Case Law Details

Case Name : DCIT Vs Sopariwala Exports (ITAT Mumbai)
Appeal Number : ITA Nos. 3037, 3038, 3040 and 3077/Mum/2014
Date of Judgement/Order : 17/01/2018
Related Assessment Year : 2004-05 to 2006-07

DCIT Vs Sopariwala Exports (ITAT Mumbai)

So far as the facts are concerned, it is uncontroverted position as noted by the learned Commissioner (Appeals) that no incriminating material was found in the search operations qua the additions and the additions were not based on any incriminating material. The original assessment under section 143(3) had already completed on 26-12-2006 whereas the search took place on 29-4-2008 which clearly reflect that no assessment was pend­ing on the date of search operations and no proceedings have abated on the date of search. Therefore, we find that, at the moment, the issue stood squarely covered in the assessee’s favour by the cited decision of the juris­dictional Bombay High Court as rightly noted by the learned Commissioner (Appeals). Similar view has been taken by the Hon’ble Delhi High Court in CIT v. Kabul Chawla (2016) 380 ITR 573 (Delhi). Further, upon a perusal of SLP No. 18560 of 2015 dated 12-10-2015 admitted by the Hon’ble Supreme Court against the decision of the Hon’ble Bombay High Court rendered in CIT v. Continental Warehousing Corpo­ration (supra), we find that the Hon’ble Apex Court has only admitted a special leave petition against the ruling of the Hon’ble Bombay High Court’s finding that no addition can be made in respect of assessments which have become final if no incriminating material is found during search or during section 153A proceedings.

FULL TEXT OF THE ITAT JUDGMENT

The captioned appeal by the assessee as well as the Revenue for the assessment years 2004-05 to 2006-07 contest a common order of the learned Commissioner (Appeals)-37 (CIT(A)), Mumbai, Appeal Nos. CIT(A)-37/IT 509 to 513/ACCC-44/12-13 dated 24-2-2014. Since common issues are involved, we dispose of the same by way of this common order for the sake of convenience and brevity. First we take up ITA No. 3040/Mum/ 2014 which is the Revenue’s appeal for the assessment year (AY) 2004-05 by raising the following grounds of appeal :–

“1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in allowing the commission paid to the overseas agent M/s. Khadlaj Perfumes LLC, for the assessment year 2004-05 without appreciating the fact that the assessee was unable to prove the need for commission at 25 per cent, paid to M/s. Khadlaj Perfumes LLC, whereas the commis­sion incurred with other parties was at 0.5 per cent, to 5.85 per cent.”

2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals), erred in deleting the addition made in respect of the loan advanced to the associated enterprises, M/s. Mellow Commodities SDN. BHD at the arm’s length price, without appreciating the fact that section 92 of the Income Tax Act is clearly applicable to the transaction made with the associated entity.

3. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals), erred in allowing the appeal of the assessee placing reliance on the decision of the juris­dictional Hon’ble Income Tax Appellate Tribunal, Mumbai Bench (Special Bench) in the case of All Cargo Global Logistics Ltd. v. Deputy CIT (2012) 18 ITR (irib) 106 (Mumbai) (SB); (2012) 137 ITD 287 (Mum), whereas the decision in All Cargo Global Logistics Ltd. has been further contested in appeal and the decision of the Hon’ble Mumbai High Court is still pending.

4. The appellant prays that the order of the Commissioner (Appeals), on the above grounds be set aside and that of the assessing officer be restored.”

