Madras H.C : Reopening was not justified where Assessing Officer had actually before him all relevant materials at time of original assessment itself

High Court Of Madras

CIT Vs. RPG Transmissions Ltd.

Assessment Years : 1996-97 To 2001-02

Section : 37(1), 147, 36(1)(iii)

Elipe Dharma Rao And M. Venugopal, Jj.

T.C. (A) Nos. 310 To 312 And 1388 To 1390 Of 2007

July 9, 2013

JUDGMENT

Elipe Dharma Rao, J. – T. C. (A.) Nos. 310 to 312 of 2007 are filed against the common order dated January 23, 2006, passed by the Income-tax Appellate Tribunal, Madras “A” Bench, in I. T. A. Nos. 751 to 753/Mds/2005.

2. The appeals in T. C. (A.) Nos. 1388 to 1390 of 2007 have been preferred by the Revenue against the common order dated January 23, 2006, passed by the Income-tax Appellate Tribunal (“the Tribunal”) in I. T. A. Nos. 1036 and 1058/Mds/2005 for the assessment years 1997-98 and 2001-02.

3. The Assessing Officer completed the assessment in these cases, after complying with all the formalities by disallowing certain claims made by the assessee and by making additions. The appeals preferred by the assessee before the Commissioner of Income-tax (Appeals) as against the orders passed by the Assessing Officer were partly allowed. Challenging the same the assessee as well as the Revenue filed appeals before the Income-tax Appellate Tribunal. The Tribunal partly allowed the appeals filed by the assessee and dismissed the appeals filed by the Revenue. Aggrieved by the said order the Revenue has filed T. C. (A.) Nos. 310 to 312 of 2007. Likewise, T. C. (A.) Nos. 1388 to 1390 of 2007 are filed by the Revenue against the order dated November 17, 2006, passed by the Income-tax Appellate Tribunal in I. T. A. Nos. 1036/1058/1489/Mds/2005.

4. At the time of admitting T. C. (A.) Nos. 310 to 312 of 2007, on March 26, 2007, the following substantial questions of law were framed by this court :

“1. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the reopening of the assessment was illegal ?

2. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the licence fee paid by the assessee to RPGE, Bombay, for the assessment years 1996-97, 1998-99 and 1999-2000 are nothing but expenditure incurred wholly and exclusively for the purpose of business ?

3. Whether, in the facts and in the circumstances of the case, the Tribunal was right in allowing the claim of interest on borrowed funds utilised for investment in shares of CESC, as a business expenditure on the ground that investment is one of the objectives of the assessee-company ?”

5. With regard to T. C. (A.) Nos. 1388 to 1390 of 2007, the following substantial questions of law were framed on October 31, 2007, at the time of admitting these appeals :

“1. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the reopening of the assessment was illegal ?

2. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the licence fee paid by the assessee to RPGE, Bombay, for the assessment year 1997-98 (T. C. A. No. 1388 of 2007) and 2001-02 (T. C. A. Nos. 1389 and 1390 of 2007) are nothing but expenditure incurred wholly and exclusively for the purpose of business?

3. Whether, in the facts and in the circumstances of the case, the Tribunal was right in allowing the claim of interest on borrowed funds utilised for investment in shares of CESC, as a business expenditure on the ground that investment is one of the objectives of the assessee-company ?”

6. We have heard the learned counsel appearing on either side in respect of all the issues framed by this court and referred to above and perused the entire materials available on record. Substantial question of law No. 1 in both the batches.

7. The above appeals involve common substantial questions of law on the claim of licence fee payment and the claim of interest on borrowed funds utilised for investment in shares and, therefore, for the sake of brevity of judgment, the said common issues are dealt with together and decided. The issue relating to legality of reopening of the assessment, which is one of the substantial questions of law is taken up first and separately dealt with.

8. Before adverting to the issues involved in the appeals, a brief prelude of the facts are required to be stated.

9. The assessee, M/s. RPG Transmission Ltd., has filed its return of income for the assessment year 1996-97 on November 29, 1996, and declared a net income of Rs. 7,31,70,390. The assessment was completed under section 143(2) on February 22, 1999. A notice was served upon the assessee under section 148 and by letter dated April 15, 2003, the assessee requested to treat the return filed by him on November 29, 1996, as a return filed in response to the notice under section 148. Thereafter, the Assessing Officer issued notices under sections 142(1) and 143(2) seeking certain details, information and explanations. Pursuant to the said notices, the assessee appeared through its authorized representatives who appeared in person and furnished certain details. After perusing the reply, the Assessing Officer came to a conclusion in pages 15 and 16 of the assessment order, that huge amounts were received by RPG Enterprises Ltd. from the RPG group companies in the name of licence fee. In respect of the subsequent assessment years, i.e., 1996-97, 1997-98, 1998-99, 1999-2000 and 2001-02 similar procedure was followed.

10. In so far as the assessment for the years 1996-97 which is the subject matter of I. T. A. No. 751/Mds/2005, the assessee had objected to the reopening of the assessment claiming it as statutorily barred by limitation. On the contrary the Assessing Officer pursuant to the notice under section 142(1) and 143(2) came to a conclusion that the facts emerging from the response would indicate that the assessment could be reopened under section 147 read with section 148. It was this reopening of assessment which was the subject matter of challenge before the Commissioner of Income-tax (Appeals) claiming that the reopening of the assessment is barred by limitation under the proviso to section 147 of the Act.

11. It was contented before the Tribunal by the assessee that the Commissioner of Income-tax (Appeals) had not rendered a finding on the issue of limitation and, therefore, before the Tribunal the assessee, as a preliminary objection, had raised the issue of limitation claiming that the reopening of assessment is clearly barred by the proviso to section 147. The Tribunal, while considering the issue of limitation has elaborately considered the contentions of the assessee as well as the Department and has also taken note of several judgments rendered by various High Courts, including this court as well as the apex court, on the proposition and came to a conclusion that in so far as the reopening of the assessment for the year 1996-97 is concerned, the assessments were reopened after a lapse of four years and, therefore, it would clearly be barred by the limitation set out in section 147 of the Act.

12. In so far as the assessment year 1998-99 is concerned, the assessments were reopened within a period of four years and, therefore, the issue of applicability of the proviso to section 147 would not arise for consideration. However, the Tribunal has recorded a finding that the reopening of the assessment was not in accordance with the provisions of section 147 in so far as the reasons recorded to believe that the income has escaped assessment is not inferable from the materials on record. Similarly, with regard to reopening of the assessment for the assessment years 1998-99 and 1999-2000 the issue of limitation did not arise for consideration. It was only on the merits of the assessment that the assessee had preferred an appeal before the Tribunal. After recording its finding with regard to the applicability of the proviso to section 147 in respect of the assessment year 1996-97 and the same being barred by limitation, the Tribunal, has, in so far as the subsequent assessment years are concerned, recorded a finding that the reopening and, thereafter, reassessment was not in conformity with the provisions of section 147. It is against the aforesaid findings of the Tribunal that the Revenue has preferred these appeals.

