum/2012 : Asst. Year 2009-10 : 2. The following grounds have been taken by the assessee:

2 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012 "1. The Commissioner of Income Tax (Appeals) erred in upholding the disallowance of a sum of Rs.

1,58,940/- under section 14A read with rule 8D.

It is further submitted that interest paid by the appellant is for specific borrowing and cannot be apportioned to the investments. The conclusions arrived at by the Commissioner of Income-tax and by the Assessing Officer is erroneous and contrary to the law and facts.

2. The Commissioner of Income Tax erred in upholding addition of Rs. 1,25,940/- to the Book Profits computed under section 115JB of the Act.

It is submitted that disallowance made under Sub section (2) and (3) of Section 14A cannot be added to the book profits.

The conclusions arrived at by the Commissioner of Income-tax and by the Assessing Officer is erroneous and contrary to the law.

3. The appellant reserves the right to add to, alter or amend the grounds of appeal".

2. Ground no.1 pertains to disallowance of Rs. 1,58,940/- u/s 14A read with Rule 8D.

3. The facts are that the assessee was established in 1931. Between 1964 and 1969, the assessee made investments in certain shares of around 66,000/-. Again in 1991-92, it made further investment of Rs. 29.49 lacs in the shares of Infra Financial Corp. Ltd. This aggregate investment in shares is shown consistently in its Balance Sheet. In the year under consideration, the assessee earned dividend income of Rs. 14,760/-, which was straight away deposited in its Bank account.

4. The AO, while conducting the assessment proceedings sought the assessee's view as to why the provisions of section 14A should not be invoked and also taking into consideration the fact that the assessee had paid interest of Rs. 10.52 crores on borrowed funds.

3 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012

5. The assessee submitted before the AO that the only investment of Rs. 31 lacs was made prior to 1993, much before the current year. The assessee also submitted that there was only one dividend receipt of Rs. 14,760/-. In such a case, the disallowance as computed by the AO at Rs. 1,58,940/- was not warranted.

6. The AO rejected the arguments of the assessee and added back Rs. 1,58,940/- to the income of the assessee.

7. The assessee approached the CIT(A) and reiterated the submission made before the AO. The CIT(A) after considering the submissions of the assessee, sustained the disallowance u/s 14A, as computed by the AO. The CIT(A) also sustained the disallowance under MAT provisions.

8. The assessee is now in appeal before the ITAT.

9. Before us, the AR submitted (a) that the investments were made much earlier and not made in the current year and (b) that there has been only one divided receipt, which too was deposited straight into the bank and that neither it is a case of diverting interest bearing funds towards making investments therefrom, and neither it is a case of a making efforts to earn dividend/exempt income. The AR also submitted that the disallowance cannot be made under MAT provisions as well because under MAT provisions, the reliance on book results is not taken into account. The AR, therefore, pleaded that the addition made to be deleted.

10. The DR on the other hand supported the order of the revenue authorities.

11. We have heard the arguments and have pursued the order of the revenue authorities and material placed on record.

4 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012

12. The assessee has clearly proved, with reference to its accounts (PB pgs. 3-22), that the investment under reference (Rs. 30.15 lacs) was in fact made in the past. The assessee has, as at 31.3.2008, i.e., at the beginning of the relevant previous year, a capital base of Rs. 13,291.58 lacs, as against a miniscule investment portfolio of Rs. 30.15 lacs, and which continues for the current year as well. Even excluding the fixed assets thereat (Rs. 8508.51 lacs), i.e., net of that financed by term loans (Rs. 3,500 lacs), or Rs. 5008.51 lacs, would yet leave a surplus of Rs. 8,283.07 lacs (13291.58 - 5008.51). The Cash Flow Statement (PB pg. 8), forming part of the annual accounts, clearly depicts the movement of funds for the current year, indicating nothing adverse qua the sufficiency of the surplus capital, i.e., with reference to the investment, which in fact flow from an earlier year. Under these conditions of abundance of capital, i.e., even considering the deployment toward business assets, the presumption in law, as explained in the case of Reliance Utilities and Power Ltd [2009] 313 ITR 340 (Bom), would only be of the investment as having been financed out of own funds, toward which we find valid basis on facts. We are, under the circumstances, in no manner of any doubt, which way clarify to be a finding of fact, that the investment in shares, etc., is funded by the assessee out of own capital. Consequently, no disallowance of interest cost u/s. 14A r/w rule 8D shall arise in the facts and circumstances of the case.