2. Facts, in brief are that the assessee being a resident firm engaged in the business of exports of tobacco products and other items was subjected to an assessment under section 143(3) read with section 153A for the impugned assessment year on 31-12-2010. Consequent to search action under section 132 on the Sopariwala group of cases on 29-4-2008, the assessee being part of the group, was also covered under the same. Accordingly, notices under section 153A were issued for the assess­ment years 2003-04 to 2009-10 on 29-1-2010, pursuant to which the assessee filed returned income of Rs. 752.43 lakhs on 4-3-2010. The original income was determined under section 143(3) on 26-12-2006 at Rs. 906.08 lakhs. The assessment under section 143(3) read with section 153A was completed by the learned Assistant Commissioner, Central Circle-44, Mumbai (AO) after making certain quan­tum additions of Rs. 384.10 lakhs. The quantum additions pertained to commission disallowance of Rs. 370.43 lakhs paid to an entity namely Khadlaj Perfumes LLC and the disallowance of interest for Rs. 13.66 lakhs being proportionate interest at 10 per cent, on certain interest-free loans advanced by the assessee to its associated enterprises namely Mellow Commodities SDN BHD.

3. Aggrieved the assessee contested the same with success before the learned Commissioner (Appeals) vide impugned order dated 24-2-2014 where the assessee while contesting the impugned addi­tions drew attention to the fact that the assessment for the impugned assessment year was not pending on the date of search and had not abated in terms of section 153A and therefore, the additions, which were to be made by the learned assessing officer could be qua incriminating material found during the search operations only and since no incriminating mate­rial was found in the search, the impugned additions were not justified. The learned Commissioner (Appeals), after appreciating the factual matrix and the assessee’s various contentions, concurred with the stand of the assessee by making the following observations :–

5.9.32 From the discussion above, it is noted that annexure A-5 referred to in the assessment order is a loose paper file comprising mainly of unaudited balance-sheet and stock report as on 31-3-2008 in respect of various group companies. There is no incriminating document brought on record by the assessing officer in respect of the disallowance of commission expenses. The commission was being paid even prior to the assessment year 2004-05 and even in respect of Afzal Pandharpuri. Commission payment even at rate of 32 per cent, had been incurred in the earlier years. Scrutiny assessments were made for the assessment year 2004-05 and the assessment year 2005-06, prior to search, and no disallowance of commission expenses were made. There is a generally accepted practice and the requirement of appointing a local agent for business in Middle East. From the details of country-wise exports called, it is observed that sales to the UAE and Yemen fell at the end of 2002-03 and beginning of the financial year 2003-04. The exports of Afzal Pandharpuri to the UAE fell from Rs. 7.45 crores in the financial year 2002-03 to Rs. 6.36 crores in the financial year 2003-04. Similarly exports to Yemen fell from Rs. 2.53 crores in the financial year 2002-03 to Rs. 1.61 crores in the financial year 2003-04. This corroborates the claim of the appellant that its sales were getting affected by availability of spurious and duplicate products necessitating appointment of a strong sales agent. The sales of branded product Afzal Pandharpuri went up manifold, both in terms of value and quantity, even after increasing the sales price, after the appointment of Khadlaj Perfumes LLC, Dubai. The details of the commission agent giving the name and address was furnished. The assessing officer did not seek verification of details regarding the foreign agent by using the Double Taxation Avoidance Agreement provisions for exchange of information and unreasonably insisted on the appellant to furnish financial statements, tax returns of its foreign agent and insisted on the production of the foreign agent before the assessing officer. The assessing officer selectively looked at the financial data ignoring the increased profitability in the later years which were available at the time assessment was completed, thereby concluding that the commission agent was appointed to siphon out money. The assessing officer ignored evidence on record at the time of post-search investigation showing commission payments as high as 32.4 per cent., thereby erroneously concluding that the rate of commission to Khadlaj Perfumes LLC was very high. The overall export over the period assessment year 2004-05 to the assessment year 2009-10 shows that the sales targets were achieved. The assessing officer ignored the evidence in support of services provided by the agent such as e-mail, elimination of spurious products and action against infringement of copyrights, confirmation of the commission agent, evidence of sales executed with the help of the agent. These evidences support the case of the genuineness of commission payment. The commission payments and the rates are disclosed in the application filed with the RBI which has allowed the same. In the case of commission exceeding 12 per cent., the details have to be mentioned and remittance of commission requires the RBI approval. It is reasonable to expect that the appellant cannot force the foreign commission agent to furnish its audited financial statements and tax returns and to force the principal officer of the foreign agent to appear before the assessing officer. That the issue of commission expenses was taken up through the assessing officer’s letter dated 8-12-2010 and the appellant’s reply dated 22-12-2010, supports the grievance of the appellant that reasonable opportunity was not given to it in the assessment proceedings. The assessment order and the remand report indicates that the assessing officer’s emphasis is on the appellant maintaining meticulous documentary evidences for commission expenses. The appellant is not incorrect in claiming that business is not run with an eye on creating documentary evidence for everything. The disallowance cannot be made for the assessment year 2004-05 and the assessment year 2005-06, sans incriminating docu­ments, as per the ratio of the decision of the Special Bench in the case of All Cargo (supra). In view of the above facts and discussions, the action of the assessing officer in disallowing the entire commission expenses is not tenable on the merits. As regards the alternative contention of the assessing officer, I have already discussed earlier that the assessing officer has selectively considered the rates of commission without spelling out any reason. This action of the assessing officer is biased. Further, I am unable to agree with the view of the assessing officer that even if the commission services is held as genuine, part of the payment should still be disallowed as unreasonable. Once the services is held to be genuine, it is not for the assessing officer to sit in the judgment on the reasonableness of the payment. In any case there is no evidence that the payment has been siphoned off. The commission agent is an independent third party. I therefore do not uphold the alternative argument of the assessing officer. Ground of Appeal No. 8 is allowed for all the assessment year 2004-05 to the assessment year 2008-09