13. We will first take up the issue relating to legality of reopening of the assessment in respect of the assessment year 1996-97 and whether such reopening is barred by limitation in view of the proviso to section 147. This issue is covered by the substantial question of law No. 1 in T. C. (A.) Nos. 310 to 312 of 2007. The said substantial question of law, however, has two aspects for consideration, viz., (i) reopening of the assessment under section 147 invoking the proviso to section 147 by invoking the extended period of limitation, and (ii) whether the reopening of the assessment under section 147 is in accordance with the provisions even though it is within a period of four years. In this regard, it is useful to extract section 147 of the Income-tax Act, which reads as under :

“147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.”

14. The proviso to the said section provides for action to be taken after the expiry of four years, if the income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to file a return under section 139 and in response to issue of notice under section 142(1) or section 148 or to disclose fully and truly all material facts necessary far that assessment year. In this case, it is admitted that the assessee had filed its return under section 139 and, therefore, the requirement to file a return under section 139 has been met by the assessee. Similarly, in response to the notice under section 148 dated March 25, 2003, the assessee has sent a reply dated April 15, 2003, requesting to treat the return filed on November 29, 1996, as a return filed in response to the notice under section 148. Consequent upon which the Assessing Officer has issued a notice under section 142(1) calling upon the assessee to file certain information, details and explanation. Therefore, substantive compliance with the proviso to section 147 has been done, however what remains to be now decided is as to whether the information, details and explanation provided would meet the disjunctive requirement contemplated under the last limb of the proviso to section 147. In this regard a look at section 143 of the Act becomes necessary to determine as to whether the reopening by invocation after the extended period is justifiable.

“143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely :-

(a) the total income or loss shall be computed after making the following adjustments, namely :-

(i) any arithmetical error in the return ; or

(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return ;

(b) the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a) ;. . .

Explanation.— For the purposes of this sub-section,-

(a) ‘an incorrect claim apparent from any information in the return’ shall mean a claim, on the basis of an entry, in the return,-

(i) of an item, which is inconsistent with another entry of the same or some other item in such return ;

(ii) in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished ; or

(iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction ; . . .

(2) Where a return has been furnished under section 139 or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall,-

(i) where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, serve on the assessee a notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him, on a date to be specified therein to produce, or cause to be produced, any evidence or particulars specified therein or on which the assessee may rely, in support of such claim : . . .

(ii) notwithstanding anything contained in clause (i), if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return :

Provided that no notice under clause (ii) shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.

(3) On the day specified in the notice,—

(i) issued under clause (i) of sub-section (2), or as soon afterwards as may be, after hearing such evidence and after taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss accordingly, and determine the sum payable by the assessee on the basis of such assessment ;

(ii) issued under clause (ii) of sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment : . . .

(4) Where a regular assessment under sub-section (3) of this section or section 144 is made,-

(a) any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment ;

(b) if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly.

(5) (Omitted by the Finance Act, 1999, with effect from June 1, 1999.)”

15. A bare perusal of section 143 would indicate that the Assessing Officer is required to comply with the provisions of section 148 before reassessment proceedings and, therefore, a perusal of section 148 also becomes inevitable.

“148. (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed ; manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139 . . .

(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.”

16. The Assessing Officer has formulated an opinion that the assessee has failed to fully and truly disclose all material facts necessary for completion of assessment. The Assessing Officer had served a notice under section 143(1) and under section 148 seeking response to certain specific queries which has admittedly been provided for by the assessee. Now, the issue that requires to be decided is as to whether the response to the queries would justify a true and full disclosure of all material facts as contemplated under the proviso to section 147.

17. We have given our anxious consideration to the submissions on either side and our attention was specifically drawn to the finding of the Assessing Officer contained in page 3 of the assessment order dated March 26, 2004. The learned counsel for the Revenue did not, however, cite any judgment in support of the contentions and merely drew our attention to the findings of the Assessing Officer and the Commissioner of Income-tax (Appeals) to substantiate his contentions. The learned counsel also pointed out that the findings of the Tribunal with regard to the invocation of the extended period of limitation have been erroneously interpreted by the Tribunal and assailed the same.

18. Per contra, the learned senior counsel for the respondent would substantiate the findings of the Tribunal and specifically drew our attention to the order of the Tribunal rendering a finding that the reopening of the assessment is barred by limitation.

19. Even though no case law were cited on behalf of the Revenue, we have gone through the citations which were referred to in the order of the Tribunal and which are exhaustive on the point. Similarly, the contra citations of the respondent cited before the Tribunal supporting the case of the assessee have also been considered by us. Even though a number of decisions were considered by the Tribunal, we find that the law is already well settled in the decisions of the Supreme Court and this court which we refer to hereunder. The following are the said decision relied upon by the Revenue :

(a) In Ess Ess Kay Engg. Co. (P.) Ltd. v. CIT [2001] 247 ITR 818/[2002] 124 Taxman 491, the hon’ble Supreme Court held as follows (page 456 of 137 ITR) :

“On these facts it was held that the Tribunal would be justified in upholding the reopening of the assessment under section 147(a) if the confessional statements were in any manner related to the assessee ; otherwise, not. In view of these two decisions, the law, so far as, this court is concerned, is well settled that though the assessee may have disclosed fully the facts at the time of the original assessment, if they are found to be untrue on the basis of the material discovered later on by the assessing authority, the assessment would be liable to be reopened under section 147(a) because in such a case, the assessee failed to disclose truly all the material facts necessary for the assessment and it would not merely be a case of change of opinion.”

(b) In Indo-Aden Salt Mfg. & Trading Co. (P.) Ltd. v. CIT [1986] 159 ITR 624/25 Taxman 356, the honourable Supreme Court held (page 628) :

” . . . . mere production of evidence before the Income-tax Officer was not enough, that there may be omission or failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the Revenue could have uncovered but did not, then, it is the duty of the assessee to bring it to the notice of the assessing authority . . . Further, if there are some primary facts from which reasonable belief could be formed that there was some non-disclosure or failure to disclose fully and truly all material facts, the Income-tax Officer has jurisdiction to reopen the assessment.”
(c)
In Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456/69 Taxman 627, the honourable Supreme Court observed (pages 477 and 478) :

“. . . an Income-tax Officer acquires jurisdiction to reopen assessment under section 147(a) read with section 148 of the Income-tax Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons which he must record, to believe that, by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profit or gains chargeable to income-tax has escaped assessment . . .

We are not persuaded to accept the argument of Mr. Sharma that the question regarding truthfulness or falsehood of the transactions reflected in the return can only be examined during the original assessment proceedings and not at any stage subsequent thereto. The argument is too broad and general in nature and does violence to the plain phraseology of sections 147 (a) and 148 of the Act and is against the settled law by this court. We have to look to the purpose and intent of the provisions. One of the purposes of section 147, appears to us to be, to ensure that a party cannot get away by willfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say ‘you accepted my lie, now your hands are tied and you can do nothing’. It would be travesty of justice to allow the assessee that latitude.”

