2007-VIL-326-ITAT-HYD

Equivalent Citation: [2009] 308 ITR 192, ITD 124, 272, TTJ 120, 855,

Income Tax Appellate Tribunal HYDERABAD

IT APPEAL NO. 1056 & 1074 (HYD.) OF 2003 AND 327 (HYD.) of 2006

Date: 14.12.2007

PENNAR ELECTRONICS (P) LIMITED.

Vs

DEPUTY COMMISSIONER OF INCOME-TAX. INCOME-TAX OFFICER.

BENCH

Member(s)  : DINESH K. AGARWAL., ANANDILAL GEHLOT.

JUDGMENT

These three appeals concerning two different assessees are directed against two separate orders of the learned CIT(A), dt. 8th July, 2003 in the cases concerning M/s Pennar Electronics (P) Ltd. and dt. 31st Jan., 2006 in the case of Shri Neelam Ravi Kumar for the asst. yr. 1998-99. The appeals concerning M/s Pennar Electronics Ltd. are cross-appeals by assessee and Revenue whereas the other appeal is filed only by the assessee, Shri Neelam Ravi Kumar, managing director of M/s Pennar Electronics (P) Ltd. Since facts are identical and issues are common and interconnected, these three appeals are disposed of by this common order for the sake of convenience.

2. We may take up the cross-appeals in M/s Pennar Electronics (P) Ltd., for consideration first.

Assessee's appeal (ITA No. 1056/Hyd/2003)-Asst. yr. 1998-99

Revenue's appeal (ITA No. 1074/Hyd/2003)

3. Briefly stated facts of the case, as observed by the AO, are that the assessee, a private limited company engaged in the business of manufacture and sale of TVs filed its return of income admitting loss of Rs. 2,48,534. It was observed by the AO that as per the statement filed with the return, it is seen that the company had admitted income of Rs. 16,17,154 under the head 'Other income' The above income included Rs. 12,06,778 being syndication charges received and Rs. 4,10,370 being the waiver of interest by the bank. From the total income of Rs. 16,17,154, the assessee has deducted Rs. 5,17,089 being decrease in value of closing stock Rs. 1,05,263, selling and administration expenses Rs. 4,11,726 and finance expenses Rs. 100. From the profit thus arrived at Rs. 11,00,065 brought forward loss pertaining to TV unit was adjusted and unabsorbed loss was carried forward. During the course of assessment, it was found that the business of the company was to purchase raw material for assembling TV sets and sell them to Government agencies. Further, it was noticed by the AO that during the assessment proceedings for asst. yr. 1996-97, it was stated by the assessee that due to mounting losses, business was discontinued and production was stopped from April, 1995 onwards. Audit report filed by the assessee for the financial years 1995-96 and 1996-97 also revealed that the company stopped the production of TVs from April, 1995 and the staff was also retrenched. This position was also confirmed by the subsequent statements filed by the assessee for the asst. yrs. 1997-98 and 1998-99, wherein no purchases or sales were admitted nor any expenditure was debited under any head except Rs. 200 under the head 'Filing and licence fee' relating to TV business, which according to the AO, proved that the business of TV was stopped w.e.f. April, 1995 as admitted by the assessee.

