TaxTMI 
TaxTMI 
2025 (3) TMI 648
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....ing, bottling and sale of Beer for M/s United Breweries Ltd. (UBL). The assessee filed its return of income for the year under consideration on 30.11.2013, declaring a total income of Rs. 30,90,13,100/- and tax was paid on the deemed total income of Rs. 36,12,49,703/- as per the provisions of section 115JB of the Income Tax Act, 1961 (hereinafter called "the Act'). The case of the assessee was reopened by issuing notice dated 27.03.2021 under section 148 of the Act. For the sake of ready reference, the reasons recorded by the AO for re-opening the assessment are reproduced as under: "The facts of the case are that M/s Wave Distilleries and Breweries Limited (WDBL) owned a distillery for the manufacture and sale of alcoholic beverages under a license obtained from the State Government. The company entered into an agreement with M/s. United Breweries Limited (UBL) for manufacturing of their various Brands of Beer at the new Brewery commissioned by the Company at Village Ahmedpura, District: Aligarh, U:P. The agreement provides for committing a substantial portion of the Beer manufacturing capacity of the Company to UBL and accordingly UBL has been treated as Principal Manufa....
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....o (c) the reward of bottling charges as agreed upon as above, would be paid by M/s Wave Distilleries and Breweries Limited (WDBL) in favour of M/s UBL India. Here it would be relevant to mention that M/s WDBL has shown Rs 2841 Lakh as Bottling Charges. 4.2 At this juncture, it is pertinent to mention the decision of Hon'ble High Court of Karnataka in case of Principal Commissioner of Income Tax, Bangalore Vs. M/s Chamundi Winery & Distillery, [2018] 97 taxmann.com 568 (Karnataka)/ [2018] 408 ITR 402 (Karnataka) wherein similar issue has been decided by the Hon'ble court and it has been held in the case that in case of contracts such as entered with by assessee company and United breweries Limited (UBL), there does not exist any diversion of income by overriding title. Rather, in such cases, position of law only authorizes the assessee for application of income or distribution of profits after having paid due taxes on the income earned by the assessee from the activity of manufacturing of beer, bottling of beer, selling of beer. Further the judgment of court further holds that it is undisputed principle that only real income of the assessee shall be subject to levy ....
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....re / sale of UBL Brand in its account. In view of the aforesaid the escapement of income is being based on the inputs given in notes on account by the Chartered Accountant in his report. Escapement of income is calculated: Assessment Year Sales not included as it has been claimed relating to UBL brand. Consumption of raw materials and packing materials not included as it has been claimed relating to UBL brand. Other expenses not included as it has been claimed relating to UBL brand. Charges received by the assessee in the name of bottling fees. Escapement of income 2013-14 35765.45 lakhs 11384.87 lakhs 5883.21 lakhs Rs.2341 Lakhs Rs.15,656.37 Lakhs 5. Basis of forming reason to believe and details of escapement of income: On the basis of material available on record as discussed above and having gone through the case records and further it is seen that the assessee has not disclosed fully and truly all material facts on this issue and therefore there was omission and failure on part of the assessee with regard to this transaction to disclose fully and truly all necessary material facts necessary for assessment. Accordingly, after conside....
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....or committing a substantial portion of the Beer manufacturing capacity of the company to UBL and accordingly UBL was the principal manufacturer. It was further submitted that while sales and purchases for the manufacturing of UBL brands was done in the name of the assessee-company, in essence, the assessee company was receiving only a fixed amount for such manufacture and therefore, sales, consumption of raw materials and packing materials and other expenses were not to be treated as part of the profit and loss account of the assessee-company. 3.2 However, these contentions of the assessee did not find favour with the AO and he concluded that since the assessee was the Excise Licensee under the provisions of the Excise Act and that further time UBL had no Excise License in its name, it could not be said that the assessee was carrying on business exclusively for and on behalf of UBL only who was not at all subjected to any control under the Excise Act. The AO further observed that for all practical and legal purposes, the assessee was the Excise Licensee engaged in the business of manufacture and sale of liquor and, therefore, the assessee must account for all of the profits from....