(d) In Revathy CP Equipment Ltd. v. Dy. CIT [2000] 241 ITR 856/108 Taxman 279, it has been held (page 860) :

“It is thus clear that the assessee cannot take shelter under the plea that the return did not require a particular fact to be set out and, therefore, the failure to disclose the facts will provide immunity to the assessee from any notice being issued under section 148 of the Act after a period of four years. The duty that is cast upon the assessee is to disclose the primary facts on the basis of which the Assessing Officer can decide as to whether the assessee is entitled to the deduction claimed or not. The mere fact that the Income-tax Officer had reached some conclusions and had allowed the deduction does not necessarily imply that the Income-tax Officer had been provided with the primary facts required for making a decision as to whether the deduction claimed was allowable in terms of the relevant statutory provisions.”

(e) In South India Corpn. Agencies (P.) Ltd. v. CIT [1999] 239 ITR 305 (Mad.), it has been held (page 310) :

“Though the expenditure incurred might have been shown or figured in the profit and loss account, mere filing of the profit and loss account would not be sufficient and that would not discharge the duty cast upon the assessee to disclose all primary facts before the Income-tax Officer for the application of section 40A(5) of the Act . . . In this case, the assessee had not disclosed the full details in respect of the expenditure either at the time of filing of the return or in the statement filed along with the return or subsequently before the Income-tax Officer at the time of completion of the original assessment . . . . the Income-tax Officer, therefore, has the necessary jurisdiction to reopen the assessment under section 147(a) of the Act.”

20. On the contrary, the assessee before the Tribunal relied on the decision in Fenner (India) Ltd. v. Dy. CIT [2000] 241 ITR 672/[1999] 107 Taxman 53, wherein this court held as follows (page 681) :

“If the details placed by the assessee before the Assessing Officer were in conformity with the requirements of all applicable laws and known accounting principles, and material details had been exhibited before the Assessing Officer, it is for the Assessing Officer to reach such conclusions as he considered was warranted from such data and any failure on his part to do so cannot be regarded as the assessee’s failure to furnish the material facts truly and fully.”

21. In a nut-shell, the principles that emerge from the aforesaid decisions including the authoritative pronouncement of the hon’ble Supreme Court are that the Assessing Officer’s finding should categorically establish that the assessee has failed to disclose “fully and truly” the material facts which resulted in the escapement of the assessment on taxable income. The hon’ble apex court has also laid down certain principles to be followed while deciding the cases of such nature, which are as follows ?

1. that there should be reasons to believe that income chargeable to tax has escaped the assessment ;

2. mere change of opinion could not entitle the Assessing Officer to reopen the assessment ;

3. it is incumbent upon the assessee to disclose all primary facts to reach a proper conclusion ;

4. that in the event new or fresh facts emerge which was not present at the time of original assessment it would constitute a reason to believe that income chargeable as tax has escaped assessment ; and

5. if there is no change of law or new material which has come on record then the Assessing Officer cannot reopen the assessment.

22. We find from the reasons set out in the assessment orders that the assessee has explained and disclosed the entire facts which would constitute a full disclosure and, therefore, we have no hesitation to hold that the reopening of assessment is barred by the proviso to section 147. Further, the facts which emerge from the assessment order as well as the order of Commissioner of Income-tax (Appeals) are well founded and in terms of the principles laid down by the apex court. For the aforesaid reasons, we find that the Tribunal has correctly appreciated the facts in holding that the reopening of the assessment orders are barred by limitation. We find that the Commissioner of Income-tax (Appeals) as well as the Tribunal has concurrently held from the facts that the proviso to section 147 would not apply to the facts of this case and since it is a finding of fact that too which is essentially based on the principles which are gathered from the judgments referred to above, we find that the Assessing Officer has departed from the said principles in arriving at a conclusion that the proviso to section 147 would apply in the instant case. We see no reason to deviate from the finding of fact and, hence, the appeal of the Revenue fails on this ground. Therefore, the first part of the substantial question of law No. 1 in T. C. (A.) Nos. 310 to 312 of 2007 with regard to the invocation of extended period of time under the proviso to section 147 is answered in the affirmative and in favour of the assessee.

23. Now, we shall dealing with the second part of the substantial question of law No. 1 as to whether the Assessing Officer is right in reopening the assessment under section 147, even though the same is within the period stipulated under the proviso to section 147. In so far as the assessments for the assessment years 1997-98, 1998-99 and 1999-2000 are concerned, the reopening of the assessment was done well within the period of four years, stipulated under section 147 of the Act and, therefore, the invocation of the extended period of limitation set out in proviso to section 147 does not arise for consideration for these assessment years, however, the essential issue to be considered is as to whether the Assessing Officer is justified in reopening the assessment once the original assessment has been done under section 143(3). Section 147 is the enabling provision which deals with escaped assessment under the heading “Income escaping assessment”. The section enunciates the ground under which the income which has escaped assessment can be assessed or reassessed. The power of the Assessing Officer to assess or reassess such income or other income chargeable to tax, which has escaped assessment circumscribes from the preceding words of the said section that is, “if the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment”.

24. The learned counsel for the Revenue succinctly put forth his argument that the Assessing Officer rightly came to a conclusion that income chargeable to tax has escaped assessment and that the reasons to believe has to be gathered from the assessment order itself, which in his view are exhaustive and the Assessing Officers recording of reasons was neither “vague or fanciful”, nor was it something which can be termed as “change of opinion” on the same set of facts, without any new material available after the assessment.

25. Essentially, the Assessing Officer while recording his reasons to believe that income has escaped assessment, has also come to a conclusion that complete details were not available and, therefore, came to a conclusion that the assessee has suppressed the facts. The learned counsel for the Revenue further pointed out that the factum of payment to RPG Enterprises Ltd. in the form of licence fee came to the knowledge of the Assessing Officer only from the assessment order of RPG Enterprises Ltd., Bombay, and, therefore, it is not as if the assessee has disclosed all the materials fully and truly even when the original assessment proceedings were concluded and, therefore, it can by no stretch of imagination be termed as “change of opinion”.

26. In conclusion, the learned counsel also contended that the assessee had failed to let in evidence that the payment to RPG Enterprises Ltd., Bombay, was for any services that were rendered and, therefore, the payments were not wholly and exclusively for the purpose of business and, hence, not allowable as an expenditure under section 37. To fortify the said contentions, no citations were relied upon before us, nevertheless, we have considered some of the judgments, cited by the Revenue before the Tribunal, which are as follows :

(a) In A. L. A. Firm v. CIT [1976] 102 ITR 622 this court held (page 629) :

“It is enough if the material, on the basis of which the reassessment proceedings are sought to be initiated, came to the notice of the Income-tax Officer subsequent to the original assessment. If the Income-tax Officer had considered and formed an opinion on the said material in the original assessment itself, then he would be powerless to start the proceedings for the reassessment. Where, however, the Income-tax Officer had not considered the material and subsequently come by the material from the record itself, then such a case would fall within the scope of section 147(b) of the Act.”

(b) In Claggett Brachi Co. Ltd. v. CIT [1989] 177 ITR 409/44 Taxman 186, the hon’ble Supreme Court held (page 413) :

“It is open to an Income-tax Officer to assess either a non-resident assessee or to assess the agent of such non-resident assessee. It cannot be disputed also that if an assessment is made on one there can be no assessment on the other . . . The assessment proceedings taken by the Income-tax Officer against the agent have to be ignored and cannot operate as a bar to assessment proceedings directly against the assessee.”