Similarly, the disallowance of proportionate interest on interest-free advances given by the assessee was deleted by the learned Commissioner (Appeals) by noting that the advances were subsequently converted into share capital and the said transactions were duly approved by the RBI. Finally, the matter was concluded in the following manner :–

5.10.6 It is noticed that in the assessment order there is no refer­ence to any incriminating seized material found during the course of search on this issue. As discussed earlier in respect of the disallow­ance of commission, the Hon’ble Income Tax Appellate Tribunal Special Bench in the case of All Cargo Global Logistics Ltd. v. Deputy CIT (2012) 18 ITR (Trib) 106 (Mumbai) (SB) ; (2012) 137 1TD 287 (Mum)has held that in respect of completed assessments, no addi­tion can be made which is not based on any incriminating material found in the course of search. To that extent such addition in the present case cannot be made up to the assessment year 2006-07.

5.10.7 Coming to the merits of the case it is seen that the assessing officer has not examined the nature of transaction carefully. First, there is ample evidence that the amount advanced by the appellant to its subsidiary was for investing in its equity. The assessing officer has not noticed that the first trash of the loan was already converted into equity amounting to Rs. 66,99,900 equivalent to USD 1,50,000 in the first year itself (calendar year 2004). Even the subsequent remittances to the extent of Rs. 21,66,09,171 equivalent to USD 49,00,000 remitted between 14-1-2004 and 31-1-2005 was subsequently converted entirely into shares on 14-12-2007. Thus on the date when assessment order was passed on 31-12-2010, there was no doubt that the entire amount had been converted into equity. In the case of Micro Inks Ltd., the Hon’ble Income Tax Appellate Tribunal, Ahmedabad Bench in its order dated 6-8-2013 has examined this issue. The Hon’ble Bench has considered the earlier Tribunal decision referred to by the assessing officer. The facts of Micro Inks Ltd. are similar to the facts of the appellant. In that case also the amount advanced was eventually converted into equity capital and advances were made from the EEFC account. The Hon’ble Tribunal noted that the loan was in the nature of quasi-capital and that it was not open to the assessee to subscribe to the equity capital without the permission of the RBI. To that extent the Income Tax Appellate Tribunal distinguished the facts from the facts of the case Perot Systems Ltd. which has been relied upon by the assessing officer. For the detailed reasons mentioned therein, the Tribunal came to the conclusion that no arm’s length price adjustment was warranted in that case.

