Snacko Bisc Pvt. Ltd., CHENNAI v. DCIT, CHENNAI

ITA 1730/CHNY/2012 | 2006-2007
Pronouncement Date: 31-07-2015

Appeal Details

RSA Number 173021714 RSA 2012
Assessee PAN AABCS5170P
Bench Chennai
Appeal Number ITA 1730/CHNY/2012
Duration Of Justice 2 year(s) 10 month(s) 16 day(s)
Appellant Snacko Bisc Pvt. Ltd., CHENNAI
Respondent DCIT, CHENNAI
Appeal Type Income Tax Appeal
Pronouncement Date 31-07-2015
Appeal Filed By Assessee
Bench Allotted D
Assessment Year 2006-2007
Appeal Filed On 14-09-2012
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH CHENNAI . . . ! ' # $% BEFORE SHRI N.R.S.GANESAN JUDICIAL MMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ./ ITA NO. 1730/MDS/2012 / ASSESSMENT YEAR : 2006-07 SNACKO BISC PVT. LTD. NO.1 FIRST STREET SOUTH CANAL BANK ROAD MANDAVELIPAKKAM CHENNAI 600 028. PAN AABCS5170P APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME-TAX COMPANY CIRCLE-VI(3) CHENNAI-34. RESPONDENT) / APPELLANT BY : SHRI R.T.VIJAYARAGHAVAN CA / RESPONDENT BY : SHRI S. DAS GUPTA JCIT ! / DATE OF HEARING : 14.07.2015 '# ! / DATE OF PRONOUNCEMENT: 31.07.2015 / O R D E R PER CHANDRA POOJARI ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) DATED 29 .6.2012. - - ITA 1730 /1 2 2 2. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD T O REOPENING OF ASSESSMENT. 3. THE BRIEF FACTS OF THE ISSUE ARE THAT ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 30.11.2006 DECLARING A LOSS OF ` 16 34 707/-. THE RETURN WAS PROCESSED U/S.143(1) O F THE INCOME-TAX ACT 1961 ON 26.2.2010. SUBSEQUENTLY T HE CASE WAS REOPENED BY ISSUING NOTICE U/S.148 ON 28.7.2010 AND THE ASSESSMENT WAS COMPLETED U/S.143(3) R.W.S. 147 OF T HE ACT ON 21.11.2011 DETERMINING THE TOTAL ASSESSED INCOME AT ` 3 58 26 109/- AFTER MAKING AN ADDITION OF ` 3 74 60 816/- TOWARDS DISALLOWANCE OF EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT. 4. ACCORDING TO THE LD. AR REOPENING OF ASSESSMENT IS BAD IN LAW AS THE REASONS FOR REOPENING WERE NOT COMMU NICATED TO THE ASSESSEE. HE FURTHER SUBMITTED THAT THE ASSESS ING OFFICER HAS NOT ADDUCED ANY STRONG REASON FOR REOPENING THE ASSESSMENT TO SHOW THAT THE INCOME HAD ESCAPED ASSE SSMENT. ACCORDING TO THE LD. AR. THE ASSESSING OFFICER REO PENED THE ASSESSMENT ON WRONG SET OF FACTS IN SPITE OF REPORT ING IN THE ANNUAL REPORT FOR 2005 BY THE ASSESSEE THAT NO BUSI NESS ACTIVITY - - ITA 1730 /1 2 3 WAS CARRIED OUT BY THE ASSESSEE FOR THE PERIOD RELE VANT TO THE ASSESSMENT YEAR AND THE COMPANY CONTINUED TO DERIVE ROYALTY INCOME BY LICENSING THE BRANDS/TRADEMARKS. THE LD . AR FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAD NOT CONSID ERED THE FACT THAT IN THE ADDENDUM TO THE DIRECTORS REPORT THE