4. During the course of hearing before the AO it was explained by the assessee that the assessee company rendered services to M/s Praveen Securities Ltd. and got commission. It was also explained that M/s Praveen Securities Ltd. got a joint mandate from Andhra Pradesh State Electricity Board (in short "APSEB") along with Kotak Mahindra Ltd. for provision of lease finance to an extent of Rs. 300 crores and as time for providing the lease finance was too short, M/s Praveen Securities Ltd. and its sister concern Kommineni Fintech Ltd. approached the assessee to help them in that regard, on commission basis. The assessee on behalf of Praveen Securities approached Infrastructural Leasing & Finance Securities, Bangalore and got finance to the extent of Rs. 45 crores for APSEB and on behalf of Kommineni Fintech Ltd. The assessee also approached Tata Finance Ltd., Bombay and got funds to the extent of Rs. 13 crores for the APSEB. On these transactions, the assessee had received commission of Rs. 9,47,778 from M/s Praveen Securities and Rs. 2,59,000 from M/s Kommineni Fintech Ltd., which aggregated to Rs. 12,06,778. The AO was of the view that the commission income from the above parties admitted by the assessee cannot be adjusted against the loss from TV business for the simple reason that the TV business was stopped as long back as in April, 1995. Accordingly, the AO issued show-cause notice calling for the objections of the assessee, if any. In response, the assessee company filed petition for direction under s. 144A of the IT Act, 1961 (the Act) before the Jt. CIT. The Jt. CIT vide his directions dt. 6th March, 2000, relying on certain decisions, directed that since the business in which the loss was originally computed was not carried on by the assessee, the loss cannot be set off in this year. In this view of the matter, the AO after rejecting the assessee's claim for adjustment of carry forward loss from TV business against the income from syndication charges, computed the total income of Rs. 15,13,650, which was arrived at after deducting expenditure relating to commission of Rs. 1,03,500 from gross income of Rs. 16,17,154, comprising of syndication charges of Rs. 12,06,778 and interest waived by the bank treated as income under s. 41 of the Act of Rs. 4,10,376, and accordingly completed the assessment vide order dt. 23rd Nov., 2000 under s. 143(3) of the Act.

5. Being aggrieved, the assessee preferred appeal before the CIT(A). The learned CIT(A) after examining the objects of the assessee company, however, held that it is the managing director of the assessee company, Shri N. Ravikumar Reddy, in his individual capacity, who has earned the syndication charges and not the appellant company. The learned CIT(A) without deciding the grounds raised by the assessee before him, allowed the appeal for statistical purposes vide penultimate para of the appellate order impugned which is extracted hereunder:

"I do not find any reason for assessing the syndication charges in the hands of the appellant company. I give a finding that it is not the appellant company that has earned the syndication charges but it is the individual, Sri Ravi Kumar, who has earned this syndication charges. Perhaps, the syndication charges of Rs. 12,06,778 was shown in the hands of the appellant company, for the reason that the appellant company had enough losses in the earlier years and, therefore it need not pay any income-tax on the syndication charges received. In these circumstances, the AO is directed to reopen the assessment of Sri Ravi Kumar and assess this sum of Rs. 12,06,778 in the individual assessment of the managing director of the appellant company. The time-limit for issuing notice under s. 148 would be in accordance with the provisions of s. 150 of the Act and the time-limit for completion of assessment would be according to s. 153(2A) of the Act."

6. Being aggrieved by the order of the learned CIT(A), the assessee as well as the Revenue are in appeal before us.

7. In the appeal of the Revenue, viz. ITA No. 1074/Hyd/2003, the following grounds are taken :

"1. The CIT(A)'s order is erroneous both in law and on facts of the case.

2. The CIT(A) is not correct in holding without any evidence that it is not the appellant company that earned the syndication charges and it is Sri N. Ravi Kumar who earned the same.

3. The CIT(A) ought to have considered that accounting entries of a company should not be touched in view of the Hon'ble Supreme Court's decision in the case of Apollo Tyres 215 ITR.

4. ......."

8. In the appeal of the assessee, viz. ITA No. 1056/Hyd/2003, the following grounds are taken:

".......

1. The order of the CIT(A) is erroneous insofar as the observations are prejudicial to the appellant.

2. The learned CIT(A) erred in not deciding the following grounds:

(a) The AO erred in holding that the activity of production of electronic goods is closed particularly when the appellant produced abundant proof to the effect that the said business was still being carried on.

(b) The AO erred in holding that the business of electronic goods was discontinued by the appellant when the evidence shows that the said business was still continuing.

(c) The AO erred in holding that the syndication charges were received during the course of separate business activity of the appellant and was not a part of the earlier existing business. The AO erred in not allowing the entire expenditure debited to the P&L a/c. The AO did not discuss the issue about the allowability of the expenditure incurred by the appellant.

(d) The AO erred in not adjusting the earlier year's business losses from the income finally determined particularly when such adjustment is possible under s. 72 of the IT Act.

(e) The AO erred in not allowing deduction of the brought forward unabsorbed depreciation under s. 32(2) of the IT Act, 1961.

3. The learned CIT(A) erred in holding that it is assessable in the hands of the individual while deciding the case of the company.