5.10.8 Coming to the case of the appellant, it is seen that the facts are similar to the case decided by the Income Tax Appellate Tribunal, Ahmedabad Bench. From the copies of the audited accounts of the subsidiary filed in the appellate proceedings, it is seen that the authorised capital of the subsidiary was 100000 MYR at beginning of the calendar year 2003 which increased to 500000 MYR by the end of 2003. This again was increased to 1000000 MYR by the end of the calendar year 2004. In the calendar year 2006, MYR 430300 was shown as share application money. In the calendar year 2007, the total share capital went up to MYR 190,42,700 and the share appli­cation money was converted into equity. Further, the assessing officer has made halfhearted attempt at determining the comparable. He has taken the LIBOR rate to be uniform six per cent, for the entire period of the financial year 2003-04 to the financial year 2007-08 on the dates when the amount was advanced without identifying the LIBOR rate for the specific dates on which the amount was advanced and for specific tenure. Further, there is no basis given for determin­ing the mark-up at of four per cent, over LIBOR. Lastly and most significantly, the assessing officer has not examined the true nature of transaction that the amount was advanced only as subscription to equity capital. The fact that the entire amount advanced was converted into equity was before the assessing officer even as he framed the assessment order. It is a fundamental proposition of trans­fer pricing that the true character of the transaction has to be considered before applying the arm’s length price. The contractual terms, the economic circumstances, the nature of transaction, the business purpose and strategy-all have to be considered before a comparable is sought. In the present case, such an analysis would indicate that the amount was advanced as towards equity and not as commercial loan. There was some delay in converting the advances into equity but the same is explained as delay in getting the necessary approvals. If at all LIBOR is considered, appropriate adjustments have to be made to account for the difference in the transaction being evaluated, which in the present case is quasi-equity. In my view, in the facts and circumstances of this case and the case law in the case of Micro Inks Ltd., the impugned transaction is not in the nature of loan, therefore,, the same cannot be compared with LIBOR rate along with the mark-up. I am unable to uphold on the merits the adjust­ment made as the arm’s length price. The adjustment made for the assessment year 2004-05 and the assessment year 2005-06 is liable to be deleted further also in view of the Special Bench decision in the case of All Cargo (supra). The adjustment computed by the assessing officer is therefore directed to be deleted. Accordingly, the ground of Appeal No. 9 is allowed for all the assessment year 2004-05 to the assessment year 2008-09

Aggrieved, the Revenue is in further appeal before us.

4. The learned Departmental Representative (DR) contended that the payment of commission at such a higher rate of 25 per cent, was not justified and placed reliance on the stand of the learned assessing officer. Per contra, the learned counsel for the assessee (Authorised Representative) contended that the stand of the learned Commissioner (Appeals) was quite fair and logical one in view of the decision of the Hon’ble Bombay High Court rendered in CIT v. Continental Warehousing Corporation (Nhava Sheva) Ltd. (2015) 374 ITR 645 (Bom) and the Income Tax Appellate Tribunal, Special Bench decision in All Cargo Global Logis­tics Ltd. v. Deputy CIT (2012) 18 ITR (Trib) 106 (Mumbai) (SB); (2012) 137 ITD 287 (Mum).