COMPANY IN REPLY TO THE AUDITORS REPORT STATED THAT THE BOAR D OF DIRECTORS WAS STRIVING TO GET SOME NEW BUSINESS AND COMMENCE THE OPERATION OF THE COMPANY WHICH WAS EXPECTED TO IMPR OVE THE SITUATION. THE COMPANY HAD SHOWN INCOME FROM THE L ICENSE OF ITS BRANDS AND PRODUCTS AND ADMITTED INCOME IN THE PREVIOUS YEAR ALSO. FURTHER HE SUBMITTED THAT THE ASSESS ING OFFICER FORMED THE OPINION THAT NO BUSINESS WAS CARRIED ON BY THE ASSESSEE DURING THE FINANCIAL YEAR 2005-06 PERTAINI NG TO THE ASSESSMENT YEAR 2006-07 IS NOT CORRECT. THE DERIVA TION OF INCOME BY EXPLOITING THE LICENCES AND THE BRANDS AR E BUSINESS ACTIVITIES RELATED TO THE BUSINESS OF THE COMPANY A ND TO BE CONSIDERED AS BUSINESS OF THE COMPANY. 5. THE LD. DR RELIED ON THE ORDER OF THE CIT(APPEAL S). 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IN THIS CASE THE ASSESSMENT WAS REOPEN ED BY - - ITA 1730 /1 2 4 ISSUING A NOTICE U/S.148 DATED 28.7.2010 ON THE REA SON THAT THE INCOME HAD ESCAPED ASSESSMENT. THOUGH THE ASSESSEE WAS DISCONTINUED THE BUSINESS THE CLAIM OF BUSINESS EX PENSES WAS WRONGLY ALLOWED BY THE ASSESSING OFFICER WHILE PROC ESSING RETURN U/S.143(1) OF THE ACT. ADMITTEDLY IN THIS CASE T HERE WAS NO ORIGINAL ASSESSMENT U/S.143(3) OF THE ACT. HENCE THERE IS NO QUESTION OF FORMING ANY OPINION AT THE TIME OF ORIG INAL ASSESSMENT. AS PER THE REASONS RECORDED THE INCOM E HAS ESCAPED INCOME IN VIEW OF THE FACT THAT THE ASSESSE E CLAIMED EXPENDITURE IN SPITE OF DISCONTINUITY OF THE BUSINE SS. THERE ARE NO DETAILS AVAILABLE IN THE RECORD AS TO WHETHER TH E ASSESSEE WAS ACTUALLY CARRYING ON BUSINESS OTHER THAN EARNIN G OF INCOME BY WAY OF ROYALTY INCOME. PRIMA FACIE THERE WAS E XCESS CLAIM OF EXPENDITURE WHICH ARE NOT RELATING TO ROYALTY INCO ME. THE PROCESSING OF RETURN U/S.143(1) DOES NOT REFLECT AN Y APPLICATION OF MIND BY THE ASSESSING OFFICER AND FORMED ANY OPINIO N. BEING SO IT CANNOT BE SAID THAT ANY OPINION HAS BEEN FOR MED BY THE ASSESSING OFFICER AND MERE PRODUCTION OF RETURNS AL ONG WITH ANNEXURES CANNOT BE CONSTRUED AS THE ASSESSING OFF ICER HAS APPLIED HIS MIND. HAD THAT BEEN ANY ASSESSMENT MAD E - - ITA 1730 /1 2 5 U/S.143(3) OF THE ACT AND THE ASSESSING OFFICER MAD E DETAILED ENQUIRY REGARDING THE ISSUE IN DISPUTE THEN IT WOU LD HAVE BEEN SAID THAT THE ASSESSEE HAD DONE ITS DUTY AND IT IS FOR THE ASSESSING OFFICER TO DRAW ANY INFERENCE ON THE FACT S PLACED BEFORE HIM. IN OUR OPINION THE ISSUE RELATING TO REOPENING OF ASSESSMENT IS SQUARELY COVERED BY THE JUDGMENT OF T HE SUPREME COURT IN THE CASE OF ACIT V. RAJESH JHAVERI STOCK B ROKERS PVT. LTD. (2007) 291 ITR 500 (SC) WHEREIN IT WAS HELD T HAT THE SCOPE AND EFFECT OF SEC.147 AS SUBSTITUTED WITH