TaxTMI 
TaxTMI 
2021 (10) TMI 826
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....ing of assessment u/s.147 of the Act may be declared as bad in law and the reassessment order may please be cancelled. Ground No. 2: On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in affirming the action of the A.O. in making addition of Rs. 10,19,80,709/- in respect of interest on income tax refund to the appellant's total income. 3. The assessee has also raised an additional ground. This ground read as under :- 1. On the facts and in circumstances of the case and in law the Ld. CIT(A) ought to have held that the Education cess and higher and secondary education cess paid by the appellant is allowable as deduction while computing income under the head "Profits and Gains of Business or Profession". 4. The ground of appeal in Revenue's appeal read as under :- 1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs. 332,65,62,293/- on account of Capital Gain". 2. 'On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that scheme of Demerger of Investment undertaking business activity has been carried out under....
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....on'ble Bombay High Court vide its order dated 14.07.2014 in Writ Petition No. 980 of 2014 set-aside the order passed by the Assessing Officer dated 03.03.2014 and directed the Assessing Officer to pass a fresh order after disposing off the objections filed by the assessee. The assessee filed its objections vide letter dated 25.07.2014 before the Assessing Officer. The same were disposed off by the Assessing Officer vide order dated 19.12.2014. Subsequently, the Assessing Officer passed the impugned assessment order under Section 143(3) r.w.s 147 of the Act dated 31.03.2015 wherein addition on account of interest on income tax refund and long term capital gains, rejecting the demerger under Section 47(vib) r.w.s2(19AA) of the Act, was made. This order is the subject matter of dispute in the captioned proceedings. Before CIT(A), assessee reiterated this objections raised before the Assessing Officer with respect to the validity of reassessment proceedings.. It was further submitted that no fresh material was available with the Assessing Officer for reopening the assessment and hence, the reopening made by the Assessing Officer was bad in law. The CIT(A) did not agree with the con....
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....ate of issuance of notice u/s 148 of the Act, no new tangible material came in the possession of the Assessing Officer, hence the reopening of assessment based on the notice dated 08/03/2013 is bad in law. In support of the above, reliance was placed on the judgment of the Hon'ble Bombay High Court in case of Asian Paints v. Dy. CIT 308 ITR 195 (Bom.) and decision of CIT Vs. Jet Speed Audio Pvt. Ltd. (ITA No. 285 of 2013 vide order dated 28.1.2015). At this stage, reference has been made to the reasons recorded for issuance of 1st notice u/s 148 of the Act dated 08.03.2013, which reads as under:- "The assessee company, during the year, has credited Profit & Loss Account by Rs. 1503.65 lakhs under the head refund & interest on income tax refund. Interest on income tax refund has not been offered to tax. Therefore, I have reason to believe that income chargeable to tax has escaped assessment due to failure on part of the assessee to disclose truly all material facts necessary to assessment." 7. On merits, it was submitted by the learned Counsel of the assessee that interest on income tax refund received by the assessee cannot be taxed in the current year as the assessee follow....
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....ice issued under Section 148 of the Act is valid. 9. Insofar as, the 2nd notice issued on 25/03/2013 is concerned, it was explained that the Assessing Officer has sought to reopen the assessment on the ground that the capital gains arising on demerger have not been offered to tax. The reasons for issue of 2nd notice have been referred to which read as under: ( as per letter of Assessing officer dated 06/12/2013):- "In the A.Y. 2008-09 it is observed that M/s, CHI Investments Ltd. demerged from assessee company. It resulted in capital gains arising to the tune of Rs. 318 crores in the hands of the assessee company which have not been offered to tax. M/s. Ceat Ltd. (demerged company) had demerged its investments to M/s. CMS Investments Ltd., then a scheme of arrangement approved by Hon'ble Bombay High Court w.e.f 1/7/2007. As per the scheme, shares of non-tyre business were hived off from M/s, Ceat Ltd. to M/s. HI Investments Ltd. As per annual reports Of the assessee company for F.Y. 2005-06 and 2006-07, it is seen that M/s. Ceat Ltd. is engaged in one segment "tyre business". No specific/dedicated employees were earmarked to look after investment portfolio. No fresh investme....