5. We have heard the rival contentions and perused the relevant material on record including the cited case law. So far as the facts are concerned, it is uncontroverted position as noted by the learned Commissioner (Appeals) that no incriminating material was found in the search operations qua the additions and the additions were not based on any incriminating material. The original assessment under section 143(3) had already completed on 26-12-2006 whereas the search took place on 29-4-2008 which clearly reflect that no assessment was pend­ing on the date of search operations and no proceedings have abated on the date of search. Therefore, we find that, at the moment, the issue stood squarely covered in the assessee’s favour by the cited decision of the juris­dictional Bombay High Court as rightly noted by the learned Commissioner (Appeals). Similar view has been taken by the Hon’ble Delhi High Court in CIT v. Kabul Chawla (2016) 380 ITR 573 (Delhi). Further, upon a perusal of SLP No. 18560 of 2015 dated 12-10-2015 admitted by the Hon’ble Supreme Court against the decision of the Hon’ble Bombay High Court rendered in CIT v. Continental Warehousing Corpo­ration (supra), we find that the Hon’ble Apex Court has only admitted a special leave petition against the ruling of the Hon’ble Bombay High Court’s finding that no addition can be made in respect of assessments which have become final if no incriminating material is found during search or during section 153A proceedings. It is seen that the Hon’ble Apex Court has not stayed or suspended the operation of the decision of the Hon’ble Bombay High Court and therefore, at the moment, the decision of jurisdictional High Court is binding on us arid we are bound to follow it.

6. For the sake of completeness, we find that the Hon’ble Delhi High Court in the case of Kabul Chawla (supra) dated 28-8-2015 has summarised the legal position on the issue as under :–

“Summary of the legal position :–

37. On a conspectus of section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the afore­mentioned decisions, the legal position that emerges is as under :–

(i) Once a search takes place under section 132 of the Act, notice under section 153A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six assessment years immediately preceding the previous year relevant to the assessment year in which the search takes place.

(ii) Assessments and reassessments pending on the date of the search shall abate. The total income for such assessment years will have to be computed by the assessing officers as a fresh exercise.

(iii) The assessing officer will exercise normal assessment powers in respect of the six years previous to the relevant assessment year in which the search takes place. The assessing officer has the power to assess and reassess the ‘total income’ of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six assessment years ‘in which both the disclosed and the undisclosed income would be brought to tax’.

(iv) Although section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the assessing officer which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assess­ment has to be made under this section only on the basis of seized material.

(v) In the absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassess­ment can be made. The word ‘assess’ in section 153A is relatable to abated proceedings (i.e. those pending on the date of search) and the word ‘reassess’ to the completed assessment proceedings.

(vi) In so far as pending assessments are concerned, the jurisdic­tion to make the original assessment and the assessment under section 153A merges into one. Only one assessment shall be made separately for each assessment year on the basis of the findings of the search and any other material existing or brought on the record of the assessing officer.

(vii) Completed assessments can be interfered with by the assessing officer while making the assessment under section 153A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. Conclusion

38. The present appeals concern the assessment years 2002-03, 2005-06 and 2006-07. On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed during the search, no additions could have been made to the income already assessed.

39. The question framed by the court is answered in favour of the assessee and against the Revenue.” Respectfully following the binding judicial precedent, we upheld the conclusions drawn by the learned Commissioner (Appeals) and dismiss the Revenue’s appeal.

Revenue’s appeal ITA No. 3037/Mum/2014, assessment year 2005-06

7. The assessee, in the similar fashion suffered quantum additions against commission and interest aggregating to Rs. 637.60 lakhs. The learned Commissioner (Appeals) applying the same logic and reasoning, deleted the same. The order of the first appellate authority is common order from the assessment years 2004-05 to 2008-09. Aggrieved, the Revenue is in further appeal before us and raised identical worded grounds of appeal. Since we have already dismissed the Revenue’s appeal for the assessment year 2004-05 on identical facts and circumstances, taking the same view, this appeal also stand dismissed.

Revenue’s appeal ITA No. 3038/Mum/2014, assessment year 2006-07

8. In this year, the assessee has, inter alia, suffered quantum additions against the commission and interest for Rs. 622.41 lakhs and Rs. 223.37 lakhs which has been deleted by the learned Commissioner (Appeals) on the same logic and reasoning. Aggrieved, the Revenue is in further appeal before us with identical worded grounds of appeal. We find that in this year all facts are similar except for the fact that the original return of income filed by the assessee was processed under section 143(1) on 16-7-2007 and there was no original scrutiny assessment under section 143(3). Be that as the case may be, we find that the time limit for issuance of notice under section 143(2) against the original return of income had already expired well before the date of search i.e. 29-4-2008. We find that this Tribunal in the case of Gurinder Singh Bawa v. Deputy CIT (2016) 386 ITR 483 (Bombay) has applied the ratio of the judg­ment of the Special Bench rendered in All Cargo Global Logistics Ltd. v. Deputy CIT (2012) 18 ITR (Trib) 106 (Mumbai) (SB) ; (2012) 137 ITD 287 (Mum) and held as under :–