4. The learned CIT(A) ought to have observed that the company is entitled for deduction of the business loss and unabsorbed depreciation under s. 72 and under s. 32(2) of the IT Act, 1961 respectively.

5. The learned CIT(A) is not correct in giving a direction to reopen the assessment of Shri Ravi Kumar without properly appreciating the facts.

6. The learned CIT(A) ought to have held that the entire expenditure debited to the P&L a/c is allowable as a deduction for the purpose of determining the total income as against Rs. 1,03,500 allowed by the AO.

7. Any other ground that may be urged at the time of hearing."

9. The learned Departmental Representative, while relying on the order of the AO submitted that the learned CIT(A) is not correct in holding that it is not the assessee company that earned the syndication charges, but it is Shri N. Ravikumar Reddy who has to be assessed for the same. He, therefore, submitted that the order passed by the AO be restored.

10. The learned counsel for the assessee on the other hand, submitted that since the Revenue in its appeal is not disputing the fact that syndication charges of Rs. 12,06,778 are the income of the assessee company, the learned CIT(A) has erred in directing the AO to assess the same in the hands of Shri N. Ravikumar Reddy. He further submitted that since the learned CIT(A) has not passed any order on the grounds raised by the assessee in the appeal before him, in the interests of justice, the matter may be restored back to the file of the learned CIT(A), which was not objected to by the learned Departmental Representative.

11. We have carefully considered the submissions of the rival parties, and perused the material available on record. We find that the syndication charges Rs. 12,06,778 were shown by the assessee as income from business. We further find that the AO while holding that the business of electronic goods was stopped by the assessee allowed expenditure to the extent of Rs. 1,03,500 relating to commission business and disallowed the set off of brought forward losses pertaining to TV business and unabsorbed depreciation. We further find that the learned CIT(A) without considering the grounds raised by the assessee including the issue 'relating to allowability of set off of brought forward losses and unabsorbed' depreciation against the taxable income from syndication charges and waiver of interest treated as income under s. 41 of the Act, however, held that the syndication charges amounting to Rs. 12,06,778 are not the income of the assessee but that of its managing director, Sri Ravi Kumar Reddy.

12. Now the issue arises as to whether while deciding an appeal, preferred by the assessee, the first appellate authority has power to consider new source of income and/or is competent to issue such directions to vary an assessment made in the hands of third party.

13. In CIT vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC) while construing the corresponding provisions of Indian IT Act, 1922 relating to jurisdiction of the AAC in such an appeal, the Hon'ble Supreme Court held that, in an appeal filed by the assessee, the AAC has no power to enhance the assessment by discovering a new source of income, not considered by the ITO in the order appealed against.

14. Similar views were expressed by the Hon'ble apex Court in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) wherein it has been held by their Lordships that the power of enhancement under s. 31(3) of 1922 Act was restricted to the subject-matter of the assessment or the source of income which had been considered expressly or by clear implication by the ITO from the point of view of taxability and that the AAC had no power to assess a source of income which had not been processed by the AO.

15. In CIT vs. Union Tyres (1999) 157 CTR (Del) 286 : (1999) 240 ITR 556 (Del) the dispute related to the asst. yr. 1967-68 for which the accounting period ended on 31st March, 1967. The assessee is an individual and deals in tyres. In his return the assessee declared a loss of Rs. 4,552 which was revised to Rs. 3,500. The said loss was computed by applying rate of GP at 0.9 per cent on the total sales of Rs. 11.75 lakhs. During the course of assessment proceedings, the assessee did not produce any books of accounts. The ITO estimated the sales at Rs. 11.85 lakhs and by applying the GP rate of 3.5 per cent. he made an addition of Rs. 30,756 to the declared loss. Against the said addition, the assessee preferred an appeal to the AAC. The AAC had his doubts about the capacity of the assessee to raise finances for the purchase of the goods and show a huge turnover in the very first year of its business.

He, therefore, directed the ITO to submit a report on the following points:

".......

1. Full and complete antecedents of the appellant.

2. Whether the books of account were maintained. For this purpose, the ITO will obtain an affidavit of the appellant.

3. Source of investment made in the purchase of goods.

4. Whether the sales and purchases are on cash or credit basis, wholly or partly. The ITO will obtain a list of sales and purchases made on credit basis exceeding Rs. 1,000 in each case.