(c) In Family of V.A.M. Sankaralinga Nadar v. CIT [1963] 48 ITR 314, this court held (page 322) :

“There is no jurisdiction on the part of the officer to start upon a venture of reassessment in a haphazard fashion on mere suspicion in the hope of unearthing in escapement of tax. Whether the officer had reason to believe, in consequence of information in his possession, may not be a justiciable issue in a proceeding of this court under section 66 of the Act and to that extent it may really be a matter of subjective satisfaction of the officer concerned, but it is open to the assessee to assail the jurisdiction of the officer on the ground that he had no information upon which he could reasonably believe that any income had escaped assessment.”

(d) In ITO v. Purushottam Das Bangur [1997] 224 ITR 362/90 Taxman 541, the hon’ble Supreme Court held (pages 369, 370) :

“On the basis of the information contained in the letter of Shri Bagai and the documents annexed to it, the Income-tax Officer could have had reason to believe that the fair market value of the shares was far more than the sale price and the market quotations from Calcutta Stock Association shown by the assessee at the time of original assessment were manipulated ones and as a result income chargeable to tax had escaped assessment. It could not be said that the information that was contained in paragraph 2 of the letter of Shri Bagai was not definite information and it could not be acted upon by the Income-tax Officer for taking action under section 147(b) of the Act . . .

Merely because the impugned notice was sent on the next day after receipt of the letter of Shri Bagai does not mean that the Income-tax Officer did not apply his mind to the information contained in the said letter of Shri Bagai. On the basis of the said facts and information contained in the said letter, the Income-tax Officer, without any further investigation, could have formed the opinion that there was reason to believe that the income of the assessee chargeable to tax had escaped assessment.”
(e)
In Salem Provident Fund Society Ltd. v. CIT [1961] 42 ITR 547 this court held :

“We hold that the mistake apparent on the face of the order of assessment itself constitutes information : whether someone else gave that information to the Income-tax Officer or whether he informed himself is immaterial. Further, in the circumstances of this case, the availability of the powers vested in the Income-tax Officer by section 35 did not bar recourse to the jurisdiction vested in him by section 34. The initiation of proceedings under section 34 was valid.”

(f) In Virudhunagar Co-operative Milk Supply Society Ltd. v. CIT [1990] 183 ITR 545/[1989] 46 Taxman 13, this court held (page 549) :

“We are, therefore, of the view that the reopening of the assessment was not the outcome of a mere change of opinion on the part of the successor-officer, but owing to his having come into possession of information with reference to the erroneous allowance of the losses claimed by the assessee during the assessment years in question while finalising the assessment for the year 1970-71. The question whether section 10(27) of the Act would apply or not, has been remitted for on investigation and the assessee has also been given an opportunity of placing such evidence as it may have in support of its stand. We, therefore, hold that on the facts and in the circumstances of the case, section 147(b) of the Act was properly invoked and the Tribunal was right in the view it took on that question. We, therefore, answer the question referred to us in the affirmative and against the assessee.”
(g)
In VE. A. Vairavan Chettiar v. CIT [1973] 92 ITR 474, this court has observed (page 476) :

“On the question of jurisdiction, we are of the view that section 147(b) of the new Act is clearly applicable to the facts of this case. It is not as if the Income-tax Officer considered the applicability of section 41(1) of the old Act at the stage of the original assessment. From the records it appears to be clear that he did not advert his mind to the provisions of section 41 at all. As a matter of fact, from the records, it is clear that he was not aware at all of the existence of the trust in favour of an indeterminate body of persons. He merely proceeded to assess the income from the fund in the hands of the assessee at the ordinary rate. While he has not considered the applicability of section 41(1) of the old Act to the facts, it cannot be said that he has purported to change his opinion on the applicability of section 41(1) by making a revised assessment. It cannot be disputed, and it is clear from the findings given by the Appellate Assistant Commissioner as well as by the Tribunal, that the assessing authority became aware or informed himself of the existence of the trust in favour of an indeterminate body only after the assessment, and that the applicability of section 41 came up for consideration by him only in the subsequent assessment years. Though the learned counsel for the assessee may be right in his general submission that the Income-tax Officer cannot change his opinion merely in the guise of reopening an assessment, in this case, we are not inclined to hold that the Income-tax Officer has merely attempted to change his opinion by making the revised assessment. We have to, therefore, answer the first question in the affirmative and against the assessee. On the second question, we are clearly of the opinion that the proviso to section 41(1) of the old Act is quite applicable to the facts of this case. It is not in dispute that the shares of the various beneficiaries of the trust are indeterminate and unknown and, as a matter of fact, the beneficiaries themselves are a fluctuating body of persons. We have to, therefore, agree with the view taken by the Tribunal on this aspect. The second question is, therefore, also answered in the affirmative and against the assessee.”

The following cases were cited by the respondent-assessee :

(a) Andhra Bank Ltd. v. CIT [1997] 225 ITR 447/92 Taxman 534 wherein the honourable Supreme Court held (headnote) :

“Once the change in the method of accounting of the assessee had been knowingly allowed by the Income-tax Officer after taking into account all the relevant facts, it was not permissible for the Income-tax Officer, or his successor, to reopen the assessment at a later point of time under section 147(b) unless any information came from an extraneous source.”
(b)
CIT v. Foramer France [2003] 264 ITR 566/129 Taxman 72 wherein the hon’ble Supreme Court held (page 444 of 247 ITR) :

“It is settled law that an appeal is a continuation of the original proceedings and hence, when the Tribunal in the appeal relating to the petitioner has considered the decision of the Tribunal in Boudier Christian’s case, the impugned notice under section 147/148 would obviously be on the basis of a mere change of opinion by the income-tax authorities, which would not be valid.”

(c) Jindal Photo Films Ltd. v. Dy. CIT [1998] 234 ITR 170/[1999] 105 Taxman 386, wherein the Delhi High Court has held as follows (pages 178 and 179) :

“. . . . if an expenditure or a deduction was wrongly allowed while computing the taxable income of the assessee, the same could not be brought to tax by reopening the assessment merely on account of subsequently the Assessing Officer forming an opinion that earlier he had erred in allowing the expenditure or the deduction . . .

It is also equally well-settled that if a notice under section 148 has been issued without the jurisdictional foundation under section 147 being available to the Assessing Officer, the notice and the subsequent proceedings will be without jurisdiction, liable to be struck down in exercise of writ jurisdiction of this court. If ‘reason to believe’ be available, the writ court will not exercise its power of judicial review to go into the sufficiency or adequacy of the material available.”