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....1,000.00 Consumption of raw materials and packing materials not included as it has been claimed relating to UBL brand (B) 1,44,45,78,000.00 Other expenses not included as it has been claimed relating to UBL brand (C) 77,99,18,000.00 Income not considered for computation D=A-B-C` 2,59,43,25,000.00 Charges received by the assessee in the name of Bottling Fees (E) 41,70,03,000.00 Escapement of Income (D-E) 2,17,73,22,000.00 Assessment year 2016-17: Detail Amount (Rs.) Sales not included as it has been claimed relating to UBL brand (A) 5,02,72,95,000.00 Consumption of raw materials and packing materials not included as it has been claimed relating to UBL brand (B) 1,64,93,33,000.00 Other expenses not included as it has been claimed relating to UBL brand (C) 80,57,50,000.00 Income not considered for computation D=A-B-C` 2,57,22,12,000.00 Charges received by the assessee in the name of Bottling Fees (E) 42,64,38,000.00 Escapement of Income (D-E) 2,14,57,74,000.00 Assessment year 2017-18: Detail Amount (Rs.) Sales not included as it has been claimed relating to UBL brand (A) 2,18,82,36,00....
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.... 156,56,37,000/-, holding the same as 'distributable surplus' paid by the assessee M/s Wave Distilleries and Breweries Limited to M/s United Breweries Limited, India in pursuance of agreement dated 04.11.2011. (ii) Ignoring the fact that the assessee has paid brand charges to the UBL and merely that the sale was made in the name of UBL under the arrangement of the agreement thereby treating the reimbursement as 'distributable surplus' without appreciating the fact that profit and gains from the business of manufacture and sale of liquor by assessee were assessable in its hands. (III) Holding the 'application of income' as reimbursement to M/s United Breweries Limited, India on the ground that sale proceeds were deposited in the bank account of the M/s United Breweries Limited, India and M/s United Breweries Limited, India would be providing necessary funds to the assessee for meeting all direct expenses. 7. The Revenue has raised following common grounds of appeal, except the difference in amount, for assessment years 2014-15 to 2017-18: 1. The Ld. CIT(A) has erred in 1. Deleting the addition of Rs. 2,23,83,23,000/- (in A.Y. 2014-15) Rs. 2,17,73,....
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....red by time limitation as the reopening in the instant case has been done after expiry of four years from the end of the relevant assessment year without any failure on the part of the Assessee to disclose fully and truly all material facts. 5. That in view of the facts and circumstances of the case and in law, the notice issued under Section 148 of the Act is illegal, bad in law and without jurisdiction as there is no fresh tangible material on the basis of which the purported reasons have been recorded and therefore, there are no valid reasons to believe in the eyes of law. 6. That in view of the facts and circumstances of the case and in law, the notice issued under Section 148 of the Act is illegal, bad in law and without jurisdiction as the same has been issued without a valid approval as required under the provisions of Section 151 of the Act. That the sanction u/s 151 of the Act is illegal, bad in law and not sustainable in law as there is no application of mind while granting the approval. 7. That in view of the facts and circumstances of the case and in law. the assessment order dated 29.03.2022 passed pursuant to the notice under Section 148 of ....
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.... illegal, bad in law and without jurisdiction. 11.1 The Ld. A.R. submitted that it is evident from the records obtained by the assessee through RTI application dated 15.09.2021 that the independence of the AO was compromised in the instant case. The AO had sent a report dated 22.01.2020, wherein after due application of mind, the AO had clearly stated that the audit objections were not acceptable in the light of the fact that the sales made by the Assessee on behalf of the UBL was duly recorded in the books of accounts of the UBL and that the assessee had only received bottling charges from UBL for such services which had been duly recorded in its books of account of the assessee. Thereafter, another report dated 20.02.2020 was submitted by the AO to the Pr. CIT, wherein the AO had recorded a finding that the procedure adopted by the assessee that where total sale proceeds was actually received by the UBL directly and then UBL had reimbursed various costs and bottling charges to the assessee, would not have any adverse effect on the income of the assessee. The Ld. A.R. submitted that the AO had also rightly noted that the said procedure had been followed by the assessee year-aft....