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.... the knowledge of the Assessing Officer subsequent to the order passed under Section 143(3) of the Act dated 28.12.2010. In the absence of any new tangible material, reopening on the same set of facts is not permissible, and reliance in this regard was placed on the decision of the Hon'ble Bombay High Court in case of Asian Paints (supra) and Jet Speed Audio (supra). 11. The learned Counsel of the assessee further argued that the so-called fresh information like investment division not having employee, etc. are neither relevant nor contrary to information already available on record. The Assessing Officer in the reasons recorded has stated that the company formed after demerger was merely a combination of assets and liabilities and did not constitute business activity or a unit or division as envisaged in Explanation 1 to Section 2(19AA) of the Act. In this regard, it was submitted that the Hon'ble Bombay High Court vide their order dated 23.11.2007 approved the scheme of demerger and held that investment undertaking would be demerged from the assessee. It has further submitted that the business of assessee comprises of two undertakings i.e. tyre undertaking and investment....
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....8 crores has escaped assessment. Thus, reopening has been made in complete haste and without independent application of mind on the part of Assessing Officer while reopening the assessment. 13. The learned counsel submitted that in the scheme of demerger there was no transfer of assets by the company. The shareholders of the company decided to part with their rights in the company and hence, there was no transfer of capital asset by the assessee. It was further submitted that on account of demerger, no consideration has accrued to the assessee, hence it would not be possible to compute capital gain tax in absence of any consideration received by the assessee. It was submitted that on these set of facts, no reasonable person would come to a belief that capital gain tax has escaped assessment. 14. The learned counsel submitted that in the order disposing-off the objections raised by assessee, the Assessing Officer has indeed recorded the objection taken by the assessee that no consideration accrued to the assessee under scheme of demerger However, the said objection of the assessee was not disposed off by the Assessing Officer. It was submitted that if the objections are not dispos....
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....his context, reliance was placed on the decision of the Hon'ble Delhi High Court in case of Indo Rama Textiles Ltd (212 taxman 462). 18. The CIT(A) accepted the contention of the assessee that the investment undertaking was a separate undertaking of the assessee as envisaged in Explanation to Section 2(19AA) of the Act; and accordingly, the CIT(A) concluded that no capital gain tax liability would arise on account of demerger and deleted the addition made by the Assessing Officer. 19. Before us, ld. DR relied on the order of the Assessing Officer to contend that the assessee's case does not fall under Section 2(19AA) of the Act and, therefore, benefit of Section 47(vib) of the Act was not available to the assessee and the capital gain arising out of this transaction was chargeable to tax in the hands of the assessee. With regard to the order of the Hon'ble Bombay High Court, the ld. DR stated that term 'undertaking' referred to by the Hon'ble High Court is under the provisions of Companies Act, 1956 and not Income-tax Act. He also referred and reiterated the various objection raised by the Assessing Officer in the assessment order. He submitted the same stands....
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.... be cohesive, self-contained and independent business unit. In the present case, post-demerger M/s CHI Investment Ltd was having an independent business unit, i.e. investment undertaking and, hence, it satisfies the condition of 'undertaking' as envisaged in Explanation 1 to section 2(19AA) of the Act. It was further submitted that the company has made profit in the first year of existence itself. 22. The learned Counsel of the assessee further countered the various aspects of Assessing Officer's order. The Assessing Officer has raised various objections in the assessment order to contend that investment unit of assessee is not a separate 'undertaking'. First objection was that no separate employees or office or accounts of expenses with regard to the investment unit etc. In this regard, it was submitted that having an employee is not a legal requirement. It was submitted that even M/s CHI Investment Ltd. does not have any employees. It was submitted that all the investments are looked after by the Board of Directors before and after demerger. His next objection was no fresh investments made during financial year 2005-06 to 2008-09. It was submitted that major investme....