(d) Fenner (India) Ltd.’s case (supra) wherein this court held (pages 681 and 682) :

“The duty of an assessee is limited to fully and truly disclosing all the material facts. The assessee is not required thereafter to prepare a draft assessment order. If the details placed by the assessee before the Assessing Officer were in conformity with the requirements of all applicable laws and known accounting principles, and material details had been exhibited before the Assessing Officer, it is for the Assessing Officer to reach such conclusions as he considered was warranted from such data and any failure on his part to do so cannot be regarded as the assessee’s failure to furnish the material facts truly and fully. Any lack of comprehension on the part of the Assessing Officer in understanding the details placed before him cannot confer a justification for reopening the assessment, long after the period of four years had expired. On the facts of this case, it is clear that the escapement of income, if any, on this account is not on account of any failure on the assessee’s part to disclose the material facts fully and truly. The notice issued by the Assessing Officer in exercise of his power under section 147, therefore, cannot be sustained.

As the error here is one of jurisdiction it is not necessary for the assessee to have recourse to the remedies by way of appeal, revision, etc. It is well settled that when a jurisdictional error is brought to the notice of this court such errors are capable of being corrected by this court in exercise of the court’s powers under article 226 of the Constitution of India. The Supreme Court in the case of CIT v. Progressive Engineering [1993] 200 ITR 231 (sic), held that when all the relevant facts were before the court and the law is clear on the subject, it is the duty of the High Court to interfere. That was also a case where the proceedings were sought to be initiated against the assessee under section 147 of the Act.”

(e) S. Harinivas Chowdry v. Asstt. CIT [2000] 246 ITR 256 wherein this court held :

“. . . the Income-tax Act has been amended to ensure finality of assessment, and thus Parliament has recognised the importance of assessment reaching a finality and the necessity to ensure that assessments are not reopened without any basis or justification. Therefore, it is crystal clear that unless the necessary ingredients of section 147 are established, the assessment cannot be reopened. But in the cases, there is not even an averment on the side of the respondent that there is any escapement of income. That being so, the reopening in question is illegal and without jurisdiction, as there is no escapement of income warranting the reopening of the assessment already completed.”
(f)
Phool Chand Bajrang Lal’s case (supra) wherein the honourable Supreme Court held (pages 477 and 478) :

“It would be immaterial whether the Income-tax Officer at the time of making the original assessment could or could not have found by further enquiry or investigation, whether the transaction was genuine or not if, on the basis of subsequent information, the Income-tax Officer arrives at a conclusion, after satisfying the twin conditions prescribed in section 147(a), that the assessee had not made a full and true disclosure of the material facts at the time of original assessment and, therefore, income chargeable to tax had escaped assessment . . .

In our opinion, therefore, in the facts of the present case, the Income-tax Officer, Azamgarh, rightly initiated the reassessment proceedings on the basis of subsequent information, which was specific, relevant and reliable and, after recording the reasons for formation of his own belief that in the original assessment proceedings, the assessee had not disclosed the material facts truly and fully and, therefore, income chargeable to tax had escaped assessment.”

(g) CWT v. B. Vijayakumar [1999] 238 ITR 728 wherein this court held (page 729 of 238 ITR) :

“. . . the reliance placed by the Assessing Officer on the report of the audit party which had not merely drawn the attention of the Assessing Officer to the law, but had coloured his view of the law did not constitute ‘information’ on the basis of which, the concluded assessment could be reopened and a fresh assessment made.”

(h) Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996/2 Taxman 197 wherein the honourable Supreme Court held (page 1004) :

“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 . . . the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income-tax Officer.”

(i) Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC) the court held (page 296 of 102 ITR) :

“That information, must, it is true, have come into the possession of the Income-tax Officer after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected.”
27.
The crux of the decisions cited by the Revenue is that the Assessing Officer is entitled to reopen the assessment taking aid under section 147 and if the facts and circumstances warrants so and thus it was contended that the findings of the Commissioner of Income-tax (Appeals) and the Tribunal are erroneous and, hence, require to be set aside.

28. Per contra, the learned senior counsel for the assessee pointed out that once the assessment is completed, it cannot be reopened for the mere asking unless and until the requirements of section 147 is met with all its rigour and as amplified by authoritative pronouncements of this court and the hon’ble apex court (which we have extracted above). The learned senior counsel also pointed out that once the original assessment is completed under section 143(3), the Assessing Officer cannot record vague and fanciful reasons to reopen the assessment and a mere “change in opinion” of the Assessing Officer will not entitle reopening of the assessment. It was further argued that nevertheless the expenditure incurred for payment of licence fee to RPG Enterprises Ltd. is in the nature of business expenditure and wholly and exclusively for the purpose of the business, it is allowable as a business expenditure. Therefore, it was contented that the Assessing Officer’s order of reassessment recording reasons to reopen has been rightly set aside by the Commissioner of Income-tax (Appeals) and confirmed by the Tribunal. We shall deal with this arguments pertaining to payment of licence fee in the latter part of this judgment. However, while deciding the issue as to whether the Assessing Officer is entitled to reassess such escaped assessment, we shall confine to the arguments pertaining to the purport and ambit of section 147 and the case law cited by either side.

29. The crux of the issue that emerges for consideration as to whether the Assessing Officer has recorded reasons to believe that the income chargeable to tax has escaped assessment or not. In this regard, a detailed scrutiny of the assessment order would lead to a conclusion that certain specific queries were raised by the Assessing Officer and that the assessee had submitted its reply to the said queries which form the essential basis to determine as to whether there has been any income which has escaped assessment.

30. We have carefully examined the assessment orders and we find that the reasons recorded by the Assessing Officer goes into various details while coming to the conclusion that the income has escaped assessment and, in our opinion, the said material and details were already available with the Assessing Officer at the time of initial assessment and it does not appear to be something which has been gathered afresh or that which came to the notice of the Assessing Officer after the completion of original assessment. The payment of licence fee to RPG Enterprises Ltd. was not a new fact which has emerged, on the contrary in the original returns that were filed, the factum of payment of licence fee to RPG Enterprises Ltd. was clearly disclosed and, therefore, it appears that the Assessing Officer had a mere relook at the same facts, which, in our considered opinion, is against the dictum of the apex court and the principles that emerge therefrom. An analysis of the orders of the Commissioner of Income-tax (Appeals) as well as the Tribunal would show that the Assessing Officer had actually before him all the relevant materials at the time of the original assessment itself and, therefore, the finding of fact recorded by the Commissioner of Income-tax (Appeals) as well as the Tribunal does not call for any interference and we find that the reassessment was merely a relook of the earlier assessment with a change of opinion and, therefore, the reasons by which the Assessing Officer reopens the assessment are actually vague and fanciful. We also find that the Commissioner of Income-tax (Appeals) while dealing with the appeals arising out of the assessment had considered at length the Assessing Officer’s finding and came to a conclusion that the reasoning assigned by the Assessing Officer are not sufficient and, hence, the reopening of the assessment was bereft of materials to come to a conclusion that there were reasons to believe that the income has escaped assessment. Therefore, the order of the Commissioner of Income-tax (Appeals) overturning the order of Assessing Officer is, in our opinion, correct. We have also given our anxious consideration to the order of the Tribunal which has considered the issue at length and essentially the judgments in this regard. We are of the considered opinion that the Tribunal has correctly appreciated the finding of the Commissioner of Income-tax (Appeals) and applied the law in this regard in coming to such a conclusion. Arguments were advanced to the effect that it was a concurrent finding of facts by the Commissioner of Income-tax (Appeals) and the Tribunal and, therefore, no substantial question of law arises for consideration and we are, in the facts and circumstances of the case, in agreement with the findings of the Tribunal and the Commissioner of Income-tax (Appeals), which are essentially final fact finding authorities. It is not as if this court in exercise of its power under section 260A of the Act cannot examine the correctness of such concurrent findings. It is, however, to be borne in mind that while examining the orders of the Tribunal and the Commissioner of Income-tax (Appeals) when it is found that the findings were perverse or contrary to the law in this regard, we would have no hesitation to interfere. However, from an overall conspectus of the facts and law that emerges from the judgments referred to supra, we find no reasons to interfere with the findings of the Tribunal, which in turn confirmed the finding of the Commissioner of Income-tax (Appeals). We, therefore, answer these substantial questions of law in favour of the assessee and against the Revenue.

