TaxTMI 
TaxTMI 
2016 (5) TMI 1177
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....llowing grounds, which may kindly be considered without prejudice to one another Ground 1: Order contrary to law, facts and is violative of principles of natural justice 1.1 The impugned order is grossly without jurisdiction, unjust, unlawful and bad in law, as the same is contrary to the express provisions of the Act and facts. as also the law as laid down by Hon'ble Court(s). Further impugned order reached wrong conclusions without affording complete opportunity to the Appellant to meet all the new objections/ grounds stated therein. Ground 2: Initiation of reassessment proceedings is without jurisdiction, illegal and untenable 2.1 The impugned order erred in upholding the validity of reassessment proceedings and failed to appreciate that proceedings initiated under Section 147 of the Act are invalid, unlawful and grossly without jurisdiction, as preconditions prescribed in law were not satisfied 2.2 The impugned order proceeds on unsubstantiated presumptions while completely ignoring correct and relevant facts on record to erroneously uphold the exercise of jurisdiction under Section 147 of the Act by wrongly relying on the decisi....
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....ating that the Appellant's claim of depreciation on "Goodwill" amounting to Rs. 6,56,25,000 is as per provisions of Section 32(1)(ii) of the Act is therefore, fully justified in law. 4.2 The learned CIT(A) has erred in not following Court decisions including that of the Honble Supreme Court of India in the case of CIT v. SMIFS Securities Ltd. 348 ITR 302 and the decision of the Hon'ble Delhi High Court in the case of CIT v. Hindustan Coca Cola Beverages (P) Ltd. 331 ITR 192. 4.3 The learned CIT(A) has erred in lightly disregarding various submissions filed by the Appellant during the course of appellate proceedings and in upholding the disallowance by wrongly and mechanically relying on decision in orders relating to subsequent years without citing any valid reasons. Further, the Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before, or at the time of hearing of the appeal." 3. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and sale of garments. Return ....
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....t substantiate with whom from South Elegant he had interacted or even to say where this deal was entered into and when. Surprisingly this agreement was cancelled on 26.10.2005 though it was made for a period up to 2012 and the so called termination is done again through a three line letter and huge sum running into tens of crores rupees has been paid by the assessee company towards termination fee. The genuineness of this Info Trekking and Delivery schedule expenditure was not proved by the assessee to the satisfaction of the Assessing Officer and even the assessee could not prove the legality of this document as the document in question was on a plain sheet of paper, neither registered nor notarized or either witnessed by any person or even does not have the name of the authorized person as such. Furthermore the assessee company could not prove beyond doubt the necessity of such expenditure as this kind of expenditure is unknown in this line of trade. Accordingly in the order passed u/ s 143(3) for A. Y. 2006- 07 the expenses debited under this head of Rs. 10,68,71,384/ - was disallowed and added to the returned income. Similar nature of expenditure has been debited by the assesse....
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....s claimed that sales are the backbone of any business and the south Elegant Limited track the requirement of the customers and ensure that the assessee company get orders. The transactions are all entered in the assessee's books. The payments to the parties are through banking channel. The turnover for the year under assessment is close to Rs. 166,17,14,885/- and the same was capable of being achieved only on account of the support given by the agents of the assessee company in sending the timely information and support to ensure that orders are placed to the assessee company. The assessee company has paid the Commissioner to South Elegant Limited of Hong Kong and this party has not come to India to the best of their recollection. The customers visit G- Star International B.V. Netherlands and visit the assessee's factory at the instance of the above agent. Copies of invoices raised by the above party has also been filed along with the copies of letters of agreement with them. Documents such as ledger extracts as appearing in the books of the assessee company towards these expenses are also filed. It is claimed that the payments are made through authorised dealers and they a....
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....nts. During the course of Survey on 5.11.2009, a statement on oath of Shri. V. Sreedhar, General Manager (Fin) of the company was recorded confronting him about the details of the above payment, genuineness thereof and the business relevance of the expenditure. Later, the said points were confronted to Mr. Anuparn Kothari, Managing director of the company who also could not satisfactorily explain the various aspects. The Managing Director of the company (Mr. Anupam Kothari) has been living in Italy / Monte Carlo since last 10 years and the major dealings of the company including the export of finished garments and import of fabric etc., are with Italian based companies though in a few cases the sales / purchases have been made from Netherland based companies also. Keeping this in view and the unsatisfactory reply forthcoming from the General Manager (Fin) and the Managing Director of the company, I hold that it is highly unlikely as to why the assessee company will pay such huge amount to non resident company at Hong Kong. I hold that the payment made to Gruyters Agenturen B.V and South Elegant of Hong Kong is not genuine payment which is wholly and exclusively necessary for earnin....