EFFECT F ROM 1.4.1989 IF THE ASSESSING OFFICER FOR WHATEVER REASON HAS REA SON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT IT CONF ERS JURISDICTION TO REOPEN THE ASSESSMENT. NOTHING CAN BE INFERRED FROM THE DEEMING PROVISIONS. THEREFORE THERE BEI NG NO ASSESSMENT UNDER SEC.143(1)(A) THE QUESTION OF CHA NGE OF OPINION DOES NOT ARISE. FURTHER THE ASSESSEE MADE A PLEA THAT REASON FOR REOPENING OF THE ASSESSMENT WAS NOT COMM UNICATED TO THE ASSESSEE. HOWEVER THE ASSESSMENT ORDER SHO WS THAT THE REASONS FOR REOPENING WERE RECORDED AND FURNISHED T O THE ASSESSEE IN RESPONSE TO THE ASSESSEES LETTER DATE D 20.8.2010. - - ITA 1730 /1 2 6 BEING SO THIS PLEA OF THE ASSESSEE IS ALSO MIS-CON CEIVED. ACCORDINGLY THIS GROUND OF REOPENING OF ASSESSMENT IS REJECTED. 7. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF EXPENDITURE. 8. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HAS CLAIMED A SUM OF ` 3 74 60 816/- AS AN EXPENDITURE WHILE COMPUTING TH E INCOME OF THE ASSESSEE. THE ASSESSING OFFICER DISA LLOWED THE SAME ON THE REASON THAT THERE WAS NO BUSINESS ACTIV ITY CARRIED ON BY THE ASSESSEE FOR THE PERIOD RELEVANT TO THE A SSESSMENT YEAR AND THE COMPANY DERIVES ONLY ROYALTY INCOME BY LICENSING ITS BRANDS/TRADE MARK AS A MANUFACTURING AND SELLIN G ACTIVITIES STOPPED SINCE OCTOBER 2003 AS EVIDENT FROM THE ANNU AL REPORT 2005. 9. THE CONTENTION OF THE ASSESSEES COUNSEL IS THAT EARNING OF ROYALTY BY LICENSING ITS BRANDS/TRADE MARK IS AL SO PART AND PARCEL OF ASSESSEES MAIN BUSINESS AS OBJECTS CLAUS E OF MEMORANDUM OF ASSOCIATION OF THE COMPANY. ACCORD ING TO HIM SINCE THE ACTIVITY CARRIED ON BY THE ASSESSEE IS WITHIN THE OBJECTS CLAUSE OF MEMORANDUM OF ASSOCIATION OF THE COMPANY IT IS TO BE CONSIDERED AS BUSINESS ACTIVITY SO AS TO A LLOW - - ITA 1730 /1 2 7 EXPENDITURE INCURRED BY THE ASSESSEE IN THE ASSESSM ENT YEAR . TO SUPPORT HIS ARGUMENT HE RELIED ON THE FOLLOWING DECISIONS: SUPREME COURT 1. CIT V. KELVINATOR INDIA LIMITED (320 ITR 561) 2. CIT V. FOAMER FINANCE (264 ITR 566) MADRAS HIGH COURT 1. CIT V. ANNAMALAI FINANCE LIMITED (275 ITR 451) 2. CIT V. TDFC (306 ITR 135) 3. CIT V. ELGI FINANCE (286 ITR 674) 4. CIT V. INDIAN OVERSEAS BANK (252 ITR 640) 5. CIT V. FENNER INDIA (241 ITR 672) BOMBAY HIGH COURT 1. AVENTIS PHARMA V. ASST. CIT (323 ITR 570) 2. RALLIS INDIA V. ACIT (323 ITR 54) 3. THIAGARAJA MILLS P LIMITED V. DY. CIT (317 ITR 6 6) DELHI HIGH COURT 1. D.T. 7 D.C. LTD. V. ACIT (324 ITR 234) 2. CARLTON OVERSEAS LIMITED V. ITO (318 ITR 295) 3. CIT V. KELVINATOR OF INDIA LTD. (256 ITR 1) GUJARAT HIGH COURT 1. VIKAS PRINTERY V. ACIT (INVESTIGATION) (270 ITR 68) 2. INDUCTO ISPAT ALLOYS LTD. V. ACIT(OSD) (320 ITR 458) 3. VODAFONE