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....urt of Madhya Pradesh in the case of Yeshwant Talkies v. CIT 157 ITR 103 (M.P). The Ld. A.R., accordingly, submitted that the reassessment proceedings were void and in contravention to the provisions of section 148 of the Act and that consequently, the reassessment proceedings are to be quashed and the additions are liable to be deleted on this count alone. 11.3 The Ld. A.R. further submitted that with specific reference to Assessment years 2013-14 & 2014-15, the assessee had also raised the ground that impugned notices for the respective Assessment years were barred by limitation in terms of first proviso to section 147 of the Act. The Ld. A.R. submitted that the impugned notice under section 148 of the Act was issued on 27.03.2021 for Assessment year 2013-14 and on 30.03.2021 for Assessment year 2014-15, therefore, these notices were issued beyond the prescribed period of 4 years. The Ld. A.R. also submitted that as per section 147 of the Act, the Assessing Officer has the power to re-open a case even beyond 4 years, when there is failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for the relevant assessment year. Th....
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....refore, there has been no failure on the part of the assessee to make full and true disclosure in the instant case. In this regard, the Ld. A.R. placed reliance on the judgment of Hon'ble Supreme Court of India in the case of ITO v. Mewalal Dwarka Prasad, 176 ITR 529 and submitted that in this case, the Hon'ble Apex Court had held that where assessee had disclosed all material facts and the AO had accepted the documents produced and had treated the transaction to be genuine and on that footing had completed the assessment, then it was no open for the AO to re-open the assessment on the ground that there was failure on the part of the assessee to disclose all material facts. 11.5 The Ld. A.R. also placed reliance on the judgement of Hon'ble Supreme Court of India in the case of Indian Oil Corporation vs. Indian Tax Officer, Central Circle V, Calcutta and Ors: [1986] 159 ITR 561 (SC) and submitted that in this case the Hon'ble Apex Court had ruled that there must be materials to come to the conclusion that there was 'omission or failure to disclose fully and truly all material facts necessary for the assessment of the year. 11.6 The Ld. A.R. further placed reliance ....
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.... 11.9 The Ld. A.R. also submitted that it is well settled through catena of judgments that Section 147 of the Act does not allow reassessment of an income merely on the ground that the AO has a change of opinion with regard to the interpretation of law differently on the facts that were well within his knowledge even at the time of assessment. In this regard, the Ld. A.R. placed reliance on the judgment of Supreme Court in the case of CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561(SC). 11.10 The Ld. A.R. submitted that in the instant case, proceedings for reopening had been initiated with respect to alleged profit generated on account of sale made on behalf of UBL. The disclosure in this behalf had been categorically made by the assessee in its Notes to Accounts attached to the Balance Sheet which were before the AO during the regular assessment proceedings. Therefore, neither there was any failure to disclose fully and truly all material facts nor there was any new tangible material which could justify the reopening of the present case. The reasons recorded were primarily based on the audit objection report which in turn is based on the records which were already part of....
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....ndian and Eastern Newspaper Society v. CIT: [1979] 119 ITR 966 (SC), wherein it was held that part alone of the note of an audit party which mentions the law which escaped the notice of the Income-tax Officer constitutes 'information' within the meaning of section 147(b); the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the Income-tax Officer. 11.13 In the light of the above facts, the Ld. A.R. submitted that initiation of reassessment proceedings for the captioned Assessment years was void-ab-initio, illegal and in contravention to the provisions of section 148 of the Act. Consequently, the proceedings under section 148 of the Act and the assessment orders passed are liable to be quashed. 11.14 On merits of the case, the Ld. A.R. submitted that as per the agreement, the assessee has received remuneration in terms of the bottling charges only and the same was offered to tax for all the concerned Assessment years. The allegation that the proceeds of sales were the income of the assessee is entirely baseless. Firstly, UBL procured License FL-3A (for contract manufacturing) an....
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.... 3. Gate passes authorising movement of goods from out of Assessee's premise is issued in the name of UBL, Compliance with Excise/VAT regulations is made by UBL. I Para 8.3 at page 49 432-436 11.15 It was further submitted that in the case of Chamundi Winery & Distillery (supra), it was an admitted fact that the assessee therein distributed surplus income in favour of the other party to the agreement, whereas in the instant case, the assessee had never received any money on account of manufacture/sale of UBL's Brand and the same accrued to UBL only. 11.16 The Ld. A.R. concluded his submission by stating that the assessee had merely acted as a contract manufacturer and was only entitled to the agreed contract charges as per the agreement which had been duly offered for tax and that the assessee had neither recognized the sales, manufacturing expenses, purchase and other expenses incurred by them in its books, nor any loss for non-payment of bills, discounts, selling expenses which were made by UBL had been claimed by the assessee and, thus, the ld. CIT(A) has rightly appreciated the facts of the case and deleted the additions made by the AO in the caption....