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....the case are discussed in detail in earlier part of the order, the same are not again discussed for sake of brevity. Admittedly, the original assessment was completed under Section 143(3) of the Act vide order dated 28.12.2010. In the course of assessment proceedings, the assessee had submitted its financial statement to the Assessing Officer wherein at Schedule 20, the interest on income tax refund was reflected at Rs. 10,48.42 lacs. Further, in response to the query raised in the course of original assessment proceedings, the assessee vide letter dated 15.12.2010 at Q.3. replied that interest on income tax refund has been reduced from income in the computation. Thus, this issue was very much considered by the Assessing Officer at the time of original assessment proceedings and it is not the case where the issue was not at all raised by the Assessing Officer. Nothing new has happened between the date of passing of original assessment order and the date of issuing notice under Section 148 of the Act as can been seen from the reason supplied by the Assessing Officer which categorically states that assessee has credited its Profit & Loss Account by Rs. 1503.65 lacs under the head 're....
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.... to above, has taken a clear view that reopening of assessment under section 147 merely because there is a change of opinion cannot be allowed. In our opinion, therefore, in the present case also, it was not permissible for respondent No. 1 to issue notice under section 148." (underlined for emphasis by us) 25. It may also be gainful here to refer to the exposition of Hon'ble Bombay High Court in the case of Jet Speed Audio Pvt. Ltd. (supra) as under :- "We find that the impugned order of the Tribunal has rendered a finding of fact on the basis of material before it, in particular the fact that during original assessment proceedings a query was made with regard to the same issue which was responded to by the respondent - Assessee and on satisfaction of the same, the Assessing Officer had passed an assessment order. Therefore, reopening of assessment on an issue in respect of which a query was raised and responded to by the assessee would amount to a change of opinion. The tangible material being urged before us by Mr. Chhotaray, is the audit objections received by the Assessing Officer. However, as would be clear from the reasons reproduced hereinabove, there is no mention....
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....ct it has been held to be no longer good law by the subsequent decision of the Supreme Court in the case of "Indian and Eastern Newspaper Society Vs. Commissioner of Income Tax, New Delhi, (119 ITR 996)" wherein the Supreme Court has observed thus:- "Now, in the case before us, the ITO had, when he made the original assessment, considered the provisions of S.9 and 10. Any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. The revenue contends that it is open to him to do so, and on that basis to reopen the assessment under s.147(b). Reliance is placed on Kalyanji Mavji & Co. V. CIT (1976) 102 ITR 287 (SC), where a Bench of two learned Judges of this court observed that a case where income had escaped assessment due to the "oversight, inadvertence or mistake" of the ITO must fall within S.34(1)(b) of the Indian I.T.Act,1922. It appears to us, with respect that the proposition is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the ITO disco....
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....ome tax refund is taxable in the year of grant of refund, which in the present case is Assessment Year 2007-08. The year under consideration for which reopening is made is Assessment Year 2008-09. Thus, even if the interest income would have escaped assessment, it would be for Assessment Year 2007-08 and not Assessment Year 2008-09. In this regard, the learned Counsel of the assessee placed reliance on the decision of our co-ordinate bench in the case of Hindustan Unilever Ltd v. Addl. CIT (supra) wherein the Tribunal, after relying on the order of the Special Bench of Tribunal in case of Avada Trading Co. (P) Ltd v ACIT (supra), held that interest on income tax refund is taxable in the year in which it is granted. The relevant observations of the Tribunal are as under: "66. Briefly stated, AO granted interest on Rs. 589,81,740 under section 244A on processing of return for assessment year 2005-06 on 31.3.2006. As assessee received the amount in April 2006 this amount was taken as income in that year. AO was of the opinion that assessee should have offered the amount for taxation in assessment year 2006-07 as having been granted on 31.03.06. Accordingly, he brought to tax an amou....