5. Whether the appellant is a registered dealer under the Sales-tax Act?

6. Whether the appellant has obtained registration under the Shops and Establishment Act?

7. Whether any sales-tax assessment has been made.

8. The business connections of the appellant with any business/businesses carried on by the appellant's close relatives.

9. GP rate declared by other similar business assessees in the locality.

10. A bank reconciliation statement to be obtained.

11. Name of the employees whole-time/part-time........"

Aggrieved by the said directions and alleging that the AAC had travelled beyond the legitimate scope of his jurisdiction in disposing of the appeal preferred before him, the assessee filed an appeal before the Tribunal. Observing that in calling for the remand report in respect of some of the afore noted points the AAC had travelled beyond his powers inasmuch as it had the effect of directing the ITO to make the assessment on an entirely new footing, the Tribunal held that the AAC was not justified in calling for the remand report in respect of item Nos. 1, 3, 8 and 10 noted above but sustained his action in calling for the report on the remaining points. The Revenue's application under s. 256(1) of the Act having been dismissed, on its approaching to the Hon'ble Court under s. 256(2) of the Act on a question "whether the directions by the AAC to the ITO to conduct enquiry and furnish information on the afore noted four points fell within the ambit of his powers under s. 251 (1)(a) of the Act", it has been held by their Lordships at p. 561 that:

"........ In our opinion, any addition on account of unexplained investment would constitute. a new source of income which was not the subject-matter of assessment before the AO and, therefore, it was not open to the first appellate authority to direct the AO to conduct enquiry on the said four points."

16. Again in CIT vs. Sardari Lal & Co. (2001) 170 CTR (Del)(FB) 431 : (2001) 251 ITR 864 (Del)(FB), it has been held by their Lordships at p. 864 as under:

"In CIT vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC) the matter related to provisions of the Indian IT Act, 1922. It was held, inter alia, that in 'an appeal filed by the assessee, the AAC has no power to enhance the assessment by discovering a new source of income not considered by the ITO in the order appealed against. A similar view was expressed in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC). That also related to a case under s. 31(3) of the old Act. It was held that the power of enhancement under s. 31 (3) of the old Act was restricted to the subject matter of the assessment or the source of income, which had been considered expressly or by clear implication by the AO from the point of view of taxability and that the AAC had no power to assess a source of income. which had not been taken into consideration by the AO. In CIT vs. Nirbheram Daluram (1997) 139 CTR (SC) 484 : (1997) 224 ITR 610 (SC), it was observed by the apex Court that the appellate powers conferred on the first appellate authority under s. 251 of the IT Act, 1961, were not confined to the matter, which had been considered by the ITO, as the first appellate authority is vested with all the wide powers that the AO may have while making the assessment, but the issue whether these wide powers also include the power to discover a new source of income was not commented upon. Consequently, the view expressed in CIT vs. Shapoorji Pallonji Mistry and CIT vs. Rai Bahadur Hardutroy Motilal Chamaria still holds good. Whenever the question of taxability of income from a new source which had not been considered by the AO is concerned, the jurisdiction to deal with the same in appropriate cases may be dealt with under s. 147/148 of the Act and s. 263 of the Act, if requisite conditions are fulfilled. In the presence of such specific provisions a similar power is not available to the first appellate authority."

17. In Mrs. Banoo E. Cowasji vs. CIT (1982) 138 ITR 686 (MP) the factual position, in brief, was that the widow of the deceased preferred appeals before the CIT(A) objecting to the inclusion of the income from her husband's estate which had already been taxed in her husband's file. The CIT(A) upheld the inclusion of such income in her hands. At the same time, he directed that as the assessment was made in the file of the deceased husband was void ab initio and illegal, the same be cancelled and the tax, if collected, be refunded. On appeal by the Department, the Tribunal held. that the CIT(A) was not competent to issue directions. On reference, their Lordships while upholding the view of the Tribunal held at p. 686 as under:

"Held, that there was no provision of law under which the CIT(A) could, while deciding the appeal preferred by the assessee (widow), pass orders with regard to the assessments made by the ITO in the case of her deceased husband. Therefore, the Tribunal was right in holding that the CIT was not competent to issue directions to cancel the assessments made in the case of the deceased and to refund the taxes to the concerned taxpayers."

