Ita/90/2010 Of The Commissioner Of Income Tax v. M/S Mineral Enterprises Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURU| ON THE 23 DAY OF NOVEMBER, 2018 BEFORE THE HON BLE MR. JUSTICE RAVI MALIMATH| AND| THE HON BLE MR. JUSTICE K. NATARAJAN. INCOME TAX APPEAL NO.90O OF 201CONNECTED WITHINCOME TAX APPEAL NO.9SL OF 2ZO BETWEEN 1THE COMMISSIONER OF INCOME-TA®™C.R. BUILDING, |QUEENS ROAD,BENGALURU. 2 |THE DEPUTY COMMISSIONEROF INCOME-TAX, CENTRAL CIRCLE-1(1)C.R. BUILDING, |QUEENS ROAD,BENGALURU. .., APPELLANTS|(COMMON). (BY SRI K.V. ARAVIND, ADVOCATE) ANI M/S. MINERAL ENTERPRISES LTD.NO.300/B, 16 CROSS,|SADASHIVANAGAR,BANGALORE. ... RESPONDENT(COMMON)| (BY SRI A. SHANKAR, SENIOR COUNSEL, ALONG WITH SRI M. LAVA, ADVOCATE) x KK THESE INCOME TAX APPEALS ARE FILED UNDER|SECTION 260A OF INCOME-TAX ACT, 1961, PRAYING|TO FORMULATE THE SUBSTANTIAL QUESTIONS OF.LAW STATED THEREIN AND ALLOW THE APPEALS AND|SET ASIDE THE ORDERS PASSED BY THE INCOME TAX.APPELLATETRIBUNAL,|BENGALURU, IN|1.1 .A.NO.645/BANG/2009AND.LIA.NO.493/BANG/2009RESPECTIVELY DATED 9-10-2009 AND CONFIRM THE!ORDER|OF|THEAPPELLAIECOMMISSIONER,CONFIRMING THE ORDER PASSED BY THE DEPUTY.COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), BENGALURU. THESE INCOME TAX APPEALS COMING ON FORHEARING THIS DAY, RAVI MALIMATH, J., DELIVEREDTHE FOLLOWING: JUDGMENT Tne assessee — M/s. Mineral Enterprises Limited(for snort, MEL’) is a public limited company, engagedin the business of mining, trading and export of iron-ore and generation of power through windmills. The|Company nas two units, one is MEL (Export Oriented|Unit), [for short, —MEL (EQOU)| and the otner is MEL|(Non-Export Oriented Unit) [for short, ‘MEL (Non-EOU)'|. The Company is owned by Sri Basant Poddar|and his family members. 2 |On 22-7-2005, a searcn under Section 132|of the Income Tax, 1961, (for short, ‘the Act’) was/initiated in the case of MEL and during the course of search proceedings, several books of accounts and/incriminating documents were seized. Consequent to |the search, a notice under Section 153A of the Act was)issued to tne assessee. In response to the same, the|Company filed its return of income, declaring the| income as originally returned. Subsequently, a notice|under Section 143(2) of the Act was issued to the'assessee. Tne Assessing Officer computed the profits|of potn tne units on tne basis of allocation otfproportionate expenditures, in the ratio of their'respectiveturnoverTO.tneCOMDINECturnover. |Aggrieved by the same, an appeal was filed before the|CommissionerofIncomeTax!(Appeals).TneCommissioner of Income Tax (Appeals) partly allowed|the appeal and confirmed the additions. Questioning|tneSame,|tneRevenue|filed17TANos.645&493/Bang/2009 for the Assessment Years 2005-06 and2006-0 /respectively.TneaSsSsesSsTiled1.1 .A.No.527/Bang/2009 for the Assessment Year 2005-06.Cross Objection No.40/Bang/2009 was also filed by the|assessee for tne Assessment Year 2ZOO6-0/. Tne.assessee’sS appeal in I.T.A. No.527/Bang/2009 waspartly allowed. The Revenue’'s appeals in I.T.A Nos.645|& 493/Bang/2009 were dismissed and the Cross- ObjectionNo.40/Bang/2009°WaSsalsodismissed.Hence, Income Tax Appeal Nos.90 of 2010 and 91 of2010 are filed by the Revenue for the Assessment|Years 2005-06 and 2006-07 respectively. 3. By the order dated 23-11-2011, the appeals|were admitted to consider the following substantial|questions of law: /.Whether In the facts and circumstancesof the case and the law, the finding ofthe Appellate Authorities holding that.the assessee has not inflated the profitsfrom MEL (Non-EOU) and MEL (EOU) by|debiting the common expenditure in thebooks of accounts of the Non-EOU and|the estimation of tne profits by tne)Assessing Officer is not correct, Is'perverse and arbitrary?| i.Whetner tne finding of tne AppellateAutnorities is contrary to the provisions of Section 10-B(7) r/w Section 80IA(8)of the Act?| ObjectionNo.40/Bang/2009°WaSsalsodismissed.Hence, Income Tax Appeal Nos.90 of 2010 and 91 of2010 are filed by the Revenue for the Assessment|Years 2005-06 and 2006-07 respectively. 3. By the order dated 23-11-2011, the appeals|were admitted to consider the following substantial|questions of law: /.Whether In the facts and circumstancesof the case and the law, the finding ofthe Appellate Authorities holding that.the assessee has not inflated the profitsfrom MEL (Non-EOU) and MEL (EOU) by|debiting the common expenditure in thebooks of accounts of the Non-EOU and|the estimation of tne profits by tne)Assessing Officer is not correct, Is'perverse and arbitrary?| i.Whetner tne finding of tne AppellateAutnorities is contrary to the provisions of Section 10-B(7) r/w Section 80IA(8)of the Act?| 4. Sri K.V. Aravind, the learned counsel appearing|for the appellants - Revenue, contends tnat the orders|of the Commissioner of Income Tax as well as the|Tridunal are erroneous. They Nave failed to consider|the material placed on record and nave not considered|the books of accounts of the Company. He contends|that MEL (EQU) receives various income and the same)was exempted from tax for the relevant years.Therefore, in order to snow a higher rate of profit, the|expenses have wrongly shown in MEL (Non-EQU).Consequently, the net profit, as shown for MEL (EOU),|iS an inflated and unnatural amount. [Tne Authorities|nave failed to consider the same. Therefore, he pleads|that the substantial questions of law be answered in hisfavour. 