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....f section 244A only affects its quantification under certain circumstances and not the right of interest. The Supreme Court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675 has observed that once a debt is created, then the liability cannot be said to be contingent merely because it is to be quantified at later date. Under section 244A, even the interest is quantified immediately whenever a refund is issued. Hence, the right to grant interest is absolute since existence of such right is not dependent on any event. It is well settled from the judgment of the Supreme Court rendered in the case of Kedarnath Jute Mfg. Ltd. v. CIT [1971] 82 ITR 363 that if an enforceable debt is created under a statute, then any subsequent event would not affect the existence of such right/obligation despite the fact that such debt is subject-matter of appeal. The right to interest under section 244A is not dependent upon any assessment inasmuch as there is no compulsion or obligation upon the Assessing Officer to make an assessment under section 143(3). The moment the return is processed under section 143(1)(a) and refund is issued on the basis of intimation under section 143(1)(a), an enfor....
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....itled for any interest under the same provisions after an order under section 143(3) was passed and if so modify the order to the extent assessee's quantum of interest to be brought to tax. In case the entire interest granted was withdrawn by any order subsequently, the relief to the extent has to be provided to assessee. With these directions, the ground 32 is partly allowed." (underlined for emphasis by us) 28. From above, it is evident that date of grant of interest and non-receipt of interest is relevant to determine the year of taxability of the same. Undisputedly, the interest has been granted in Assessment Year 2007-08 and, therefore, the interest was not chargeable to tax in the current year, and thus, the Assessing Officer cannot have a reason to believe that in the current year, any income has escaped assessment. 29. Accordingly, on merits also, qua the issue in assessee's appeal following the ratio laid down by the Special Bench of this Tribunal in case of Avada Trading Co. (P) Ltd v ACIT (Supra) and followed in the case of Hindustan Unilever Ltd. (supra), we find that interest on income tax cannot be said to be chargeable to tax in current year as the same was grant....
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....e of evasion of tax. The objection, if any, could have been raised by the Assessing Officer at the time when the Scheme was pending with the Hon'ble Bombay High Court. No such objection was raised by the Department, and nor the decision of Hon'ble Bombay High Court approving the Scheme of Demerger was challenged before the Hon'ble Supreme Court. The Assessing Officer cannot now form an opinion to the contrary and object to the scheme of demerger. In this regard, reliance was placed on the decision of Kolkata Bench of the Tribunal in the case of Electrocast Sales India Ltd v. Dy. CIT [170 ITD 507 (Kol)]. The relevant observations of the Tribunal are reproduced as under:- "4.7 It would be relevant to note that the scheme of amalgamation was approved on 6.10.2010 and intimation to this effect was sent by the assessee to the income tax department in January 2011 (copies of letters enclosed in pages 33 to 37 of paper book). The same was acted upon by the assessee assuming acceptance from the income tax department since no appeal against the said judgement of the Hon'ble High Court was filed before the Hon'ble Supreme Court Thus, at this juncture if the revenue is allowed to ch....
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....contravention of any law including provisions of Income-tax, he is entitled to voice his doubt/apprehension before Court, at time Court considers grant of sanction to scheme and it is always open to Court to consider doubt/apprehension expressed by Regional Director and pass necessary orders either rejecting scheme or sanctioning same with/or without necessary clarifications - Held, yes Whether since Court is required to ensure that a scheme of amalgamation does not contravene any provision of law, Regional Director is not only entitled to but is duty bound to bring to attention of Court any provision in scheme which may contravene/circumvent provisions of any law including law pertaining to Income-tax legislature intended that Regional Director will examine a scheme from all aspects and place his observations and views before Court and Court will consider same before sanctioning scheme-Held, yes Whether merely because a protective assessment is made, it does not mean that Income-tax Department has accepted a scheme of amalgamation - Held, yes." 34. It is evident from the above decisions that Income-tax Department has a chance to object to the scheme prior to sanction of scheme by....