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....ng such business as to make it eligible to receive such payment. During the course of assessment proceeding the AR was asked to furnish proof as to confirm that such company own manpower, machineries and technology to provide the tracing services but no proof was furnished. It is not out of place to mention here that on the similar issue an addition of Rs. 10,68,71,384/- was made for the AY 2006-07 and against this order assessee preferred appeal and this ground of appeal was dismissed by the CIT(A) vide ITA No. 63 & 97/DC 11(3)/A-1/09-10 dated 11.8.2010 holding that: - the agreement in question is on a plain sheet of paper, not enforceable in the court of law and cannot be held as a contract at all. - the assessee has not produced any documentary evidence in support of the claim that a company by name South Elegant Limited by filing copies of incorporation certificate, commencement of business certificates, Memorandum and Articles of Association, exact location of the place of business, nature of its activity, financial statement, the audit ports etc. etc. either at assessment stage or at the stage of appeal though the onus of proving the genuineness of transacti....
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....r submitted that based on the reasons recorded, reassessment proceedings cannot be upheld, as the reasons recorded only lead to a suspicion and not to reasons to believe. In support of this proposition, he relied on the decisions of the Hon'ble Apex Court in the Sheonath (supra) and ITO vs. Lakhmani Mewal Das (103 ITR 437). On merits of disallowance of commission expenditure, learned counsel for assessee submitted that the following material was produced before the AO during the course of the original assessment proceedings in support of the claim for deduction of commission expenditure: (i) copy of the agreement (ii) audited financial statement (iii) invoices raised and (iv) proof of payment through banking channel, He controverted the allegation of the AO that discreet enquiry revealed non-existence of the service provider. He further submitted that the agreement copy with service provider was produced before the department during the course of TDS proceedings. Therefore, according to him, there was no basis for the AO to disallow the commission expenditure. On the issue of allowance of depreciation on goodwill, learned counsel for assess....
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....eeking information as to the nature, name and address of the service provider and mode of payment, details of payment etc., but undisputedly the AO had not inquired into the aspect of rendering of services by the recipient of the commission payment. The AO sought to reopen the assessment on the ground that during the course of survey operations conducted on 5/11/2009, it was found that the assessee-company had incurred huge expenditure in the nature of Info Tracking and Delivery schedule, which is said to be paid to foreign companies viz., M/s.South Elegant Ltd., Hong Kong as per agreement entered into between assessee-company and M/s.South Elegant Ltd., on 1/7/2002. Subsequent to the survey operations, when the statement was recorded from the managing director of the assessee-company Shri Anupam Kothari, he failed to substantiate the agreement and payments made pursuant to this agreement. According to the AO, the answers to the queries were evasive and the genuineness of the expenditure was not proved by the assessee to the satisfaction of the AO. It was further stated by the AO that during the course of assessment proceedings for the assessment year 2005-06, the assessee-company ....
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.... AO from the angle whether the reasons recorded could have enabled the AO to form a belief or reason to believe that 'income escaped assessment'. (a) The AO noticed that the expenditure incurred on info tracking and delivery, was huge. This is only an opinion or view and this cannot be treated as a tangible material which would have enabled the AO to form a belief that income escaped assessment. It is settled law that an opinion cannot be a basis for reopening the assessment. The Hon'ble Supreme Court had an occasion to deal with the validity of the re-assessment proceedings in a case where the re-assessment was based on the report of a District Valuation Officer. The Hon'ble Supreme Court held that the opinion cannot be a basis for re-assessment proceedings and it has to be based on the facts [ACIT vs. Dhariya Construction Co. (328 ITR 515)]. Therefore, this reason, as recorded by the AO, cannot form the basis for the reason to believe that income escaped assessment. (b) and (c): On perusal of the queries posed to the Managing Director (MD) of the assessee-company, during the course of survey proceedings, we find that the AO was trying to find out from the MD about th....
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.... or that in fact any profit was earned". InCIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 (SC), it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand [1938] 6 ITR 636 (HL) that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), and it was observed as under: - "We fail to app....
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....hat addition on account of this expenditure was made by the AO on account of failure of the assesseecompany to adduce evidence in support of the services rendered by recipients of commission payment. The appeal filed by the assessee-company before the ld.CIT(A) was dismissed. On further appeal before the Hon'ble Tribunal, prayer of the assessee-company for admission of additional evidence in support of services rendered by the foreign agents came to be accepted by the Tribunal and the matter was restored to the file of the AO for fresh adjudication. The relevant paras viz paras 5.10 to 5.12 of the assessment order for assessment year 2006- 07 are reproduced below: "5.10 The assessee company is engaged in manufacturing and exporting of denim based garments. At the outset, the assessee has produced the original service agreement document, dated 1st July 2002, for verification. The copy of the said service agreement, claimed to have been made on 01.07.2002, between the assessee company and the South Elegant Ltd., Hong Kong, as supplied by the assessee company reflect the certain important aspects as discussed in para 4.10 of this order, but for clarity mentioned again as unde....
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....ensation payable for the termination of the agreement has been calculated with reference to the commission payments of the calendar year 2004 which is maximum since the agreement is entered. xiv. When there is a separate letter of arrangement dated 01.04.2005 for payment of charges for "Info & Tracking of Delivery Schedule" to the concerned non residents the need for such an separate agreement on 01.07.2002 with SEL alone and its cancellation within a short period of less than three years is not clearly explained and this gives rise to doubt as to the genuineness of the agreement and existence of the said party. 5.12 All the above unusual aspects of the case gave rise to a doubt as to the genuineness of the very document. The discreet enquiries caused revealed that the South Elegant of Hong Kong is likely to be a nonexistent concern. Further, without accepting and for a while it is assumed that there existed a concern by said name at Hong Kong, from the explanation given by the assessee company in its various replies whether the said concern had necessary infrastructure or expertise or man power to render the required services as per the agreement in Italy is agai....