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....submitted that as per this judgment if the revenue audit raised an objection that the assessment was not completed in accordance with the provisions of the Act, it cannot be treated as a change of opinion because this is a statutory ground for reopening of assessment. 12.2 The ld. CIT (DR) also referred to the order of the AO dated 25.01.2022 wherein he had disposed of the objections raised by the assessee to the reassessment proceedings and submitted that the audit objection constituted a proper reason to believe. The ld. CIT (DR) also referred to the case of PCIT, Bangalore vs. M/s Chamundi Winery & Distillery (supra) and submitted that in this case also Chamundi Winery & Distillery was the Excise Licensee and was undertaking entire business activity of manufacture and sale of liquor in its name and ownership. It only purchased raw materials from market, sold the entire liquor in the open market and to other purchasers under its own invoices, collected all gross sale receipts, met day-to-day expenses, met all sales tax, excise duty, VAT, labour charges, etc. as its operating cost and the Hon'ble Karnataka High Court had concluded that whatever income was generated out of l....
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....nd it was submitted that it is only after considering these submissions of the assessee that the ld. CIT(A) had rightly come to the conclusion that the impugned addition was to be deleted. The Ld. A.R. also sought to distinguish the judgment of the Hon'ble Karnataka High Court in the case of PCIT, Bangalore vs. M/s Chamundi Winery & Distillery (supra) from the case of the assessee and submitted that in that particular case, not only was excise license under the name of M/s Chamundi Winery & Distillery, the entire business was also carried out under its own name by booking sales and purchases in its name. It was pointed out by the Ld. A.R. that in that case, M/s Chamundi Winery & Distillery had been assessed under the Sales Tax/ VAT provisions, as the principle owner of the liquor products manufactured and sold and it was under these set of facts that it was consequently held that M/s Chamundi Winery & Distillery was responsible to pay income tax on such income as well. Whereas in the present case, the assessee was only having a license for contract manufacturing of brand of Beer owned by UBL which was evident from Form FL-3A issued by the State Excise Department. It was pointed....
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....enses incurred by it on behalf of UBL after deducting various expenses and bottling charges out of total sale proceeds or whether it receives reimbursement of various expenses and bottling charges in case sale proceeds were directly received by UBL will give the same revenue result to the assessee. The Ld. A.R. pointed out that the AO has concluded specifically that this practice adopted by the assessee has not resulted in any suppression of revenue as far as accounting of revenue from bottling activity was concerned. 13.2 The Ld. A.R. prayed that the C.O.s of the assessee deserved to be allowed and the appeals of the Department deserveed to be dismissed. 14. We have heard the rival submissions and have also perused the material on record. We have also gone through the paper books filed by the assessee in support of its contentions and have also duly considered the implications of the factual matrix of the appeals as is clear from the records. First of all, we proceed to deal with the assessee's challenge to the validity of reassessment proceedings as taken in grounds in the C.O.s. 14.1 As assessment year 2013-14 was argued as the lead case by the Ld. A.R., we will take th....
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.... Team. A copy of this letter has been placed at pages 126 to 140 of the paper book submitted by the assessee and it was pointed out in this Report that there were suppression of sales resulting in short computation of income and short charging of tax. The AO, vide letter dated 22.01.2020 responded to the audit objections. The response of the AO is placed at pages 243 to 261 of the paper book filed by the assessee. A perusal of the response of the AO shows that the AO has categorically dealt with the objections and has pointed out that the difference in sales as per 26AS Statement and the sales shown in the profit and loss account has been reconciled and that in view of the facts available in the case records and after getting the required information from the assessee under section 133(6) of the Act, the audit objection was not acceptable. There were as many as 14 objections raised by the CAG Team and in his reply, the AO did not accept any of the objections and in the concluding paragraph of the reply, submitted that the Audit Party had made sweeping and generalized observations which had no bearing on the income of the assessee and that in view of the detailed facts enumerated in....