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...., even if treated as valid, loses its importance as no separate assessment order has been passed pursuant to the said notice. 37. Since we have already held that the reopening pursuant to the first reopening notice is invalid, the entire reassessment proceedings will be treated as invalid. The Hon'ble Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd. (2011) 331 ITR 0236 has held that if no addition is made on the reasons recorded for reopening, the Assessing Officer is not free to make addition on the other grounds. Following the ratio laid down by the Hon'ble Bombay High Court also, we hold that the addition made by the Assessing Officer on the other ground of denial of benefit of demerger, which was not forming part of the original reasons for reopening of assessment, is invalid and bad in law. On this ground alone, we hold that the addition made on second ground shall not survive. We make it clear that the addition pursuant to the second reopening notice is bad in law in view of the fact that no separate assessment order has been passed by the Assessing Officer even after recording the separate reasons for reopening and issuing separate notice u/s 148 of the Act. 3....
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....,this ground stands allowed. 39. Now coming on the merits of the case for which Department has challenged the action of the CIT(A) in allowing the appeal of the assessee, we find that the CIT(A) has allowed the appeal of the assessee, and aggrieved by the same, Department has filed the appeal before us. In this regard, we may refer to the relevant observation of the CIT(A) while allowing the appeal of the assessee. The relevant para of the CIT(A) order are reproduced hereunder:- "12.16 I have considered the submissions of the appellant and perused the materials available on record, including copies of judicial decisions relied upon by the appellant as well as the order of Hon'ble Mumbai High Court dated 23.11.2007, approving the Scheme of Arrangement of Demerger. The issue for determination before me is, whether capital gain has accrued / arisen in the hands of the appellant due to of the appellant's business by virtue of Mumbai High Court decision dated 23.11.2007, approving the demerger of the appellant's business. 12.17 It is seen that the AO's contention regarding the long term capital gain was on account of transfer of shares by the appellant to the demerg....
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....nvestment Ltd. at book value. On account of demerger of investment activity/undertaking, the shareholders of the appellant have been issued shares in CHI on a proportionate basis. As a result shareholders having not less than 75% in value of shares of appellant becomes shareholder of CHI. The investment activity/ undertaking has been transferred on a going concern basis. It is also seen that the demerged investment activity/ undertaking was an independent revenue generating activity. 12.20 It is seen that the AO was of the view that the phrase 'undertaking referred in the order of the Hon'ble Mumbai High Court i.e. 23.11.2007, approving the scheme of demerger is under the provisions of Companies Act, 1956 only and not as per the Income Tax Act 1961, I find that this view of the A.O. is not tenable. It is seen that the term undertaking has not been defined either under Companies Act or under Tax Act. However, the Courts have interpreted the phrase under both these laws to mean physically separate viable independent unit which can be existent on its own as viable unit. Investment undertaking of the appellant company, which got demerged into CHI Investment Ltd, in my view, i....
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.... transferred by the appellant to CHI under the scheme of demerger is an independent revenue generating activity or undertaking and hence, the conditions stipulated u/s.2(19AA) of the Act have duly been fulfilled. Section 47(vib) of the Act provides that any transfer of capital asset by the demerged company to the resulting company by virtue of demerger is exempt from capital gain tax. The assets/liabilities are transferred under a scheme of demerger as defined in section 2(19AA) of the Act i.e. if the scheme satisfies all the conditions mentioned in section 2(19AA) of the Act then the transfer of the capital assets would not attract liability to capital gain tax. It is seen that the appellant has fulfilled all the conditions laid down u/s.2(19AA) of the Act and therefore, in my view, the transfer of assets by the appellant to resulting company under the scheme of demerger is exempt u/s.47(vib) of the I.T. Act, 1961. 12.24 Looking at the facts and legal position of the matter, it is seen that the appellant has fulfilled the conditions laid down u/s. 2(19AA) of the Act at the time of demerger of its Investment Undertaking. The appellant's case is duly covered under the provisio....