2016-TII-209-ITAT-DEL-INTL

INDIAN FARMERS FERTILIZERS COOPERATIVE LTD Vs PR CIT: DELHI ITAT (Dated: September 19, 2016)

Income Tax - Sections 36(1)(iii), 90, 263, 142(1), 143(2) & rule 8D(2) - India-Oman DTAA - Articles 5 & 25(4).

Keywords: deemed dividend - reasonable view - tax credit - unsecured loans - branch office - PE - foreign entity - interest free funds - Personnel Placement & Technical Services.

Whether if detailed inquiries were made by AO at the time of the original assessment proceedings with regard to the tax credit on deemed dividend which would have been payable in Oman, assessee filed detailed replies in relation to the queries raised, which were duly considered by AO before allowing tax credit, can CIT agitate such issue again - NO: ITAT

Whether when Revenue has allowed claim of tax credit to the assessee consistently on year to year basis, the view proposed subsequently by principal CIT, in similar set of circumstances, is totally outside the ambit of the provisions of section 263 - YES: ITAT

Whether if the assessee has already discharged its onus of proving non-diversion of funds borrowed for working capital towards capital WIP and fixed assets by submitting a certificate of an independent statutory auditor which was not rebutted by Pr.CIT, the commissioner still has jurisdiction to invoke the provisions to pass an order u/s.263 - NO: HC

The assessee is a co-operative society registered in India. The principal business of the Assessee was manufacture and import of fertilizers like Urea, DAP and Complex Fertilizers. During the year 2002, as a PSU, pursuant to a MOU between the GOI and the Sultanate of Oman to promote projects of mutual economic interest for both the countries, the assessee along with another Indian Cooperative Society (M/s Krishak Bharti Cooperative Ltd.) entered into a JV with Oman Oil Company to form Oman Fertilizer Company SAOC (OMIFCO), which was a registered company in Oman under the Omani Laws. The assessee society holds 25% share in OMIFCO, which was engaged in manufacturing Urea and Ammonia. The Urea manufactured by OMIFCO was purchased by the Government of India under a long term agreement. The assessee Society had established a branch office in Oman to oversee its investment in OMIFCO and to facilitate rendering of Personnel Placement and Technical Services to M/s OMIFCO. The branch office was independently registered as a Foreign Company Branch under the Omani laws and it was an accepted position by the Income Tax Department that the said branch office constitutes PE in Oman in terms of Article – 5 of DTAA between India and Oman. The said branch office maintains its own Books of Account and files Returns of Income as per the local income tax law of Oman. In this case the assessee had originally filed the return of income for the AY 2010-11 on 13.10.2010 declaring total income of Rs.723,16,22,035. Subsequently revised return of income was filed on 14.10.2011 declaring income of Rs.577,15,94,117. The main reason for the variation in the total income as per the original return and revised return of income was that dividend income received by assessee society’s Branch in Oman from OMIFCO, Oman amounting to Rs.144,11,73,150 was excluded on the ground that the said income was earned by the P.E. of the assessee in Oman and as per the provisions of DTAA read with section 90, as interpreted by the SC in India, the said income was assessable only in Oman and not in India.

The case of the assessee was picked up for scrutiny and notices u/s.143(2) and 142(1) were issued by AO alongwith the detailed questionnaires. During the course of the assessment proceedings, detailed replies were filed alongwith supporting evidences and the authorized representatives of the assessee-society duly attended before AO from time to time as also acknowledged in the assessment order. All necessary details and particulars were duly furnished and the case was examined minutely by AO and discussed with the authorized representatives of the assessee society. The assessment was completed u/s.143(3) wherein AO had made additions regarding dividend income, disallowance u/s 43B, disallowance u/s 14A, horticulture expenses. While completing the assessment, AO allowed tax credit of a sum of Rs.41,52,45,771/- in respect of the dividend income of Rs.144,11,73,150 received by the assessee society from OMIFCO. As mentioned above, the aforesaid dividend income was simultaneously brought to the charge of tax by the AO after rejecting the assessee’s claim that the said income could not be taxed under the Indian Income-tax Law. It may be mentioned that as per the Omani Tax Laws, exemption was granted to the dividend income by virtue of amendments made in the Omani Tax Laws in the year 2000. However, by virtue of the provisions of Article-25(4) of DTAA r.w.s 90(1)(a)(ii), the AO, after thoroughly examining the issues and after full application of mind allowed credit for the aforesaid tax which would have been payable in Oman but for the exemption granted. Subsequent to the completion of the assessment Pr. C.I.T.-11, Delhi issued a show cause notice dated 22.12.2015 u/s.263. On the very next day i.e. on 23.12.2015, Pr. C.I.T. issued a letter purported to be a second show cause notice u/s 263. Vide his impugned order u/s.263 the Principal CIT rejected the various submissions made before him.