Substantial question of law No. 2 in both the batches :

31. The first of the other two remaining issues that has to be considered is as to whether the payment of licence fee by the assessee to RPG Enterprises Ltd. is incurred wholly and exclusively for the purpose of the business. The learned counsel for the Revenue, taking us through the assessment orders (which are almost identical for all the assessment years) pointed out that the Assessing Officer has dealt with this issue elaborately and various facts including the payment by the subsidiary company to RPG Enterprises Ltd. over the years and has come to a conclusion that the payment of such licence fee cannot be termed as an expenditure wholly and exclusively for the purpose of the business. The learned counsel pointed out that the payment of licence fee, no doubt, is a question of fact which has to be gathered from the circumstances governing such payments and the services which are provided and pointed out that the Commissioner of Income-tax (Appeals) as well as the Tribunal committed an error, while upturning the order of the Assessing Officer. It is the case of the Revenue that the finding of fact cannot, be overlooked by the appellate authorities below unless there are just and valid grounds. Essentially, the learned counsel would submit that it is not the substitution of reasons that the appellate authorities are called upon to carry out but rather to evaluate the reason of the Assessing Officer to come to a conclusion whether the said findings are correct. In effect, the learned counsel would submit that the payments to RPG Enterprises Ltd. is gratuitous in nature and, hence, not wholly and exclusively laid down for the purpose of the business and, therefore, in conclusion would contend that the disallowance was valid and justified.

32. On the other hand, learned counsel for the respondent-assessee submitted that the respondent-assessee belong to the RPG group of companies. Learned counsel submitted that in case of large group of companies like that of the respondent-assessee, the business overheads is shared by establishing a common organisational service platform to provide common services to all the group companies. It is an established practice in many large business groups to establish a common administrative or service platform to cater the needs of the companies in the group. Learned counsel cited the examples of M/s. Duncon Industries Ltd. under the Duncan group of companies and M/s. Eveready Industries India Ltd. under the Williamson Magor group of companies paying licence fee for availing of benefits of the business organisation platform set up by Duncan Co. Ltd. and Williamson Magor and Co. Ltd. Such common organisation service platform catering the need of the group companies not only result in saving of business overheads but also gives benefit of synergies and result in better, efficient and centralised control over the group companies.

33. Learned counsel submitted that, in the present case, M/s. RPG Enterprises Ltd. is a group resource company providing centralised resources to all the group companies. The respondent-assessee, in terms of the agreement entered into with M/s. RPG Enterprises Ltd. availed of valuable services from M/s. RPG Enterprises Ltd. and also made use of RPG logo as part of their business operations for their business prospects. The respondent-companies by availing of service benefits from M/s. RPG Enterprises Ltd. also availed of valuable benefit for their business operations. The payment of licence fee to M/s. RPG Enterprises Ltd. by the respondent-assessee was towards their share of actual expenses incurred by M/s. RPG Enterprises Ltd. Learned counsel submitted that the assessee-companies were, therefore, gained through this cost sharing arrangement with M/s. RPG Enterprises Ltd. and in the absence of such cost sharing arrangement, the assessee would have incurred higher financial costs. The payment of licence fee paid to M/s. RPG Enterprises Ltd. was undoubtedly, as has been held by the Commissioner of Income-tax (Appeals) and the Tribunal, a business expenditure wholly and exclusively for the purpose of respondents’ business.

34. Learned counsel for the respondent-assessee, referring to the agreement entered into with M/s. RPG Enterprises Ltd., submitted that in terms of the said agreement, the licensee (respondents) has to reimburse the licensor (M/s. RPG Enterprises Ltd.) their share of costs incurred for availing of the benefits of the expertise developed by M/s. RPG Enterprises Ltd. It was on the basis of the said agreement, for availing of the benefit of business expertise from M/s. RPG Enterprises Ltd., the respondent companies had paid the licence fee on the basis of the debit notes raised by RPG Enterprises Ltd..

35. The assessing authority held that the respondent-assessee and M/s. RPG Enterprises Ltd. are two different legal entities under the Income-tax Act and, therefore, the sharing of expenditure of some other entity by the assessee was not an allowable expenditure. The assessing authority was of the view that it may be true and not disputed that RPG Enterprises Ltd. had incurred this expenditure but the business purpose of the assessee reimbursing the said expenses to RPG Enterprises Ltd. was not established and that the payment of licence fee was more in the nature of an application of income by the assessee. The Assessing Officer disallowed the claim of the assessee towards licence fee paid to M/s. RPG Enterprises Ltd. and added the said amounts to their income. The appellate authority, the Commissioner of Income-tax (Appeals), relying on the order passed by the Kolkata Income-tax Appellate Tribunal in the case of Dy. CIT v. Philips Carbon Black Ltd. [2011] 133 ITD 189/16 taxmann.com 64 (TM) was of the view that by taking the benefit of the common business establishment, the assessee could access the expert advice in various business fields and, therefore, licence fee paid to M/s. RPG Enterprises Ltd. was a business expenditure incurred wholly and exclusively for the purpose of business. The appellate authority found that the facts and circumstances of the assessee’s case were identical to the facts of Philips Carbon Black Ltd. and, therefore, following the order passed by the Kolkata Income-tax Appellate Tribunal, set aside the order of the assessing authority and deleted the disallowance of licence fee paid to M/s. RPG Enterprise Ltd. In the appeal before the Tribunal by the Revenue, the Tribunal, following the decision of the co-ordinate Bench of the Madras Income-tax Appellate Tribunal in the case of RPG Transmission Ltd. IT Appeal Nos. 751 to 753 (Mad) of 2005, held that since the material facts and circumstances governing payments made by the assessee towards licence fee were same as in the case of RPG Transmission Ltd. (supra) confirmed the order of the Commissioner of Income-tax (Appeals) in deleting the disallowance of licence fees paid to RPG Enterprises Ltd. and rejected the appeal filed by the Revenue. It, however, appears that in the appeal before the Tribunal neither the Revenue nor the assessee has brought to the notice of the Tribunal that the earlier order passed by the Tribunal in the case of RPG Transmission Ltd. (supra) was the subject matter of further appeal before this court.