5. The same is disputed by Sri A. Shankar, the.learned senior counsel appearing for the respondent's|counsel. His submission ts tnat potn the units are|maintaining|separateDOOKS|ofaccounts.TneCommissioner of Income Tax (Appeals) has consideredeach one of the expenditures. The reasons assigned by |the Tridunal, as to why the plea of the assessee nas to be accepted, is that the nature of the expenses|invoived by MEL (EQU) and MEL (Non-EOU) being|different, the same cannot be attributed equally.Therefore, the apportionment is based on the relevant|expenses incurred. He further pleads that these are|questions of apportionment and nence, no substantial|question of law arises for consideration. 6. Heard learned counsels. — 7. Two units are being run by the Company.One is MEL (EOU) and the other is MEL (Non-EOU).The expenditures, according to the Revenue, Nave| been allocated to MEL (Non-EOU) in order to inflate the|net profit of MEL (EOU). The expenses apportioned|reads as under: 8. Thnerefore, it is contended that so far asexpenses snown as ‘Nil towards four neads therein is |inappropriate. The expenses snown for MEL (Non-EQOU)would have been incurred for MEL (EOU). The.AssessingOfficer,On|consideringtneSame,|recomputed the profit. Accordingly, tne net profit was|worked out aS under: | 9. The Commissioner of Income Tax (Appeals)considered eacn one of the grounds, wnicn was|considered by the Assessing Order. So far as theKeyman Insurance is concerned, ne came to the)conclusion that the insurance Premium paid is Dased on)tne profits of the Company. That MEL (EQU) was not in|existence prior to the year under consideration.Therefore, MEL (EOU) could not have incurred such|expenditure. So far as the business promotionexpenses are concerned, it was of the view that there|was no reason assigned by the Assessing Officer as to 9. The Commissioner of Income Tax (Appeals)considered eacn one of the grounds, wnicn was|considered by the Assessing Order. So far as theKeyman Insurance is concerned, ne came to the)conclusion that the insurance Premium paid is Dased on)tne profits of the Company. That MEL (EQU) was not in|existence prior to the year under consideration.Therefore, MEL (EOU) could not have incurred such|expenditure. So far as the business promotionexpenses are concerned, it was of the view that there|was no reason assigned by the Assessing Officer as to why|tneEXDeNnsSénavetOde allocateddisproportionately. There snould be reasoning by the|Assessing Officer. In so far as advertisement expensesare concerned, it was noted that advertisement)expense incurred was for the purpose of marketing the|products with respect to MEL (Non-EOU). Therefore,|the question of advertisement would not arise for'consideration. With regard to retainer charges, the|Same was incurred for meeting the retainer charges in respect of the Money Train Project, which was carried|by MEL (Non-EOU). Therefore, it could not be added toMEL (EOU). With regard to staff and labour welfareexpenses, there nas been appropriate reasoning. That!the number of employees are higher in MEL (Non-EOU)as there are multiple units, wnereas in MEL (EQU), the|activities are confined to manufacturing and export of|iron-ore. Since there is nigher administrative expense|In MEL.(Non-EOU),.tneEXDeNnsSéallocated|a fCacceptable. With regard to traveling expenses of the| Directors, it is not backed by any reason.With regardto finance charges, it was incurred in respect of loans|and otner credit taken by respective units and the)same is reflected in the Balance Sheet of the respectiveunits. 10.hHence,fOr|all|tneseFEedaSONntne|Commissioner of Income Tax (appeals) accepted the|re-computation made by the Assessing Officer. TheTribunal affirmed tne view of the Commissioner of.Income Tax. It also came to the view tnat theAssessing Officer has not found any defect or mistake|in the books of accounts so as to justify invocation ofSection 145 of the Act. That in fact, the Assessing|Officer having accepted the books profit as snown in/respect of MEL (EOU), profit and loss account as well asthat of MEL (Non-EOU) could not have interfered with|the same. That in the absence of any defect in the)books of accounts, there was no_ justification for determination of profits of MEL (EOQU) undertaking inthe ratio of turnover by aggregating the profit shown inrespect of two undertakings. That activity of MEL|(Non-EOU) is largely trading, whereas in the case of MEL (EOU), it is manufacturing and _ production.Therefore, the comparison of the financial result has tobe considered likewise. 11. On considering the contentions and reasons,we do not find any ground to interfere in the impugnedorders. The orders passed by both the Authorities are|just and proper. Each of the expenses allocated by theassessee has been rightly reflected in the books of|accounts of botn the units. Therefore, the findings|recorded by the Tribunal, being just and proper, do not|call for interference. Hence, the first substantial|question of law is answered by holding that the findingsof the appellate authorities that the assessee has not|inflated the profits from MEL (Non-EOU) and MEL| (EOU) by debiting the common expenditure in the|books of accounts of MEL (Non-EOU) and_ theestimation of the profits by tne Assessing Officer is just|and appropriate. 12. In view of the answer to tne first substantia!question of law, the second substantial question of law|would not arise for consideration. The appeals are, disposed off, accordingly. SD/-JUDGE | SD/-|JUDGE KVK