Coming to the disallowance in respect of indirect, administrative expenditure, worked out at Rs. 15,075/- by following the prescription of rule 8D(2)(iii), i.e., at 0.5% of the average investment for the year, the assessee did not raise any argument before us nor do we find any such before the authorities below, i.e., towards non-application of the said estimate or at a lower sum. Under the circumstances, we find no reason or any basis in law to interfere therewith. Ground #1 is accordingly partly allowed.

13. As regards the disallowance under the MAT provisions, which forms the subject matter of the assessee's ground # 2. The deletion of the disallowance of 5 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012 interest component (at Rs. 1,43,865/-) of the total disallowance of Rs. 1,58,940/-, would consequently cause deletion of the corresponding adjustment under section 115JB r/w Explanation 1(f) below sub-sec. (2) thereof. As regards the balance disallowance of Rs. 15,075/-, i.e., toward adjustment qua the corresponding administrative expenditure, we have already clarified the assessee as having not made out any case at any stage, i.e. either in principle or on quantum, and which position continues before us as well. We accordingly decline to interfere with the corresponding adjustment for book profit purposes as well. We decide accordingly, partly allowing the assessee's Ground # 2.

14. In the result, the assessee's appeal for AY 2009-10 is partly allowed.

ITA No. 2941/Mum/2012 : Asst. Year 2004-05 : 15. The following grounds have been raised by the assessee:

"1. The Commissioner of Income-tax (Appeals) erred in upholding the reopening of the assessment completed under section 143(3) of the Act. It is submitted that the Commissioner of Income-tax failed to appreciate that no material has been brought on record to suggest that the income chargeable to tax has escaped assessment due to failure on part of the appellant to disclose fully and truly all material necessary for assessment. A change of opinion cannot be construed as income having escaped assessment.

The assessing officer had no jurisdiction to reopen the assessment completed under section 143(3) of the Act. The notice under section 148 of the Act is bad in law and was sought to be cancelled.

2. Without prejudice to ground 1 and in the alternate the Commissioner of Income-tax erred in upholding computation of deduction under section 80HHC of the Act by excluding 90% of the job work charges from profits of the business.

It is submitted that "Job Work" is part and parcel of the main business and is duly included in the Total Turnover of the appellant. The recomputation of deduction allowable under section 80HHC of the 6 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012 Act as made by the AO and upheld by the Commissioner of Income-tax (Appeals) is bad in law and consequential additions be deleted.

3. The appellant reserves the right to add to, alter or amend the grounds of appeal".

16. In the impugned appeal, the assessee has raised following additional grounds, which read as under:

"1. In the alternate and without prejudice to the grounds raised, if it is held that job work receipts would not be entitled to deduction under Section 80HHC of the Act, the exclusion has to be the net of receipt from job work.

2. The learned Assessing Officer erred in disallowing a sum of Rs. 28,450/- under section 14A. It is further submitted the interest have been made out of interest free fund. Further interest paid by the appellant is specific borrowing and cannot be apportion to the investment. The conclusion arrived by the learned Assessing Officer is erroneous and contrary to the facts and bad in law.

3. The appellant reserves the right to add to, alter or amend the grounds of appeal".

17. The facts are that the assessee filed its return on 26.10.2004, and an order u/s 143(3) was passed on 27.11.2006. On 25.03.2011, the AO issued a notice u/s 148, seeking to reopen the assessment framed earlier. Against this notice the assessee filed its return on 11.04.2011, requesting the AO to treat his original ROI as return filed in response to notice u/s

148. The assessee also asked for the reasons of reopening, which was communicated vide letter dated 07.09.2011.

18. Consequent to the communication of reasons, the AO issued notices u/s 142(1) and 143(2). On 28.09.2011, vide letter dated 26.09.2011, the assessee filed a formal objection to the reasons and notice u/s 148, which was disposed off by the AO on 29.09.2011.

7 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012

19. The reasons as recorded by the AO are, "Reasons for issue of notice u/s 148 of the Act in the case of M/s. The Indian Smelting & refining Co.

Ltd. for AY 2004-05 In the instant case, order u/s 143(3) of the Act was passed on 27.11.2006 assessing total income at Rs. 9,93,86,560/-.

Subsequently, it has come to the notice that the assessee had claimed excess deduction u/s 80HHC. It had received job work charges of Rs.

18,60,57,181/-, which were not eligible for deduction u/s 80HHC. 90% of the said income from job work charges should have been reduced for computing the deduction u/s 80HHC which has not been done by the assessee resulting into excess claim of deduction to the extent of Rs. 26,82,872/-. Therefore, I have reason to believe that income to the extent of Rs. 26,82,872/- has escaped assessment within the meaning of the provisions of section 147 of the .Act by reason of failure on the port of the assessee 'to disclose fully and truly all material facts necessary for the assessment.