Having heard the matter, the Tribunal held that,

++ since the Revenue has allowed the claim of tax credit to the assessee consistently on year to year basis the view now proposed to be substituted by the Pr. CIT is totally outside the ambit of the provisions of section 263 following the decision of the jurisdictional HC in the case of CIT vs. Escorts Ltd., where it was observed that a fundamental aspect of a transaction is found to have been permeated through different AYs and this fundamental aspect has stood uncontested then the Revenue cannot be allowed to change its view taken in earlier AYs unless it is able to demonstrate a change in circumstances in the subsequent AY. Assessee had been engaged in these transactions in the preceding AYs, the Commissioner could have had no occasion to have recourse to the revisional powers u/s 263 on the fundamental aspects of the transactions in issue on which a view had been taken and not shown to have been challenged. Respectfully following the findings of the Jurisdictional HC, the Pr. CIT has erred in assuming jurisdiction u/s.263. Accordingly, the Pr. CIT could have no occasion to have recourse to the revisional powers u/s.263 on the very fundamental issue that a consistent view has to be adopted after detailed inquiries by the Revenue for all the earlier years i.e. A.Ys. 2006-07 to 2009-10. Further, as discussed above, we have no hesitation in holding that the order passed by the Pr. CIT is bad in law for the reasons that, detailed inquiries were made by the AO at the time of the original assessment proceedings with regard to the tax credit on deemed dividend which would have been payable in Oman but for the exemption granted the assessee had filed detailed replies in response to the query which were duly considered by the Assessing Officer before allowing tax credit. That, such credit was allowed by the Revenue for all the earlier years i.e. A.Ys. 2006- 07 to 2009-10, therefore, we have no hesitation in holding that there was complete application of mind on the part of AO and that the AO has adopted a view consistent with the preceding years and, therefore, the AO having taken a plausible view after full application of mind, the view of the Pr. CIT cannot substitute his view by assuming jurisdiction u/s.263;

++ assessee is following a settled accounting policy/principle for capitalization of expenses including interest expenses to both the fixed assets as well as capital WIP. This method was forming part of the audited financial statements which were filed before AO as well. We also find that the free reserves were also more than sufficient to cover up the investment in fixed assets / capital work in progress. Further the assessee society has generated sufficient internal cash flows to meet with the cost of fixed assets as well as capital work in progress. In spite of this fact the assessee has capitalized a sum of Rs. 7.09 crores in the books of accounts. Pr. CIT has also not disputed that the total investments were merely 10% of the interest-free funds available with the assessee society. We also find that a consistent view has taken by all the judicial authorities that in the event of availability of interest-free funds a presumption would be that investments would be out of interest free funds generated or available with the assessee. In this respect, reliance was placed on the decision of the Bombay High Court in the case of CIT vs. Reliance Utility and Power Ltd. 313 ITR 340. In light of the above discussions as well as factual matrix, we have no hesitation in holding that the order passed by Pr. CIT is bad in law for the reason that as discussed above, detailed inquiries were made by AO with regard to the capitalization of interest to fixed assets as well as capital WIP. Even on the facts of the case the assessee had sufficient interest-free funds to meet with the capital expenditure and, therefore, following the ratio of the decision of the Bombay HC in Reliance Utility and Power Ltd., no disallowance u/s.36(1)(iii) is called for. That, the assessee had already discharged its onus of proving non-diversion of funds borrowed for working capital towards capital work in progress and fixed assets by submitting a certificate of an independent statutory auditor and proved availability of own funds and internal accruals which was not rebutted by Pr.CIT. Therefore, since there was full application of mind on the part of AO during the course of the assessment proceedings as well as based on the above evidences placed before him, the Pr. CIT has no jurisdiction to invoke the provisions to pass an order u/s.263. For this reason, we hold that the order passed by the Pr. CIT u/s.263 on this issue is bad in law and set aside. We have already held above that in respect of both the issues i.e. allowing credit of deemed taxes paid on dividend in Oman as well as capitalization of interest u/s 36(1)(iii) detailed enquiries as well as verification have been made by the AO. Further it is also not the case of Pr CIT that the order is not in accordance with any instruction/ direction issued by the Board or is not in accordance with any decision of Delhi HC or SC. Accordingly the order passed by the AO cannot be regarded as deemed to be erroneous or prejudicial to the interests of the revenue under Explanation 2 of the Act. In view of the above, we hold that the impugned order passed by Pr. CIT u/s. 263 is without jurisdiction and not sustainable in law. Accordingly, the said order is hereby quashed and as a result, the Assessee’s Appeal stands allowed. In the result, the Appeal filed by the Assessee stands allowed.

Assessee's appeal allowed