18. In Gauri Shankar Chaudhary vs. Addl. CIT & Anr. (1999) 154 CTR (Pat) 264 : (1998) 234 ITR 865 (Pat), it has been observed by their Lordships at p. 869 as under:

"........ We have no doubt in our mind that resort to sub-s. (1) of s. 150 of the Act can be taken only in cases where it becomes necessary to make assessment or reassessment or recomputation in consequence of, or to give effect to, any finding or direction pursuant to an appellate order passed by the appellate authority or pursuant to any order in reference or revision or by a Court in any proceeding under any other law. Obviously, the appeal, reference or revision or any other proceeding before a Court must relate to the assessee in question, and not any direction or assessment made in appeal, reference or revision in the case of any other assessee, or in a proceeding in which the assessee in question is not a party "

19. Applying the ratio of the above decisions, we find that there is no dispute that the assessee company has offered syndication charges for assessment and the AO also assessed the same in the hands of the assessee company as such; there was no dispute about the assessability of syndication charges in the hands of the assessee company as it was never the case of the Revenue that it was not assessable in the hands of the assessee company but in the hands of its managing director, Sri N. Ravi Kumar Reddy. That position is also evident from the grounds raised by the parties in the present appeals before us, as both the parties are aggrieved by direction of the learned CIT(A) to assess the syndication charges in the hands of the managing director of the assessee company. This being so and respectfully following the ratio of the above decisions, we are of the view that the learned CIT(A) was not justified in holding that it is not the assessee company that has earned the syndication charges but it is the individual Sri N. Ravi Kumar Reddy who has earned these syndication charges and in directing the AO to reopen the assessment of Sri N. Ravi Kumar Reddy and assess a sum of Rs. 12,06,778 in the individual assessment of the managing director of the assessee company. Accordingly, we reverse the order of the learned CIT(A) to this extent and uphold the stand of the AO in assessing the syndication charges in the hands of the assessee company. Consequently, the grounds taken by the Revenue in its appeal and ground Nos. 3 and 5 in assessee's appeal are allowed.

20. However, since the CIT(A), as stated above, has not adjudicated the grounds raised by the assessee in the appeal before him, we are of the view that in the interests of justice, the matter should go back to the file of the CIT(A) and accordingly we set aside the order of the learned CIT(A) on this account and restore the matter to the file of the CIT(A), who shall decide the same, including the grounds raised by the assessee before us, afresh in accordance with law after providing reasonable opportunity of being heard to the assessee. Accordingly, the ground Nos. 1, 2, 4 and 6 taken by the assessee before us are partly allowed for statistical purposes.

Assessee's appeal-ITA No. 327/Hyd/2006: Asst. yr. 1998-99

21. This appeal by the assessee, Shri N. Ravikumar Reddy directed against the order of the CIT(A), dt. 31st Jan., 2006, arises out of the assessment order dt. 28th Feb., 2005 passed under s. 143(4) r/w s. 147 of the Act, in pursuance of the directions of the learned CIT(A)-III, Hyderabad, dt. 8th July, 2003 in the case of M/s Pennar Electronics Ltd. Since, in the context of Revenue's appeal in ITA No. 1074/Hyd/2003 and assessee's appeal in ITA No. 1056/Hyd/2003 against the said order of the learned CIT(A) dt. 8th July, 2003, vide para 19 hereinabove, we have reversed the finding of the CIT(A) and upheld the stand of the AO in assessing the syndication charges in the hands of the company, M/s Pennar Electronics (P) Ltd.; the reassessment proceedings giving rise to this appeal, have no legs to stand. Accordingly, the reassessment order passed by the AO as well as the appellate order of the CIT(A), impugned herein are cancelled and the appeal of the assessee is allowed.

22. In the result, out of the cross-appeals, the appeal of the Revenue (ITA No. 1074/Hyd/2003) is allowed and the appeal of the assessee (ITA No. 1056/Hyd/2003) is allowed for statistical purposes, and the appeal of the other assessee, Shri N. Ravikumar Reddy (ITA No. 327/Hyd/2006) is allowed.

 

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