36. Before us, reiterating the findings of the Tribunal in the orders impugned in this appeal, learned senior counsel for the respondent-assessee drew our attention to the decision of the Calcutta High Court in Phillips Carbon Black Ltd.’s case (supra) where the Calcutta High Court had dismissed the appeal filed by the Revenue on the licence fee holding that no substantial question of law was involved. It is pertinent here to note that the said decision was not rendered on the merits of such expenditure which was allowed as business expenditure but the High Court was of the view that no substantial question of law was involved. In such circumstances, the said decision of the Calcutta High Court may not be of any assistance to the respondent-assessee to substantiate their claim. It was also pointed out on behalf of the respondent-assessee that the Bombay Tribunal in the case of RPG Life Science has allowed the deduction towards licence fee paid to RPG Enterprises Ltd. and that the decision of the Bombay Tribunal got the approval of the Bombay High Court. We note from the order dated December 6, 2010, in I. T. A. No. 4148 of 2009 of the Bombay High Court that the appeals were dismissed at the stage of admission as the High Court was of the view that no substantial question of law involved for a decision by the High Court and it reads as follows :

“The second question raised by the Revenue is, whether the Tribunal was justified in holding that the expenditure incurred by the assessee was exclusively for the purposes of business. A perusal of the order passed by the Commissioner of Income-tax (Appeals) shows that the Commissioner of Income-tax (Appeals) has recorded a finding of fact that M/s. RPG Enterprises Ltd. had actually rendered service for the business needs of the assessee-company and the assessee-company has also taken benefit of infrastructure resources, services and expert guidance of the group corporate centre at RPG Enterprises Ltd. and, therefore, the expenditure was allowable. In our opinion, the decision of the Tribunal is based on finding of fact. No substantial question of law arises from the order of the Tribunal.

3. The appeal is dismissed with no order as to costs.”

37. Following the above decision, the appeals by the Revenue pertaining to subsequent assessment years were also dismissed. Similarly, the Calcutta High Court, by an order dated July 6, 2007, in the case of Philip Carbon Black Ltd. IT Appeal No. 293 of 2007, has held as follows :

“In respect of the earlier assessment years the same order was passed by the Tribunal. No appeal was admitted by the court. Hence, in our opinion, the issue has already been settled. We have also perused the order passed by the Tribunal and we do not find any substantial question of law involved in this matter. Hence, dismissed.”

38. We have carefully perused the order passed by the Bombay Tribunal, which was taken up in appeal before the Bombay High Court in the judgment referred to above. We find that the findings recorded by the Bombay Tribunal were essentially based on the decision of the Madras Bench of the Tribunal rendered in RPG Transmission’s case, which order is impugned before this court. We, therefore, cannot solely rely on the decisions cited by the learned counsel for the respondent-assessee as at the time of rendering the abovesaid decision, the present appeal was already admitted and, therefore, this court could very well examine the correctness or otherwise of the Tribunal’s order, independently.

39. We have carefully examined the order of the Tribunal, which is impugned before us in this appeal. We find that while concurring with the Commissioner of Income-tax (Appeals), on the issue of licence fee paid, the Tribunal had set aside the findings of the assessing authority. The essential facts which emerge from the material on record are as to whether the expenditure incurred by the assessee towards payment of licence fee to M/s. RPG Enterprises Ltd. was justifiable on the facts for such allowance. We note from the order of the Commissioner of Income-tax (Appeals) as well as the order of the Tribunal that the respondent-assessee by availing of service benefits from the group resource company, viz., M/s. RPG Enterprises Ltd. availed of valuable benefit for their business operations and that the payment of licence fee to M/s. RPG Enterprise Ltd. by the respondent-assessee was towards their share of actual expenses incurred by M/s. RPG Enterprises Ltd. The Commissioner of Income-tax (Appeals) and the Tribunal in their orders clearly pointed out that the expenditure incurred by the respondent-assessee towards licence fee payment to M/s. RPG Enterprises Ltd. were relatable to the business expediency and profits of the respondent-assessee and that the benefits availed of by the respondent-assessee from the service of the group resource company are tangible and justified. We, therefore, do not see any reason to interfere with the concurrent finding of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal. The orders passed by the Commissioner of Income-tax (Appeals) and the Tribunal contain cogent reasons for arriving at such findings.

40. As pointed out by the learned counsel for the Revenue, the Assessing Officer has considered in detail the nature of payment vis-a-vis the services rendered and the expertise of RPG Enterprises Ltd. We have also seen the order of the Commissioner of Income-tax (Appeals) overturning the said finding and that of the Tribunal affirming the findings of the Commissioner of Income-tax (Appeals). We are in agreement with the said findings and since it is a concurrent finding of fact, in normal circumstances, this court would not interfere with such concurrent finding of fact unless it is pointed that the findings were perverse or that it was an erroneous application of law. The Revenue has not been able to countenance this question of fact before us by pointing out as to how the findings are perverse. The learned counsel for the Revenue has not pointed out as to whether the orders of the Bombay and the Calcutta High Courts have attained finality or not. In other words, it has not been informed by the Revenue as to whether the aforesaid decisions were taken upon on further appeal before the hon’ble Supreme Court or not. We, therefore, find that the Tribunal as well as the Commissioner of Income-tax (Appeals) has correctly held that the payment of licence fee to the RPG Enterprise is justified and, therefore, the business expenditure is liable to be deleted from the income.

41. We find that RPG Life Sciences as well as Philip Carbon Black are group companies of RPG Enterprises Ltd. and that both these companies are paying licence fees to RPG Enterprises Ltd. in the similar manner paid by the assessee herein. The facts in this case are identical to the facts involved in the decisions cited above as we had also an occasion to peruse the order of the Bombay and Calcutta Tribunals and, hence, we respectfully agree with the decisions of the Bombay and the Calcutta High Courts in dismissing the Revenue’s appeal in those cases.

42. We, therefore, answer substantial question of law No. 2 in both the batches against the Revenue.

Substantial question of law No. 3 in both the batches :

43. The remaining issue which requires to be considered is with regard to the payment of interest on borrowed funds utilized for investment of share in CESE Ltd. and if the same can be treated as business expenditure on the grounds that it is one of the objectives of the assessee-company.

44. The Assessing Officer while reopening and reassessing the income has disallowed the expenditure towards payment of interest on borrowed funds, which were utilised for the purpose of investment in group companies. Consistently the expenditure has been disallowed in all the assessment years from 1996-97 onwards. As against the said findings, the assessee had preferred appeals before the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) had disallowed certain amount paid as interest and also deleted the addition of certain amount of income, as against which the assessee had filed appeals before the Tribunal. Cross-appeal was filed by the Revenue for the assessment year 2001-02 before the Tribunal.

45. The issue that requires to be considered is as to whether under section 36(1)(iii) of the Act, interest paid for borrowings could be allowed as an expenditure. In this regard, it will be useful to refer to the said section 36(1)(iii) :

“36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-. . .

(iia) (Omitted by the Finance Act, 1999, with effect from April 1, 2000.)

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not) ; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.”