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.... make addition only by inferences drawn, this is very clear from the perusal of the assessment order, as extracted above. (ii) The Hon'ble Supreme Court in the case of Ess Ess Kay Engg. Co.(P) Ltd. Vs. CIT (247 ITR 818) and Phool Chand Bajrang Lal vs. ITO (203 ITR 456) held that information obtained in the subsequent assessment proceedings could lead to a belief that income chargeable to tax had escaped assessment even though the transaction in question had been examined during the course of original assessment proceedings. This ratio was followed by the Hon'ble Bombay High Court in the case of Multiscreeen Media P. Ltd. vs. Union of India (324 ITR 54). As mentioned supra, no new tangible material was brought by the AO in the present case. Therefore, the ratio laid down in those cases is not applicable to the facts of the present case. (iii) The decision in the case of Multiscreeen Media P. Ltd (supra) was considered subsequently by the same High Court in the cases of NYK Line (India) Ltd. Vs. DCIT (346 ITR 361) and CIT vs. Srusti Diam (57 Taxmann.com 392)(232 Taxman 127) and held that in the absence of fresh tangible material in the subsequent assessment proceeding, the subs....
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....en disallowed to the extent the same were found bogus. This conclusion/opinion formed by the Assessing Officer in the subsequent Assessment Year which is treated as tangible material by the Revenue to reopen the proceedings. There can be no manner of doubt that material obtained during the assessment proceedings for another year can form the basis of re-opening of an assessment. However, the re-opening of an assessment cannot be on the basis of a material which has already been considered during the regular assessment proceedings by the Assessing Officer. The decision relied upon by the Revenue in the matter of Multiscreen Media (supra) was considered by this Court in its subsequent decision in NYK Line (India) Ltd. v. Dy. CIT [2012] 346 ITR 361/211 Taxman 185 (Mag.)/28 taxmann.com 229 wherein the at para 18 the following observations is made:- "18:- Consequently and in this background the mere fact that the Assessing Officer for the assessment year 2007-08 had come to a different conclusion would not justify the reopening of the assessment for the assessment year 2006-07. In order to establish that the reopening of the assessment for the assessment year 2006-07 is not a m....
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....re-opening of the earlier assessment order only in the event fresh tangible information was brought on record in the subsequent assessment years contrary to the material already on record in the earlier assessment year. (v) The facts of the present case are similar to the above cases dealt by the Hon'ble High Court of Bombay. Therefore, in the absence of any fresh tangible information brought on record in the assessment year 2006-07, the re-assessment proceedings are vitiated by change of opinion. Even the Hon'ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd., (320 ITR 561) emphasized that the reasons to believe must be based on fresh tangible material, not on the change of opinion. The relevant observation is as under: "6. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from 1st April, 1989), they are given a goby and only one condition has rem....
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....e same facts and material which was available with the ITO at the time of original assessment proceedings. The two situations are distinct and different. ........" (vi) Again, the Hon'ble Supreme Court, in the case of Ram Bai vs. CIT (236 ITR 696), reiterated the above position that in absence of any fresh tangible material, subsequent assessment cannot be the basis for reopening the assessment for earlier assessment year. (vii) In the instant case, AO had drawn fresh inference on the same set of facts which were available with AO. AO had not referred to any fresh material or information which led him to believe that income escaped assessment. Therefore, the assessment order for assessment year 2006-07, in the instant case, cannot be the basis to form a belief that income escaped assessment for assessment year in question. (f) The last reason assigned by the AO to form a belief that income escaped assessment is that the issue of claim for allowance of commission expenditure was not examined by AO during the course of original assessment proceedings. (i) Now, in this background, the facts of the present case have to be evaluated. The claim for allowing commission pay....
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....sion was subsequently referred by the Hon'ble Supreme Court in the case of CIT vs. Burlop Dealers Ltd. AIR 1971 SC 635 and held that if the assessee disclosed primary facts relevant to assessment, he is under no obligation to instruct the ITO about the inference, which the ITO may draw from those facts. This position was again reiterated by Hon'ble Supreme Court in subsequent decision in the case of ITO vs. Madnani Engineering Works Ltd. (118 ITR 1). (iv) In the case of CIT v. Kelvinator of India Ltd (256 ITR 1)(Del), the Hon'ble Delhi High Court, observed that an order that has been purportedly passed without application of mind could not itself confer jurisdiction upon the AO to reopen the proceeding "without anything further" as that would amount to "giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong". (v) In CIT v. Usha International Ltd (348 ITR 485) (Del), Full Bench of the Hon'ble Delhi High Court observed that there can be cases where an AO may not raise any written query but still the Assessing Officer in the first round/original proceedings may have examined the subject matter because the aspect or question m....