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....occasion when the AO was asked to re-examine the case of the assessee that the AO submitted his third Report that the transactions entered into by the assessee had resulted into suppression of sales and income. Thus, it is very clear that the AO on two earlier occasions had categorically stated that there was no loss to the Revenue, but on being again guided by the Ld. PCIT did a complete volte face and submitted a Report stating that there was suppression of sales and income. A perusal of the records would show that there was no new set of facts which came into possession or knowledge of the AO between the period 20.01.2020 and 22.06.2020, i.e., the dates of the first and third Report respectively, which would prompt the AO to submit before the Ld. PCIT that there was suppression of sales and income. Even the judgment of the Hon'ble Karnataka High Court in the case of M/s Chamundi Winery & Distillery (supra) is of year 2018 and thus, apparently there was no justifiable reason for the AO to reach a conclusion that there has been suppression of sales or income except the continued prompting by the Office of the Ld. PCIT to draft the Report in a particular manner. Thus, we, in no....
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....e afraid that such tangible material is not present. Although the Department has argued vehemently that the Report of the CAG is tangible material and there are numerous judicial precedents which now also support this view. However, on the facts of the present case, it is seen that the AO had already twice refused to accept the audit objections as being material enough for reopening the case and had stated in no uncertain terms that the observations/objections of the Audit Report were merely sketchy and without any substance. Thereafter, revising the opinion by the AO in his third Report would only tantamount to change of opinion and the audit objections of the CAG would lose the character of tangible material. 14.5 It is also seen that although the AO has, in his third Report, stated that there was failure on the part of the assessee to disclose the material facts necessary for the purpose of assessment, he has not mentioned as to what those material facts were and what new facts had come in his possession/knowledge between the period of the first Report and the third Report. Therefore, in the absence of any specific instance being pointed out about suppression of material fact....
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....er or abdicate his function to his superiors nor can the superior arrogate to themselves such authority. In this case also, the Audit Report had pointed out defects and had raised audit objections and the Hon'ble Gujarat High Court had held that in every case, it is the AO who must determine for himself as to what was the effect and consequence of the law mentioned in the Audit Report and that whether any consequence of the law, which comes to his notice through the Audit Report, can he reasonably believe that income has escaped assessment. The Hon'ble Gujarat High Court also referred to the Head Note in the judgment rendered by the Hon'ble Apex Court in the case of Indian and Eastern Newspaper Society vs. CIT reported in [1979] 119 ITR 966 (SC) and reiterated that the opinion rendered by the Audit Party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law and that true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer. Thus, based on the above judicial precedents also, we are of the considered opinion that the AO did not hold independent belief at any p....
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.... pointed out to Clause 2.2 of the Agreement, wherein UBL has given non-exclusive, non-assignable and non-transferable right to the assessee to manufacture UBL products. The Ld. First Appellate Authority has also referred to Clause 2.3 of the Agreement which states that the assessee shall sell, dispose of the UBL products as instructed by UBL. Further, the Ld. First Appellate Authority has also referred to Clause 6.1 of the Agreement, wherein it has been specifically stated that UBL would pay bottling cost to the assessee at the prevailing market rates. It has also been stated by the Ld. First Appellate Authority that during the course of hearing a confirmation certificate from UBL was taken on record which confirmed that all the sale proceeds were deposited in the bank account of UBL and that UBL would be providing to the assessee necessary funds for meeting all the direct expenses to be incurred on behalf of UBL. After analyzing these Clauses, the Ld. First Appellate Authority has reached the conclusion that the nature of Agreement was empirical to that of a job work and that the right, title and interest over receipts/expenses attributable to such Agreement/ arrangement was exclu....
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....s in terms of Brewery and Distillery Agreement. 15.1 Thus, having regard to various terms of the Agreement, Excise Licenses, Sales Invoices, Gate Passes, Bank accounts as well as conduct of both the parties, it becomes very clear that the assessee is only a contract manufacturer for UBL and in effect the sales alleged to have been effected by the assessee were in fact sales of UBL and would, thus, constitute the income by overriding title, as far as the case of the assessee is concerned. Although the concept of diversion of income by overriding title is not explicitly defined in the Act, however, it is more or less well established through various judicial decisions. The core principle on diversion of income is the presence of overriding title that causes income to be re-directed before it reaches the hands of the assessee. The Hon'ble Apex Court had an occasion to elaborate on the concept of diversion of income in the case of CIT vs. Bijli Cotton Mills (P) Ltd. [1979] 116 ITR 60 (SC) and the Hon'ble Apex Court held that for an income to be considered diverted at source, there must be an overriding title that diverts the income before it reaches the assessee and that if ....