“6.1 The Special Bench in the case of All Cargo Global Logistics Ltd. (supra), has held that the provisions of section 153A come into operation if a search or requisition is initiated after 31-5-2003 and on satisfaction of this condition, the assessing officer is under an obligation to issue notice to the person requiring him to furnish the return of income for six years immediately preceding the year of search. The Special Bench further held that in case assessment has abated, the assessing officer retains the original jurisdiction as well as jurisdiction under section 153A for which assessment shall be made for each assessment year separately. Thus in case where assess­ment has abated the assessing officer can make additions in the assessment, even if no incriminating material has been found. But in other cases the Special Bench held that the assessment under section 153A can be made on the basis of incriminating material which in the context of relevant provisions means books of account and other documents found in the course of search but not produced in the course of original assessment and undisclosed income or property disclosed during the course of search. In the present case, the assess­ment had been completed under summary scheme under section 143(1) and time limit for issue of notice under section 143(2) had expired on the date of search. Therefore, there was no assessment pending in this case and in such a case there was no question of abatement. Therefore, addition could be made only on the basis of incriminating material found during search.”

Further, the Revenue’s appeal against the said order of the Tribunal has been dismissed by the Hon’ble Bombay High Court in CIT v. Gurinder Singh Bawa (2016) 386 ITR 483 (Bombay) finding no substantial question of law in the same. Hence, facts being identical, following binding judicial precedent, we dismiss the Revenue’s appeal.

Assessee’s appeal ITA No. 3077/Mum/2014, assessment year 2006-07

9. In this year, the assessee has suffered another quantum addition of Rs. 72.18 lakhs, being expenses incurred for charitable purposes which has been confirmed by the learned Commissioner (Appeals). The learned Authorised Representative, at the outset, drew our attention to the additional grounds of appeal being filed by the assessee vide letter dated 24-10-2017 which reads as under :–

The learned Commissioner (Appeals) failed to appreciate that as the assessment was completed and as no incrim­inating material was unearthed during search, no addition can be made in the assessment order under section 153A read with section 143(3).

Since the same is purely legal ground and do not require appreciation of new facts and therefore, admitted in terms of the ruling of the Hon’ble Apex Court in National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC) and Jute Corporation of India Ltd. v. CIT (1991) 187 ITR 688 (SC).

10. The learned Authorised Representative further drew our attention to the fact that no incriminating material was found during search operation qua this addition as the impugned expenses were already claimed by the asses­see in the regular books of account and hence, the impugned additions were not justified in view of the cited judgment of the Hon’ble Bombay High Court. The learned Departmental Representative, while defending the additions, could not controvert this fact as raised by the learned Authorised Representative.

11. We have carefully heard the rival contention and perused relevant mate­rial on record. In the Revenue’s appeal, we have already noted the strength in proposition raised by the learned Authorised Representative and the same is supported by binding judicial precedents also as already cited by us in paragraph 8. The Revenue could not rebut the contention that the impugned expenditure was not part of the regular books of account main­tained by the assessee. Hence, following the same reasoning, we delete the impugned additions and allow the assessee’s appeal. Since the appeal has been allowed on legal grounds, the necessity of going into the merits become merely academic in nature and hence, not delved into by us.

Conclusion

12. Finally, the three appeals filed by the Revenue stands dismissed whereas the assessee’s appeal stands allowed in terms of our above order.

Download Judgment/Order

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

June 2021
M T W T F S S
 123456
78910111213
14151617181920
21222324252627
282930