46. A careful perusal of the above section contemplates that, firstly, the money should have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business and, thirdly, the assessee must have paid interest on the said amount. The learned counsel for the Revenue, vehemently put forth his arguments contending that the Assessing Officer after an overall analysis of the facts had come to a conclusion that the expenditure on account of interest was mainly relatable to the borrowings which were invested for purchase of shares of CESE Ltd., which is a group company of the assessee. The learned counsel also drew our attention to pages 20 to 27 of the assessment order to drive home the point that the expenditure cannot be termed as expenditure incurred for the purpose of the business. In other words, the interest which was paid cannot be treated as business expenditure for the simple reason that the investments were made in a group company. Furthermore, it was contended that the expenditure on borrowings far exceeded the income derived therefrom. In support of his argument learned standing counsel relied on the following decisions :

(a) In K. Somasundaram & Bros v. CIT [1999] 238 ITR 939 this court held as follows (page 943) :

“The amount borrowed for the business remains a liability for the business till its discharge. The fact that the amount borrowed may have been invested in the purchase of machinery or utilised as working capital or used in any other way does not in any way affect the liability for repayment of the amount borrowed. So long as the money borrowed is used in the business, interest paid on such borrowing is a proper charge on the business and is allowable as an expenditure. Under section 36(1)(iii) of the Act, amounts diverted not being used for the purposes of the business, interest relating to the operation diverted cannot be treated as an item of permissible deduction in the computation of income.”

(b) In CIT v. Munjal Sales Corpn. [2008] 298 ITR 294 (Punj. & Har.), it was held as under (page 295) :

“We have already considered an identical issue in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 (P&H) this court held as under (page 12) :

‘As far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister concern on interest-free basis is concerned, in our view, the stand of the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister concerns without interest is on the Revenue is not correct. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for non-business purposes without any interest and, accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. In our view, even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest-free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted.’

Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loans, as working capital loan, as sale proceeds, etc., do not have any different colour. Whatever are the receipts in the business, they have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for nan-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest.”
47.
Per contra, the learned senior counsel for the respondent-assessee, contended that with regard to the findings of the Tribunal regarding disallowance of business expenditure, the Tribunal has rightly come to a conclusion that the investments were made for the purposes of purchase of the shares in CESE Ltd. and that it has been pointed out that one of the purposes of the business of the assessee was also to invest in other business activities, including shares, debentures, etc. Furthermore, there is nexus between the nature of business carried out, i.e., generation and distribution of electricity, power transmission, etc., and, therefore, the investments was for the purpose of the business and, therefore, no part of the interest expenditure could be disallowed. In this regard, fortifying the said submission, the learned senior counsel also relied upon the decisions of this court as well as other courts. Learned senior counsel to buttress his arguments, relied on the following decisions.

(a) Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 wherein the honourable Supreme Court held as under (page 329) :

“We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”

(b) CIT v. Phil Corpn. Ltd. [2011] 202 Taxman 368/14 taxmann.com 58, wherein the Bombay High Court has held as under :

“Mr. Sonak, learned counsel for respondent No. 1 submitted that the Tribunal has rightly relied on the decision of Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45 (Guj) ; [1982] 26 CTR (Guj) 184 of the Gujarat High Court. He further relied on CIT v. Jardine Henderson Ltd. [1994] 210 ITR 981 (Cal) ; [1995] 125 CTR (Cal) 12 of the Calcutta High Court, wherein it was held that the interest paid on borrowings utilized for the purchase of shares in order to retain managing agency by the assessee-company was held allowable as business expenditure. We find that the reasoning of the Tribunal that the overdraft was not operated only for investing in the shares of subsidiary company and that the fact that it was also used for investment in the shares of the subsidiary company to have control over that company and, therefore, the element of interest paid on the overdraft was not susceptible of bifurcation and, therefore, respondent No. 1 is entitled to the deduction under section 36(1)(iii) of the Income-tax Act is correct and deserves to be accepted.”
(c)
CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 wherein the honourable Supreme Court held as under (page 150) :

“The aforesaid discussion leads to the following result : The expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory ; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. In the present case, the company, as a statutory agent of the deceased owners of the shares, paid the sums payable by the legal representatives of the deceased shareholders. The payments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues the Revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of the business. It is manifest that the amounts in question were paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. We, therefore, hold that the estate duty paid by the respondent was not an allowable deduction under section 10(2)(xv) of the Act. We answer the question in the negative. The order of the High Court is wrong and is set aside.”

48. It is an admitted fact that substantial expenditure on payment of interest was incurred only on account of borrowings which appears to have been invested in shares, savings certificates, fixed deposits, etc. In fact, section 57 lays down the permissible deductions and section 57(iii) lays down that the expenditure so expended should be wholly and exclusively for the purpose of making or earning such income. It is no doubt true that one of the purposes of the assessee’s business was also to invest in the shares of other companies.

49.
The Tribunal, in consideration of appeal of the assessee in paragraph 35 of the order dated January 23, 2006, has dealt with this issue at length. The Tribunal has found that there is proximate nexus between the business of the assessee-company and that of the company in which investments were made in the form of shares. It may be true that the returns are not commensurate with the expected returns in the form of interest, but if and when, the shares are liquidated, there is expectancy of substantial gains which fact has been glossed over by the Assessing Officer while confining his findings that the returns are far below the quantum of interest paid on the borrowed funds and, therefore, the basis of analysing that the payment of interest on borrowed funds has to be tested on the ground of quantum of return is untenable. Furthermore, as rightly pointed out by the learned senior counsel for the assessee, section 36(1)(iii) of the Act does not contemplate any test that the amounts so invested should be “wholly and exclusively for making or earning such income”. On a plain reading of section 36(1)(iii), we do not find any such requirement mandated in the section to confine such expense. Furthermore, the section also does not place any embargo for investments to be made in group concerns and subsidiary concerns. Therefore, we are not in agreement with the findings of the Commissioner of Income-tax (Appeals) and concur with the findings of the Tribunal in this regard.

50. In our judgment in the tax case appeal in T. C. (A.) No. 1980 of 2008, (since reported in CIT v. Spencers & Co. Ltd. (No.3) [2013] 359 ITR 644 which was heard along with these appeals and disposed of today, we have elaborately discussed the issue relating to payment of interest on borrowed capital and the reasons given by us in the said judgment for sustaining the order of the Tribunal are also applicable to the present appeals.

51. We have carefully scrutinised the reasons given by the appellate authority and the Tribunal for allowing the assessee’s claim of interest paid on borrowed capital. The appellate authority and the Tribunal found that the investment made in shares by the assessee by utilising borrowed capital was for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments and, therefore, the claim was fully allowable under section 36(1)(iii). We also found that the Revenue did not adduce any material to show that the borrowed capital was utilised by the assessee for non-business purposes. The appellate authority, in our considered view, was correct in allowing the claim of the assessee and deleting the disallowance made by the assessing authority. We also find that the Tribunal in correct appreciation of the matter had in turn confirmed the finding of the appellate authority. We see no reason to interfere with the order passed by the Tribunal.

52. We, thus answer these substantial questions of law in favour of the assessee.

In the result, all these appeals filed by the Revenue are dismissed. No costs.

[Citation : 359 ITR 673 ]