ESSAR GUJARAT LIMITED VS. ACIT (231 CTR 203) 10. THE LD. DR ON THE OTHER HAND SUBMITTED THAT T HE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE WITH REGA RD TO - - ITA 1730 /1 2 8 EARNING OF INCOME AND THE EXPENDITURE CLAIMED HAS N O NEXUS WITH ROYALTY INCOME. FURTHER HE SUBMITTED T HAT THE EXPENDITURE IS NOT FOR THE PURPOSE OF BUSINESS OR I NCIDENTAL TO CARRY ON THE BUSINESS OF THE ASSESSEE. ACCORDIN G TO THE LD. DR THERE IS NO COMPELLING REASON TO INCREASE T HIS KIND OF EXPENDITURE AND IT CANNOT BE ALLOWED WHILE COMPU TING THE INCOME OF THE ASSESSEE. IT IS NOT PERMISSIBLE U /S.37 OF THE ACT AS THE RELEVANT BUSINESS NOT EXISTING DURI NG THE PREVIOUS YEAR AND THE BUSINESS WAS CEASED TO EXIST IN THE ASSESSMENT YEAR UNDER CONSIDERATION. HE RELIED ON THE ORDER OF THE CIT(APPEALS). 11. WE HAVE HEARD BOTH THE PARTIES. IN THIS CASE THE ASSESSEE DECLARED INCOME FROM ROYALTY BY LICENSING ITS BRANDS/TRADEMARKS AS A MANUFACTURING AND SELLING ACTIVITIES WHICH STOPPED FROM OCTOBER 2003. THE M AIN PLEA OF THE ASSESSEE IS THAT ROYALTY INCOME IS PART AND PARCEL OF ACTIVITIES MENTIONED IN CLAUSE OF MEMORAN DUM OF ASSOCIATION OF THE ASSESSEE-COMPANY. IN OUR OPINIO N TO ALLOW ANY EXPENDITURE THE EXPENDITURE SHOULD BE IN CURRED FOR THE PURPOSE OF BUSINESS CARRIED ON BY THE ASSES SEE IN - - ITA 1730 /1 2 9 THE ASSESSMENT YEAR UNDER CONSIDERATION. THE WORD BUSINESS WOULD SIGNIFY AS CONTINUANCE COURSE OF COMMERCIAL ACTIVITY WHICH IS CARRIED ON WITH A VIE W OF MAKING AND EARNING PROFIT. THUS UNDER SEC.37(1) O F THE ACT THE EXPENDITURE MUST BE INCURRED FOR THE PURPO SE OF BUSINESS WHICH WAS IN EXISTENCE IN THE ACCOUNTING Y EAR AND PROFIT OR LOSS OF WHICH ARE UNDER ASSESSMENT. DURIN G THE PERIOD THERE WAS IN FACT NO BUSINESS EITHER BECA USE OF DISCONTINUITY OR SOME REASON IT HAS TO CEASE TO EXI ST. THEN THE QUESTION OF COMPUTATION OF INCOME AFTER DEDUCTI NG THE EXPENSES CANNOT ARISE. BY MERELY MAINTAINING AN OF FICE IT MAY NOT BE SAID THAT THE ASSESSEE WAS CARRYING ON BUSINESS FOR THE EXPENSES OF WHICH THE ASSESSEE WAS ENTITLED DEDUCTION. THEREFORE IF THERE IS NO BUSI NESS THERE COULD BE NO QUESTION OF COMPUTATION OF INCOME ON TH AT COUNT AND NO QUESTION OF EXPENDITURE INCURRED EXCLU SIVELY FOR SUCH BUSINESS AROSE. THE SUPREME COURT IN THE CASE OF CIT V. LAHORE ELECTRIC SUPPLY CO. (60 ITR 1) HELD THAT BUSINESS IS AN ACTIVITY WHICH IS CAPABLE OF PRODUCI NG PROFIT WHICH CAN BE TAXED. IT WOULD BE LAYING DOWN STRANG E LAW TO - - ITA 1730 /1 2 10 HOLD THAT WHERE A BUSINESS HAS IN FACT CEASED TO B E RUN IT MUST BE DEEMED AS CONTINUING BECAUSE OF OUTSTANDING LIABILITIES OF THAT BUSINESS CANNOT BE LIQUIDATED. BUSINESS AS CONTEMPLATED IS AN ACTIVITY CAPABLE OF PRODUCING A PROFIT WHICH CAN BE TAXED. PAYMENT OF OUTSTANDING LIABILI TY IS NOT AN ACTIVITY WHICH CAN EVER PRODUCE SUCH A RESULT. IT CANNOT BE SAID THEREFORE THAT BECAUSE OF LIABILITIES OF A CLOSED BUSINESS WERE OUTSTANDING IT HAS TO BE HELD THAT E ITHER THE BUSINESS WAS CONTINUING OR THAT AN INTENTION TO RES UME BUSINESS MUST BE INFERRED. 