Notice u/s 148 of the Act is, therefore, issued."

20. We have heard the parties and perused the material on record.

20.1 The dispute as taken in the reasons pertains to deduction u/s 80HHC, which according to the AO, has been claimed by the assessee was in excess. The assessee contests the appeal on both the legal ground of the validity of the reopening (vide issue of notice u/s. 148 dated 25.3.2011), as well as on the merits of the adjustment to its income made on reassessment, per its Grounds 1 & 2 respectively. The challenge on the legal ground, which we shall take-up first, is two-fold:

(a) that there was proper consideration by the Assessing Officer (AO) at the time of framing the original assessment u/s. 143(3) on 27.11.2006 (copy of the order on record) PB pgs 14-17), and toward which the Ld. Authorized Representative (AR) would during hearing take us through the details of the information called for (PB. Pgs. 20-23) as well as the assessee's reply thereto (PB. pg 24-32); and 8 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012

(b) that there was true and full disclosure of all material facts necessary for the assessment and, in any case, in respect of the adjustment proposed per the reasons recorded.

We may at this stage clarify that the assessee vide its computation of deduction u/s.80HHC highlighted the fact of the inclusion of processing charges in its' turnover for the year (PB. pgs 28, 30, being Annexure 18 and 8 to its' letters dated 18.8.2006 & 6.9.2006 respectively), the figure of which for the year (at Rs. 1860.57 lakhs) stood brought out clearly in its' annual accounts (PB. pgs. 45-55, per Schedule 9/PB pg. 53). Further, the deduction u/s. 80HHC had been claimed and allowed in assessment by:

(i) including the processing charges in the quantum of the total turnover; and

(ii) without excluding 90% thereof in computing the 'profits of the business' under Explanation (baa) to sec. 80HHC.

The said non-exclusion, i.e., at 90% of the job work charges, under Explanation (baa), being contrary to the judgment of the apex court in ITO vs. Ravindranathan Nair (2007) 295 ITR 228 (SC), forms the sole basis of the Revenue's reopening of the assessment, and for which reference may be made to the reasons recorded u/s. 147, reproduced at para 2 & 2.1 of the impugned assessment order and the appellate order u/s. 250(6) respectively.

20.2 The assessee's argument of it being a case of change of opinion on the part of the AO would be of no consequence. We are, though, for the reasons stated hereinafter, unable to agree with the ld. CIT(A) that the AO did not consider the said aspect of the deduction u/s. 80HHC. True, no query was put by the AO during the assessment with regard to excluding 90% of the processing charges, i.e., toward computing 'profits of the business'. However, it cannot be said that he overlooked the said matter, or had not applied his mind to it. In our view, he was in conscious agreement with the said exclusion by the assessee, which is patent from the detailed computation of deduction u/s.

9 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012 80HHC, furnished twice, as noted above, during the course of the assessment proceedings. The processing charges were considered by him as a part of the assessee's operational income and, thus, a constituent of the turnover. There was, accordingly, no question of deduction of 90% thereof, which is only in respect of independent incomes, which had no relation with an assessee's turnover. Clearly, therefore, the AO regarded the processing charges as a part of the assessee's turnover, while the exclusion under Explanation (baa) to s. 80- HHC was only qua incomes which had no element of turnover.

We are, therefore, unable to agree with the ld. CIT(A) that the AO had not considered this aspect of the matter while examining and allowing deduction u/s. 80HHC. The same is essentially a matter of fact, to be gathered from the entirety of the facts and circumstances, including the given position of law, so that the reliance on the decision in the case of Piaggio Vehicles Pvt. Ltd. vs. Dy. CIT, reported at 290 ITR 377 (Bom) and CIT vs. Popular Vehicles and Services Ltd. (2010) 191 Taxman 333 (Ker) would be of little moment. The A.O., in our view, was in conscious agreement with the assessee's working on this aspect of the matter. In fact, his view was in conformity with the ruling decision by the hon'ble jurisdictional High Court rendered in the case of CIT vs. Bangalore Clothing Co. (2003) 260 ITR 371 (Bom) (dated 15.01.2003), which though cautioned that the AO shall in each case have to ascertain the nature of the income liable for exclusion under Explanation (baa) to s. 80-HHC depending upon its genesis and the assessee's business activities.