12. IN THE PRESENT CASE MERE FACT THAT THE ASSESSE E COMPANY HAD CONTINUED TO EARN CERTAIN INCOME BY WAY OF ROYALTY BY LICENSING ITS BRANDS AND TRADE MARK THOU GH MANUFACTURING ACTIVITY WAS STOPPED SINCE OCTOBER 2 003 AND THIS FACT IS NOT SUFFICIENT FOR THE PURPOSE OF ESTABLISHING THAT THE ASSESSEE HAD CONTINUED TO CARRY ON BUSINES S AS HELD BY THE MADRAS HIGH COURT IN THE CASE OF CIT VS . VANGUARD INSURANCE CO. LTD. (97 ITR 546). IN OUR O PINION IN THE PRESENT CASE THE EXPENDITURE INCURRED CANNO T BE SAID THAT EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF - - ITA 1730 /1 2 11 ASSESSEES BUSINESS. ACCORDINGLY LOWER AUTHORITIE S RIGHTLY PROCEEDED ON THE BASIS THAT THERE MUST BE NO NEXUS BETWEEN EXPENDITURE INCURRED AND BUSINESS OF THE ASSESSEE. THE BUSINESS OF THE ASSESSEE IS MANUFACT URING AND SELLING OF BISCUITS WHICH IS CEASED TO EXIST I N THE RELEVANT PERIOD AND NO EXPENDITURE WAS INCURRED WIT H RELATION TO BUSINESS AND BEING SO THE EXPENDITURE CLAIMED BY THE ASSESSEE CANNOT BE ALLOWED IN ASSESSMENT YEA R UNDER CONSIDERATION. THE ASSESSEE IS NOT INCURRED EXPENDITURE IN CARRYING ON BUSINESS OF MANUFACTURIN G AND SELLING OF BISCUITS AND IT CANNOT BE SAID THAT THER E WAS DIRECT AND INTERCONNECTION BETWEEN THE EXPENDITURE INCURRE D AND BUSINESS OF THE ASSESSEE AS HELD BY THE MADRAS HIG H COURT IN THE CASE OF AMALGAMATIONS LTD. V. CIT (235 ITR 246). IN THE FACTS OF THE PRESENT CASE IN OUR OPI NION THE EXPENDITURE INCURRED BY THE ASSESSEE CANNOT BE CONSIDERED AS EXCLUSIVELY AND WHOLLY FOR THE PURPOS E OF BUSINESS AND IT CANNOT BE ALLOWED. THIS GROUND IS REJECTED. 13. THE NEXT GROUND IS WITH REGARD TO IMPROPER ADJUSTMENT OF CARRY FORWARD LOSS. THE LD. AR SUBMIT TED THAT - - ITA 1730 /1 2 12 THE LOWER AUTHORITIES HAVE NOT PROPERLY ASCERTAINED BROUGHT FORWARD LOSSES AND ALLOWED TO BE CARRIED FORWARD. W E FIND MERIT IN THE ARGUMENT OF THE ASSESSEE. ACCORDINGLY WE REMIT THE ISSUE TO THE FILE OF THE AO FOR FRESH CON SIDERATION. 14. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON FRIDAY THE 31 ST OF JULY 2015 AT CHENNAI. SD/- SD/- ( $ . . $ . %& ) ( ' ( ) * ) N.R.S.GANESAN + -./01.2334.15+ 6 78 /JUDICIAL MEMBER ! 789::3;/<./<=>?@>1 '6 /CHENNAI A7 /DATED THE 31 ST JULY 2015. MPO* 7& BCDC /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. E+ /CIT(A) 4. E /CIT 5. CF% G /DR 6. %HI /GF.