The said view by the AO, however, amounts to little in view of the subsequent (i.e., dated 13.11.2007) decision by the apex court in the case of Ravindranathan Nair (supra), holding of both, the inclusion of the processing charges as part as part of total turnover of the assessee, as well its exclusion (at 90% thereof) in arriving at the 'profits of the business' under Explanation (baa) to section 80HHC. It is trite law that the decision of the apex court settles the law as it always was, i.e., since the cooption of the relevant provision (or part thereof) on the statute book. Timing of the decision, either preceding or 10 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012 subsequent to the assessment or an order, is thus rendered of no consequence. The law consequentially admits of no debate, and no view contrary thereto can hold. The Revenue would even be perfectly justified in law to move a rectification under section 154. Why, the Mumbai Benches of this Tribunal are in the regular course admitting and allowing petitions by the assessees u/s. 254(2) of the Act for allowing their claim u/s. 80HHC following Topman Exports vs. CIT, reported at [2012] 342 ITR 49 (SC), rectifying its earlier orders rendered following the decision by the hon'ble jurisdictional High Court in CIT vs. Kalapataru Colours & Chemicals [2010] 328 ITR 451 (Bom), since reversed by the apex court therein. Reference here may also be made to the decision by the apex court in the case of Asst. CIT v. Saurastra Kutch Stock Exchange Ltd. [2008] 305 ITR 227 (SC). As such, whatever the AO's opinion may be worth, it is no opinion in the eyes of law. It would not, therefore, qualify to be an opinion in law, liable for being rectified, and the instant case, consequently, as a case of change of opinion.

At the same time, however, the reassessment notice u/s. 148, issued on 25.3.2011, is beyond a period of four years from the end of relevant assessment year. Where, therefore, the original assessment, as in the instant case, is u/s. 143(3), reassessment proceedings could be initiated only where the escapement of income from assessment is by reason of a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. This constitutes the second limb of the assessee's argument, which we observe to have, in fact, not been answered by the ld. CIT(A) (refer para 2.2 of the impugned order). We have held that the matter had been, as a matter of fact, considered by the AO in the original assessment. The question of the assessee therefore not disclosing fully and truly all the facts in relation to processing charges earned for the year, or of the manner in which the same had been considered by it in computing the deduction u/s. 80HHC, i.e., which constitutes the reason for reopening, which has been abundantly referred to hereinabove and, thus, of any improper disclosure by it, does not arise.

The obligation of the 11 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012 assessee's extends to only disclosing the primary facts, and not in the manner in which the same is to be pursued or otherwise utilized in assessing the total income by the assessing authority. Rather, we have noted the AO's view in its respect to be in fact in conformity with the decision rendered by the hon'ble jurisdictional High Court in the case of Bangalore Clothing Co. (supra), so that he was in any case bound to follow the same. Accordingly, any other view by the AO at the relevant time was liable to be considered as 'mistaken'. The time limitation prescribed under proviso to section 147, would therefore operate to render the AO's notice u/s. 148, being issued after four years from the end of the relevant assessment year, as bad in law. The reassessment proceedings are without jurisdiction, and the resulting assessment, therefore, void in law. We may further add that our decision, apart from have being covered by the express language of the provision of section 147, stands in fact settled by the apex court per its decision in the case of Dy.

CIT vs. Simplex Concrete Piles (India) [2013] 358 ITR 129 (SC), affirming the decision by the hon'ble High Court, reported at 262 ITR 605 (Cal). We decide accordingly.

We have, accepting the assessee's Gd. # 1, raising a legal ground, held the reassessment proceedings as bad in law, do not therefore consider it necessary to address the assessee's Gd. # 2. We decide accordingly.

21. In the result assessee's appeal for A.Y. 2004-05 is allowed Order pronounced in the open court on 27th February, 2015

Sd/- Sd/-

िववेक वमा ) (िववे संजय अरोरा) (सं अरोरा याईक सद य लेखा सद य (Vivek Varma) (Sanjay Arora) Judicial Member Accountant Member

Mumbai, Date: 27th February, 2015 त/Copy to:- 1) अपीलाथ /The Appellant. 2) यथ /The Respondent. 12 The Indian Smelting and Refining Company Ltd ITA 2942/M/2012 ITA 2941/M/2012 3) The CIT(A) -22, Mumbai. 4) The CIT-10, Mumbai/CIT -10, Mumbai.

5) वभागीय त न!ध "आईG", आयकर अपील य अ!धकरण, मुंबई/ The D.R. "I" Bench, Mumbai.

6) गाड' फाईल Copy to Guard File.

आदे शानुसार/By Order

उप/सहायक पंजीकार आयकर अपील य अ!धकरण, मंब ु ई Dy./Asstt. Registrar I.T.A.T., Mumbai

*च हान व.िन.स *Chavan, Sr.PS